-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DIDNtMHIqwPFKw//OXwqIQhLSPX1gCtfhZpyIS0nv5vDg7q8czDM494IiKt/yyYJ Gw1ucycYFFLbw5+MjAewuA== 0000883979-97-000003.txt : 19970407 0000883979-97-000003.hdr.sgml : 19970407 ACCESSION NUMBER: 0000883979-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970105 FILED AS OF DATE: 19970404 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: POMEROY COMPUTER RESOURCES INC CENTRAL INDEX KEY: 0000883979 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 311277808 STATE OF INCORPORATION: DE FISCAL YEAR END: 0105 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20022 FILM NUMBER: 97574930 BUSINESS ADDRESS: STREET 1: 1840 AIRPORT EXCHANGE BLVD, SUITE 240 CITY: ERLANGER STATE: KY ZIP: 41018 BUSINESS PHONE: 6062827111 MAIL ADDRESS: STREET 1: 1840 AIRPORT EXCHANGE BLVD STREET 2: SUITE 240 CITY: ERLANGER STATE: KY ZIP: 41018 10-K 1 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 [FEE REQUIRED] For the fiscal year end January 5, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-20022 POMEROY COMPUTER RESOURCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 31-1227808 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 1020 Petersburg Road, Hebron, Kentucky 41048 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (606)586-0600 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class 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 $125,361,000 as of March 24, 1997. The number of shares outstanding of the Registrant's common stock as of March 24, 1997 was 7,503,287. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into Which Document Portions of Documents are Incorporated __________________________ ____________________________ Definitive Proxy Statement Part III for the 1997 Annual Meeting of Stockholders to be Filed with the Securities and Exchange Commission prior to May 5, 1997 POMEROY COMPUTER RESOURCES, INC. FORM 10-K YEAR ENDED JANUARY 5, 1997 TABLE OF CONTENTS PART I Page Item 1. Business 1 Item 2. Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 4 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8. Financial Statements and Supplementary Data 9 Item 9. Disagreements on Accounting and Financial Disclosures 9 PART III Item 10. Directors and Executive Officers of the Registrant 9 Item 11. Executive Compensation 9 Item 12. Security Ownership of Certain Beneficial Owners and Management 9 Item 13. Certain Relationships and Transactions 9 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 9 SIGNATURES Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer 17 Directors 17 Independent Auditor's Report F-1 Financial Statements F-2 to F-17 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 1993 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, 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." All written or oral forward-looking statements attributable to the Company are expressly qualified in their entirely 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 offers a broad range of microcomputers and related products and provides a comprehensive selection of integration and support services including network and system design, equipment selection and procurement, complex network configuration, integration, Internet and electronic commerce services, depot repair, on-site maintenance, staffing and network management. The Company provides products and services to large and medium sized commercial, health care, governmental, financial and educational customers. An important component of the Company's operating strategy is to offer its customers a wide range of microcomputer systems and related products and software at competitive prices. The principal components of the microcomputer systems generally supplied by the Company include microprocessor-based central processing units, peripheral devices such as video displays, keyboards, additional storage units, printers and software packages. The Company offers microcomputer products from an array of manufacturers including Compaq, Hewlett-Packard, IBM, Lexmark and Toshiba. The Company sells these products together with a broad selection of networking, integration and software products from manufacturers including 3Com, Bay Networks, Intel, Microsoft, and Novell. Services provided by the Company allow customers to outsource the selection, installation, integration and maintenance of their microcomputer systems. The Company is an authorized dealer or reseller for the products of over 35 major vendors. The Company believes that its access to major vendors enables it to offer a wide range of products to meet the diverse requirements of its customers. However, the increasing demand for microcomputers has resulted in significant product supply shortages from time to time because manufacturers have been unable to produce sufficient quantities of certain products to meet demand. The Company has in the past and expects in the future to experience some difficulty in obtaining an adequate supply of products from its major vendors which has resulted, and may continue to result, in delays in completing sales. These delays have not had, and are not anticipated to have, a material adverse effect on the Company's results of operations, although failure to obtain adequate product supply could have a material adverse effect on the Company's results of operations. The Company has entered into dealer agreements with its major vendors/manufacturers. These agreements are typically subject to periodic renewal and to termination on short notice. Substantially all of the Company's dealer agreements may be terminated by the vendor without cause upon 30 to 90 days advance notice, or immediately upon the occurrence of certain events. A vendor could also terminate an authorized dealer agreement for reasons unrelated to the Company's performance. Although the Company has never lost a major vendor/manufacturer, the loss of such a vendor/product line or the deterioration of the Company's relationship with such a vendor/manufacturer would have a material adverse effect on the Company. The Company's sales are generated primarily by its 208 person direct sales force and sales support personnel located in 15 regional offices in Kentucky, Iowa, Tennessee, Florida, Alabama, Indiana, North Carolina and South Carolina. The Company's business strategy is to provide its customers with a complete package of advanced microcomputer products, high level services and support, including designing and installing systems, training system users, maintaining and repairing hardware and software and brokering used equipment. The Company believes that its ability to combine competitive pricing of microcomputer hardware and related products with higher margin sophisticated services and support allows it to compete effectively against a variety of alternative microcomputer distribution channels, including independent dealers, superstores, mail order and direct sales by manufacturers. With the majority of businesses considering how to "rightsize", the Company is using its resources to assist customers in the appropriate decision-making and project implementation. Most microcomputer products are sold pursuant to purchase orders. For larger procurements, the Company will enter into written contracts with customers. These contracts typically establish prices for certain equipment and services and require short delivery dates for equipment and services ordered by the customer. These contracts do not require the customer to purchase microcomputer products or services exclusively from the Company and may be terminated without cause upon 30 to 90 days' notice. Most contracts are for a term of 12 to 24 months and, in order to be renewed, may require submission of a new bid in response to the customer's request for proposal. As of January 5, 1997, the Company had been awarded contracts which it estimates will result in an aggregate of approximately $71.3 million of net sales and revenues after January 5, 1997. Of this amount, the Company estimates that $35.5 million of net sales and revenues will be generated during fiscal year 1997 and the remainder will be generated after the end of fiscal year 1997. The estimates of management could be materially less than stated as a result of factors which would cause one or more of these customers to order less product or services than is anticipated. Such factors include that the customer finds another supplier for the desired products at a lower price or on better terms, the internal business needs of the customer change causing the customer to require less or different products and services, or a significant change in technology or other industry conditions occurs which alters the customer's needs or timing of purchases. An estimate of the value of contracts awarded as of a comparable date in the preceding fiscal year is not available. For fiscal years 1994, 1995 and 1996, sales of microcomputers, peripheral products, supplies and software accounted for approximately 90.1%, 91.5% and 91.2%, respectively, of the consolidated net sales and revenues of the Company. The Company's revenues from its service and support activities have also grown over the last several years. For fiscal years 1994, 1995 and 1996, revenues from service and support activities were approximately $13.4 million, $17.9 million and $27.4 million, respectively, and accounted for approximately 9.3%, 7.8% and 8.2%, 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 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) creative 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. Employees As of January 5, 1997, the Company had 923 full-time employees consisting of the following: 470 service and technical personnel including 115 systems engineers; 110 direct sales representatives and 98 sales support personnel; 29 management personnel; and 216 administrative and distribution personnel. The Company has no collective bargaining agreements and believes its relations with its employees are good. Backlog The Company does not have a significant backlog of business since it normally delivers and installs products purchased by its customers within 10 days from the date of order. Accordingly, backlog is not material to the Company's business or indicative of future sales. From time to time, the Company experiences difficulty in obtaining products from its major vendors as a result of general industry conditions. These delays have not had, and they are not anticipated to have, a material adverse effect on the Company's results of operations. Patents and Trademarks The Company owns no trademarks or patents. Although the Company's various dealer agreements do not generally allow the Company to use the trademarks and trade names of these various manufacturers, the agreements do permit the Company to refer to itself as an "authorized dealer" of the products of those manufacturers and to use their trademarks and trade names for marketing purposes. The Company considers the use of these trademarks and trade names in its marketing efforts to be important to its business. Acquisitions Acquisitions have contributed significantly to the Company's growth. The Company believes that acquisitions are one method of increasing its presence in existing markets, expanding into new geographic markets, adding experienced service personnel, gaining new product offerings and services, obtaining more competitive pricing as a result of increased purchasing volumes of particular products and improving operating efficiencies through economies of scale. In recent years, there has been consolidation among providers of microcomputer products and services and the Company believes that this consolidation will continue, which, in turn, may present additional opportunities for the Company to grow through acquisitions. The Company continually seeks to identify and evaluate potential acquisition candidates. The Company is currently engaged in preliminary discussions with potential acquisition candidates, including a signed letter of intent with a small network service provider in Indiana. 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 year 1996, the Company completed three acquisitions. The following is a description of these acquisitions. TCSS. In March 1996, the Company acquired certain assets of The Computer Supply Store, Inc. (TCSS), a computer reseller based in Des Moines, Iowa, whose primary geographic market area is central Iowa. The operations acquired from TCSS now constitute the Company's Des Moines branch office. The Des Moines branch provides a broad range of microcomputer products and related professional services to a variety of business and other organizations. The purchase price consisted of approximately $4.5 million in cash, $2.7 million in a subordinated note, the assumption of certain liabilities and 150,000 unregistered shares of Common Stock. In addition, the Company entered into 5-year employment agreements with key employees of TCSS. TCSS' service revenues have historically accounted for a smaller percentage of total revenues than the percentage of service revenues of the Company, thus affording the Company an opportunity to provide additional value-added services to TCSS' customers. As of January 5, 1997, the Des Moines branch had approximately 134 service contracts in effect. As of January 5, 1997, the Des Moines branch had more than 4,800 customers, the largest of which included Principal Mutual Life Insurance Company, Pioneer HiBred International, Norwest Mortgage, Inc., Iowa Medical Center and Blue Cross/ Blue Shield of Iowa. As part of its growth strategy, the Company recently opened a branch office in Cedar Rapids, Iowa and intends to expand its presence to the entire state of Iowa. AA MICROSYSTEMS. In August 1996, the Company acquired certain assets of AA Microsystems, Inc. (AA Micro), a network service provider located in Birmingham, Alabama. This acquisition enabled the Company to expand the operations of its existing branch office in Birmingham and increase the number, and enhance the expertise, of its technical and service personnel. The purchase price consisted of $67 thousand in cash, a $200 thousand note payable, and 19,974 unregistered shares of Common Stock. In addition, the Company has entered into a three year employment contract with the former president. DILAN. In October 1996, the Company acquired certain assets of Communications Technology, Inc. (DILAN), a network integrator headquartered in Hickory, North Carolina. Through this acquisition, the Company expanded into the North Carolina and South Carolina markets, added Internet and electronic commerce services capabilities and enhanced its technical expertise, in particular WAN services and complex network integration. Historically, DILAN's business focused on network integration products and services with limited sales of microcomputers. The Company believes there exists an opportunity to expand sales of desktop and laptop PCs and related products to DILAN's current customer base as well as other companies in DILAN's markets. The purchase price consisted of approximately $2.6 million in cash, a $1.1 million subordinated note and the assumption of $5.5 million of liabilities. The purchase price is subject to adjustment based on DILAN's operating income for the fiscal year ending March 31, 1997. The Company has entered into a three year employment agreement with one employee and a one year employment agreement with another employee, both of whom were key employees of DILAN. ITEM 2. Properties The Company's principal executive offices and distribution facility are located in Hebron, Kentucky, comprised of approximately 36,000 and 91,000 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 intends to expand the distribution facility in 1997 to include a new depot repair facility. Pomeroy Investments intends to finance, purchase and own the land and improvements necessary to accommodate the new depot repair facility. The Company will lease the additional space from Pomeroy Investments at an annual lease rate no less favorable to the Company than can be obtained from unaffiliated third parties. The Company also has noncancelable operating leases for its regional offices, expiring at various dates between 1997 and 2006. The Company believes there will be no difficulty in negotiating the renewal of its real property leases as they expire or in finding other satisfactory space. In the opinion of management, the properties are in good condition and repair and are adequate for the particular operations for which they are used. The Company does not own any real property. ITEM 3. Legal Proceedings There are various legal actions arising in the normal course of business that have been brought against the Company. Management believes these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders None PART II ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters The following table sets forth, for the periods indicated, the high and low sales price for the Common Stock for the quarters indicated as reported on the Nasdaq National Market. The following prices have been adjusted to reflect the 10% stock dividend effected on May 22, 1995 and a three-for-two stock split in the form of a stock dividend effected on October 4, 1996. 1995 1996 High Low High Low First quarter $9.24 $5.61 $10.50 $8.00 Second quarter $12.67 $7.88 $11.33 $8.67 Third quarter $13.83 $10.50 $22.75 $9.17 Fourth quarter $12.33 $7.50 $38.00 $20.38 As of March 24, 1997, there were approximately 223 holders of record of the Company's common stock. Dividends The Company has not paid any cash dividends since its organization and the completion of its initial public offering. The Company has no plans to pay cash dividends in the foreseeable future, and the payment of such dividends are precluded under the Company's current borrowing agreement. ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (In Thousands Except Per Share Data) Fiscal Years (1) _____________________________________________________ 1992(2) 1993 1994(3) 1995 1996(4) Consolidated Statement of Income Data: Net sales and revenues $61,389 $112,178 $144,575 $230,710 $336,358 Cost of sales and service 48,176 94,151 120,901 197,174 281,753 ______ ______ _______ _______ _______ Gross profit 13,213 18,027 23,674 33,536 54,605 Operating expenses: Selling, general and administrative 9,225 12,969 17,231 23,247 35,175 Royalty expense 1,732 605 - - - Depreciation and amortization 203 400 886 1,004 2,561 ______ ______ ______ ______ ______ Total operating expenses 11,160 13,974 18,117 24,251 37,736 Income from operations 2,053 4,053 5,557 9,285 16,869 Other expense (income): Interest expense 604 850 1,031 1,999 2,170 Litigation settlement and related costs - - - - 4,392 Miscellaneous (54) (57) (57) (64) (221) _______ _______ _______ _______ ______ Total other expense 550 793 974 1,935 6,341 Income from continuing operations before income taxes(5) 1,503 3,260 4,583 7,350 10,528 Income tax expense 523 1,360 1,856 2,983 4,296 _______ _______ _______ ________ ______ Net income from continuing operations $980 $1,900 $2,727 $4,367 $6,232 ======= ======= ======== ======== ====== Net income from continuing operations per share (fully diluted)(6) $0.31 $0.52 $0.75 $1.08 $1.14 ======= ======= ======== ======== ====== Pro forma income from continuing operations(7) $917 $1,900 $2,727 $4,367 $6,232 Pro forma net income 702 1,900 2,727 4,367 6,232 Pro forma net income per share (fully diluted)(6)(7) $0.22 $0.52 $0.75 $1.08 $1.14 Consolidated Balance Sheet Data: Working capital $5,768 $6,339 $6,556 $10,340 $27,203 Long-term debt, net of current maturities - - 167 100 2,189 Equity 8,616 10,594 13,130 19,200 46,593 Total assets 26,813 34,086 57,061 63,985 121,380 (1) On December 30, 1992, the Company changed its fiscal year from a 52- or 53-week period ending on the first Saturday following December 31 to a 12-month period ending January 5. (2) During fiscal 1992, the Company acquired the outstanding stock of C&N Corp. and discontinued its retail operations. (3) During fiscal 1994 the Company acquired the outstanding stock of Xenas Communications Corp. See Note 12 of Notes to Consolidated Financial Statements. (4) In March 1996 and October 1996, the Company acquired the assets of TCSS and DILAN, respectively. See Note 12 of Notes to Consolidated Financial Statements. (5) Fiscal year 1996 reflects the Vanstar litigation settlement and related costs of $4,392. Without this charge, net income would have been $8,832 and fully diluted net income per share would have been $1.62. (6) Net income per share from continuing operations and pro forma per share amounts are calculated using pro forma weighted average shares outstanding adjusted for the three-for-two stock split in the form of a stock dividend effective on October 4, 1996. (7) The pro forma data compares the net operating results of the Company for fiscal year 1992 with the comparable results for fiscal years 1993 through 1996 as if the Company had been taxed as a C Corporation on all income in fiscal 1992 at an effective rate of 39%.
QUARTERLY RESULTS OF OPERATIONS (in thousands, except per share data) The following table sets forth certain unaudited operating res This information is unaudited, but in the opinion of managemen consisting of normal recurring adjustments, necessary for a fa operations of such periods.
1996(1) ________________________________________ First Second Third Fourth Quarter(2) Quarter Quarter Quarter(3) _________ ________ __________ _________ Net sales and revenues $63,224 $77,836 $92,975 $102,323 Gross profit 9,600 12,846 14,667 17,492 Net income (loss) $(1,355) $ 1,853 $ 2,619 $ 3,115 Net income (loss) per share Primary $ (0.33) $ 0.43 $ 0.40 $ 0.47 Fully Diluted $ (0.33) $ 0.43 $ 0.40 $ 0.47 1995(1) ___________________________________________ First Second Third Fourth Quarter Quarter Quarter Quarter ________ _________ __________ _________ Net sales and revenues $ 47,990 $ 58,487 $ 64,982 $ 59,252 Gross profit 7,753 7,882 8,765 9,137 Net income $ 906 $ 1,055 $ 1,088 $ 1,319 Net income per share Primary $ 0.25 $ 0.27 $ 0.26 $ 0.32 Fully Diluted $ 0.24 $ 0.27 $ 0.26 $ 0.32 (1) All per share amounts prior to the third quarter of 1996 have been restated to reflect the stock split effected as a stock dividend in the third quarter of 1996. (2) During the first quarter of fiscal 1996, the Company acquired certain assets of TCSS. See Note 12 of Notes to Consolidated Financial Statements. The first quarter of 1996 also includes the effect of the Vanstar litigation settlement and related costs of $4.4 million. Without this charge, net income would have been $1.3 million and net income per share would have been $0.30. (3) During the fourth quarter of fiscal 1996, the Company acquired certain assets of DILAN. See Note 12 of Notes to Consolidated Financial Statements.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Net Sales and Revenues. Total net sales and revenues increased $105.7 million, or 45.8%, to $336.4 million in fiscal 1996 from $230.7 million in fiscal 1995. This increase was attributable to the acquisitions of The Computer Supply Store, Inc. (TCSS) and Communications Technology, Inc. ( DILAN ), and increased sales to existing and new customers. After eliminating (i) fiscal 1995 revenues relating to the Kingsport, Tennessee branch which was closed in September 1995, and The Procter & Gamble Company, which ceased to purchase products and services from the Company in September 1995, (ii) fiscal 1996 revenues from the acquisition of TCSS which was acquired in March 1996 and (iii) fiscal 1996 revenues from the acquisition of DILAN which was acquired in October 1996, total net sales and revenues increased 27.1%. Sales of equipment and supplies increased $95.6 million, or 45.3%, to $306.7 million in fiscal 1996 from $211.1 million in fiscal 1995. After elimination of the revenues described above, sales of equipment and supplies increased 25.1%. Service revenues increased $9.5 million, or 52.8%, to $27.4 million in fiscal 1996 from $17.9 million in fiscal 1995. After elimination of the revenues described above, service revenues increased 50.4%. Gross Profit. Gross profit margin was 16.2% in fiscal 1996 compared to 14.5% in fiscal 1995. This increase was primarily attributable to a lesser number of lower margin, high volume equipment roll-outs, larger vendor rebates and the increase in higher margin service revenues. Vendor rebates increased $3.7 million, or 78.9%, to $8.4 million in fiscal 1996 from $4.7 million in fiscal 1995. Provided there are no changes in rebate programs, the level of vendor rebates is expected to continue into fiscal 1997 as volume purchases with major manufacturers continue to increase. Operating Expenses. Selling, general and administrative expenses (also including rent expense and provision for doubtful accounts) expressed as a percentage of total net sales and revenues increased to 10.5% in fiscal 1996 from 10.1% for fiscal 1995. This increase is primarily attributable to the addition of technical personnel as a result of the growth of the Company's service business. As the personnel reach full productivity, their costs as a percentage of services revenues are expected to decrease. In addition, market development funds, which reduce selling, general and administrative expenses, have declined as a percentage of total net sales and revenues during fiscal 1996 to 1.0% from 1.3% in fiscal 1995 primarily as a result of vendors shifting funds to rebates. Total operating expenses expressed as a percentage of total net sales and revenues increased to 11.2% in fiscal 1996 from 10.5% in fiscal 1995 due to the reduction of market development funds and the increase in depreciation related to the new headquarters and distribution facilities and amortization of goodwill related to the acquisitions of TCSS and DILAN. Income from Operations. Income from operations increased $7.6 million, or 81.7 %, to $16.9 million in fiscal 1996 from $9.3 million in fiscal 1995. The Company's operating margin increased to 5.0% in fiscal 1996 from 4.0% in fiscal 1995 because the increase in gross margin more than offset the increase in operating expenses as a percentage of total net sales and revenues. Interest Expense. Total interest expense was $2.2 million in fiscal 1996 compared with $2.0 million in fiscal 1995. Income Taxes. The Company's effective tax rate was 40.8% in fiscal 1996 compared to 40.6% in fiscal 1995. Litigation Settlement and Related Costs. On April 29, 1996, the Company agreed to a settlement of the litigation with Vanstar. The settlement of $3.3 million consisted of a payment made by the Company to Vanstar of $1.65 million in cash and a $1.65 million note which was paid on August 27, 1996. The settlement agreement also provided for mutual forgiveness of any and all claims or obligations of the parties, resulting in a write-off of $0.5 million of receivables from Vanstar and additional expenses of $0.5 million for costs related to the litigation. Net Income. Net income increased $1.8 million, or 42.7%, to $6.2 million in fiscal 1996 from $4.4 million in fiscal 1995. The increase was a result of the factors described above. Excluding the impact of the Vanstar settlement, net income in fiscal 1996 would have been $8.8 million, an increase of 102.2% over the comparable period in 1995. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 Net Sales and Revenues. Total net sales and revenues increased $86.1 million, or 59.6%, to $230.7 million in fiscal 1995 from $144.6 million in fiscal 1994. Of the increase, approximately $82.3 million resulted from increased sales to existing customers, including $35.6 million from one customer and $18.4 million from two roll-out projects. The remainder of the increase, $3.8 million, was attributable to the opening of a new branch office in Birmingham, Alabama in January 1995, and the acquisition of Xenas in November 1994. Sales of equipment and supplies increased $80.9 million, or 62.1%, to $211.2 million in fiscal 1995 from $130.3 million in fiscal 1994. Of the increase, approximately $77.5 million resulted from internal growth and $3.4 million was attributable to the opening of the new branch and acquisition described above. Service revenues increased $4.5 million, or 33.8%, to $17.9 million in fiscal 1995 from $13.4 million in fiscal 1994. Of this increase, approximately $0.2 million resulted from the opening of the Alabama branch, with the remainder due to internal growth. As part of an overall strategy to gain market share in 1995, the Company increased its hardware sales by more aggressively bidding on large volume projects which resulted in an increase in the proportion of equipment sales to total net sales and revenues in 1995 as compared to 1994. During the third quarter of 1995, the Company experienced a decline in its sales of equipment to The Procter & Gamble Company ( P&G ). P&G discontinued using the Company as its primary computer equipment supplier as part of P&G's program to select a single international supplier. The Company continues to provide minimal equipment to P&G as well as certain outsourcing services pursuant to an arrangement with the international supplier. The future impact on the Company of the loss of P&G as a significant customer is uncertain. Additionally, the Company closed its Kingsport, Tennessee location in an effort to focus on more profitable business opportunities. Gross Profit. Gross profit margin was 14.5% in fiscal 1995 compared to 16.4% in fiscal 1994. This decrease was attributable to a combination of strong price competition and large volume equipment roll-outs which increased the proportion of total revenues derived from relatively lower gross margin sales of product as compared to relatively higher gross margin revenues derived from services. Operating Expenses. Selling, general and administrative expenses (also including rent expense and provision for doubtful accounts) expressed as a percentage of total net sales and revenues declined to 10.1% in fiscal 1995 from 11.9% for fiscal 1994. This was attributable to the large volume increase in sales in 1995 and continued emphasis on expense control. Another contributing factor was the implementation of a new MIS system which has allowed the Company to reduce overhead costs as a percentage of sales. Total operating expenses expressed as a percentage of total net sales and revenues declined to 10.5% in fiscal 1995 from 12.5% in fiscal 1994 as the increase in these costs slowed relative to the growth in total net sales and revenues. Income from Operations. Income from operations increased $3.7 million, or 67.1 %, to $9.3 million in fiscal 1995 from $5.6 million in fiscal 1994. The Company's operating margin was essentially unchanged in 1995 as compared to 1994 as the decline in gross margin was offset by a decline in total operating expenses as a percent of total net sales and revenues. Interest Expense. Total interest expense was $2.0 million in fiscal 1995 compared with $1.0 million in fiscal 1994. The increase was attributable to higher average levels of debt outstanding on the bank line of credit and the floor plan financing arrangements during fiscal 1995 as compared to fiscal 1994. At January 5, 1996, the amounts outstanding on the bank line of credit and floor plan lines of credit were $16.9 million and $17.7 million, respectively. The additional levels of financing were necessary primarily to support the increased levels of accounts receivable and inventory needed to finance the higher sales and revenues. In addition, the weighted average interest rate on bank borrowings increased to 8.7% in fiscal 1995 compared with 7.1% in fiscal 1994, because of higher interest rates in the first quarter of 1995. Income Taxes. The Company's effective tax rate was 40.6% in fiscal 1995 compared to 40.5% in fiscal 1994. Net Income. Net income increased $1.6 million, or 59.3%, to $4.4 million in fiscal 1995 from $2.7 million in fiscal 1994. The increase was a result of the factors described above. Liquidity and Capital Resources Cash used in operating activities was $4.9 million in fiscal 1996. Cash used in investing activities included $9.9 million for acquisitions and $3.5 million for capital expenditures. Cash provided by financing activities included $17.9 million of net proceeds from a stock offering, $6.4 million of net proceeds from bank notes payable , $1.8 million from the exercise of stock options and less $1.3 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, 1997, these lines of credit totaled $37.0 million, including $12.0 million with IBM Credit Corporation ( ICC ) and $25.0 million with Deutsche Financial Services ( DFS ). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. All such borrowings are secured by the related inventory. Financing on many of the arrangements which are subsidized by manufacturers is interest free. The average rate on the plans overall is less than 2.0%. The Company classifies amounts outstanding under the floor plan arrangements as accounts payable. The Company's financing of receivables is provided through its Credit Facility, which permits the Company to borrow up to the lesser of $25.0 million or an amount based upon a formula of eligible trade receivables. The Credit Facility carries a variable interest rate based on (i) Star Bank's prime rate less the Incentive Pricing Spread or (ii) LIBOR plus the Incentive Pricing Spread, at the Company's election. The Incentive Pricing Spread is adjusted quarterly. At January 5, 1997, the amount outstanding was $24.1 million of which $14.1 million was at an interest rate of 7.5%, and $10.0 million was at an interest rate of 7.25% based on LIBOR rates. The Credit Facility expires in April 1997 and is collateralized by substantially all of the assets of the Company, except those assets that collateralize certain other financing arrangements. Under the terms of the Credit Facility, the Company is prohibited from paying any cash dividends and is subject to various restrictive covenants. The Company completed a secondary public offering of its stock on February 28, 1997. Net proceeds to the Company were approximately $23.2 million from the issuance of 1.02 million shares of common stock. The proceeds were used to reduce amounts outstanding under its line of credit. The Company believes that the net proceeds from the above noted offering, 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. The Company moved to a new distribution facility in January 1996 and new executive offices in May 1996. The Company has executed a ten year triple-net lease agreement for these facilities with Pomeroy Investments, LLC, which is controlled by the Chief Executive Officer of the Company. The base rental for 1996 on an annualized basis is $583 thousand. In conjunction with the new facilities, the Company has been approved for state tax credits of approximately $4.0 million over 10 years by the Kentucky Economic Development Finance Authority. Item 8. Financial Statements and Supplementary Data Registrant hereby incorporates the financial information required by this item by reference to Item 14 hereof. Item 9. Disagreements on Accounting and Financial Disclosure None PART III Items 10-13. The Registrant hereby incorporates the information required by Form 10-K, Items 10-13 by reference to the Company's definitive proxy statement for its 1997 Annual Meeting of shareholders which will be filed with the Commission prior to May 5, 1997. PART IV Item. 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - Index (a) The following documents are filed as a part of this report: 1996 Form 10-K Page __________ 1. Financial Statements: Independent Auditor's Report F-1 Consolidated Balance Sheets, January 5, 1996 and January 5, 1997 F-2 to F-3 For each of the three fiscal years in the period ended January 5, 1997: Consolidated Statements of Income F-4 Consolidated Statements of Cash F-5 Flows Consolidated Statements of Equity F-6 Notes to Consolidated Financial F-7 to F-17 Statements 2. Financial Statement Schedules: None Filed Herewith (page #) or Incorporated 3. Exhibits by Reference to: ________________ 3(a) Certificate of Incorporation Exhibit 3(a) of the Company of Company's Form S-1 filed Feb. 14, 1992 3(b) Bylaws of the Company Exhibit 3(b) of Company's Form S-1 filed Feb. 14, 1992 10(i) Material Agreements (a)(1) Loan Agreement between Star Exhibit Bank, NA and the Company 10(i)(a)(1) of dated November 19, 1992 Company's Form 10-K filed March 31, 1993 (a)(2) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(2) of December 16, 1992 by and Company's Form among Star Bank, NA, the 10-K filed March Company and C&N Corp. 31, 1993 (a)(3) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(3) of March 12, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994 (a)(4) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(4) of April 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994 (a)(5) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(5) of June 30, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994 (a)(6) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(6) of August 5, 1993 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 7, 1994 (a)(7) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(7) of November 29, 1993 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 7, 1994 (a)(8) Amendment to Loan Agreement Exhibit by Letter Agreement dated May 10(i)(a)(8) of 6, 1994 by and among Star Company's Form Bank, N.A., the Company and 10-K filed April C&N Corp. 4, 1995 (a)(9) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(9) of November 3, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995 (a)(10) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(10) of November 8, 1994 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995 (a)(11) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(11) of November 30, 1994 by and Company's Form among Star Bank, N.A., the 10-K filed April Company and C&N Corp. 4, 1995 (a)(12) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(12) of January 30, 1995 by and among Company's Form Star Bank, N.A., the Company 10-K filed April and C&N Corp. 4, 1995 (a)(13) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(13) of March 31, 1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed May C&N Corp. and Xenas 18, 1995 Communications Corp. (a)(14) Amendment to Loan Agreement Exhibit by Letter Agreement date May 10(i)(a)(14) of 31, 1995 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 18,1995 Communications Corp. (a)(15) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(15) of October 19,1995 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 17, Communications Corp. 1995 (a)(16) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(16) of December 18,1995 by and among Company's Form Star Bank, N.A., the Company, 10-K filed April C&N Corp. and Xenas 4, 1996 Communications Corp. (a)(17) Amended and Restated Loan Exhibit Agreement dated March 14, 10(i)(a)(17) of 1996 by and between Star Company's Form Bank, N.A., the Company, C&N S-1 filed June Corp., Xenas Communications 4, 1996 Corp. and Pomeroy Computer Leasing Company, Inc. (a)(18) Letter Agreement and Exhibit Promissory Note dated June 10(i)(a)(18) of 12, 1996 by and among Star Company's Form Bank, N.A., the Company, C&N 10-Q filed Corp. and Xenas August 15, 1996 Communications Corp. (a)(19) Waiver Letter dated June 20, Exhibit 1996 by and among Star Bank, 10(i)(a)(19) of N.A., the Company, C&N Corp. Company's Form and Xenas Communications 10-Q filed Corp. August 15, 1996 (a)(20) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(20) of June 21, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas August 15, 1996 Communications Corp. (a)(21) Amendment to Loan Agreement Exhibit 10.1 of by Letter Agreement dated Company's Form June 27, 1996 by and among S-3 filed Star Bank, N.A., the Company, January 3, 1997 C&N Corp. and Xenas Communications Corp. (a)(22) Amendment to Loan Agreement Exhibit by Letter Agreement dated 10(i)(a)(22) of October 18, 1996 by and among Company's Form Star Bank, N.A., the Company, 10-Q filed C&N Corp. and Xenas November 19, Communications Corp. 1996 (a)(23) Amendment to Loan Agreement Exhibit 10.2 of by Letter Agreement dated Company's Form December 20, 1996 by and S-3 filed among Star Bank, N.A., the January 3, 1997 Company, C&N Corp., Xenas Communications Corp. and Pomeroy Computer Leasing Company, Inc. (b)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(b)(1) of Agreement) between IBM Credit Company's Form Corporation and the Company 10-K filed April dated April 2, 1992 7, 1994 (b)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(b)(2) of IBM Credit Corporation and Company's Form the Company dated July 7, 10-K filed April 1993 7, 1994 (c)(1) Agreement for Wholesale Exhibit Financing (Security 10(i)(c)(1) of Agreement) between ITT Company's Form Commercial Finance 10-K filed April Corporation and the Company 7, 1994 dated March 27, 1992 (c)(2) Addendum to Agreement for Exhibit Wholesale Financing between 10(i)(c)(2) of ITT Commercial Finance Company's Form Corporation and the Company 10-K filed April dated July 7, 1993 7, 1994 (c)(3) Amendment to Agreement for Exhibit Wholesale Financing between 10(i)(c)(3) of Deutsche Financial Services Company's Form f/k/a ITT Commercial Finance 10-Q filed May Corporation and the Company 18, 1995 dated May 5, 1995. (d)(1) Asset Purchase Agreement Exhibit 10(i)(z) among the Company; TCSS; and of Company's Richard Feaster, Victoria Form 8-K dated Feaster, Harry Feaster, March 14, 1996 Carolyn Feaster, Victoria Feaster, trustee of the Emily Patricia Feaster Trust, and Victoria Feaster, as trustee of the Nicole Ann Feaster Trust dated March 14, 1996 (d)(2) Lease between the Company and Exhibit 10.48 of TCSS dated March 15, 1996 Company's Form S-1 filed June 4, 1996 (d)(3) Lease between Arthur K. Jones Exhibit 10.49 of Trust, Firststar Bank Des Company's Form Moines, N.A., and William A. S-1 filed June Jones, Trustees, and The 4, 1996 Computer Supply Store, Inc. dated July 1, 1994 (assigned to the Company effective as of March 14, 1996) (d)(4) Registration Rights Agreement Exhibit 10.50 of between the Company and TCSS Company's Form dated March 14, 1996 S-1 filed June 4, 1996 (d)(5) Employment Agreement between Exhibit 10.51 of the Company and Richard Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996 (d)(6) Employment Agreement between Exhibit 10.52 of the Company and Victoria Company's Form Feaster dated March 14, 1996 S-1 filed June 4, 1996 (e)(1) IBM Agreement for Authorized Exhibit Dealers and Industry 10(i)(e)(1) Remarketers with the Company, of Company's dated September 3, 1991 Form S-1 filed Feb. 14, 1992 (e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) Identical IBM Agreements for of Company's Authorized Dealers and Form S-1 filed Industry Remarketers Feb. 14, 1992 (f) Compaq Computer Corporation Exhibit 10(i)(f) United States Dealer Agreement of Company's with the Company, dated Form S-1 filed September 27, 1990 Feb. 14, 1992 (g) Dealer Sales Agreement Exhibit 10(i)(g) between Apple Computer, Inc. of Company's and the Company, dated Form S-1 filed April 1, 1991 Feb. 14, 1992 (h) Lease between Sydney A. Warm Exhibit 10(i)(h) and the Company for 1021 West of Company's Eighth Street, Cincinnati, OH, Form S-1 filed dated May 15, 1990 Feb. 14, 1992 (i) Lease between F.G.&H. Exhibit 10(i)(i) Partnership and the Company of Company's for 908 DuPont Road, Form S-1 filed Louisville, KY, dated May 9, Feb. 14, 1992 1990 (j)(1) Purchase Agreement between Exhibit 10.86 of the Company and First of Company's Form Michigan Corporation dated S-1 filed June March 28, 1996 4, 1996 (j)(2) Purchase Agreement between Exhibit 10.87 of the Company and John C. Company's Form Donnelly dated March 28, 1996 S-1 filed June 4, 1996 (j)(3) Purchase Agreement between Exhibit 10.88 of the Company and Dan B. French Company's Form dated March 28, 1996 S-1 filed June 4, 1996 (j)(4) Purchase Agreement between Exhibit 10.89 of the Company and James C. Company's Form Penman dated March 28, 1996 S-1 filed June 4, 1996 (k)(1) Lease between Industrial Exhibit Developments International, 10(i)(k)(1) of Inc., and the Company for Company's Form 1840 Airport Exchange Blvd., 10-K filed March Suite 240, Erlanger, KY dated 31, 1993 November 2, 1992 (k)(2) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(2) of International, Inc., and the Company's Form Company for 1840 Airport 10-K filed March Exchange Blvd., Suite 240, 31, 1993 Erlanger, KY dated December 31, 1992 (k)(3) Lease between Industrial Exhibit Developments International, 10(i)(k)(3) of Inc., and the Company for Company's Form 1850 Airport Exchange Blvd., 10-K filed March Suite 600, Erlanger, KY dated 31, 1993 November 2, 1992 (k)(4) Amendment to lease between Exhibit Industrial Developments 10(i)(k)(4) of International, Inc., and the Company's Form Company for 1850 Airport 10-K filed March Exchange Blvd., Suite 600, 31, 1993 Erlanger, KY dated December 31, 1992 (l) Covenant not to Compete Exhibit between the Company and 10(i)(l)(2) of Richard C. Mills dated July Company's Form 7, 1993 10-K filed April 7, 1994 (m)(1) Asset Purchase Agreement Exhibit 10.5 of among the Company, AA Company's Form Microsystems, Inc. and Stuart S-3 filed Raburn dated August 2, 1996 January 3, 1997 (m)(2) Promissory Note dated August Exhibit 10.6 of 2, 1996 of the Company in Company's Form favor of AA Microsystems, S-3 filed Inc. January 3, 1997 (n)(1) Lease between Crown Exhibit 10(i)(n) Development Group and the of Company's Company for 3740 St. Johns Form 10-K filed Bluff Road, Suite 19, March 31, 1993 Jacksonville, FL dated September 17, 1992 (n)(2) Amendment to Lease between Exhibit Crown Development Group and 10(i)(n(2 of the Company for 3740 St. Company's Form Johns Bluff Road, Suite 19, 10-K filed April Jacksonville, FL dated 4, 1996 December 11, 1995 (o) Lease between Lincoln Exhibit 10(i)(o) National Investment of Company's Management Company and the Form 10-K filed Company for Suite 150F in the March 31, 1993 Terraces on Market Place Blvd., Knoxville, TN dated September 30, 1992 (p)(1) Remarketing and Agency Exhibit Agreement (the "Remarketing 10(i)(p)(1) of Agreement") between Company's Form Information Leasing S-1 filed Feb. Corporation and the Company 14, 1992 dated January 7, 1990 (p)(2) Amendment No. 1 to the Exhibit Remarketing Agreement dated 10(i)(p)(2) of November 12, 1991 Company's Form S-1 filed Feb. 14, 1992 (p)(3) Letter, dated February 2, Exhibit 1994, extending term of 10(i)(p)(3) of Remarketing Agreement to May Company's Form 1, 1996 10-K filed April 4, 1996 (p)(4) Amendment No. 2 to the Exhibit Remarketing Agreement dated 10(i)(p)(4) of October 10, 1995 Company's Form 10-K filed April 4, 1996 (q) Lease between Athens Exhibit 10(i)(q) Properties and the Company of Company's for Crosspark Drive, Form 10-K filed Knoxville, TN dated October April 4, 1996 31, 1995 (r)(1) Asset Purchase Agreement Exhibit 10.7 of among the Company, Company's Form Communications Technology, S-3 filed Inc. d/b/a DILAN and Robert January 3, 1997 Martin dated October 11, 1996 (r)(2) Subordinated Promissory Note Exhibit 10.8 of dated October 11, 1996 of the Company's Form Company in favor of S-3 filed Communications Technology, January 3, 1997 Inc. (r)(3) Subordination Agreement among Exhibit 10.9 of the Company, Communications Company's Form Technology, Inc. and Star S-3 filed Bank, N.A. dated October 11, January 3, 1997 1996 (s) Services Agreement between Exhibit 10.13 of the Company and Nationwide Company's Form Mutual Insurance and the S-3 filed Company dated December 11, January 3, 1997 1996 (u) Lease between NWI Airpark Exhibit 10(i)(u) L.P. and the Company for 717 of Company's Airpark Center Drive, Form 10-K filed Nashville, TN dated February April 4, 1995 24, 1994 (x) Lease between the Company and Exhibit 10(i)(x) Pomeroy Investments, LLC for of Company's buildings at Airpark Form 10-Q filed International dated September November 17, 5, 1995 1995 (y) Lease between the Company and Exhibit 10(i)(y) New England Mutual Life of Company's Insurance Company for Form 10-Q filed building at Lexington November 17, Business Center dated October 1995 4, 1995 (z)(1) Asset Purchase Agreement Exhibit between the Company and 10(i)(z)(1) of Cabling Unlimited, Inc. dated Company's Form October 13, 1995 10-K filed April 4, 1996 (z)(2) Agreement between Cabling Exhibit Unlimited, Inc. and the 10(i)(z)(2) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996 (z)(3) Agreement between Karen Exhibit Epperson and the Company 10(i)(z)(3) of dated October 13, 1995 Company's Form 10-K filed April 4, 1996 (z)(4) Employment Agreement between Exhibit Karen Epperson and the 10(i)(z)(4) of Company dated October 13, Company's Form 1995 10-K filed April 4, 1996 (z)(5) Assumption of Liabilities Exhibit between Cabling Unlimited, 10(i)(z)(5) of Inc. and the Company dated Company's Form October 13, 1995 10-K filed April 4, 1996 (aa) Lease between Gleeson, Inc. Exhibit and the Company for 115 10(i)(aa) of Wiltshire Ave., Louisville, Company's Form KY dated May 10, 1995 10-K filed April (assigned to the Company 4, 1996 effective October 13, 1995) (bb) Columbia/HCA Agreement Exhibit between Columbia/HCA 10(i)(bb) of Information Services, Inc. Company's Form and the Company dated 10-K filed April December 12, 1995 4, 1996 10(iii) Material Employee Benefit and Other Agreements (a)(1) Employment Agreement between Exhibit the Company 10(iii)(a) and David B. Pomeroy, dated of Company's March 12, 1992 Form S-1 filed Feb. 14, 1992 (a)(2) First Amendment to Employment Exhibit Agreement between the Company 10(iii)(a)(2) of and David B. Pomeroy Company's Form effective July 6, 1993 10-K filed April 7, 1994 (a)(3) Second Amendment to Exhibit Employment Agreement between 10(iii)(a)(3) of the Company and David B. Company's Form Pomeroy dated October 14, 10-K filed April 1993 7, 1994 (a)(4) Agreement between the Company Exhibit and David B. Pomeroy related 10(iii)(a)(4) of to the personal guarantee of Company's Form the Datago agreement by David 10-K filed April B. Pomeroy and his spouse 7, 1994 effective July 6, 1993 (a)(5) Third Amendment to Exhibit Employment Agreement between 10(iii)(a)(5) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed 1995 November 17, 1995 (a)(6) Supplemental Executive Exhibit Compensation Agreement 10(iii)(a)(6) of between the Company and David Company's Form B. Pomeroy effective January 10-Q filed 6, 1995 November 17, 1995 (a)(7) Collateral Assignment Split Exhibit Dollar Agreement between the 10(iii)(a)(7) of Company; Edwin S. Weinstein, Company's Form as Trustee; and David B. 10-Q filed Pomeroy dated June 28, 1995 November 17,1995 (a)(8) Fourth Amendment to Exhibit Employment Agreement between 10(iii)(a)(8) of the Company and David B. Company's Form Pomeroy dated December 20, 10-Q filed May 1995, effective January 6, 17, 1996 1995 (a)(9) Fifth Amendment to Exhibit Employment Agreement between 10(iii)(a)(9) of the Company and David B. Company's Form Pomeroy effective January 6, 10-Q filed May 1996 17, 1996 (a)(10) Sixth Amendment to Exhibit 10.10 of Employment Agreement between Company's Form the Company and David B. S-3 filed Pomeroy effective January 6, January 3, 1997 1997 (a)(11) Award Agreement between the Exhibit 10.11 of Company and David B. Pomeroy Company's Form effective January 6, 1997 S-3 filed January 3, 1997 (a)(12) Registration Rights Agreement Exhibit 10.12 of between the Company and David Company's Form B. Pomeroy effective January S-3 filed 6, 1997 January 3, 1997 (b) Employment Agreement between Exhibit the Company and Edwin S. 10(iii)(c) of Weinstein dated February 13, Company's Form 1992 S-1 filed Feb. 14, 1992 (d) The Company Savings 401(k) Exhibit Plan, 10(iii)(d) effective July 1, 1991 of Company's Form S-1 filed Feb. 14, 1992 (e) The Company's Employee Stock Exhibit Ownership Plan and Trust, 10(iii)(e) of effective July 1, 1992 Company's Form 10-K filed March 31, 1993 (f) The Company's 1992 Non- Exhibit Qualified and Incentive 10(iii)(f) Stock Option Plan, of Company's dated February 13, 1992 Form S-1 filed February 14, 1992 (g) The Company's 1992 Outside Exhibit Directors 10(iii)(g) Stock Option Plan, dated of Company's February 13, 1992 Form S-1 filed Feb. 14, 1992 (h) Employment Agreement between Exhibit the Company and Richard C. 10(iii)(h) of Mills dated July 7, 1993 Company's Form 10-K filed April 7, 1994 (I) Employment Agreement between Exhibit 10.64 of the Company and James Eck Company's Form dated February 6, 1996, and S-1 filed June effective as of September 18, 4, 1996 1995 (j)(1) Employment Agreement between Exhibit 10.3 of the Company and Stephen E. Company's Form Pomeroy dated November 13, S-3 filed 1996 January 3, 1997 (j)(2) Incentive Deferred Exhibit 10.4 of Compensation Agreement Company's Form between the Company and S-3 filed Stephen E. Pomeroy dated January 3, 1997 November 13, 1996 11 Computation of Per Share Earnings E-1 21 Subsidiaries of the Company E-2 27 Financial Data Schedule E-3 (b) Reports on Form 8-K: On October 25, 1996, the Company filed a current report on Form 8-K for the acquisition of Communications Technology, Inc. On January 3, 1997, the Company filed a current report on Form 8-K to file audited financial statements for the nine months ended October 5, 1996. 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/Edwin S. Weinstein Edwin S. Weinstein Chief Financial Officer and Chief Accounting Officer Dated: April 4, 1997 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 4, 1997 _____________________________________ David B. Pomeroy, Director By: /s/Edwin S. Weinstein April 4, 1997 ______________________________________ Edwin S. Weinstein, Director By: /s/James H. Smith, III April 4, 1997 ______________________________________ James H. Smith III, Director By: _______________________________________ Dr. David W. Rosenthal, Director By: _______________________________________ Michael E. Rohrkemper, Director REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders Pomeroy Computer Resources, Inc. We have audited the accompanying consolidated balance sheets of Pomeroy Computer Resources, Inc. as of January 5, 1996 and 1997, and the related consolidated statements of income, equity, and cash flows for each of the three years in the period ended January 5, 1997. 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, 1996 and 1997, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended January 5, 1997 in conformity with generally accepted accounting principles. Grant Thornton LLP Cincinnati, Ohio February 4, 1997, except for Note 18 as to which the date is February 28, 1997 POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
January 5, January 5, (in thousands) 1996 1997 ____________ _____________ ASSETS Current assets: Cash.................................................... $ 596 $ 6,809 Accounts receivable: Trade, less allowance of $201 and $372 at January 5, 1996 and 1997, respectively.............. 27,098 53,374 Vendor product returns, less allowance of $210 and $137 at January 5, 1996 and 1997, respectively...... 3,485 8,649 Vendor incentive rebates.............................. 3,142 5,762 Amount due from stockholder........................... 206 - Other................................................. 389 309 Total receivables............................... 34,320 68,094 _______ ________ Inventories............................................. 18,987 23,426 Other................................................... 487 739 _______ ________ Total current assets............................ 54,390 99,068 Equipment and leasehold improvements: Furniture, fixtures and equipment....................... 5,408 8,639 Leasehold improvements.................................. 1,151 4,437 _______ ________ Total........................................... 6,559 13,076 Less accumulated depreciation........................... 1,968 3,864 _______ ________ Net equipment and leasehold improvements......... 4,591 9,212 Investment in lease residuals.............................. 2,596 3,043 Goodwill and other intangible assets....................... 1,446 9,435 Other assets............................................... 962 622 _______ ________ Total assets..................................... $ 63,985 $ 121,380 ======= ======== See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
January 5, January 5, (in thousands) 1996 1997 __________ ___________ LIABILITIES AND EQUITY Current liabilities: Current portion of notes payable..................... $ 409 $ 907 Accounts payable: Floor plan financing............................... 17,677 34,609 Trade.............................................. 3,967 5,734 _______ ________ Total accounts payable....................... 21,644 40,343 Bank notes payable................................... 16,877 24,146 Deferred revenue..................................... 2,286 2,318 Accrued liabilities: Employee compensation and benefits................. 801 2,016 Income taxes....................................... 1,118 1,544 Interest........................................... 42 147 Miscellaneous...................................... 874 444 _______ ________ Total current liabilities.................... 44,051 71,865 Notes Payable.......................................... 100 2,189 Deferred income taxes.................................. 635 733 Equity: Preferred stock (no shares issued or outstanding).... - - Common stock (2,626 and 6,469 shares issued and outstanding at January 5, 1996 and 1997, respectively) 26 65 Paid-in capital...................................... 13,279 34,402 Retained earnings.................................... 6,098 12,330 _______ ________ 19,403 46,797 Less treasury stock, at cost (21 shares at January 5, 1996 and 1997, respectively)....................... 204 204 _______ ________ Total equity.................................... 19,199 46,593 _______ ________ Total liabilities and equity.................... $ 63,985 $ 121,380 ======= ======== See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended January 5, __________________________________ (in thousands, except per share data) 1995 1996 1997 ________ ________ ________ Net sales and revenues: Sales - equipment and supplies..................... $ 130,270 $ 211,149 $ 306,745 Service............................................ 13,410 17,940 27,419 Other.............................................. 895 1,621 2,194 ________ _________ ________ Total net sales and revenues............... 144,575 230,710 336,358 Cost of sales and service: Equipment and supplies............................. 117,594 192,839 275,272 Service............................................ 3,307 4,335 6,481 ________ _________ ________ Total cost of sales and service............ 120,901 197,174 281,753 ________ _________ ________ Gross profit....................................... 23,674 33,536 54,605 ________ _________ ________ Operating expenses: Selling, general and administrative................ 16,268 21,863 33,384 Rent expense....................................... 700 894 1,546 Depreciation....................................... 331 770 1,925 Amortization....................................... 555 234 636 Provision for doubtful accounts.................... 263 490 245 ________ _________ ________ Total operating expenses................... 18,117 24,251 37,736 ________ _________ ________ Income from operations............................... 5,557 9,285 16,869 ________ _________ ________ Other expense (income): Interest expense................................... 1,031 1,999 2,170 Litigation settlement and related costs............ - - 4,392 Miscellaneous...................................... (57) (64) (221) ________ _________ ________ Total other expense........................ 974 1,935 6,341 ________ _________ ________ Income before income tax............................. 4,583 7,350 10,528 Income tax expense................................... 1,856 2,983 4,296 ________ _________ ________ Net income........................................... $ 2,727 $ 4,367 $ 6,232 ======== ========= ======== Weighted average shares outstanding: Primary............................................ 3,644 4,005 5,404 ======== ========= ======== Fully diluted...................................... 3,644 4,044 5,467 ======== ========= ======== Net Income per common share: Primary........................................... $0.75 $1.09 $1.15 ======== ========= ======== Fully diluted...................................... $0.75 $1.08 $1.14 ======== ========= ======== See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended January 5, ____________________________________ (in thousands) 1995 1996 1997 Cash Flows from Operating Activities: Net income........................................ $ 2,727 $ 4,367 $ 6,232 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation.................................... 331 771 1,925 Amortization.................................... 555 234 636 Deferred income taxes........................... 112 258 57 Net acquisition of lease residuals.............. (253) (1,294) (273) Issuance of common shares for stock awards...... 40 40 40 Changes in working capital accounts, net of effects of subsidiary company purchased: Accounts receivable........................... (12,612) (2,130) (24,007) Inventories................................... (8,619) (1,814) (1,959) Floor plan financing.......................... 11,399 (1,298) 16,932 Trade payables................................ 458 (688) (3,949) Deferred revenue.............................. 503 586 (355) Income tax payable............................ 177 67 426 Other, net.................................... 166 486 (591) ________ _________ _________ Net operating activities.......................... (5,016) (415) (4,886) ________ _________ _________ Cash Flows from Investing Activities: Capital expenditures.............................. (1,243) (1,070) (3,459) Payments for covenants not to compete............. (219) (238) - Acquisition of subsidiary companies, net of cash acquired................................... (114) (20) - Acquisition of reseller assets.................... _ (425) (9,934) ________ _________ _________ Net investing activities.......................... (1,576) (1,753) (13,393) ________ _________ _________ Cash Flows from Financing Activities: Payments on notes payable......................... (58) (305) (1,288) Net proceeds of stock offering.................... _ _ 17,924 Net proceeds under bank notes payable............. 6,303 1,435 6,419 Proceeds from note payable........................ 500 - - Purchase of treasury stock........................ (204) _ _ Offering costs.................................... (169) _ _ Proceeds from exercise of stock options........... _ 1,560 1,767 Retirement of stock warrants...................... _ _ (330) ________ _________ _________ Net financing activities.......................... 6,372 2,690 24,492 ________ _________ _________ Increase (decrease) in cash ........................ (220) 522 6,213 Cash: Beginning of period............................... 294 74 596 ________ _________ _________ End of period..................................... $ 74 $ 596 $ 6,809 ======== ========= ========= See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC. CONSOLIDATED STATEMENTS OF EQUITY
Common Paid-in Retained Treasury Total stock capital earnings stock equity _______ _______ ________ ________ ________ (in thousands, except for share amounts) Balances at January 5, 1994............ $ 22 $ 8,145 $ 2,426 $ - $ 10,593 Net income......................... 2,727 2,727 3,168 common shares issued for stock awards................. 40 40 12,976 common shares issued for acquisition of subsidiary.... 137 137 Purchases of treasury stock........ (204) (204) Costs associated with initial public offering.................. (169) (169) Tax benefit of costs related to initial public offering.......... 5 5 _______ _______ ________ ________ ________ Balances at January 5, 1995............. 22 8,158 5,153 (204) 13,129 Net income.......................... 4,367 4,367 4,000 common shares issued for stock awards.................. 40 40 5,755 common shares issued for acquisition .................. 100 100 Stock options exercised and related tax benefit............... 2 1,558 1,560 Stock dividend...................... 2 3,420 (3,422) - Tax benefit of costs related to initial public offering........... 3 3 _______ _______ ________ ________ ________ Balances at January 5, 1996............. 26 13,279 6,098 (204) 19,199 Net income.......................... 6,232 6,232 3,076 common shares issued for stock awards.................. 40 40 113,316 common shares issued for acquisitions ................. 1 1,474 1,475 Stock options exercised and related tax benefit............... 4 2,049 2,053 Retirement of stock warrants........ (330) (330) Effect of 3 for 2 stock split....... 20 (20) 1,402,500 common shares issued by public offering........ 14 17,910 17,924 _______ _______ ________ ________ ________ Balances at January 5, 1997............. $ 65 $34,402 $12,330 $ (204) $ 46,593 ======= ======= ======== ======== ======== See notes to consolidated financial statements.
POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL YEARS ENDED JANUARY 5, 1995, JANUARY 5, 1996 AND JANUARY 5, 1997 1. Company Description On February 13, 1992, Pomeroy Computer Resources, Inc. was formed and on April 2, 1992 was merged with eight related businesses ("predecessor businesses") (collectively the "Company"), five of which owned and operated franchises of ComputerLand Corporation ("ComputerLand") in Ohio and Kentucky. The Company has 10 million shares of $.01 par value common stock authorized, with 6.5 million shares outstanding. The Company is also authorized to issue 2 million shares of $.01 par value preferred stock. Since the owner of the Company and the predecessor businesses were the same, this transaction constituted a combination of the predecessor businesses under common control and was accounted for at historical cost in a manner similar to that followed for a pooling of interests. The Company purchased C&N Corp. ("C&N") in fiscal 1992 and Xenas Communications Corp. ( Xenas) in fiscal 1994 (see Note 12). In fiscal 1995 the Company formed a wholly-owned subsidiary, Pomeroy Computer Leasing Company, Inc. (PCL), for the purpose of leasing computer equipment to the Company's customers. In 1996 C&N was merged into the Company. The Company sells, installs and services microcomputers and microcomputer equipment primarily for business, professional, educational and government 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 fifteen branch offices in Kentucky, Indiana, Tennessee, Florida, Alabama, Iowa, North Carolina and South Carolina, and grants credit to substantially all customers in these areas. 2. Summary of Significant Accounting Policies Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Xenas and PCL. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1995 financial statements included herein to conform with the presentation used in 1996. Fiscal Year - The Company's fiscal year is a 12- month period ending January 5. References to fiscal 1994, 1995 and 1996 are for the fiscal years ended January 5, 1995, January 5, 1996 and January 5, 1997, 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 income tax liabilities and assets are provided for temporary differences between the tax basis and reported amounts of assets and liabilities that will result in taxable or deductible amounts in future years. The Company's temporary differences primarily result from revenue from the acquisition of lease residuals not taxable until received, the use of accelerated depreciation for tax purposes and accrued expenses not deductible for tax purposes until paid. 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 has adopted SFAS No. 123 for disclosure purposes and for non-employee stock options. This has no material effect on the results of operations or financial position of the Company. Net Income per Share - The computation of primary net income per common and common equivalent 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 and warrants. Fully diluted net income per common share also reflects dilution due to the use of the market price at the end of the period, when higher than the average price for the period. In February 1997 the Financial Accounting Standards Board issued SFAS No. 128, ``Earnings Per Share." The Company will implement the statement in the fourth quarter of 1997, the effect of which has not yet been determined. 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. POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 3. Accounts Receivable The following table summarizes the activity in the allowance for doubtful accounts for fiscal 1994, 1995 and 1996. (in thousands) Trade Other _______ ______ Balance January 5, 1994 $ 65 - Provision 1994 38 $ 225 Accounts written-off (38) - _______ _______ Balance January 5, 1995 65 225 Provision 1995 94 417 Accounts written-off (89) (444) Recoveries 131 12 ________ _______ Balance January 5, 1996 201 210 Provision 1996 250 31 Accounts written-off (249) (604) Recoveries 170 500 ________ _______ Balance January 5, 1997 $ 372 $ 137 ======== ======= 4. Inventories Inventories consist of items held for resale and are comprised of the following components as of the end of fiscal: (in thousands) 1995 1996 Equipment and supplies $ 17,927 $ 21,730 Service parts 1,060 1,696 _______ _______ Total $ 18,987 $ 23,426 ======= ======= 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 $489 thousand (1995) and $984 thousand (1996), respectively: (in thousands) 1995 1996 Goodwill $ 451 $ 8,698 Covenants not to compete 394 208 Customer lists 601 529 _____ ______ $ 1,446 $ 9,435 _____ ______ As a result of its litigation with Vanstar Corporation, the Company in fiscal 1994 wrote-off unamortized costs in the amount of $251 thousand related to its agreement with Vanstar which are included in amortization expense. On April 29, 1996 the Company and Vanstar entered into a settlement agreement which in effect terminated all agreements between the parties. POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued In 1993, the Company acquired certain assets, principally customer lists, of a computer reseller in Louisville, Kentucky. Also, the Company entered into a five year covenant not to compete with the reseller and its owners. Amounts paid to the reseller for these intangibles were $194 thousand for customer lists and $241 thousand for the covenant not to compete. The Company entered into an additional covenant not to compete with a former owner of the reseller whereby the Company paid a total of $277 thousand in two installments during 1994 and 1995. In fiscal 1996, the Company acquired certain assets of The Computer Supply Store, Inc. ("TCSS") a privately held computer reseller located in Des Moines, Iowa, AA Microsystems, Inc. ("AA Micro"), a network service provider located in Birmingham, Alabama and Communications Technology, Inc. (DILAN ), a privately held network integrator located in Hickory, North Carolina (See Note 12). The Company recorded $5.7 million, $0.4 million and $2.5 million of goodwill in connection with those acquisitions, respectively. 6. Borrowing Arrangements The Company has an available line of credit up to the lesser of $25 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, 1996 and 1997, bank notes payable include $0.6 million and $2.2 million, respectively, of overdrafts in accounts with the Company's primary lender. These amounts were subsequently funded through the normal course of business. The interest rate charged was 8.25% at January 5, 1996. At January 5, 1997, the amount outstanding included $14.1 million at an interest rate of 7.5% and $10.0 million at an interest rate of 7.25% based on LIBOR rates. The agreement, which expires in April 1997, calls for the payment of a .25% commitment fee based on the unused portion of the line of credit. The revolving credit agreement is collateralized by substantially all assets of the Company, except those assets which collateralize certain other financing arrangements. Under the revolving credit agreement, the Company may not make any cash dividend payments. The maximum amount outstanding and the average amount outstanding on bank revolving credit agreements were as follows: (in thousands) Maximum Average Amount Amount Period Ending Outstanding Outstanding _______________ ____________ ____________ January 5, 1995 $ 15,442 $ 9,382 January 5, 1996 $ 19,000 $ 14,741 January 5, 1997 $ 26,687 $ 17,402 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 7.1%, 8.7% and 8.2% in fiscal 1994, 1995 and 1996, respectively. In November 1994 the Company exercised an option in its revolving credit agreement to borrow $500 thousand on a term note with interest at a rate of 0.5% above the bank's prime rate. The interest rate on this term note was revised to the bank's prime rate in March, 1995. The term note matured July 31, 1996 and was paid off. The Company finances inventory through floor plan arrangements with two finance companies. As of January 5, 1997 the floor plan lines of credit were $12 million with IBM Credit Corporation ("ICC") and $25 million with Deutsche Financial Services ("DFS"). Borrowings under the ICC floor plan arrangement are made on sixty day notes, with one-half of the note amount due in thirty days. Borrowings under the DFS floor plan arrangement are made on thirty day notes. Financing on many of the arrangements which are subsidized by manufacturers is interest free. The average rate on the plans overall is less than 2.0%. POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The maximum amount outstanding and the average amount outstanding on each of the floor plan arragements were as follows (in thousands):
ICC DFS ______________________ ___________________ Maximum Average Maximum Average Amount Amount Amount Amount Period Ending Outstanding Outstanding Outstanding Outstanding ________________ ______________________ ___________________ January 5, 1995 $5,391 $3,579 $14,225 $7,703 January 5, 1996 $6,300 $4,191 $21,045 $15,979 January 5, 1997 $9,045 $5,779 $27,349 $18,532 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) 1994 1995 1996 ______ ______ ______ Current: Federal $ 1,403 $ 2,071 $ 3,205 State 406 654 1,034 ______ ______ _______ Total current 1,809 2,725 4,239 Deferred: Federal 35 206 46 State 12 52 11 ______ ______ _______ Total deferred 47 258 57 ______ ______ _______ Total income tax provision $ 1,856 $ 2,983 $ 4,296 ====== ====== ======= The approximate tax effect of the temporary differences giving rise to the Company's deferred income tax assets (liabilities) are: (in thousands) 1995 1996 ____ ____ Deferred Tax Assets: Bad debt provision $ 167 $ 208 Deferred compensation 98 210 Other 24 - _____ _____ Total deferred tax assets 289 418 _____ _____ Deferred Tax Liabilities: Acquisition of lease residuals (609) (847) Depreciation (148) (96) _____ _____ Total deferred tax liabilities (757) (943) _____ _____ Net deferred tax liability $(468) $(525) ===== ===== POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The Company's effective income tax rate differs from the Federal statutory rate as follows: 1994 1995 1996 ______ _____ _____ Tax at Federal statutory rate 34.0% 34.0% 34.0% State taxes 6.0 6.3 6.6 Other 0.5 0.3 0.2 _____ _____ _____ Effective tax rate 40.5% 40.6% 40.8% ===== ===== ===== 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, 1997 are as follows: (in thousands) Fiscal Year 1997 $ 2,015 1998 1,601 1999 1,258 2000 1,044 2001 742 Thereafter 2,430 ______ Total minimum lease payments $ 9,090 ====== 9. Employee Benefit Plans The Company has an Employee Stock Ownership Plan ("ESOP") which covers substantially all employees. No less than a majority and no more than 75% of the assets of the ESOP will be invested in common stock of the Company purchased on the open market. As of January 5, 1997, the ESOP held 57,129 shares of Company stock. No contributions were made or accrued in fiscal 1995 and 1996. A contribution of $100 thousand was accrued in fiscal 1994. The Company also has a savings plan intended to qualify under sections 401(a) and 401(k) of the Internal Revenue Code. The plan covers substantially all employees of the Company. The Company does not contribute to the plan. In December 1996, the Board of Directors took action to initiate proceedings to terminate the ESOP, which is expected to become effective during fiscal 1997. 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 1994, 1995 and 1996, the Company sold equipment and related support services to ILC, for lease to ILC's customers, in amounts of $4.2 million, $23.7 million and $15.2 million, respectively. The Company also obtained rights to lease residuals from ILC in the amount of $300 thousand, $875 thousand and $575 thousand in 1994, 1995 and 1996, 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 interest retained. POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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 totaled approximately $16.0 million for fiscal 1994. Sales to a major customer were approximately $43.8 million for fiscal 1995. Sales to a major customer were approximately $40.3 million for fiscal 1996. 12. Acquisition On November 14, 1994, the Company acquired all of the outstanding stock of Xenas for approximately $546 thousand. The purchase price consisted of $273 thousand in cash, notes payable in the amount of $136 thousand with interest at the rate of 0.5% above the prime rate of the Company's primary lender, and 12,976 unregistered shares of the Company's common stock with a value of $137 thousand. The acquisition was accounted for as a purchase, and accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the date of acquisition. The results of Xenas's operations have been included in the consolidated statements of income from the date of acquisition. The acquisition agreement provides for the payment of contingent consideration if certain levels of net operating income, as defined in the agreement, are achieved periodically from the date of acquisition through fiscal 1997. Any future payments under this provision would adjust the recorded cost in excess of fair market value of net assets acquired. Had Xenas been acquired at the beginning of fiscal 1993, the pro-forma inclusion of its operating results would not have had a significant effect on the reported consolidated net income for the two years ended January 5, 1995. On March 14, 1996, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of TCSS, a privately held computer reseller located in Des Moines, Iowa. The purchase price consisted of $4.5 million in cash, a $2.7 million subordinated note and 150 thousand unregistered shares of the Company's common stock with an approximate value of $1.3 million. Interest on the subordinated note, which is calculated at prime plus 0.5%, is payable quarterly. Principal is payable in four equal annual installments of $425 thousand after a payment of $1.0 million was made upon the Company's successful completion of a secondary stock offering in July 1996. The acquisition was accounted for as a purchase, accordingly the purchase price was allocated to assets and liabilities based on their estimated value as of the date of the acquisition. The results of TCSS's operations are included in the consolidated statement of income from the date of acquisition. In August 1996, the Company acquired certain assets of AA Micro, a network service provider located in Birmingham, Alabama. The purchase price consisted of $67.5 thousand in cash, a $200 thousand note payable and 19,974 unregistered shares of the Company's common stock with an approximate value of $200 thousand. Interest on the note, which is calculated at 8.25%, is payable quarterly and principal is payable in three equal annual installments of $66.7 thousand. In addition, the Company has entered into a three-year employment contract with the former president. The acquisition was accounted for as a purchase, accordingly the purchase price was allocated to assets based on their estimated value as of the date of acquisition. The results of AA Micro's operations are included in the consolidated statement of income from the date of acquisition. On October 11, 1996 the Company acquired substantially all of the assets and assumed substantially all of the liabilities of DILAN, a privately held network integrator located in Hickory, North Carolina. The purchase price consisted of $2.6 million in cash, a $1.1 million subordinated note and $5.5 million of assumed liabilities. Interest on the subordinated note, which is calculated at 10% per annum, is payable quarterly and POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued principal is payable in three equal annual installments of $365 thousand. The acquisition will be accounted for as a purchase, accordingly the purchase price will be allocated to assets and liabilities based on their estimated value as of the date of the acquisition. The results of DILAN's operations will be included in the consolidated statement of income from the date of acquisition. The following table summarizes, on an unaudited pro forma basis, adjusted to reflect a three-for-two split of the Company's common stock in the form of a stock dividend paid on October 4, 1996 and a 10% stock dividend paid on May 22, 1995, the estimated combined results of the Company, TCSS and DILAN 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 TCSS and DILAN during the periods presented: (in thousands) Fiscal Year ________________ 1995 1996 _______ ________ Net sales and revenues $309,655 $ 364,005 Net income $ 4,630 $ 6,250 Net income per common share: Primary $ 1.11 $ 1.15 Fully diluted $ 1.10 $ 1.14 13. Related Parties During fiscal 1995 the Company entered into a ten year triple-net lease agreement commencing in 1996 for a new headquarters and distribution facility with a company that is controlled by the Chief Executive Officer of the Company. The base rental for 1996 on an annualized basis is $583 thousand. The annual rental for these properties was determined on the basis of a fair market value rental opinion provided by an independent real estate company. During fiscal 1992 the Company loaned $100 thousand to an officer of the Company. This loan was evidenced by a promissory note with an annual interest rate of 1% over the prime rate. In addition, a total of $106 thousand was advanced to the officer in fiscal years 1993 through 1995. The note plus accrued interest and the advance were repaid during fiscal 1996. During fiscal 1996, the Company made periodic advances to a company that is controlled by the Chief Executive Officer of the Company. No interest was charged on the advances which were repaid in December 1996. 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) 1994 1995 1996 ____ ____ ____ Interest paid $998 $2,037 $2,065 ==== ====== ====== Income taxes paid $1,719 $2,658 $3,813 ====== ====== ====== Business combination accounted for as a purchase: Assets acquired $680 $774 $24,526 Liabilities assumed (355) (24) (9,121) Note payable (136) (225) (3,996) Stock issued (137) (100) (1,475) ______ ______ _______ Net cash paid $52 $425 $9,934 ====== ======= ======= POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 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 primary and fully diluted earnings per share would have been $1.05 and $1.04, 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. On September 6, 1996, the Company's Board of Directors authorized a three-for-two stock split in the form of a stock dividend payable October 4, 1996, to shareholders of record September 19, 1996. The split resulted in the issuance of 2.1 million new shares of common stock. The stated par value of each share was not changed from $0.01. A total of $20 thousand was reclassified from the Company's additional paid in capital account to the Company's common stock account. Accordingly, net income per common share, weighted average shares outstanding and stock option plan information have been restated to reflect the stock split. 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. 600,000 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. 75,000 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. POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The following summarized the stock option transactions under the plans for the three fiscal years ended January 5, 1997:
Weighted Average Option Price Shares Exercise price Per Share ($) ________ _________________ ______________ Options outstanding January 5, 1994 179,332 $6.62 to $10.75 Granted 106,500 $8.00 to $10.57 Surrendered (2,000) $7.81 to $9.50 _______ Options outstanding January 5, 1995 283,832 $6.62 to $10.75 Granted 66,300 $10.95 Stock dividend effect 33,383 8.32 Exercised (164,975) 8.27 _______ 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 =======
The following summarizes options outstanding and exercisable at January 5, 1997:
Options Outstanding Options Exercisable __________________________________________________ _____________________________ Number Weighted Average Number Range of Outstanding Remaining Weighted Average Exercisable Weighted Average Exercise Prices at 1/5/97 Contractual Life Exercise Price at 1/5/97 Exercise Price ______________ ___________ ________________ ________________ ___________ ________________ $4.01 to $5.99 128,872 1.3 $ 5.10 127,497 $ 5.10 $6.41 to $8.50 98,303 1.8 $ 7.89 85,002 $ 8.10 $9.50 to $11.92 65,000 3.6 $ 10.08 51,250 $ 9.95 ___________ ____________ 292,175 2.0 $ 7.27 263,749 $ 7.01 =========== ============
POMEROY COMPUTER RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued The weighted average fair value at date of grant for options granted during fiscal 1995 and 1996 was $2.42 and $2.75, respectively. The fair value of options at the date of grant was estimated using the Black- Scholes model with the following weighted average assumptions: Fiscal 1995 Fiscal 1996 ___________ ___________ Expected life (years) 2.4 1.7 Interest rate 7.3% 5.8% Volatility 50% 55% Dividend yield 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:
(in thousands, except per share amounts) Fiscal 1995 Fiscal 1996 ___________ ____________ Net income - as reported $4,367 $6,232 Net income - pro forma $4,196 $5,777 Net income per common share - as reported Primary $1.09 $1.15 Fully diluted $1.08 $1.14 Net income per common share - pro forma Primary $1.05 $1.07 Fully diluted $1.04 $1.06
The initial application of SFAS No. 123 for pro forma disclosure may not be representative of the future effects of applying the statement. In 1994, 1995 and 1996, 3,168, 4,000 and 3,076, respectively, shares of common stock were awarded to officers of the Company. Compensation expense resulting from the awards was $40 thousand in fiscal 1994, 1995 and 1996, respectively. 16. Litigation There are various other legal actions arising in the normal course of business that have been brought against the Company. Management believes these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. 17. Risk of Loss from Concentrations During fiscal 1996, approximately 38% of the Company's total net sales and revenues were derived from its top ten customers, including one customer which accounted for 12% of total net sales and revenues. A loss of one or more of the Company's major customers could have a material adverse effect on the Company. 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 Event On February 28, 1997, the Company completed a secondary public offering of 1.02 million shares of its common stock. The net proceeds of $23.2 million were used to reduce amounts outstanding under its line of credit. EX-11 2 Pomeroy Computer Resources, Inc. Exhibit 11 - Computation of Earnings Per (in thousands, except per share amounts)
Fiscal Years _________________________ 1994 1995 1996 _________________________ PRIMARY Weighted average common shares outstanding 3,644 3,773 5,223 Dilutive effect of stock options outstanding during the period - 215 181 Contingent shares - 17 - _____ _______ ______ Total common and common equivalent shares 3,644 4,005 5,404 ===== ======= ====== Net income $2,727 $4,367 $6,232 ===== ======= ====== Net income per common share $ 0.75 $ 1.09 $ 1.15 ===== ======= ====== FULLY DILUTED Weighted average common shares outstanding 3,644 3,773 5,223 Dilutive effect of stock options outstanding during the period - 254 244 Contingent shares - 17 - _____ _______ ______ Total common and common equivalent shares 3,644 4,044 5,467 ===== ======= ====== Net income $2,727 $4,367 $6,232 ===== ======= ====== Net income per common share $ 0.75 $ 1.08 $ 1.14 ===== ======= ======
EX-21 3 EXHIBIT 21 Subsidiaries of Pomeroy Computer Resources, Inc. Subsidiary State of Incorporation _____________________ ______________________ Xenas Communications Corp. Ohio The subsidiary does business under the name Envision. Pomeroy Computer Leasing Company, Inc. Kentucky The subsidiary does business under the name Pomeroy Computer Leasing Company, Inc. EX-27 4
5 0000883979 POMEROY COMPUTER RESOURCES INC. 1000 12-MOS JAN-05-1997 JAN-05-1997 6,809 0 68,094 509 23,426 99,068 13,076 3,864 121,380 71,865 0 0 0 65 34,402 121,380 336,358 336,358 281,753 281,753 37,736 0 2,170 10,528 4,296 0 0 0 0 6,232 1.15 1.14
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