UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 5, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-20022
POMEROY IT SOLUTIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, Kentucky 41048
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (859) 586-0600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
---------------------- --------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES __X__ NO _____
The aggregate market value of voting stock of the Registrant held by
non-affiliates was approximately $86.3 million as of July 5, 2004.
The number of shares of common stock outstanding as of February 28, 2005 was
12,487,464.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Portions of Documents
Document Are Incorporated
- -------- -----------------
Definitive Proxy Statement for the 2005 Part III
Annual Meeting of Stockholders to be
filed with the Securities and Exchange
Commission on or before May 5, 2005.
POMEROY IT SOLUTIONS, INC.
FORM 10-K
YEAR ENDED JANUARY 5, 2005
TABLE OF CONTENTS
PART I Page
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Item 1 Business 1
Item 2 Properties 12
Item 3 Legal Proceedings 13
Item 4 Submission of Matters to a Vote of Security Holders 13
PART II
Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Item 5 Securities 13
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosures About Market
Risk 24
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 25
Item 9A Controls and Procedures 25
Item 9B Other Information 25
PART III
Item 10 Directors and Executive Officers of the Registrant 26
Item 11 Executive Compensation 26
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 26
Item 13 Certain Relationships and Related Transactions 26
Item 14 Principal Accountant Fees and Services 26
PART IV
Item 15 Exhibits, Financial Statement Schedules 26
SIGNATURES Chief Executive Officer, President, Chief Financial 35
Officer and Chief Accounting Officer
Directors 35
Reports of Independent Registered
Public Accounting Firms F-1
Financial Statements F-3
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
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Certain of the matters discussed under the captions "Business", "Properties",
"Legal Proceedings", "Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" may constitute
forward-looking statements for purposes of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in this document and in documents
incorporated herein by reference, including, without limitation, those
statements made in conjunction with the forward-looking statements under
"Business", "Properties", "Legal Proceedings", "Market for Registrant's Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the factors discussed under "Business - Certain Business
Factors". All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by such factors.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Pomeroy IT Solutions, Inc. is a national IT solutions provider with a
comprehensive portfolio of consulting, infrastructure and lifecycle services.
Our mission is to provide customers with increased efficiencies, decreased
costs, and the ability to maximize their existing IT investments. We are
committed to our customers, our employees and our shareholders and aim to
consistently meet and exceed their expectations.
Pomeroy was founded in 1981 and organized as a Delaware corporation in February
1992. Since then, Pomeroy IT Solutions, Inc., collectively with its
subsidiaries, ("Pomeroy" or the "Company") has strategically acquired several
companies to strengthen the core services offerings the Company delivers. Some
of these acquisitions include Ballantyne Consulting Group in Charlotte, NC; and
Micrologic Business Solutions in Kansas City, MO. Most recently, the Company
made the largest acquisition in its history, that of Alternative Resources
Corporation (ARC) in Barrington, IL. The combined service capabilities of ARC
and Pomeroy IT Solutions has strengthened our ability to provide:
- Full Life Cycle Services from technology acquisition to end of
life solutions. These solutions embrace both ISO 9001-2000 and
Information Technology Infrastructure Library ("ITIL") methodologies.
- Consulting expertise covering Enterprise Resource Planning
("ERP"), Customer Relationship Management ("CRM"), Application
Development, Security and Data Warehousing solutions.
- Network Infrastructure Solutions with specialization in IP
Communications, Storage, UNIX, Wireless and Software Solutions.
- A robust Service Desk offering that can be co-sourced, off-site
or blended to meet customer help desk needs.
Our Employees
- --------------
Pomeroy employs over 3,500 people, including approximately 2,000 technical
personnel located throughout the country. Pomeroy is committed to continuing to
build its areas of expertise and offerings through continual hiring, training,
and strategic acquisitions of companies that bring new skill sets and
experience. Collectively, the Company holds thousands of certifications and
specializations, including some of the highest recognitions in the industry such
as CCIE, HP Master SAN, CISSP, VPN Security, Wireless LAN, IP Communications,
PhD, ITIL Practitioner, ITIL Master and PMP.
Our Solution-Focused Company
- ------------------------------
Pomeroy seeks to understand the strategic goals of customers' organizations as
well as the specific challenges faced by IT executives. Through this
collaborative approach, the Company's sales and technical teams can combine the
right people, partners, technologies and methodologies to deliver solutions that
meet those goals and challenges. The Company takes advantage of its low-cost
business model and scalability to deliver the most economical, flexible
solutions to its customers. Ultimately, this allows our customers to reinvest
savings into their organizations.
1
Our Markets
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Pomeroy's target markets include governmental agencies, educational
institutions, Fortune 1000 and small and medium business ("SMB") customers.
These customers fall into government and education, financial services, health
care and other sectors. Pomeroy's customers are located throughout the United
States with an emphasis in the Southeast and Midwest regions.
Our Growth Strategy
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Pomeroy's growth strategy is to gain share in existing markets, expand its
geographical coverage, and increase the breadth and depth of its service
offerings while continuing its strategic model. In addition, Pomeroy's growth
strategy includes taking advantage of the expansion in scale and scope that the
ARC integration provides. The key impacts of the acquisition are expanded
service offerings, client base and geographies. Pomeroy will continue to focus
on higher margin services, continued operating expense control and maintaining a
strong balance sheet. Pomeroy believes by following this growth strategy, it
will be able to improve its earnings performance in the future. The Company has
experienced and expects continued pricing pressure in its products segment due
to industry consolidation and the efforts of manufacturers to sell directly to
Pomeroy's customers. In addition, the general weakness in the U.S. economy has
impacted Pomeroy's business. Any pricing pressures, reduced margins or loss of
market share resulting from the Company's inability to compete effectively could
have a material adverse effect on the Company's operations and financial
results.
Our Dedicated Delivery Organization
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In 2004, the Company invested in various initiatives to greatly enhance its
service delivery capabilities. These initiatives have enabled improved
utilization of our 3000+ technical resource base ensuring that the right
technician is identified and available to meet the customer's needs. Pomeroy
leverages proven methodologies and industry best practices to ensure consistent
and repeatable service delivery regardless of geography.
Our Segments
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The Company operates in three industry segments: products, services and leasing.
See Note 21 of Notes to Consolidated Financial Statements for a presentation of
segment financial information. Pomeroy's products segment is comprised of the
sale of a broad range of IT products that include desktop computing equipment,
servers, infrastructure devices and peripherals. Pomeroy's services business
entails providing IT services which support such computer products. The
services segment can be classified into three components: enterprise consulting,
infrastructure solutions and lifecycle services. The Company also offers
leasing solutions to its customers via an agency agreement with a financial
institution located in Cincinnati.
Our Information
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We make available free of charge on our web site at www.pomeroy.com our Annual
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Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K
and all amendments to those reports as soon as reasonably practicable after such
material is electronically filed with the Securities and Exchange Commission
(the "SEC"). We also make available on our web site other reports filed with the
SEC under the Securities Exchange Act of 1934, including our proxy statements
and reports filed by officers and directors under Section 16(a) of that Act. We
do not intend for information contained in our web site to be part of this Form
10-K or any other report that we file with the SEC.
PRODUCTS SEGMENT
The Company's products segment is comprised of the sale of a broad range of IT
products that include desktop computing equipment, servers, infrastructure
devices and peripherals.
Our Partners
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Out of the extensive list of technology brands we provide, Pomeroy has selected
an exclusive group of leading manufacturers with which to develop comprehensive
alliance agreements. These alliances underscore our commitment to providing our
customers with the most sought-after technologies. Pomeroy engages our alliance
partners at the highest levels in order to meet our customer needs in accordance
to our standards of excellence.
The Pomeroy Marketing Alliance Program goals are:
2
- To build strong on-going business relationships with a select
group of vendors and manufacturers
- To maintain extensive sales of, and technical readiness on,
alliance product and solution sets
- To bring the advantages of strong industry relationships to bear
on individual customer projects for the benefit of the customer
The following are manufacturers included within our Marketing Alliance Program.
3Com
Altiris
APC (American Power Conversion)
Brother
Cables to Go
Cisco Systems
Commvault
Computer Associates
EMC
Epson
Hewlett Packard - Compaq
Hitachi
IBM
Kingston Technology
Lexmark
Macromedia
Microsoft
Nec/Mitsubishi
Nortel
Okidata
Qlogic
Sony
Storagetek
Sun
Surfontrol
Symantec
Viewsonic
Pomeroy believes that its relationship with such vendors enables it to offer a
wide range of products to meet the diverse requirements of its customers as
opposed to original equipment manufacturers ("OEMs"), which offer a limited
range of products. Additionally, Pomeroy's ability to bundle products with
services enables its customers to obtain the flexibility, expertise, and
conveniences of multiple vendors from a single source provider of IT solutions.
The information technology needs of its customers are serviced by Pomeroy's ISO
9001:2000 registered distribution and integration center located in Hebron,
Kentucky. This facility is approximately 161,000 square feet and distributes
and integrates products and technologies sold by the Company as well as products
supplied by its customers. Pomeroy also operates a service depot operation
within this centralized facility.
Purchasing products and/or services from Pomeroy assures that highly skilled
professionals who adhere to world-class quality standards manage the IT
initiatives of its customers. Since 1997, Pomeroy's Distribution Center has
been registered to the International Organization of Standardization ("ISO") ISO
9001:2000 Quality Standard. The ISO Quality Standard has been accepted by the
U.S. and over eighty other countries around the world as the basis for a world
class Quality Management System ("QMS"). Pomeroy's QMS specifies the policies,
procedures and processes necessary to satisfy customer requirements and ensures
those processes are appropriately managed, controlled and continually improved.
As a result of Pomeroy's ISO 9001:2000 registration, Pomeroy's customers can be
assured that Pomeroy's QMS meets international standards. Documented procedures
and records that demonstrate its commitment to the very highest quality
standards back up the Company's ISO registration.
Pomeroy is committed to becoming the supplier of choice for all its customers'
IT solution needs by continuous process improvements designed to optimize its
operational effectiveness without adding undue costs to the model.
3
Part of its improvement process is an extensive corrective action and internal
audit program that not only identifies and solves quality issues but also
prevents their recurrence.
The Company believes that its distribution and integration center is adequately
designed to support its customers' business and technology needs for the
foreseeable future. Pomeroy's distribution and integration center utilizes
state-of-the-art warehouse management and enterprise resource planning ("ERP")
systems in order to stock, pick and update the status and location of physical
and perpetual inventory. The radio-frequency based warehouse management system
controls and manages the flow of physical inventory from the earliest point of
demand generation, purchase order creation, to the final step in the supply
chain process, shipping to meet its customers' delivery and integration needs.
The warehouse management system controls re-order points and directs its
fulfillment needs to the product source who can deliver at the lowest possible
capital cost while maintaining the speed to market required by Pomeroy's
customers. The warehouse management system tracks the inventory in a real time
mode, updating Pomeroy's ERP system, which then in turn updates its customers'
specific technology driven supply chain management systems. The intelligence
inherent with the system is flexible, allowing customization to almost any
specific communication standard required by Pomeroy's diverse customer base.
Essentially, Pomeroy has the ability to link its ERP and warehouse management
systems to its customers' supply chain management ("SCM") systems. As a result,
the Company has been able to provide its customers with product shipping
information as well as the ability to efficiently process orders while
safeguarding its inventory.
Significant product supply shortages have resulted from time to time because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. As in the past, the Company expects to experience
some difficulty in obtaining an adequate supply of products from its major
vendors. Historically, this has resulted, and may continue to result, in delays
in completing sales. These delays have not had, and are not anticipated to have,
a material adverse effect on the Company's results of operations. However, the
failure to obtain adequate product supply could have a material adverse effect
on the Company's operations and financial results.
For fiscal years 2004, 2003 and 2002, sales of computer hardware, software, and
related products were approximately $545.0 million, $470.3 million and $568.2
million, respectively, and accounted for approximately 73.4%, 78.6%, and 80.9%,
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
SERVICES SEGMENT
As a national service solution provider, Pomeroy offers three groups of
services: enterprise consulting, infrastructure solutions, and lifecycle
services.
Enterprise Consulting
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By combining the right people, strategy and technologies, Pomeroy helps
companies increase efficiencies and decrease costs.
The enterprise consulting group offerings consist of:
Application Development - Pomeroy has developers who assist in creating
------------------------
custom applications to meet customers' unique business needs.
Business Process Re-engineering - Dedicated to helping customers improve
---------------------------------
the bottom line, Pomeroy has consultants who help with process
improvement and collaborative logistics.
ERP Solutions - Experienced in Enterprise Resource Planning Solutions,
--------------
Pomeroy is a natural choice if customers are considering Oracle or SAP
applications.
CRM Solutions - Understanding a customer's experience across all touch
--------------
points of its organization is key to customer satisfaction. Pomeroy is
experienced in helping companies define and implement the right CRM
solution for their business.
E-Business - Pomeroy can help customers create a web site or extend its
----------
business processes to the web.
4
Business Intelligence - Pomeroy provides customers with the ability to
----------------------
access and analyze mission-critical information on demand and in
real-time. This is becoming increasingly more important with market
competition and required reporting procedures for certain industries.
Outsourcing - Pomeroy has IT personnel available to supplement its
-----------
customers' staffs, freeing up a customers' financial resources and
time to concentrate on its core business.
Infrastructure Solutions
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Pomeroy has experienced certified engineers to assist the customer with their
infrastructure needs from architecture to implementation.
The infrastructure solutions group offerings consist of:
High Performance File Servers - Pomeroy has the experience and ability to
-------------------------------
implement and support mid-range servers including clustering and
server consolidation.
Voice, Video, Data & Network Integration - Pomeroy enables businesses,
---------------------------------------------
especially call centers, to increase productivity, save costs through
management of one data source, and increase customer satisfaction with
integration of data, voice and video on a single IP based network. Pomeroy
also architects and installs wireless network connections throughout or
between buildings to provide more flexibility and productivity.
Storage Strategies - Pomeroy understands the impact enterprise storage can
-------------------
have on a company's infrastructure and applications. Pomeroy has a
team of storage architects and engineers across best of breed technologies
to help its customers select the best option for their environments.
Security Solutions - Pomeroy's Security Solution consists of a layered
-------------------
approach, offering products and services that when combined create a
comprehensive security program. Business Continuity and Disaster Recovery
Planning are two of those six layers.
Thin Client - Pomeroy provides solutions and services for secure deployment
-----------
of server-based applications via a web browser. These solutions are
low in cost compared to traditional desktop computers and provide a
centralized area for data backup and application upgrades.
Managed Services - Pomeroy can be the single source provider for its
-----------------
customers' electronic interaction and commerce needs. Services offered
include WAN Monitoring, Hosted Applications, and Remote LAN Monitoring.
Cabling Solutions - Pomeroy's Cabling Division is equipped to support all
------------------
aspects of its customers' communication cable system such as move/add
change support for cabling, telephones and PCs. We are experienced to
support all communication media types including shielded and unshielded
copper cable, coaxial cable and fiber optic cable.
Lifecycle Services
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Pomeroy has a long history of proven performance with technology refreshes,
roll-outs, and desktop services.
The lifecycle services group offers the following comprehensive portfolio of
services:
Strategic Sourcing - Pomeroy's experienced strategic sourcing group can
-------------------
assist its customers with platform selection, sourcing, and order
management.
Integration & Distribution Logistics - Pomeroy takes great pride in
---------------------------------------
preparing its customers' equipment to the exact specifications needed. We
have a 170,000 square feet distribution and configuration facility to
accommodate large rollouts.
Implementation Services - Pomeroy understands the importance of a flawless
------------------------
implementation and uses solid project management methodology to ensure
a reduction in project time lines, revisits and costs for our customers.
5
Technical Support Services - Pomeroy provides an array of support services
---------------------------
including: help desk, desk side support, moves/adds/changes, and asset
management. Pomeroy Extended Care enables customers to have extended
warranties that are more customizable and less expensive than what they
would receive from the manufacturer.
DoD Drive Wiping Services - Pomeroy offers a DoD Drive Wiping service as a
--------------------------
part of our Brokerage/End-of-Life offering. A DoD (Department of
Defense) wipe is a method of drive clearing and sanitization to the same
standard (DoD 5220.22-M) which is used by the US Department of Defense
(DoD), US Department of Energy (DoE), the US Nuclear Regulatory Commission
(NRC), the US Central Intelligence Agency (CIA), and the National Security
Administration (NSA).
In a typical DoD wipe (3 pass over-wipe with random binary patterns),
all addressable hard drive locations are overwritten with a character, its
complement, and then a random character and verify. The process repeats 3
times, thus guaranteeing that no data can be recovered by either a member
of the public or by a commercial enterprise.
By using this type of wipe, our customers can be confident that any
protected information contained on a drive will be made irretrievable.
Technology Disposition - Pomeroy provides customers with a range of
-----------------------
solutions for disposition of equipment. These solutions include
redeployment to another department within their companies, brokering the
equipment, donating the equipment or disposing of the equipment in
compliance with applicable EPA regulations.
Our Technical Team
- --------------------
Pomeroy's technical personnel maintain some of the highest credentials.
Maintaining a knowledgeable and resourceful technical staff is an ideal that
Pomeroy cultivates through career development programs that promote education
and skills training. These certifications include:
CISCO: CCIE, CCNA, CCNP, CCDP, CCDA, CCSP, INFOSEC Professional including IP
Communications, Wireless LAN, and VPN Security Specializations
NOVELL: CNE, MCNE, CNA, and Certified GroupWise Engineer
MICROSOFT: MCP, MCSA, MCSA Security Specialization, MCSE Messaging
Specialization, MCSE, MCSE+1, MCDBA and CRM Professional
IBM: xSeries Certified System Engineer, IBM Technical Specialist RS 6000 SP,
IBM Advanced Technical Expert RS 6000, WebSphere System Expert
HEWLETT PACKARD: HP Certified Professionals (NT, NetWare, Alpha/Unix, and
StorageWorks), HP Accredited Integration Specialist and Master Accredited
Systems Engineers - SAN Architect
COMPUTER ASSOCIATES: CUE
NORTEL: Networks Specialist, Nortel Networks Certified Support Expert, Nortel
Certified Design Expert
LOTUS: Notes Professional
COMPTIA: A+ Certified Technicians, Network+, IT Project+, Linux+, Server+,
i-Net+ and Security+
SUN: Storage Engineers, Solaris System and Network Administrator
(ISC)2 Certified Information Systems Security Professional (CISSP)
ORACLE: Oracle Certified Professional (OCP)
EMC: Master Operator and Builder
ALTIRIS: Certified Practitioner
ISACA: Certified Information Systems Auditor (CISA), Certified Information
Security Manager (CISM)
CITRIX: Certified Enterprise Administrator (CCEA), Certified Administrator (CCA)
F5 NETWORKS: Product Specialist
HELP DESK INSTITUTE: Helpdesk Manager and Helpdesk Analyst
QLOGIC: SAN Solution Certified
PMI: Project Management Professional (PMP)
SYMANTEC: Certified System Engineer, Certified Security Practitioner
VMWARE: VMware Certified Professional
6
Pomeroy has entered into dealer agreements with substantially all of its major
vendors/manufacturers. These agreements are typically subject to periodic
renewal and to termination on short notice. Substantially all of Pomeroy's
dealer agreements may be terminated by the vendor without cause upon 30 to 90
days advance notice, or immediately upon the occurrence of certain events. A
vendor could also terminate an authorized dealer agreement for reasons unrelated
to Pomeroy's performance. Although Pomeroy has never lost a major
vendor/manufacturer, the loss of such a vendor/product line or the deterioration
of Pomeroy's relationship with such a vendor/manufacturer would have a material
adverse effect on Pomeroy.
Pomeroy's revenues from its service and support activities have grown, as a
percentage of its consolidated net sales and revenues, over the last several
years. For fiscal years 2004, 2003 and 2002, revenues from service and support
activities were approximately $197.2 million, $127.9 million and $131.3 million,
respectively, and accounted for approximately 26.6%, 21.4% and 18.7%,
respectively, of the consolidated net sales and revenues of Pomeroy in such
years.
LEASING SEGMENT
Pomeroy helps customers from strategy to procurement. Pomeroy provides
assistance with determining the best method to finance projects based on the
customer's objectives. Pomeroy offers a variety of options including standard
leasing via an agency agreement with a financial institution located in
Cincinnati.
For fiscal years 2004, 2003 and 2002, leasing revenues were approximately $0.1
million, $0.2 million and $3.3 million, respectively, and accounted for
approximately 0.02%, 0.03% and 0.5%, respectively, of the consolidated net sales
and revenues of Pomeroy.
BUSINESS STRATEGY
Pomeroy's strategy for building shareholder value is to provide comprehensive
solutions to improve the productivity of its customers' IT systems thus reducing
their overall IT costs. Key elements of the Company's strategy are: (1) to be
the low cost provider of the complete solutions which are developed, integrated
and managed for its customers, (2) to expand service offerings particularly in
the higher end services and networking areas, (3) to expand offerings and grow
the customer base through strategic acquisitions, and (4) to maintain and
enhance technical expertise by hiring and training highly qualified technicians
and systems engineers.
Pomeroy's sales are generated primarily by its 259 person direct sales and sales
support personnel. Pomeroy's business strategy is to provide its customers
with a comprehensive portfolio of product and service offerings, including,
enterprise consulting services, complete infrastructure solutions and lifecycle
services. The Company believes that its ability to combine competitive pricing
of computer hardware, software and related products with comprehensive higher
margin services allows it to compete effectively against a variety of
competitors, including independent dealers, superstores, mail order and direct
sales by manufacturers. With many businesses seeking assistance to optimize
their information technology investments, Pomeroy is using its resources to
assist customers in their decision-making, project implementation and management
of IT capital.
Most microcomputer products are sold pursuant to purchase orders. For larger
procurements, the Company may enter into written contracts with 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 Pomeroy and may be terminated without cause upon 30
to 90 days notice. Most contracts are for a term of 12 to 24 months and, in
order to be renewed, may require submission of a new bid in response to the
customer's request for proposal. As of January 5, 2005, the Company has been
awarded contracts it estimates will result in an aggregate of approximately
$153.7 million of net sales and revenues after January 5, 2005. $108.4 million
in net sales and revenues were generated in 2004 from these contracts. Of the
aggregate total, the Company estimates that approximately $110.2 million of net
sales and revenues will be generated in fiscal 2005. By comparison, as of
January 5, 2004, the Company had been awarded contracts that it estimated would
result in an aggregate of approximately $106.0 million of net sales and revenues
after January 5, 2004. Of this amount, the Company estimated that $102.1
million of net sales and revenues would be generated during fiscal 2004. The
estimates of management could be materially less than stated as a result of
factors which would cause one or more of these customers to order less product
or services than is anticipated. Such factors include the customer finding
another supplier for the desired products at a lower price or on better terms, a
change in internal business needs of the customer causing the customer to
require less or different products and services, or the occurrence of a
significant change in technology or other industry conditions which alters the
customer's needs or timing of purchases.
7
Pomeroy has also established relationships with industry leaders relating to its
services segment including the authorization to perform warranty and
non-warranty repair work for several vendors. In some cases, the authorization
of Pomeroy to continue performing warranty work for a particular manufacturer's
products is dependent upon the performance of Pomeroy under a dealer agreement
with that manufacturer.
Pomeroy provides its services to its customers on a time-and-materials basis and
pursuant to written contracts or purchase orders. Either party can generally
terminate these service arrangements with limited or no advance notice.
Pomeroy also provides some of its services under fixed-price contracts rather
than contracts billed on a time-and-materials basis. Fixed-price contracts are
used when Pomeroy believes it can clearly define the scope of services to be
provided and the cost of providing those services.
COMPETITION
The microcomputer products and services market is highly competitive.
Distribution has evolved from manufacturers selling directly to customers, to
manufacturers selling to aggregators (wholesalers), resellers and value-added
resellers. Competition, in particular the pressure on pricing, has resulted in
industry consolidation. In the future, Pomeroy may face fewer but larger
competitors as a consequence of such consolidation. These competitors may have
access to greater financial resources than Pomeroy. In response to continuing
competitive pressures, including specific price pressure from the direct
telemarketing, internet and mail order distribution channels, the microcomputer
distribution channel is currently undergoing segmentation into value-added
resellers who emphasize advanced systems together with service and support for
business networks, as compared to computer "superstores," who offer retail
purchasers a relatively low cost, low service alternative and direct-mail
suppliers which offer low cost and limited service. Certain direct response and
internet-based fulfillment organizations have expanded their marketing efforts
to target segments of the Company's customer base, which could have a material
adverse impact on Pomeroy's operations and financial results. While price is an
important competitive factor in Pomeroy's business, Pomeroy believes that its
sales are principally dependent upon its ability to provide comprehensive
customer support services. Pomeroy's principal competitive strengths include:
(i) quality assurance; (ii) service and technical expertise, reputation and
experience; (iii) competitive pricing of products through alternative
distribution sources; (iv) prompt delivery of products to customers; (v) various
financing alternatives; and (vi) its ability to provide prompt responsiveness to
customers services needs and to build performance guarantees into services
contracts.
Pomeroy competes for product sales directly with local and national distributors
and resellers. In addition, Pomeroy competes with microcomputer manufacturers
that sell product through their own direct sales forces to end users and to
distributors. Although Pomeroy believes its prices and delivery terms are
competitive, certain competitors offer more aggressive hardware pricing to their
customers.
Pomeroy's services solutions segment competes, directly and indirectly, with a
variety of national and regional service providers, including services
organizations of established computer product manufacturers, value-added
resellers, systems integrators, internal corporate management information
systems and consulting firms. Pomeroy believes that the principal competitive
factors for information technology services include technical expertise, the
availability of skilled technical personnel, breadth of service offerings,
reputation, financial stability and price. To be competitive, Pomeroy must
respond promptly and effectively to the challenges of technological change,
evolving standards and its competitors' innovations by continuing to enhance its
service offerings and expand sales channels. Any pricing pressures, reduced
margins or loss of market share resulting from Pomeroy's failure to compete
effectively could have a material adverse effect on Pomeroy's operations and
financial results.
Pomeroy believes its services solutions segment competes successfully by
providing a comprehensive solution portfolio for its customers' information
technology asset management and networking services needs. Pomeroy delivers
cost-effective, flexible, consistent, reliable and comprehensive solutions to
meet customers' information technology infrastructure service requirements.
Pomeroy also believes that it distinguishes itself on the basis of its technical
expertise, competitive pricing and its ability to understand its customers'
needs.
CERTAIN BUSINESS FACTORS
The following business factors, among others, are likely to affect Pomeroy's
operations and financial results and should be considered in evaluating
Pomeroy's outlook.
8
Growth and Future Acquisitions
- ---------------------------------
In the past, Pomeroy has grown both internally and through acquisitions. During
fiscal 2004, Pomeroy experienced growth in its products and services segments.
Pomeroy continues to focus on customer satisfaction as well as execution of its
market development and penetration strategies. Additionally, Pomeroy is
beginning to recognize synergies and strategic benefits from the integration of
Alternative Resources Corporation ("ARC"). Pomeroy's business strategy is to
continue to grow both internally and through acquisitions. There can be no
assurance that, in the future, Pomeroy will be successful in repeating the
growth experienced in prior years. Pomeroy expects future growth will result
from acquisitions in addition to organic growth. In fiscal 2004, Pomeroy
completed one acquisition and continues to evaluate expansion and acquisition
opportunities that would complement its ongoing operations. As part of
Pomeroy's growth strategy, it plans to continue to make investments in
complementary companies, assets and technologies, although there can be no
assurance that Pomeroy will be able to identify, acquire or profitably manage
additional companies or successfully integrate such additional companies into
Pomeroy without substantial costs, delays or other problems. In addition, there
can be no assurance that companies acquired in the future will be profitable at
the time of their acquisition or will achieve levels of profitability that
justify the investment therein. Acquisitions may involve a number of special
risks, including, but not limited to, adverse short-term effects on Pomeroy's
reported operating results, disrupting ongoing business and distracting
management and employees, incurring debt to finance acquisitions or issuing
equity securities which could be dilutive to existing stockholders, dependence
on retaining, hiring and training key personnel, incurring unanticipated
problems or legal liabilities and amortization of acquired intangible assets.
Some or all of these special risks could have a material adverse effect on
Pomeroy's operations and financial results.
Vendor Receivables
- -------------------
Any change in the level of vendor rebates or manufacturer market development
funds offered by manufacturers that results in the reduction or elimination of
rebates or manufacturer market development funds currently received by Pomeroy
could have a material adverse effect on Pomeroy's operations and financial
results. In particular, a reduction or elimination of rebates related to
government and educational customers could adversely affect Pomeroy's ability to
serve those customers profitably. In addition, there are specific risks,
discussed below, related to the individual components of vendor receivables that
include vendor rebates, manufacturer market development funds and warranty
receivables. During fiscal year 2002, the Company recorded a $3.3 million
allowance, related to the collectibility of vendor receivables resulting in
$2.1 million reduction in net income. The determination of an appropriate
allowance was based on the deterioration in the aging of the vendor receivables,
the expected resolution of the disallowed claims (see primary reasons for vendor
rebate claims being disallowed in "Vendor Rebates" below) and the general
posture of the OEMs regarding resolution.
Vendor Rebates
---------------
The most significant component of vendor receivables is vendor
rebates. Vendor rebate programs are developed by OEMs allowing them to
modify product pricing on a case-by-case basis (generally determined by
individual customers) to maintain their competitive edge on specific
transactions. Pomeroy contacts the OEM to request a rebate, for a specific
transaction, and if approved, the OEM provides Pomeroy with a document
authorizing a rebate to be paid to Pomeroy at a later date when a claim is
filed. If the business is won, Pomeroy records the sale and the cost of the
sale is reduced by the amount of the rebate, which is recorded as a vendor
receivable. Rebate programs involve a complex set of rules varying by
manufacturer. As a result of the rules and complexity of applying the rules
to each item sold, claims are often rejected and require multiple
submissions before credit is given resulting in longer aging of vendor
receivables than other types of receivables. In addition, sometimes a claim
is rejected altogether and no credit is given. Primary reasons for claims
being disallowed and corresponding re-files include serial number issues
(missing, incomplete, transposed, data base match-up discrepancies, etc.),
pricing issues (dispute in calculation of rebate amounts) and other missing
or incomplete documentation (bid letters, customer information, etc.)
Pomeroy has made substantial process and system enhancements geared towards
minimizing refiling rebate claims, but there is no assurance that Pomeroy
will be able to successfully claim all of the vendor rebates that were
passed along to the customers in a form of a reduction in sales price.
Pomeroy has written off vendor receivables in the past and may do so in the
future.
Manufacturer Market Development Funds
----------------------------------------
Several manufacturers offer market development funds, cooperative
advertising and other promotional programs to distribution channel
partners. Pomeroy utilizes these programs to fund some of its advertising
and promotional programs. While such programs have been available to the
Company in the past, there is no assurance that these programs will be
continued.
9
The Emerging Issues Task Force ("EITF") reached a consensus opinion on
EITF 02-16, "Accounting by a Customer (including a reseller) for Certain
Consideration Received from a Vendor." EITF 02-16 requires that cash
payments, credits, or equity instruments received as consideration by a
customer from a vendor should be presumed to be a reduction of cost of
sales when recognized by the customer in the income statement. In certain
situations, the presumption could be overcome and the consideration
recognized either as revenue or a reduction of a specific cost incurred.
The consensus is applied prospectively to new or modified arrangements
entered into after December 31, 2002.
The Company had been participating in a vendor program that expired in
November of 2003. For those programs that were initiated prior to December
31, 2002, the Company had classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under any new
agreements, the Company classifies these vendor program payments under cost
of sales in accordance with EITF 02-16.
Warranty Receivables
---------------------
The Company performs warranty service work on behalf of the OEM on
customer product. Any labor cost or replacement parts needed to repair the
product is reimbursable to Pomeroy by the OEM. It is the Company's
responsibility to file for and collect these claims. The inability of the
Company to properly track and document these claims could result in the
loss of reimbursements.
Management Information System
- -------------------------------
Pomeroy relies upon the accuracy and proper utilization of its management
information system to provide timely distribution services, manage its
inventory, track vendor receivables and track its financial information. To
manage its growth, Pomeroy is continually evaluating the adequacy of its
existing systems and procedures. Pomeroy selected the Siebel solution to
provide a customer relationship management ("CRM") and Professional Service
Management system. Pomeroy made this selection and acquired the software in the
third quarter of 2002 and deployed the solution in phases throughout 2003. In
2004, the Company invested in software products and process engineering to
accommodate greater revenue volume and enhance efficiencies in many service
areas including remote service desk, outsourcing and staff augmentation
offerings. This development is ongoing into 2005. Pomeroy anticipates that it
will regularly need to make capital expenditures to upgrade and modify its
management information system, including software and hardware, as Pomeroy grows
and the needs of its business change. There can be no assurance that Pomeroy
will anticipate all of the demands which expanding operations may place on its
management information system. The occurrence of a significant system failure or
Pomeroy's failure to expand or successfully implement its systems could have a
material adverse effect on Pomeroy's operations and financial results.
Dependence on Technical Employees
- ------------------------------------
The future success of Pomeroy's services business depends in large part upon the
Company's ability to attract and retain highly skilled technical employees in
competitive labor markets. There can be no assurance that Pomeroy will be able
to attract and retain sufficient numbers of skilled technical employees. The
loss of a significant number of Pomeroy's existing technical personnel or
difficulty in hiring or retaining technical personnel in the future could have a
material adverse effect on the Company's operations and financial results.
Inventory Management
- ---------------------
Rapid product improvement and technological change resulting in relatively short
product life cycles and rapid product obsolescence characterize the information
technology industry. While most of the inventory stocked by Pomeroy is for
specific customer orders, inventory devaluation or obsolescence could have a
material adverse effect on Pomeroy's operations and financial results. Current
industry practice among manufacturers is to provide price protection intended to
reduce the risk of inventory devaluation, although such policies are subject to
change at any time and there can be no assurance that such price protection will
be available to Pomeroy in the future. In prior fiscal years, many manufacturers
reduced the number of days for which they provided price protection. During
fiscal 2004, most of the reductions stabilized, however, current terms and
conditions remain subject to change. In addition to the price protection
mentioned above, subject to certain limitations, Pomeroy currently has the
option of returning inventory to certain manufacturers and distributors. The
amount of inventory that can be returned to manufacturers without a restocking
fee varies under Pomeroy's agreements and such return policies may provide only
limited protection against excess inventory. There can be no assurance that new
product developments will not have a material adverse effect on the value of the
Company's inventory or that the Company will successfully manage its existing
and future inventory. In addition, Pomeroy stocks parts inventory for its
services business. Parts inventory is more likely to experience a decrease in
valuation as a result of technological change and obsolescence. Price
protection practices are not ordinarily offered by manufacturers with respect to
service parts.
10
Dependence on Vendor Relationships
- -------------------------------------
The Company's current and future success depends, in part, on its relationships
with leading hardware and software vendors and on its status as an authorized
service provider. Pomeroy is currently authorized to service the products of
many industry-leading hardware, software and internetworking product vendors.
Without these relationships, the Company would be unable to provide its current
range of services, principally warranty services.
The Company may not be able to maintain, or attract new relationships with the
computer hardware and software vendors that they believe are necessary for their
business. Since Pomeroy utilizes vendor relationships as a marketing tool, any
negative change in these relationships could adversely affect its financial
condition and results of operations while it seeks to establish alternative
relationships. In general, authorization agreements with vendors include
termination provisions, some of which are immediate. The Company cannot assure
that vendors will continue to authorize them as an approved service provider. In
addition, the Company cannot assure that vendors, which introduce new products,
will authorize them as an approved service provider for such new products.
Significant product supply shortages have resulted from time to time because
manufacturers have been unable to produce sufficient quantities of certain
products to meet demand. The Company expects to experience some difficulty in
obtaining an adequate supply of products from its major vendors, which may
result in delays in completing sales.
The loss of any vendor relationship, product line, or product shortage could
reduce the supply and increase costs of products sold by Pomeroy and adversely
impact the Company's competitive position.
Pricing Pressures
- ------------------
Pomeroy believes its prices and delivery terms are competitive; however, certain
competitors may offer more aggressive pricing to their customers. The Company
has experienced and expects continued pricing pressure in its products segment
due to industry consolidation and the efforts of manufacturers to sell directly
to Pomeroy's customers. In addition, the general weakness in the U.S. economy
has impacted Pomeroy's business. In an attempt to stimulate sales to existing
and new customers, the Company believes that pricing pressures may increase in
the future, which could require the Company to reduce prices, which may have an
adverse impact on its operating results. Decreasing prices of Pomeroy's
products and services offerings will require the Company to sell a greater
number of products and services to achieve the same level of net sales and gross
profit.
Government Contracts
- ---------------------
A portion of Pomeroy's revenue is derived from contracts with state and local
governments and government agencies. In the event of a dispute, the Company
would have limited recourse against the government or government agency.
Furthermore, future statutes and/or regulations may reduce the profitability of
such contracts. In addition, certain of the Company's government contracts have
no contractual limitation of liability for damages resulting from the provision
of services.
Dependence on Major Customers
- --------------------------------
During fiscal 2004, approximately 23.4% of Pomeroy's total net sales and
revenues were derived from its top 10 customers. No customer accounted for more
than 10% of Pomeroy's total net sales and revenues. The loss of one or more
significant customers could have a material adverse impact on the Company's
operating results.
Dependence on Key Personnel
- ------------------------------
The success of Pomeroy is dependent on the services of Stephen E. Pomeroy, Chief
Executive Officer, President and Chief Operating Officer of the Company and
Chief Executive Officer of Pomeroy Select, and other key personnel. The loss of
the services of Stephen E. Pomeroy, or other key personnel could have a material
adverse effect on Pomeroy's business. Pomeroy has entered into employment
agreements with certain of its key personnel, including Stephen E. Pomeroy.
Pomeroy's success and plans for future growth will also depend on its ability to
attract and retain highly skilled personnel in all areas of its business.
On June 10, 2004, the Company announced that Stephen E. Pomeroy had been elected
to the position of Chief Executive Officer and that David B. Pomeroy had
resigned as CEO. David B. Pomeroy continues to serve as the Chairman of the
Board of the Company. On January 31, 2005, the Company entered into a
consulting agreement with David B. Pomeroy.
Stock Price
- ------------
Pomeroy's stock price is affected by a number of factors, including quarterly
variations in revenue, gross profit and operating income, general economic and
market conditions, and estimates and projections by the investment community.
As a result, Pomeroy's common stock may fluctuate in market price.
11
EMPLOYEES
As of January 5, 2005, Pomeroy had 3,526 full-time employees consisting of the
following: 1,976 technical personnel; 259 direct sales representatives and sales
support personnel; 268 management personnel; and 1,023 administrative and
distribution personnel. Pomeroy offers its full-time employees the options to
participate in health and dental insurance, short and long term disability
insurance, life insurance, 401(k) plan and an employee stock purchase plan.
Pomeroy has no collective bargaining agreements and believes its relations with
its employees are good.
BACKLOG
Other than future sales and revenues from existing long-term contracts, Pomeroy
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 Pomeroy's business or indicative
of future sales. From time to time, Pomeroy experiences difficulty in obtaining
products from its major vendors as a result of general industry conditions.
These delays have not had, and are not anticipated to have, a material adverse
effect on Pomeroy's results of operations.
PATENTS AND TRADEMARKS
The Company owns no trademarks or patents. Although Pomeroy's various dealer
agreements do not generally allow the Company to use the trademarks and trade
names of these various manufacturers, the agreements do permit the Company to
refer to itself as an "authorized representative" or an "authorized service
provider" of the products of those manufacturers and to use their trademarks and
trade names for marketing purposes. Pomeroy considers the use of these
trademarks and trade names in its marketing efforts to be important to its
business.
ACQUISITIONS
Acquisitions have contributed significantly to Pomeroy's growth. The Company
believes that acquisitions are one method of increasing its presence in existing
markets, expanding into new geographic markets, adding experienced service
personnel, gaining new product offerings and services, obtaining more
competitive pricing as a result of increased purchasing volumes of particular
products and improving operating efficiencies through economies of scale. In
recent years, there has been consolidation among providers of microcomputer
products and services and Pomeroy believes that this consolidation will
continue, which, in turn, may present additional opportunities for the Company
to grow through acquisitions. The Company continually seeks to identify and
evaluate potential acquisition candidates.
During fiscal 2004, the Company completed one acquisition. The total
consideration paid consisted of $46.1 million, which was funded from cash on
hand and borrowings from Pomeroy's existing line of credit.
The results of operations of the acquisition are included in the fiscal 2004
consolidated statement of income from the respective date of the acquisition.
See Note 13 to the Consolidated Financial Statements for unaudited pro forma
results of operations of the Company as if the fiscal 2004 acquisition had
occurred on January 6, 2003.
ITEM 2. PROPERTIES
Pomeroy's principal executive offices, distribution facility and national
training center comprised of approximately 36,000, 161,000 and 22,000 square
feet of space, respectively, are located in Hebron, Kentucky. These facilities
are leased from Pomeroy Investments, LLC ("Pomeroy Investments"), a Kentucky
limited liability company controlled by David B. Pomeroy, II, Chairman of the
Board, under a ten-year triple-net lease agreement, which expires in July 2010.
The lease agreement provides for 2 five-year renewal options.
The Company is currently negotiating terms with a related party, Pomeroy
Investments, for an additional 70,000 square feet of space at the Company's
facilities in Hebron, Kentucky. The lease is expected to be a ten-year
triple-net lease with fair market value rent payments. The final version of the
lease will be subject to approval of the Company's Audit Committee.
Pomeroy also has non-cancelable operating leases for its regional offices,
expiring at various dates between 2005 and 2009. Pomeroy believes there will be
no difficulty in negotiating the renewal of its real property leases as they
12
expire or in finding other satisfactory space. In the opinion of management, the
properties are in good condition and repair and are adequate for the particular
operations for which they are used. Pomeroy does not own any real property.
ITEM 3. LEGAL PROCEEDINGS
Various legal actions arising in the normal course of business have been brought
against Pomeroy. Management believes these matters will not have a material
adverse effect on Pomeroy's consolidated financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The following table sets forth, for the periods indicated, the high and low
sales price for the Common Stock for the quarters indicated as reported on the
NASDAQ National Market.
2004 2003
-------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $15.15 $12.82 $13.21 $ 6.50
Second Quarter $15.00 $11.14 $11.51 $ 6.44
Third Quarter $13.35 $10.59 $15.16 $11.19
Fourth Quarter $15.40 $12.52 $16.18 $12.85
As of February 28, 2005, there were approximately 328 holders of record of
Pomeroy's common stock.
Dividends
- ---------
During 2004, the Company did not pay any cash dividends. Pomeroy has no plans
to pay cash dividends in the foreseeable future, and the payment of such
dividends are restricted under Pomeroy's current credit facility. Under such
credit facility, cash dividends and stock redemptions are limited to $5 million
annually.
During 2003, the Company paid a one-time cash dividend of $9.8 million, or $0.80
per share, to shareholders of record as of July 28, 2003.
Securities authorized for issuance under equity compensation plans
- -------------------------------------------------------------------------
During 2004, the Company granted options exercisable for approximately 1.2
million shares of common stock under the 2002 Amended and Restated Stock
Incentive Plan and 2002 Outside Directors' Stock Option Plan. As of January 5,
2005, the following shares of common stock were authorized for issuance under
equity compensation plans:
13
Plan category (1) Number of Weighted- Number of
securities to be average exercise securities
issued upon price of remaining
exercise of outstanding available for
outstanding options, warrants future issuance
options, warrants and rights under equity
and rights compensation
plans(excluding
securities
reflected in
column (a))
(a) (b) (c ) (2)
- --------------------------------- ------------------ ------------------- ----------------
Equity compensation plans
approved by security holders 2,733,919 $ 13.34 2,029,954
- --------------------------------- ------------------ ------------------- ----------------
Equity compensation plans
not approved by security holders - - -
- --------------------------------- ------------------ ------------------- ----------------
Total 2,733,919 $ 13.34 2,029,954
- --------------------------------- ------------------ ------------------- ----------------
<FN>
(1) A narrative description of the material terms of equity
compensation plans is set forth in Note 19 to the Consolidated
Financial Statements.
(2) Includes 373,891 shares available for future issuance under the
1998 Employees Stock Purchase Plan (1998 Plan). A narrative
description of the material terms of the 1998 Plan is set forth in
Note 11 to the Consolidated Financial Statements
14
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share data)
- ------------------------------------------
For the Fiscal Years Ended January 5
-------- --------- -------------- --------- ----------- ---------
2005(1) 2004(2) 2003(3) 2002(4) 2001(5) 2000(5)
-------- --------- -------------- --------- ----------- ---------
Consolidated Statement of Income Data:
Net sales and revenues . . . . . . . . . . $742,290 $598,423 $ 702,800 $809,214 $ 925,138 $756,757
Cost of sales and service. . . . . . . . . 647,154 528,030 615,135 705,937 801,788 652,503
-------- --------- -------------- --------- ----------- ---------
Gross profit . . . . . . . . . . . . . . . 95,136 70,393 87,665 103,277 123,350 104,254
-------- --------- -------------- --------- ----------- ---------
Operating expenses:
Selling, general and administrative. . . . 69,897 50,118 55,368 61,640 61,135 52,216
Depreciation and amortization. . . . . . . 4,393 5,319 5,720 10,362 9,516 6,527
Litigation settlement (6) . . . . . . . . - 150 300 1,000 - -
Provision for vendor receivables and
restructuring and severance charges (7) . 2,423 - 4,048 15,934 - -
-------- --------- -------------- --------- ----------- ---------
Total operating expenses . . . . . . . . . 76,713 55,587 65,436 88,936 70,651 58,743
-------- --------- -------------- --------- ----------- ---------
Income from operations . . . . . . . . . . 18,423 14,806 22,229 14,341 52,699 45,511
-------- --------- -------------- --------- ----------- ---------
Other expense (income):
Interest, net. . . . . . . . . . . . . . . 251 (75) 541 1,768 4,352 3,858
Other. . . . . . . . . . . . . . . . . . . 26 11 (63) (229) (547) (93)
-------- --------- -------------- --------- ----------- ---------
Net other expense (income) . . . . . . . . 277 (64) 478 1,539 3,805 3,765
-------- --------- -------------- --------- ----------- ---------
Income before income tax.. . . . . . . . . 18,146 14,870 21,751 12,802 48,894 41,746
Income tax expense (8) . . . . . . . . . . 7,213 5,799 6,742 4,993 19,406 16,864
-------- --------- -------------- --------- ----------- ---------
Net income . . . . . . . . . . . . . . . . $ 10,933 $ 9,071 $ 15,009 $ 7,809 $ 29,488 $ 24,882
======== ========= ============== ========= =========== =========
Earnings per common share (basic). . . . . $ 0.89 $ 0.74 $ 1.18 $ 0.62 $ 2.42 $ 2.12
Earnings per common share (diluted). . . . $ 0.88 $ 0.73 $ 1.18 $ 0.61 $ 2.38 $ 2.11
Consolidated Balance Sheet Data:
Working capital. . . . . . . . . . . . . . $ 80,959 $116,786 $ 123,334 $ 99,838 $ 89,449 $ 61,126
Long-term debt, net of current maturities. 250 913 - 10,213 19,572 6,971
Total assets . . . . . . . . . . . . . . . 332,888 269,199 248,496 341,718 361,268 333,141
<FN>
1) During fiscal 2004, the Company and Pomeroy Acquisition Sub,
Inc., a wholly owned subsidiary the Company, completed a merger with
Alternative Resources Corporation ("ARC"). See Notes 6 and 13 of Notes
to Consolidated Financial Statements.
2) During fiscal 2003, Pomeroy acquired all the outstanding common
stock of Micrologic Business Systems of K.C., Inc. and acquired
certain assets of eServ Solutions Group, LLC. See Notes 6 and 13 of
Notes to Consolidated Financial Statements.
3) During fiscal 2002, Pomeroy acquired certain assets of Verity
Solutions, LLC. See Notes 6 and 13 of Notes to Consolidated Financial
Statements.
4) During fiscal 2001, Pomeroy acquired certain assets of Osage
Systems Group, Inc., Ballantyne Consulting Group, Inc. and System 5
Technologies, Inc.
15
5) During fiscal 2000, Pomeroy acquired certain assets of Datasource
Hagen, DataNet, Inc. and all the outstanding stock of The Linc
Corporation and Val Tech Computer Systems, Inc.
6) During fiscal 2003, Pomeroy's results include an after tax charge
of $92 ($0.01 per diluted share) related to a litigation settlement in
the amount of $150. During fiscal 2002, Pomeroy's results include an
after tax charge of $186 ($0.01 per diluted share) related to a
litigation settlement in the amount of $300. During fiscal 2001,
Pomeroy's results include an after tax charge of $610 ($0.05 per
diluted share) related to a litigation settlement with FTA
Enterprises, Inc. in the amount of $1,000.
7) During fiscal 2004, Pomeroy's results include an after tax charge
of $1.5 million ($0.12 per diluted share) related to the Company
recording restructuring and severance charges totaling $2.4 million.
During fiscal 2002, Pomeroy's results include an after tax charge of
$2.5 million ($0.20 per diluted share) related to the Company
recording an increase in reserves and a restructuring charge totaling
$4.0 million. During fiscal 2001, Pomeroy's results include an after
tax charge of $9.7 million ($0.77 per diluted share) related to the
Company recording an increase in reserves and a restructuring charge
totaling $15.9 million.
8) During fiscal 2002, Pomeroy's results include an income tax
benefit of $1.6 million ($0.13 per diluted share) due to a tax
accounting change.
QUARTERLY RESULTS OF OPERATIONS - UNAUDITED (in thousands, except per share
data)
The following table sets forth certain unaudited operating results of each of
the eight prior quarters. This information is unaudited, but in the opinion of
management includes all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the results of operations of such periods.
Fiscal 2004
------------------------------------------
First Second Third Fourth
-------- -------- ------------ --------
Quarter Quarter Quarter (1) Quarter
Net sales and revenues $155,214 $178,155 $ 200,504 $208,417
Gross profit $ 18,369 $ 19,731 $ 26,450 $ 30,586
Net income. $ 2,276 $ 3,086 $ 1,872 $ 3,699
Earnings per common share:
Basic . $ 0.19 $ 0.25 $ 0.15 $ 0.30
Diluted $ 0.18 $ 0.25 $ 0.15 $ 0.30
Fiscal 2003
-----------------------------------------------
First Second Third Fourth
----------- ----------- -------- -----------
Quarter(2) Quarter(3) Quarter Quarter(4)
Net sales and revenues $ 129,978 $ 147,352 $158,072 $ 163,021
Gross profit $ 16,377 $ 17,317 $ 17,635 $ 19,064
Net income $ 1,506 $ 2,013 $ 2,563 $ 2,989
Earnings per common share:
Basic $ 0.12 $ 0.16 $ 0.21 $ 0.25
Diluted $ 0.12 $ 0.16 $ 0.21 $ 0.24
<FN>
1. During the third quarter of fiscal 2004, Pomeroy's results
include an after tax charge of $1.5 million ($0.12 per diluted share)
related to the Company recording restructuring and severance charges
of $2.4 million. Also, during the third quarter of fiscal 2004,
Pomeroy acquired ARC through a stock transaction. See Notes 6 and 13
of the Notes to Consolidated Financial Statements.
2. During the first quarter of fiscal 2003, Pomeroy acquired all the
outstanding common stock of Micrologic Business Systems of K.C., Inc.
See Notes 6 and 13 of Notes to Consolidated Financial Statements.
3. During the second quarter of fiscal 2003, Pomeroy's results
include an after tax charge of $92 ($.01 per diluted share) related to
the Company recording a litigation settlement of $150.
16
4. During the fourth quarter of fiscal 2003, Pomeroy acquired
certain assets of eServ Solutions Group, LLC. See Notes 6 and 13 of
Notes to Consolidated Financial Statements.
17
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's results of operation and
financial position should be read in conjunction with its consolidated financial
statements included elsewhere in this report. In addition, the Certain Business
Factor's described under "Business" should be considered in evaluating the
Company's outlook.
CRITICAL ACCOUNTING POLICIES
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Management believes that it consistently applies judgments
and estimates and such consistent application results in financial statements
and accompanying notes that fairly represent all periods presented. However,
any errors in these judgments and estimates may have a material impact on the
Company's statement of operations and financial condition. Critical accounting
policies, as defined by the Securities and Exchange Commission, are those that
are most important to the portrayal of the Company's financial condition and
results of operations and require management's most difficult and subjective
judgments and estimates of matters that are inherently uncertain. The Company
considers its critical accounting policies to be (1) vendor and trade receivable
allowances, (2) valuation of long-lived assets and (3) income taxes.
Vendor and trade receivable allowances
Pomeroy maintains allowances for doubtful accounts on both vendor and trade
receivables for estimated losses resulting from the inability of its customers
or vendors to make required payments. The determination of a proper allowance
for vendor receivables is based on an ongoing analysis as to the recoverability
of the Company's vendor receivable portfolio based primarily on account aging.
The determination of a proper allowance for trade receivables is based on an
ongoing analysis as to the credit quality and recoverability of the Company's
trade receivable portfolio. Factors considered are account aging, historical
bad debt experience, current economic trends and others. The analysis is
performed on both vendor and trade receivable portfolios. A separate allowance
account is maintained based on each analysis.
Valuation of long-lived assets Long-lived assets, including property and
equipment, goodwill and other intangible assets are reviewed for impairment
when events or changes in facts and circumstances indicate that their carrying
amount may not be recoverable. Events or changes in facts and circumstances
that Pomeroy considers as impairment indicators include the following:
- Significant underperformance of the Company's operating results
relative to expected operating results;
- Net book value compared to its market capitalization;
- Significant adverse economic and industry trends;
- Significant decrease in the market value of the asset;
- Significant changes to the asset since the Company acquired it;
- And the extent that the Company may use an asset or changes in
the manner that the Company may use it.
When the Company determines that one or more impairment indicators are present
for its long-lived assets, excluding goodwill, Pomeroy compares the carrying
amount of the asset to the net future undiscounted cash flows that the asset is
expected to generate. If the carrying amount of the asset is greater than the
net future undiscounted cash flows that the asset is expected to generate,
Pomeroy would recognize an impairment loss to the extent the carrying value of
the asset exceeds its fair value. An impairment loss, if any, would be reported
in the Company's future results of operations.
When the Company determines that one or more impairment indicators are present
for its goodwill, Pomeroy compares its reporting unit's carrying value to its
fair value. The Company has two reporting units for goodwill testing which are
a products reporting unit and a services reporting unit. The Company has adopted
January 6 as the valuation date for the annual testing. Currently, the Company
has engaged a third-party valuation specialist to perform the annual goodwill
impairment testing as of January 6, 2005. An impairment loss, if any, would be
reported in the Company's results of operations at the date it is determined.
18
Income taxes
Pomeroy is required to estimate income taxes in each of the jurisdictions in
which the Company operates. This process involves estimating the Company's
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the Company's consolidated balance sheet. The Company must then
assess the likelihood that the deferred tax assets will be recovered from future
taxable income and to the extent that the Company believes recovery is not
likely, the Company must establish a valuation allowance. To the extent the
Company establishes a valuation allowance in a period, the Company must include
an expense within the tax provision in the statement of operations. Pomeroy has
not recorded a valuation allowance to reduce the carrying amount of recorded
deferred tax assets representing future deductions, as the Company believes it
will have sufficient taxable income in the future to realize these deductions.
Pomeroy considers future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for a valuation allowance. In the
event Pomeroy were to determine that it would not be able to realize its
deferred tax assets in the future, an adjustment to the deferred tax asset would
decrease income in the period such determination was made.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of income expressed as a percentage of net
sales and revenues:
19
Percentage of Net Sales and Revenues
Financial Results Fiscal Years ended January 5,
- ----------------------------------------- -------------------------------------------
2005 2004 2003
-------------- -------------- -----------
Net sales and revenues:
Equipment, supplies and leasing 73.4% 78.6% 81.3%
Service 26.6% 21.4% 18.7%
-------------- -------------- -----------
Total net sales and revenues 100.0% 100.0% 100.0%
============== ============== ===========
Cost of sales and service:
Equipment, supplies and leasing 67.9% 72.7% 74.6%
Service 19.3% 15.5% 12.9%
-------------- -------------- -----------
Total cost of sales and service 87.2% 88.2% 87.5%
============== ============== ===========
Gross profit:
Equipment, supplies and leasing 5.5% 5.9% 6.7%
Service 7.3% 5.9% 5.8%
-------------- -------------- -----------
Total gross profit 12.8% 11.8% 12.5%
============== ============== ===========
Operating expenses:
Selling, general and administrative 8.9% 7.9% 7.3%
Rent 0.5% 0.5% 0.5%
Depreciation 0.5% 0.8% 0.6%
Amortization 0.1% 0.1% 0.2%
Provision for doubtful accounts 0.0% 0.0% 0.1%
Litigation settlement 0.0% 0.0% 0.0%
Provision for vendor receivables
and restructuring and severance charges 0.3% 0.0% 0.6%
-------------- -------------- -----------
Total operating expenses 10.3% 9.3% 9.3%
============== ============== ===========
Income from operations 2.5% 2.5% 3.2%
Net other expense 0.0% 0.0% 0.1%
Income before income tax 2.5% 2.5% 3.1%
Income tax expense 1.0% 1.0% 1.0%
-------------- -------------- -----------
Net income 1.5% 1.5% 2.1%
============== ============== ===========
FISCAL YEAR 2004 COMPARED TO FISCAL YEAR 2003
Total Net Sales and Revenues. Total net sales and revenues increased $143.9
million, or 24.0%, to $742.3 million in fiscal 2004 from $598.4 million in
fiscal 2003. This increase was a result primarily of increased industry-wide
technology spending and the acquisition of Alternative Resources Corporation
("ARC") on July 23, 2004. Excluding the acquisition completed in fiscal year
2004, total net sales and revenues increased 13.4%.
Products and leasing sales increased $74.6 million, or 15.9%, to $545.1 million
in fiscal 2004 from $470.5 million in fiscal 2003. Excluding acquisitions
completed in fiscal year 2004, total product and leasing net sales and revenues
increased 14.3%. Service revenues increased $69.3 million, or 54.2%, to $197.2
million in fiscal 2004 from $127.9 million in fiscal 2003. Excluding
acquisitions completed in fiscal year 2004, total service net sales and revenues
20
increased 10.2%. The net increase in products and leasing net sales and revenue
was primarily a result of increased industry-wide technology spending and the
increase in service revenue was primarily a result of the acquisition of
Alternative Resources Corporation on July 23, 2004.
Gross Profit. Gross profit margin was 12.8% in fiscal 2004 compared to 11.8% in
fiscal 2003. This increase in gross profit resulted primarily from the increase
in service revenues as a percentage of total revenues and the increase in
service gross margin as a percentage of total gross margins due to the
acquisition of Alternative Resources Corporation and by the adoption of EITF
02-16. On a forward looking basis, the Company expects to continue its
aggressive product pricing in order to gain existing market share which will
have a continued impact on product gross margin. The competitive environment
as well as less than maximum technical employee utilization rate has also
resulted in downward pressure on service margins. Additionally, the Company
expects to continue increasing the breadth and depth of its service offerings,
which will have a continued impact on service gross margin. Service gross margin
increased to 56.8% of total gross margin in fiscal 2004 from 49.6% in fiscal
2003. Factors that may have an impact on gross margin in the future include the
continued changes in hardware margins, change in technical employee utilization
rates, the mix of the type of products sold and services provided, the
percentage of equipment or service sales with lower-margin customers, the ratio
of service revenues to total net sales and revenues, and the Company's decision
to aggressively price certain products and services.
As a consequence of adopting EITF 02-16, the Company recorded approximately $734
thousand during fiscal 2004 of vendor considerations as a reduction of cost of
sales, which would previously have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, the gross profit would have been 12.7% during
fiscal 2004 compared to 11.7% during fiscal 2003. The non-GAAP gross profit
margin is included in this discussion to provide meaningful comparison to prior
periods.
Operating Expenses. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 9.4% in fiscal 2004 from 8.4% for
fiscal 2003. Total operating expenses expressed as a percentage of total net
sales and revenues increased to 10.3% in fiscal 2004 from 9.3% for fiscal 2003.
The increases are primarily the result of the acquisition of Alternative
Resources Corporation and recording a $2.4 million restructuring charge in the
third quarter of fiscal 2004 and the adoption of EITF 02-16 offset by higher net
sales and revenues in fiscal 2004 as compared to fiscal 2003. On a
forward-looking basis, the Company expects to continue monitoring its selling,
general and administrative expenses for strict cost controls.
As noted above, as a result of adopting EITF 02-16, the Company reclassified
approximately $734 thousand of vendor consideration to a reduction of cost of
sales, which would previously have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, operating expenses would have been 10.2% during
fiscal 2004 as compared to 9.3% during fiscal 2003. This non-GAAP measurement
is included to provide a more meaningful comparison to prior periods.
Litigation Settlement. No litigation settlement expenses were recorded in
fiscal 2004. $0.2 million was recorded in fiscal 2003. For fiscal 2003, the
litigation settlement relates to a single bankruptcy preference claim.
Restructuring and Severance Charges. Restructuring and severance charges
reported were $2.4 million for fiscal 2004. During fiscal 2004, in connection
with certain strategic initiatives, the Company recorded restructuring and
severance charges of $1.0 million. The restructuring charge is associated with
costs of facilities and processes of Pomeroy that have or will become
duplicative or redundant as ARC operations are integrated into the Company.
The Company also recorded a non-recurring, one-time charge for severance in the
amount of $1.4 million related to the resignation of David B. Pomeroy II as CEO
of the Company. David B. Pomeroy II continues to serve as Chairman of the Board
of the Company.
Income from Operations. Income from operations increased $3.6 million, or
24.3%, to $18.4 million in fiscal 2004 from $14.8 million in fiscal 2003. The
Company's operating margin remained constant in fiscal 2004 and 2003 at 2.5%,
primarily due to the increase in gross margin, offset by increase in operating
expenses.
Net Interest Income/Expense. Net interest expense was $0.25 million during
fiscal 2004 as compared to interest income of $0.08 million during fiscal 2003.
This increase in net interest expense was a result of increased borrowings under
our credit facility relating to the ARC acquisition and lower interest rates on
invested funds.
Income Taxes. The Company's effective tax rate was 39.75% in fiscal 2004
compared to 39.0% in fiscal 2003. This increase was principally related to
the increase in state and local income taxes.
21
Net Income. Net income increased $1.8 million, or 19.8%, to $10.9 million in
fiscal 2004 from $9.1 million in fiscal 2003. The increase was a result of the
factors described above.
FISCAL YEAR 2003 COMPARED TO FISCAL YEAR 2002
Total Net Sales and Revenues. Total net sales and revenues decreased $104.4
million, or 14.9%, to $598.4 million in fiscal 2003 from $702.8 million in
fiscal 2002. This decrease was a result primarily of a continued industry-wide
slowdown in technology spending due to the general weakness in the U.S. economy
and the decrease in leasing revenue due to the sale of TIFS during fiscal 2002.
Further, the Company sometimes elects to take a commission from the
manufacturers for arranging sales transactions where it judges the gross profit
to be inadequate for its participation in the sales transaction. In fiscal year
2003, Pomeroy elected to take such commissions on transactions whose sales would
otherwise have been $10.6 million. Excluding acquisitions completed in fiscal
year 2003, total net sales and revenues decreased 19.3%
Products and leasing sales decreased $101 million, or 17.7%, to $470.5 million
in fiscal 2003 from $571.5 million in fiscal 2002. Excluding acquisitions
completed in fiscal year 2003, total product and leasing net sales and revenues
decreased 22.7%. Service revenues decreased $3.4 million, or 2.6%, to $127.9
million in fiscal 2003 from $131.3 million in fiscal 2002. Excluding
acquisitions completed in fiscal year 2003, total service net sales and revenues
decreased 4.6% These net decreases were primarily a result of an industry-wide
slowdown in technology spending due to the general weakness in the U.S. economy
and the sale of TIFS.
Gross Profit. Gross profit margin was 11.8% in fiscal 2003 compared to 12.5% in
fiscal 2002. This decrease in gross profit resulted primarily from the decrease
in hardware and service margins, but was offset somewhat by the adoption of EITF
02-16 and somewhat by the higher proportion of service gross margin to total
gross margin. The decrease in product and leasing gross margin is primarily
associated with the Company's strategic decision to aggressively price its
hardware business in order to maintain and capture market share and to the
weakened economic conditions of the IT industry, and offset somewhat by the
adoption of EITF 02-16. On a forward looking basis, the Company expects to
continue its aggressive product pricing in order to gain existing market share
which will have a continued impact on product gross margin. The competitive
environment as well as less than maximum technical employee utilization rate has
also resulted in downward pressure on service margins. Additionally, the Company
expects to continue increasing the breadth and depth of its service offerings,
which will have a continued impact on service gross margin. Service gross margin
increased to 49.6% of total gross margin in fiscal 2003 from 46.1% in fiscal
2002. Factors that may have an impact on gross margin in the future include the
continued changes in hardware margins, change in personnel utilization rates,
the mix of products sold and services provided, a change in unit prices, the
percentage of equipment or service sales with lower-margin customers, the ratio
of service revenues to total net sales and revenues, and the Company's decision
to aggressively price certain products and services.
As a consequence of adopting EITF 02-16, the Company recorded approximately $324
thousand during fiscal 2003 of vendor considerations as a reduction of cost of
sales, which would previously have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, the gross profit would have been 11.7% during
fiscal 2003 compared to 12.5% during fiscal 2002. The non-GAAP gross profit
margin is included in this discussion to provide meaningful comparison to prior
periods.
Operating Expenses. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 8.4% in fiscal 2003 from 7.9% for
fiscal 2002. This increase is the result of lower than expected total net sales
and revenues in fiscal 2003 as compared to fiscal 2002 and the adoption of EITF
02-16.
As a result of adopting EITF 02-16, the Company reclassified approximately $324
thousand of vendor consideration to a reduction of cost of sales, which would
previously have been recorded as a reduction of selling, general and
administrative expenses. Excluding the impact of EITF 02-16, and therefore on a
non-GAAP basis, selling, general and administrative expenses would have been
8.3% during fiscal 2003 as compared to 7.9% during fiscal 2002. This non-GAAP
measurement is included to provide a more meaningful comparison to prior
periods.
Total operating expenses expressed as a percentage of total net sales and
revenues remained the same for fiscal 2003 and fiscal 2002 at 9.3%. However,
the composition of the fiscal 2003 total operating expenses changed from fiscal
2002. With the exception of depreciation expense, all other operating expenses
decreased in fiscal 2003 as compared to fiscal 2002. Excluding the impact of
EITF 02-16, and therefore on a non-GAAP basis, total operating expenses would
have been 9.2% during fiscal 2003 as compared to 9.3% during fiscal 2002. This
non-GAAP
22
measurement is included to provide a more meaningful comparison to prior
periods. On a forward-looking basis, the Company expects to continue monitoring
its selling, general and administrative expenses for strict cost controls.
Litigation Settlement. Litigation settlement expense decreased $0.1 million or
33.3% to $0.2 million in fiscal 2003 from $0.3 million in fiscal 2002. For both
fiscal 2003 and fiscal 2002, the litigation settlement relates to a single
bankruptcy preference claim.
Provision for Vendor Receivables and Restructuring Charge. In fiscal 2002 the
Company expensed $3.3 million to increase the vendor receivable reserve based on
the deterioration of the aging of the vendor receivables, the expected
resolution of the disputed vendor rebate claims and the general posture of the
OEMs regarding resolution. In fiscal 2002 the Company also recorded
restructuring expenses of $.7 million to consolidate and relocate operations in
various geographical locations. No such expenses were recorded in fiscal 2003.
Income from Operations. Income from operations decreased $7.4 million, or
33.3%, to $14.8 million in fiscal 2003 from $22.2 million in fiscal 2002. The
Company's operating margin decreased to 2.5% in fiscal 2003 from 3.2% in fiscal
2002. This decrease is primarily due to the decrease in gross margin and the
lower than expected total net sales and revenues , offset by decrease in
operating expenses.
Net Interest Income/Expense. Interest income was $0.08 million during fiscal
2003 as compared to interest expense of $0.5 million during fiscal 2002. This
change was due to reduced borrowings as a result of improved cash flow
management, the sale of certain TIFS assets and interest income earned on cash
balances.
Income Taxes. The Company's effective tax rate was 39.0% in fiscal 2003
compared to 31.0% in fiscal 2002. This increase was principally related to a
tax benefit of $1.6 million in fiscal 2002 associated with an increase in the
tax basis of leased assets as a result of an accounting method change for tax
purposes in fiscal 2002.
Net Income. Net income decreased $5.9 million, or 39.3%, to $9.1 million in
fiscal 2003 from $15.0 million in fiscal 2002. The increase was a result of the
factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $5.8 miIlion in fiscal 2004. Cash used
in investing activities was $18.8 million, which included $16.4 million for
acquisitions completed in fiscal 2004 and prior years and $2.4 million for
capital expenditures. Cash used in financing activities was $9.5 million which
included $31.4 million of payments on notes payable, $0.5 million for the
purchase of treasury stock, and was offset by $20.2 million in proceeds from
short-term borrowings, $1.8 million from the exercise of stock options, and $0.4
million proceeds from the employee stock purchase plan.
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At January 5, 2005, these lines of credit
totaled $85.0 million, including $75.0 million with GE Commercial Distribution
Finance ("GECDF") and $10.0 million with IBM Credit Corporation ("ICC").
Borrowings under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on fifteen-day notes.
All such borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to subsidies by
manufacturers. Overall, the average rate on these arrangements is less than
1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
On June 28, 2004, the Company finalized a new $165 million Syndicated Credit
Facility Agreement with GECDF. The new credit facility has a three-year term
and its components include a maximum of $75 million for inventory financing and
a revolving line of credit, collateralized primarily by accounts receivable, of
up to $110 million; provided that the total amount outstanding at any time under
the inventory financing facility and the revolving line of credit may not exceed
$165 million. Under the new agreement, the credit facility provides a letter of
credit facility of $5 million. Under the credit facility, the interest rate is
based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of
January 5, 2005 the adjusted LIBOR rate was 4.4%. This credit facility expires
June 28, 2007.
At January 5, 2005, the Company's balance outstanding under the credit facility
was approximately $20.2 million. At January 5, 2004, the Company did not have
an outstanding balance under its previous credit facility. The credit facility
is collateralized by substantially all of the assets of Pomeroy, except those
assets that collateralize certain other financing arrangements. Under the terms
of the credit facility, Pomeroy is subject to various financial covenants.
Currently, Pomeroy is not in violation of any financial covenants.
23
On July 23, 2004, the Company and Pomeroy Acquisition Sub, Inc. ("PAS"), a
wholly owned subsidiary the Company, completed a merger with Alternative
Resources Corporation ("ARC"). On May 11, 2004, the parties entered into a
definitive merger agreement for PAS to acquire all of the issued and outstanding
shares of capital stock of ARC. The merger was approved by ARC shareholders at
a meeting held on July 22, 2004. As a result of the merger, ARC is now a
wholly-owned subsidiary of the Company. The cash consideration paid at closing,
including the cost of all stock, stock options and warrants purchased and the
amount of ARC net debt retired, was approximately $46.1 million, which was
funded from cash on hand and borrowings from Pomeroy's existing line of credit.
Pomeroy believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy Pomeroy's capital
requirements for the next twelve months. Historically, Pomeroy has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. Pomeroy anticipates that future acquisitions will be
financed in a similar manner.
Off-Balance Sheet Arrangements and Contractual Obligations
Aggregated information about the Company's contractual obligations as of January
5, 2005 are presented in the following table:
Payments due by period
-----------------------------------------------------------
LESS THAN MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
- ----------------------- --------- ---------- ---------- ---------- ------------
Acquisition notes $ 1,162 $ 912 $ 250 $ - $ -
Operating leases 17,522 5,632 6,412 4,650 828
Total contractual cash
obligations $ 18,684 $ 6,544 $ 6,662 $ 4,650 $ 828
--------- ---------- ---------- ---------- ------------
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business. The
expected timing or payment of obligations discussed above is estimated based on
current information. Timing of payments and actual amounts paid may be
different depending on changes to agreed-upon amounts for some obligations.
Impact of Recent Accounting Pronouncement
In December 2004, the FASB issued FAS 123R. This statement, which will be
effective for the Company beginning on July 6, 2005, will change how the Company
accounts for share-based compensation, and may have a significant impact on its
future results of operations and earnings per share. The Company currently
accounts for share-based payments to employees and directors using the intrinsic
value method. Under this method, the Company generally does not recognize any
compensation expense related to stock option grants it awards under its stock
option plans.
FAS 123R will require the Company to recognize share-based compensation as
compensation expense in the statement of operations based on the fair values of
such equity on the date of the grant, with the compensation expense recognized
over the period in which the recipient is required to provide service in
exchange for the equity award. This statement will also require the Company to
adopt a fair value-based method for measuring the compensation expense related
to share-based compensation. The Company has not yet completed its evaluation of
the impact of the adoption of FAS 123R on its results of operations. In
connection with evaluating the impact of FAS 123R, the Company is considering
the potential implementation of different valuation methods to determine the
fair value of share-based compensation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk during fiscal 2004.
Currently, the Company does not have any significant financial instruments for
trading or other speculative purposes or to manage interest rate exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Registrant hereby incorporates the financial statements required by this item by
reference to Item 15 hereof.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a)(i) Effective October 3, 2003, Pomeroy IT Solutions, Inc. (the "Company")
dismissed Grant Thornton LLP as the Company's independent
accountants.
(ii) The reports of Grant Thornton LLP on the Company's consolidated
financial statements for the fiscal years ended January 5, 2003
and 2002 contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or
accounting principle.
(iii) The Audit Committee and the Board of Directors approved the Company's
change in independent accountants.
(iv) In connection with the Company's audits for the two fiscal years
ending January 5, 2003 and 2002 and through October 7, 2003, the
Company has had no disagreements with Grant Thornton LLP on any matter
of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Grant Thornton LLP would have caused them to
make reference thereto in their report on the consolidated financial
statements of the Company for such years.
(v) During the Company's two fiscal years ending January 5, 2003 and 2002
and through October 7, 2003, the Company has had no reportable
events as defined in Item 304 (a) (1) (v) of Regulation S-K.
(vi) Grant Thornton LLP has furnished the Company with a letter addressed
to the Securities and Exchange Commission stating that it agrees
with the above statements. A copy of this letter, dated October 7,
2003, was filed as Exhibit 16.1 to the Form 8-K, filed October 7,
2003.
(b)(i) The Company has engaged Crowe Chizek and Company LLC as its new
independent accountants effective October 3, 2003.
During the Company's two fiscal years ending January 5, 2003 and 2002
and through October 7, 2003, the Company has not consulted with
Crowe Chizek and Company LLC regarding either (i) the application of
accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on the
Company's financial statements, and neither a written report nor oral
advice was provided to the Company that Crowe Chizek and Company LLC
concluded was an important factor considered by the Company in
reaching a decision as to the accounting, auditing or financial
reporting issue; or (ii) any matter that was either the subject of a
disagreement, as that term is defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation
S-K, or a reportable event, as that term is defined in Item
304(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. With the participation of
management, our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 15e and 15d - 15e) as of the fiscal year
ended January 5, 2005, have concluded that, as of such date, our disclosure
controls and procedures were effective.
Internal Control Over Financial Reporting. The Company is currently completing
an evaluation, under the supervision and with the participation of its
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's internal
control over financial reporting as of the end of the period covered by this
report. This evaluation has not yet been completed. The Company is taking
advantage of the SEC's exemptive order and intends to file an amended Form 10-K,
including its control report, by the extended filing date deadline of May 5,
2005.
Changes in Internal Controls. During the fourth quarter ended January 5, 2005,
there were no changes in our internal control over financial reporting that
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
25
PART III
ITEMS 10-14.
The Registrant hereby incorporates the information required by Form 10-K, Items
10-14 by reference to the Company's definitive proxy statement for its 2005
Annual Meeting of shareholders, which will be filed with the Commission on or
before May 5, 2005.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this report:
- ----------------------------------------------------------------------------------------------------------------------
2004 Form
- ----------------------------------------------------------------------------------------------------------------------
10-K Page
-----------
1.. Financial Statements:
Reports of Independent Registered Public Accounting Firms F-1 to F-2
Consolidated Balance Sheets,
January 5, 2005 and January 5, 2004 F-3 to F-4
For each of the three fiscal years in
the period ended January 5, 2005:
Consolidated Statements of Income F-5
Consolidated Statements of Equity F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements F-8 to F-24
2. Financial Statement Schedules:
None
Filed Herewith
(page #) or
Incorporated
3. Exhibits by Reference to:
-------- -----------------
3(a) Certificate of Incorporation, as amended Exhibit 3(a) of
Company's
Form 10-Q filed
Aug. 11, 2000
3(i)(a)1 Certificate of Incorporation of Pomeroy Computer Exhibit 3(i)(a)(1) of
Resources, dated February, 1992 Company's Form 10-Q
filed Aug. 11, 2000
3(i)(a)2 Certificate of Amendment to Certificate of Exhibit 3(i)(a)(2) of
Incorporation, dated July 1997 Company's Form 10-Q
filed Aug. 11, 2000
- -------------------------------------------------------------------------------------------------------------------------
26
- -------------------------------------------------------------------------------------------------------------------------
3(i)(a)3 Certificate of Designations of Series A Junior Exhibit 3(i)(a)(3) of
Participating Preferred Stock of Pomeroy Computer Company's Form 10-
Resources, Inc. February 1998 Q filed Aug. 11, 2000
3(i)(a)4 Certificate of Amendment to Certificate of Incorporation, Exhibit 3(i)(a)(4) of
dated August 2000 Company's Form 10-
Q filed Aug. 11, 2000
3(i)(a)5 Certificate of Amendment to Certificate of Incorporation Exhibit 3(I)(a)5 of
for Pomeroy Computer Resources, Inc., dated June 19, Company's Form 10-
2003 Q filed August 19,
2003
(3)(i)(a)6 Certificate of Amendment to Certificate of Incorporation Exhibit 3(I)(a)6 of
for Pomeroy Computer Resources Sales Company, Company's Form 10-
Inc., dated June 19, 2003 Q filed August 19,
2003
3(b) Bylaws of the Company Exhibit 3(a) of
Company's
Form S-1 filed Feb.
14, 1992
4 Rights Agreement between the Company and The Fifth Exhibit 4 of
Third Bank, as Rights Agent dated as of February Company's Form 8-K
23,1998 filed February 23,
1998
10(i) Material Agreements
(b)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(b)(1) of
Agreement) between IBM Credit Corporation and Company's Form 10-
the Company dated April 2, 1992 K filed April 7, 1994
(b)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(b)(2) of
between IBM Credit Corporation and the Company Company's Form 10-
dated July 7, 1993 K filed April 7, 1994
(c)(1) Agreement for Wholesale Financing (Security Exhibit 10(i)(c)(1) of
Agreement) between ITT Commercial Finance Company's Form 10-
Corporation and the Company dated March 27, K filed April 7, 1994
1992
(c)(2) Addendum to Agreement for Wholesale Financing Exhibit 10(i)(c)(2) of
between ITT Commercial Finance Corporation and Company's Form 10-
the Company dated July 7, 1993 K filed April 7, 1994
(c)(3) Amendment to Agreement for Wholesale Financing Exhibit 10(i)(c)(3) of
between Deutsche Financial Services f/k/a ITT Company's Form 10-
Commercial Finance Corporation and the Company Q filed May 18, 1995
dated May 5, 1995
(d)(4) Registration Rights Agreement between the Exhibit 10.50 of
Company and TCSS dated March 14, 1996 Company's Form S-1
filed June 4, 1996
(e)(1) IBM Agreement for Authorized Dealers Exhibit 10(i)(e)(1) of
and Industry Remarketers with the Company, dated Company's Form S-1
September 3, 1991 filed Feb. 14. 1992
(e)(2) Schedule of Substantially Exhibit 10(i)(e)(2) of
- -------------------------------------------------------------------------------------------------------------------------
27
- -------------------------------------------------------------------------------------------------------------------------
Identical IBM Agreements for Authorized Dealers Company's Form S-1
And Industry Remarketers filed Feb. 14, 1992
(kk)(1) The Asset Purchase Agreement dated July 27, 2000 by, Exhibit 10)(i)(kk)(1)
between and among Pomeroy Computer Resources, Company's Form 10-
Inc., Pomeroy Select Integration Solutions, Inc., Q filed
DataNet, Inc., DataNet Technical Services, LLC, November 10, 2000
DataNet Tangible Products, LLC, DataNet
Programming, LLC, Richard Stitt, Gregory Stitt, Jeffrey
Eacho, and Richard Washington.
(mm)(7) The Asset Purchase Agreement by, between and Exhibit 10(l)(mm)(7)
among Pomeroy Select Integration Solutions, Inc., and of Company's Form
Ballantyne Consulting Group, Inc., Mark DeMeo, Joe 10-Q filed November
Schmidt, Scott Schneider and Date Tweedy, dated 13, 2001
September 21, 2001
(mm)(8) The Asset Purchase Agreement by, between and Exhibit 10(l)(mm)(8)
among Pomeroy Computer Resources, Inc., Pomeroy of Company's Form
Select Integration Solutions, Inc., System 5 10-Q filed November
Technologies, Inc., Dale Tweedy, Jill Tweedy and Phil 13, 2001
Tetreault, dated September 21, 2001
(mm)(10) Asset purchase agreement by, between and among Exhibit 10(I)(mm)(10)
Pomeroy Select Integration Solutions, Inc. and Verity of Company's Form
Solutions, LLC and John R. Blackburn, dated August 10-Q filed May 20,
30, 2002 2002
(mm)(11) Covenant not to compete agreement between John R. Exhibit 10(I)(mm)(11)
Blackburn and Pomeroy Select Integration Solutions, of the Company's
Inc. Form 10-Q filed May
20, 2002
x(mm)(15) The Credit Facilities Agreement dated June 28, 2004 by, between, Exhibit 10(i)(mm)(i) of
and among Pomeroy IT Solutions, Inc. (formerly known the Company's Form
as, Pomeroy Computer Resources, Inc.), Pomeroy 10-Q filed August 16,
Select Integration Solutions, Inc., Pomeroy Select 2004
Advisory Services, LLC (formerly, prior to conversion,
Pomeroy Select Advisory Services, Inc.), Pomeroy IT
Solutions Sales Company, Inc. (formerly known as,
Pomeroy Computer Resources Sales Company, Inc.),
Pomeroy Computer Resources Holding Company, Inc.,
Pomeroy Computer Resources Operations, LLP, PCR
Holdings, Inc. (formerly known as, Technology
Integration Financial Services, Inc.), PCR Properties,
LLC (formerly, prior to conversion, PCR Properties, Inc.,
and prior to such conversion, formerly known as,
T.I.F.S. Advisory Services, Inc.), TheLinc, LLC, Val
Tech Computer Systems, Inc., Micrologic Business
Systems of K.C., LLC, Pomeroy Acquisition Sub, Inc.
(collectively, and separately referred to as, "Borrower"),
and GE Commercial Distribution Finance Corporation
("GECDF"), as Administrative Agent, and GECDF and
the other lenders listed on Exhibit 3 of the Agreement
and the signature pages hereto (and their respective
successors and permitted assigns), as "Lenders".
- -------------------------------------------------------------------------------------------------------------------------
28
- -------------------------------------------------------------------------------------------------------------------------
(nn)(1) Stock purchase agreement by, between and among Exhibit (nn)(1) of the
James Hollander, trustee, Raymond Hays, trustee, Company's Form 10-
David Yoka, trustee and Matthew Cussigh and Q filed May 20, 2003
Pomeroy Computer Resources, Inc.
(nn)(2) Asset purchase agreement by, between and among Exhibit (nn)(2) of the
Pomeroy IT Solutions, Inc., Pomeroy Select Integration Company's Form 10-
Solutions, Inc., eServe Solutions Group, LLC, Tim K filed March 19,
Baldwin and Pat Sherman. 2004
(nn)(3) Agreement and plan of merger by and between Exhibit 10 (I) of the
Pomeroy Acquisition Sub, Inc., a wholly owned Company's Form 10-
subsidiary of Pomeroy, and Alternative Resources Q filed May 17, 2004
Corporation, dated May 11, 2004
(nn)(4) Lockup and Purchase Agreement by and between Exhibit 10 (ii) of the
Pomeroy IT Solutions, Inc., a Delaware corporation Company's Form 10-
("Parent"), and Wynnchurch Capital Partners, L.P. Q filed May 17, 2004
("Wynnchurch US"), a Delaware limited partnership,
Wynnchurch Capital Partners Canada, L.P.
("Wynnchurch Canada"), an Alberta, Canada limited
partnership and Wynnchurch Capital, Ltd., a Delaware
corporation (Wynnchurch US, Wynnchurch Canada and
Wynnchurch Capital, Ltd. are collectively
"Wynnchurch"), dated May 11, 2004.
(o)(1) Consulting Agreement by and between Pomeroy IT Exhibit 10 (ii) (A) of
Solutions, Inc. and David B. Pomeroy, effective January the Company's Form
5, 2005 8-K filed February 3,
2005
10 (iii) Material Employee Benefit and Other Agreements
(a)(1) Employment Agreement between the Company Exhibit 10(iii)(a)of
and David B. Pomeroy, dated March 12, 1992 Company's Form S-1
Filed Feb. 14, 1992
(a)(2) First Amendment to Employment Agreement between Exhibit 10(iii)(a)(2) of
the Company and David B. Pomeroy effective July 6, Company's Form 10-
1993 K filed April 7, 1994
(a)(3) Second Amendment to Employment Agreement Exhibit 10(iii)(a)(3) of
between the Company and David B. Pomeroy dated Company's Form 10-
October 14, 1993 K filed April 7, 1994
(a)(4) Agreement between the Company and David B. Exhibit 10(iii)(a)(4) of
Pomeroy related to the personal guarantee of the Company's Form 10-
Datago agreement by David B. Pomeroy and his K filed April 7, 1994
spouse effective July 6, 1993
(a)(5) Third Amendment to Employment Agreement Exhibit 10(iii)(a)(5) of
between the Company and David B. Pomeroy Company's Form 10-
effective January 6, 1995 Q filed November 17,
1995
- -------------------------------------------------------------------------------------------------------------------------
29
- -------------------------------------------------------------------------------------------------------------------------
(a)(6) Supplemental Executive Compensation Agreement Exhibit 10(iii)(a)(6) of
between the Company and David B. Pomeroy Company's Form 10-
effective January 6, 1995 Q filed November 17,
1995
(a)(7) Collateral Assignment Split Dollar Agreement Exhibit 10(iii)(a)(7) of
between the Company; Edwin S. Weinstein, as Company's Form 10-
Trustee; and David B. Pomeroy dated June 28, 1995 Q filed November
17,1995
(a)(8) Fourth Amendment to Employment Agreement Exhibit 10(iii)(a)(8) of
between the Company and David B. Pomeroy dated Company's Form 10-
December 20, 1995, effective January 6, 1995 Q filed May 17,
1996
(a)(9) Fifth Amendment to Employment Agreement Exhibit 10(iii)(a)(9) of
between the Company and David B. Pomeroy Company's Form
effective January 6, 1996 10-Q filed May 17,
1996
(a)(10) Sixth Amendment to Employment Agreement Exhibit 10.10 of
between the Company and David B. Pomeroy Company's Form S-
effective January 6, 1997 3 filed January 3,
1997
(a)(11) Award Agreement between the Company and David Exhibit 10.11 of
B. Pomeroy effective January 6, 1997 Company's Form S-
3 filed January 3,
1997
(a)(12) Registration Rights Agreement between the Exhibit 10.12 of
Company and David B. Pomeroy effective January Company's Form S-
6, 1997 3 filed January 3,
1997
(a)(13) Seventh Amendment to Employment Agreement Exhibit 10)(iii)(a)(13)
between the Company and David B. Pomeroy of Company's Form
effective January 6, 1998 10-Q filed May 6,
1998
(a)(14) Collateral Assignment Split Dollar Agreement Exhibit 10)(iii)(a)(14)
between the Company, James H. Smith as Trustee, of Company's Form
and David B. Pomeroy dated January 6, 1998 10-Q filed May 6,
1998
(a)(15) Eight Amendment to Employment Agreement Exhibit 10(iii)(a)(15)
between the Company and David B. Pomeroy of the Company's
effective January 6, 1999 Form 10-K filed
March 31, 2000
(a)(16) Ninth Amendment to Employment Agreement Exhibit 10(iii)(a)(16)
between the Company and David B. Pomeroy of the Company's
effective January 6, 2000 Form 10-K filed
March 31, 2000
x(a)(17) Tenth Amendment to Employment Agreement Exhibit 10(iii)(a)(17)
between the Company and David B. Pomeroy of the Company's
effective January 6, 2001 Form 10-K filed April
5, 2001
(a) (18) Eleventh Amendment to Employment Agreement Exhibit 10(a)(18) of
between the Company and David B. Pomeroy the Company's Form
effective January 6, 2002 10-K filed April 5,
2002
- -------------------------------------------------------------------------------------------------------------------------
30
- -------------------------------------------------------------------------------------------------------------------------
(a)(19) Twelfth Amendment to Employment Agreement Exhibit (a)(19) of the
Between the Company and David B. Pomeroy Company's Form 10-K
Effective January 6, 2003 filed March 31, 2003
(a) (20) Amended and restated employment agreement by Exhibit 10(iii) (j)(8) of
and between Pomeroy IT Solutions, Inc. and David the Company's Form
B. Pomeroy, II, dated January 6, 2004 10-Q filed May 17, 2004
(d) The Company Savings 401(k) Plan, Exhibit 10(iii)(d) of
effective July 1, 1991 Company's Form S-1
filed Feb. 14, 1992
(f) The Company's 2002 Non-Qualified and Incentive Exhibit A of the
Stock Option Plan, dated March 27, 2002 Company's Definitive
Schedule 14A filed May
3, 2002
(g) The Company's 2002 Outside Directors Exhibit B of the
Stock Option Plan, dated March 27, 2002 Company's Definitive
Schedule 14A filed May
3, 2002
(j)(2) Incentive Deferred Compensation Agreement Exhibit 10.4 of
between the Company and Stephen E. Pomeroy Company's Form S-3
dated November 13, 1996 filed January 3, 1997
(j)(8) Amended and restated employment agreement by and Exhibit 10(iii)(j)(7) of the
between Pomeroy IT Solutions, Inc. fka Pomeroy Company's Form 10-Q
Computer Resources, Inc. and Stephen E. Pomeroy, filed November 19,
dated November 3, 2003 2003
(j)(9) Amended and restated employment agreement by and Exhibit 10(iii)(J)(9) of
between Pomeroy IT Solutions, Inc. and Stephen E. the Company's Form
Pomeroy, dated January 6, 2004. 10-Q filed May 17, 2004
(k) The Company's 1998 Employee Stock Purchase Plan, Exhibit 4.3 of
Effective April 1, 1999 Company's Form S-8
filed March 23, 1999
(m) Employment Agreement by and between Pomeroy Exhibit 10(iii)(m) of the
Computer Resources, Inc. and Michael E. Rohrkemper Company's Form 10-K
filed April 5, 2002
(m)(1) First Amendment to Employment Agreement by and Exhibit 10(iii)(m)(1) of
between Pomeroy Computer Resources, Inc. and the Company's Form
Michael E. Rohrkemper, dated March 1, 2002 10-Q filed May 20, 2002
- -------------------------------------------------------------------------------------------------------------------------
31
- -------------------------------------------------------------------------------------------------------------------------
(m)(2) Second Amendment to Employment Agreement by and Exhibit (m)(2) of the
between Pomeroy Computer Resources, Inc. and Company's Form
Michael E. Rohrkemper, dated March 5, 2003 10-K filed March
31, 2003
(m)(3) Addendum to Second Amendment to Employment Exhibit (m)(3) of the
Agreement by and between Pomeroy Computer Company's Form
Resources, Inc. and Michael E. Rohrkemper, dated March 11, 2003 10-K filed March 31, 2003
(n)(1) 2002 Amended and Restated Outside Directors' Stock Exhibit A of the
Option Plan of Pomeroy IT Solutions, Inc. Company's
Definitive Proxy,
Schedule 14A, filed
May 4, 2004
(n)(2) 2002 Amended and Restated Stock Incentive Plan of Exhibit B of the
Pomeroy IT Solutions, Inc. Company's
Definitive Proxy,
Schedule 14A, filed
May 4, 2004
11 Computation of Per Share Earnings See Note 2 of Notes
to Consolidated
Financial Statements
21 Subsidiaries of the Company E-62
23.1 Consent of Crowe Chizek and Company LLC E-63
23.2 Consent of Grant Thornton LLP E-64
31.1 Section 302 CEO Certification E-65
31.2 Section 302 CFO Certification E-66
32.1 Section 906 CEO Certification E-67
32.2 Section 906 CFO Certification E-68
- -------------------------------------------------------------------------------------------------------------------------
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pomeroy IT Solutions, Inc.
By: /s/ Stephen E. Pomeroy
-----------------------------------------------
Stephen E. Pomeroy
President and Chief Executive
Officer
By: /s/ Michael E. Rohrkemper
-----------------------------------------------
Michael E. Rohrkemper
Chief Financial Officer and Chief
Accounting Officer
Dated: April 5, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature and Title Date
- ------------------------------------- --------------
By: /s/ David B. Pomeroy, II April 5, 2005
- -------------------------------------
David B. Pomeroy, II Director
By: /s/ Stephen E. Pomeroy April 5, 2005
- -------------------------------------
Stephen E. Pomeroy, Director
By: /s/ James H. Smith III April 5, 2005
- -------------------------------------
James H. Smith III, Director
By: /s/ Michael E. Rohrkemper April 5, 2005
- -------------------------------------
Michael E. Rohrkemper, Director
By:
- -------------------------------------
Debra E. Tibey, Director
By:
- -------------------------------------
Edward E. Faber, Director
By:
- -------------------------------------
William H. Lomicka, Director
By:
- -------------------------------------
Kenneth R. Waters, Director
By: /s/ Vincent D. Rinaldi April 5, 2005
- -------------------------------------
Vincent D. Rinaldi, Director
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Pomeroy IT Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Pomeroy IT
Solutions, Inc. and subsidiaries as of January 5, 2005 and 2004, and the related
consolidated statements of income, equity and cash flows for each of the two
years in the period ended January 5, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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
IT Solutions, Inc. and subsidiaries as of January 5, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended January 5, 2005 in conformity with accounting
principles generally accepted in the United States of America.
Crowe Chizek and Company LLC
/s/ Crowe Chizek and Company LLC
Louisville, Kentucky
March 31, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Pomeroy IT Solutions, Inc.
We have audited the accompanying consolidated statements of income, equity and
cash flows of Pomeroy IT Solutions, Inc. (formerly Pomeroy Computer Resources,
Inc.) for the year ended January 5, 2003. These statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
statements of income, equity and cash flows are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the statements of income, equity and cash flows. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
results of operations. We believe that our audit of the statements of income,
equity and cash flows provides a reasonable basis for our opinion.
In our opinion, the statements of income, equity and cash flows referred to
above present fairly, in all material respects, the consolidated results of
operations of Pomeroy IT Solutions, Inc. (formerly Pomeroy Computer Resources,
Inc.) for the year ended January 5, 2003, in conformity with accounting
principles generally accepted in the United States of America.
Grant Thornton LLP
/s/ Grant Thornton LLP
Cincinnati, Ohio
February 7, 2003
F-2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2005 2004
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 17,669 $ 40,200
----------- -----------
Accounts receivable:
Trade, less allowance of $1,462 and $2,556 at January 5,
2005 and 2004, respectively . . . . . . . . . . . . . . 143,113 111,324
Vendor receivables, less allowance of $100
at January 5, 2005 and 2004, respectively. . . . . . . 5,790 7,226
Net investment in leases . . . . . . . . . . . . . . . . . 3,814 2,056
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,902 2,043
----------- -----------
Total receivables. . . . . . . . . . . . . . . . . . 155,619 122,649
----------- -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 17,188 12,453
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,302 5,193
----------- -----------
Total current assets . . . . . . . . . . . . . . . . 200,778 180,495
----------- -----------
Equipment and leasehold improvements
Furniture, fixtures and equipment. . . . . . . . . . . . . 30,113 29,517
Leasehold Improvements . . . . . . . . . . . . . . . . . . 6,187 6,438
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . 36,300 35,955
Less accumulated depreciation. . . . . . . . . . . . . . . 21,061 19,696
----------- -----------
Net equipment and leasehold improvements . . . . . . 15,239 16,259
----------- -----------
Net investment in leases, net of current portion. . . . . . . 1,650 2,935
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 109,913 67,664
Intangible assets, net. . . . . . . . . . . . . . . . . . . . 3,702 436
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,606 1,410
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . $ 332,888 $ 269,199
=========== ===========
See notes to consolidated financial statements.
F-3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) January 5, January 5,
2005 2004
----------- ------------
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . $ 912 $ 912
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . 20,153 -
Accounts payable:
Floor plan financing. . . . . . . . . . . . . . . . . . . . 19,393 16,572
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,263 33,479
----------- ------------
Total accounts payable . . . . . . . . . . . . . . . . . 72,656 50,051
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 3,490 3,988
Employee compensation and benefits . . . . . . . . . . . . . . 8,245 2,425
Accrued restructuring and severance charges. . . . . . . . . . 7,585 -
Other current liabilities. . . . . . . . . . . . . . . . . . . 6,778 6,333
----------- ------------
Total current liabilities . . . . . . . . . . . . . . 119,819 63,709
----------- ------------
Notes payable, net of current portion. . . . . . . . . . . . . 250 913
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 97 4,780
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares,
(no shares issued or outstanding). . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares,
(13,188 and 12,962 shares issued at January 5, 2005 and
2004, respectively). . . . . . . . . . . . . . . . . . . 132 130
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 85,231 82,696
Accumulated other comprehensive loss. . . . . . . . . . . . (78) -
Retained earnings . . . . . . . . . . . . . . . . . . . . . 136,183 125,250
----------- ------------
221,468 208,076
Less treasury stock, at cost (778 and 738 shares
at January 5, 2005 and 2004, respectively) . . . . . . . 8,746 8,279
------------ -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 212,722 199,797
------------ -----------
Total liabilities and equity. . . . . . . . . . . . . $ 332,888 $ 269,199
============ ===========
See notes to consolidated financial statements.
F-4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Fiscal Years Ended
---------------------------------------
January 5, January 5, January 5,
----------- ------------ ------------
2005 2004 2003
Net sales and revenues:
Sales - equipment, supplies and leasing. . . . $ 545,115 $ 470,518 $ 571,507
Service. . . . . . . . . . . . . . . . . . . . 197,175 127,905 131,293
----------- ------------- -----------
Total net sales and revenues. . . . . . 742,290 598,423 702,800
----------- ------------- -----------
Cost of sales and service:
Equipment, supplies and leasing . . . . . . . 504,018 435,048 524,237
Service . . . . . . . . . . . . . . . . . . . 143,136 92,982 90,898
----------- ------------ ------------
Total cost of sales and service . . . . 647,154 528,030 615,135
----------- ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . 95,136 70,393 87,665
----------- ------------ ------------
Operating expenses:
Selling, general and administrative . . . . . 66,449 46,769 51,157
Rent. . . . . . . . . . . . . . . . . . . . . 3,448 3,149 3,311
Depreciation. . . . . . . . . . . . . . . . . 4,029 4,915 4,596
Amortization. . . . . . . . . . . . . . . . . 364 404 1,124
Provision for doubtful accounts . . . . . . . - 200 900
Litigation settlement . . . . . . . . . . . . - 150 300
Provision for vendor receivables
and restructuring and severance charges. . . 2,423 - 4,048
----------- ------------ ------------
Total operating expenses. . . . . . . . 76,713 55,587 65,436
----------- ------------ ------------
Income from operations . . . . . . . . . . . . . 18,423 14,806 22,229
----------- ------------ ------------
Other expense (income):
Interest, net . . . . . . . . . . . . . . . . 251 (75) 541
Other . . . . . . . . . . . . . . . . . . . . 26 11 (63)
----------- ------------ ------------
Total other expense (income . . . . . . 277 (64) 478
----------- ------------ ------------
Income before income tax . . . . . . . . . . . . 18,146 14,870 21,751
Income tax expense . . . . . . . . . . . . . . . 7,213 5,799 6,742
----------- ----------- -------------
Net income . . . . . . . . . . . . . . . . . . . $ 10,933 $ 9,071 $ 15,009
=========== =========== =============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . 12,253 12,305 12,694
=========== =========== =============
Diluted . . . . . . . . . . . . . . . . . . . 12,442 12,375 12,755
=========== =========== =============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . $ 0.89 $ 0.74 $ 1.18
=========== =========== =============
Diluted . . . . . . . . . . . . . . . . . . . $ 0.88 $ 0.73 $ 1.18
=========== =========== =============
See notes to consolidated financial statements.
F-5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, Accumulated
except per share amounts) Other
Common Paid-in Retained Treasury Comprehensive Total
Stock Capital Earnings Stock Loss Equity
------- -------- ---------- ---------- --------------- ---------
Balances at January 6, 2002. . . . . . . . . $ 128 $ 80,487 $ 110,979 $ (832) $ - $190,762
Net income and comprehensive income 15,009 15,009
Treasury stock purchased (3,351) (3,351)
Stock options exercised and
related tax benefit . . . . . . . . . . 1 812 813
40,511 common shares issued for
employee stock purchase plan 441 441
------- -------- ---------- ---------- --------------- ---------
Balances at January 5, 2003. . . . . . . . . 129 81,740 125,988 (4,183) - 203,674
Net income and comprehensive income 9,071 9,071
Treasury stock purchased (4,096) (4,096)
Cash dividend ($0.80 per share (9,809) (9,809)
Stock options exercised and
related tax benefit . . . . . . . . . . . 1 607 608
37,091 common shares issued for
employee stock purchase plan 349 349
------- -------- ---------- ---------- --------------- ---------
Balances at January 5, 2004. . . . . . . . . 130 82,696 125,250 (8,279) - 199,797
Net income, foreign currency translation -
adjustment and comprehensive income 10,933 (78) 10,855
Treasury stock purchased (467) (467)
Stock options exercised and -
related tax benefit . . . . . . . . . . . 2 2,139 2,141
40,018 common shares issued for -
employee stock purchase plan 396 396
------- -------- ---------- ---------- --------------- ---------
Balances at January 5, 2005. . . . . . . . . $ 132 $ 85,231 $ 136,183 $ (8,746) $ (78) $212,722
======= ======== ========= ========== =============== =========
See notes to consolidated financial statements.
F-6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Fiscal Years Ended January 5,
---------------------------------------
Cash Flows from Operating Activities: 2005 2004 2003
-------------- --------- ------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 10,933 $ 9,071 $ 15,009
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 4,029 4,915 5,246
Amortization . . . . . . . . . . . . . . . . . . . . . . . 364 404 1,124
Deferred income taxes. . . . . . . . . . . . . . . . . . . 2,763 2,488 7,994
Loss on sale of fixed assets . . . . . . . . . . . . . . . 222 84 1,008
Change in receivables allowances . . . . . . . . . . . . . (1,826) (4,005) (12,267)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . - - (283)
Changes in working capital accounts,
net of effects of acquisitions/divestitures:
Accounts receivable . . . . . . . . . . . . . . . . . . (12,070) (4,616) 69,709
Inventories . . . . . . . . . . . . . . . . . . . . . . (5,697) (1,097) 8,865
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . (2,216) 5,146 (10,717)
Net investment in leases. . . . . . . . . . . . . . . . 1,509 34 2,349
Floor plan financing. . . . . . . . . . . . . . . . . . 2,821 9,040 (33,117)
Trade payables. . . . . . . . . . . . . . . . . . . . . 7,533 5,526 (18,240)
Deferred revenue. . . . . . . . . . . . . . . . . . . . (498) 2,499 (1,261)
Income tax payable. . . . . . . . . . . . . . . . . . . 156 (183) (305)
Other, net. . . . . . . . . . . . . . . . . . . . . . . (2,242) (489) (169)
-------------- --------- ------------
Net operating activities . . . . . . . . . . . . . . . . . 5,781 28,817 34,945
-------------- --------- ------------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . (2,350) (1,670) (7,820)
Proceeds from sale of fixed assets . . . . . . . . . . . . 20 4 470
Proceeds from sale of leasing segment assets . . . . . . . - - 24,380
Acquisitions of businesses, net
of cash acquired . . . . . . . . . . . . . . . . . . . . (16,441) (5,858) (1,655)
-------------- --------- ------------
Net investing activities . . . . . . . . . . . . . . . . . (18,771) (7,524) 15,375
-------------- --------- ------------
Cash Flows from Financing Activities:
Payments of acquisition notes payable. . . . . . . . . . . (31,385) (541) (6,475)
Proceeds from short-term borrowings. . . . . . . . . . . . 20,153 - (12,118)
Proceeds from exercise of stock options. . . . . . . . . . 1,840 499 813
Proceeds from issuance of common shares for
employee stock purchase plan . . . . . . . . . . . . . . 396 349 441
Purchase of treasury stock . . . . . . . . . . . . . . . . (467) (4,096) (3,351)
Payment of cash dividend . . . . . . . . . . . . . . . . . - (9,809) -
-------------- --------- ------------
Net financing activities . . . . . . . . . . . . . . . . . (9,463) (13,598) (20,690)
-------------- --------- ------------
Effect of exchange rate changes on cash and cash equivalents. (78) - -
-------------- --------- ------------
Increase in cash and cash equivalents . . . . . . . . . . . . (22,531) 7,695 29,630
Cash and cash equivalents:
Beginning of year. . . . . . . . . . . . . . . . . . . . . 40,200 32,505 2,875
-------------- --------- ------------
End of year. . . . . . . . . . . . . . . . . . . . . . . . $ 17,669 $ 40,200 $ 32,505
============== ========= ============
F-7
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 5, 2005 JANUARY 5, 2004 AND JANUARY 5, 2003
1. Company Description
Pomeroy IT Solutions, Inc. (formerly, Pomeroy Computer Resources,
Inc.) is a Delaware corporation organized in February 1992. Pomeroy IT
Solutions, Inc., collectively with its subsidiaries, ("Pomeroy" or the
"Company") is a provider of enterprise-wide information technology ("IT")
solutions that leverage its portfolio of professional services to create
long-term relationships.
The Company's target markets include Fortune 1000 and small and medium
business ("SMB") customers. These customers fall into government and
education, financial services, health care and other sectors. The Company's
customers are located throughout the United States with an emphasis in the
Southeast and Midwest regions. The Company grants credit to substantially
all customers in these areas.
The Company operates in three industry segments: products, services
and leasing. See Note 14 of the Notes to Consolidated Financial Statements
for discussion of the 2002 sale of the majority of leasing segment net
assets. See Note 21 of Notes to Consolidated Financial Statements for a
presentation of segment financial information.
2. Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Fiscal Year - The Company's fiscal year is a 12 month period ending
January 5. References to fiscal 2004, 2003 and 2002 are for the fiscal
years ended January 5, 2005, January 5, 2004 and January 5, 2003,
respectively.
Cash and Cash Equivalents - Cash and cash equivalents includes highly
liquid, temporary cash investments having original maturity dates of three
months or less.
Goodwill - Effective January 6, 2002, the Company adopted the new
accounting pronouncement related to goodwill (See Note 6). In lieu of
amortization, the Company tests goodwill for impairment annually or more
frequently if certain conditions exist.
Other Intangible Assets - Effective January 6, 2002, the Company
adopted the new accounting pronouncement related to other intangible assets
(See Note 6). The Company's other intangible assets consist only of
intangibles with definitive lives that are being amortized using the
straight-line method over periods up to fifteen years.
Equipment and Leasehold Improvements - Equipment and leasehold
improvements are stated at cost. Depreciation on equipment is computed
using the straight-line method over estimated useful lives ranging from
three to seven years. Depreciation on leasehold improvements is computed
using the straight-line method over estimated useful lives or the term of
the lease, whichever is less, ranging from two to ten years. Depreciation
expense associated with the leasing segment's operating leases is
classified under cost of sales. Expenditures for repairs and maintenance
are charged to expense as incurred and additions and improvements that
significantly extend the lives of assets are capitalized. Expenditures
related to the acquisition or development of computer software to be
utilized by the Company are capitalized or expensed in accordance with
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The Company reviews
equipment and leasehold improvements for potential impairment in accordance
with Statement of Financial Accounting Standard (SFAS) 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". Upon sale or retirement of depreciable property, the cost
F-8
and accumulated depreciation are removed from the related accounts and
any gain or loss is reflected in the results of operations.
Income Taxes - Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Vendor Rebates - The most significant component of vendor receivables
is vendor rebates. Vendor rebate programs are developed by original
equipment manufacturers ("OEM') allowing them to modify product pricing on
a case by case basis (generally determined by individual customers) to
maintain their competitive edge on specific transactions. The Company will
contact the OEM to request a rebate, for a specific transaction, and if
approved, the OEM will provide the Company with a document authorizing a
rebate to be paid to the Company at a later date when a claim is filed. At
the time the Company records product sales, cost of sales is reduced by the
amount of the rebate. Rebate programs involve complex sets of rules varying
by manufacturer. As a result of the rules and complexity of applying the
rules to each item sold, claims are often rejected and require multiple
submissions before credit is given. Pomeroy maintains an allowance for
doubtful accounts on vendor receivables for estimated losses resulting from
the inability of its vendors to make required payments. The determination
of a proper allowance for vendor receivables is based on an ongoing
analysis as to the recoverability of the Company's vendor receivable
portfolio based primarily on account aging. Primary reasons for claims
being disallowed and corresponding re-files include serial number issues
(missing, incomplete, transposed, data base match-up discrepancies, etc.),
pricing issues (dispute in calculation of rebate amounts) and other missing
or incomplete documentation (bid letters, customer information, etc.).
Manufacturer Market Development Funds - Several OEM's offer market
development funds, cooperative advertising and other promotional programs
to distribution channel partners. The Company utilizes these programs to
fund some of its advertising and promotional programs. The Company
recognizes these anticipated funds as vendor receivables when it has
completed its obligation to perform under the specific arrangement. The
anticipated funds to be received from manufacturers are offset directly
against the expense, thereby reducing selling, general and administrative
expenses. In total, advertising costs associated with these programs are
charged to expense as incurred and amounted to $114 thousand, $22 thousand,
and $410 thousand for the fiscal years 2004, 2003 and 2002, respectively.
Warranty Receivable - The Company performs warranty service work on
behalf of the OEM on customer product. Any labor cost or replacement parts
needed to repair the product is reimbursable to the Company by the OEM. It
is the Company's responsibility to file and collect these claims. The
Company records the vendor receivables when it has completed its obligation
to perform under the specific arrangement. Any OEM reimbursement for
warranty labor cost incurred is recognized as revenue when the service is
provided.
Inventories - Inventories are stated at the lower of cost or market.
Cost is determined by the average cost method. Certain overhead costs are
capitalized as a component of inventory.
Translation of Foreign Currencies - Assets and liabilities of the
Company's Canadian operations are translated at the rate of exchange in
effect on the balance sheet date; income and expenses are translated at the
weighted average rates of exchange prevailing during the period. The
related foreign currency translation adjustments are reflected as
accumulated other comprehensive loss in stockholders' equity. Foreign
currency transaction gains and losses for fiscal 2004 were not material.
Revenue Recognition - The Company recognizes revenue on the sale of
equipment and supplies or equipment sold under sales-type leases, when the
products are shipped. Revenue from products sold under logistical
deployment services arrangements is recognized upon completion of the
Company's contractual obligations, customer acceptance, title passing and
other conditions, which may occur prior to product shipment. Service
revenue is recognized when the applicable services are provided or for
service contracts, ratably over the lives of the contracts. Leasing fee and
financing revenue is recognized on a monthly basis as fees accrue and from
financing at level rates of return over the term of the lease or
receivable, which are primarily sales-type leases ranging from one to three
years. For those equipment sales that include multiple deliverables, such
as configuration, training, installation or service, revenue is allocated
based on the relative fair values of the individual components in
accordance with EITF 00-21.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's common
stock at the date of grant over the amount an employee must pay to acquire
the stock. The Company adopted SFAS No. 123 for disclosure purposes and for
non-employee stock options.
Had compensation cost for the Company's stock option plans been
determined based on the fair value of the awards at the grant date
consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148,
F-9
"Accounting for Stock-Based Compensation-Transition and Disclosure," 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 2004 Fiscal 2003 Fiscal 2002
------------ ------------ ------------
Net income - as reported $ 10,933 $ 9,071 $ 15,009
Stock-based compensation expense-net of tax. 2,475 1,622 1,078
------------ ------------ ------------
Net income - pro forma $ 8,458 $ 7,449 $ 13,931
============ ============ ============
Net income per common share - as reported
Basic $ 0.89 $ 0.74 $ 1.18
Diluted 0.88 0.73 1.18
Net income per common share - pro forma
Basic 0.69 0.61 1.10
Diluted 0.68 0.60 1.09
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------ ------------ ------------
Expected life (years) 3.3 4.1 2.8
Risk free interest rate 3.3% 2.4% 2.9%
Volatility 24% 51% 46%
Dividend yield 0% 0% 0%
The total fair value of options granted are recognized as pro forma
stock-based compensation expense over each option's vesting period.
Earnings per Common Share - The computation of basic earnings per
common share is based upon the weighted average number of common shares
outstanding during the period. Diluted earnings per common share is based
upon the weighted average number of common shares outstanding during the
period plus, in periods in which they have a dilutive effect, the effect of
common shares contingently issuable, primarily from stock options.
The following is a reconciliation of the number of common shares used
in the basic and diluted EPS computations:
(in thousands, except per Fiscal Years
------------------------------------------------------------
share data) 2004 2003 2002
------------------- ------------------- ------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
------ ----------- ------ ----------- ------ ----------
Basic EPS 12,253 $ 0.89 12,305 $ 0.74 12,694 $ 1.18
Effect of dilutive stock options 189 (0.01) 70 (0.01) 61 -
------ ----------- ------ ----------- ------ ----------
Diluted EPS 12,442 $ 0.88 12,375 $ 0.73 12,755 $ 1.18
====== =========== ====== =========== ====== ==========
Use of Estimates in Financial Statements - In preparing financial
statements in conformity with accounting principles generally accepted
in the United States of America, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Accounting estimates in these financial statements
include allowances for trade accounts receivable and vendor accounts
receivable. Pomeroy maintains allowances for doubtful accounts on both
vendor and trade receivables for estimated losses resulting from the
inability of its customers or vendors to make required payments. The
determination of a proper allowance for vendor receivables is based on an
ongoing analysis as to the recoverability of the Company's vendor
receivable portfolio based primarily on account aging. The determination of
a proper allowance for trade receivables is based on an ongoing analysis as
to the credit quality and recoverability of the Company's trade receivable
portfolio. Factors considered are account aging, historical bad debt
experience, current economic trends and others. The analysis is performed
on both vendor and trade
F-10
receivable portfolios. A separate allowance account is maintained
based on each analysis. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications of prior years' amounts
have been made to conform to the current year presentation.
Fair Value Disclosures - The fair value of financial instruments
approximates carrying value.
Comprehensive Income - For fiscal 2004, the only component of
comprehensive income other than net income is foreign currency translation
adjustments.
Derivative Instruments and Hedging Activities - The Company does not
currently have any derivative instruments or hedging activities.
Recent Accounting Pronouncements - In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs,
an Amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general
principle of ARB No. 43, Chapter 4, "Inventory Pricing," that inventories
are presumed to be stated at cost; however, it amends ARB No. 43 to clarify
that abnormal amounts of idle facilities, freight, handling costs and
spoilage should be recognized as current period expenses. Also, SFAS No.
151 requires fixed overhead costs be allocated to inventories based on
normal production capacity. The guidance in SAFS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company believes that implementing SFAS No. 151 should not have any
material impact on its financial condition, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based
on their fair values, beginning with the first interim or annual period
after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Under SFAS 123R, we must
determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption.
SFAS No. 123R will apply to awards granted or modified by the Company
after July 5, 2005. Compensation cost will also be recorded for prior
option grants that vest after that date. The effect of adopting SFAS 123 on
the Company's consolidated results of operations will depend on the level
of future option grants and the fair value of the options granted at such
future dates, as well as the vesting periods provded by such awards and,
therefore, cannot currently be estimated. We are evaluating the
requirements of SFAS 123R and have not yet determined the method of
adoption or the effect of adopting SFAS 123R, and we have not determined
whether the adoption will result in amounts that are similar to the current
pro forma disclosures under SFAS 123.
3. Accounts Receivable
Trade accounts receivable represent amounts billed or billable to
customers. Past due receivables are determined based on contractual terms.
The Company generally does not charge interest on its trade receivables.
The allowance for doubtful receivables is determined by management based on
the Company's historical losses, specific customer circumstances and
general economic conditions. Periodically, management reviews accounts
receivable and adjusts the allowance based on current circumstances and
charges off uncollectible receivables against the allowance when all
attempts to collect the receivable have failed. The following table
summarizes the activity in the allowance for doubtful accounts for fiscal
years 2004, 2003 and 2002:
F-11
(in thousands) Trade Vendor and Other
-------- ------------------
Balance January 6, 2002 $ 627 $ 16,112
Provision 2002 900 3,334
Accounts written-off (389) (16,112)
Recoveries 415 -
-------- ------------------
Balance January 5, 2003 1,553 3,334
Provision 2003 200 -
Accounts written-off (971) (3,234)
Recoveries 1,774 -
-------- ------------------
Balance January 5, 2004 2,556 100
Accounts written-off (1,826) -
Recoveries 732 -
-------- ------------------
Balance January 5, 2005. $ 1,462 $ 100
======== ==================
During fiscal 2002, the Company recorded an increase in allowances of
$3.3 million specifically related to the collectibility of vendor
receivables. The determination of the increase in allowances was based on
the deterioration of the aging of the vendor receivables, the expected
resolution of the vendor rebate disallowed claims and the general posture
of the OEM's regarding resolution. Primary reasons for vendor rebate claims
being disallowed and corresponding re-files include serial number issues
(missing, incomplete, transposed, data base match-up discrepancies, etc.),
pricing issues (dispute in calculation of rebate amounts) and other missing
or incomplete documentation (bid letters, customer information, etc.).
4. Net Investment in Leases
The Company's net investment in leases principally includes sales-type
leases. See Note 14 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of TIFS.
The Company originates financing for customers in a variety of industries
and throughout the United States. The Company has a diversified portfolio
of capital equipment financing for end users.
Leases consist principally of notebook and desktop personal computers,
communication products and high-powered servers with terms generally from
one to three years. The following table summarizes the components of the
net investment in sales-type leases as of end of fiscal years 2004 and
2003:
(in thousands) 2004 2003
------- -------
Minimum lease payments receivable $4,155 $3,770
Estimated residual value 1,466 1,388
Initial direct costs 10 19
Unearned income (167) (186)
------- -------
Total $5,464 $4,991
======= =======
The future minimum lease payments for the net investment in leases are
as follows:
F-12
(in thousands)
Fiscal Year
----------------------------
2005 $3,814
2006 1,496
2007 154
------
Total minimum lease payments $5,464
======
5. Inventories
Inventories consist of items held for resale and are comprised of the
following components as of the end of fiscal years 2004 and 2003:
(in thousands) 2004 2003
------- -------
Equipment and supplies $14,053 $ 9,859
Service parts 3,135 2,594
------- -------
Total $17,188 $12,453
======= =======
6. Goodwill and Other Intangible Assets
Intangible assets with definite lives are amortized over their
estimated useful lives. The following table provides a summary of the
Company's intangible assets with definite lives as of January 5, 2005 and
January 5, 2004:
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
1/5/2005 1/5/2005 1/5/2005 1/5/2004 1/5/2004 1/5/2004
---------- ------------- --------- --------- ------------- ---------
Amortized intangible assets:
Covenants not-to-compete $ 2,024 $ 1,769 $ 255 $ 1,844 $ 1,650 $ 194
Customer lists 2,877 559 2,318 627 385 242
Other intangibles 1,200 71 1,129 - - -
---------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 6,101 $ 2,399 $ 3,702 $ 2,471 $ 2,035 $ 436
========== ============= ========= ========= ============= =========
Amortized intangible assets are being amortized over periods ranging
from 1 to 15 years for covenants not-to-compete, 7 to 15 years for customer
lists and 7 years for other intangibles. The weighted-average amortization
period for all amortized intangible assets acquired in fiscal 2004 and 2003
was 8.8 and 15 years, respectively. For the year ended January 5, 2005,
amortization expense related to intangible assets was $364 thousand. For
the year ended January 5, 2004, amortization expense related to intangible
assets was $404 thousand. For the year ended January 5, 2003, amortization
expense related to intangibles assets was $1,041 thousand of which $71
thousand was reported under the caption "cost of sales" or "selling,
general and administrative" expenses. Amortization expense associated with
assets reported under the caption "other current assets" was $154 thousand.
Projected future amortization expense related to intangible assets with
definite lives are as follows:
F-13
(in thousands)
Fiscal years:
2005 $ 525
2006 418
2007 418
2008 418
2009 418
2010+ 1,505
--------
Total $3,702
========
The changes in the net carrying amount of goodwill for the years ended
January 5, 2005 and 2004 by segment are as follows:
(in thousands) Products Services Consolidated
---------- --------- -------------
Net carrying amount as of 1/5/03 $ 42,357 $ 18,278 $ 60,635
Reallocation of goodwill (10,284) 10,284 -
Goodwill recorded during fiscal 2003 3,789 3,240 7,029
---------- --------- -------------
Net carrying amount as of 1/5/04 35,862 31,802 67,664
Goodwill recorded during fiscal 2004 198 42,051 42,249
---------- --------- -------------
Net carrying amount as of 1/5/05 $ 36,060 $ 73,853 $ 109,913
========== ========= =============
During the first quarter of fiscal 2003, the Company changed the
allocation of goodwill by reporting unit. As a result of this evaluation
process, the Company reallocated approximately $10.3 million of goodwill to
the services reporting unit from the products reporting unit. This
reallocation had no effect on the result of any previous period's
impairment testing. The reallocation is also reflected in the segment
information in Note 21.
During fiscal 2004, the Company and Pomeroy Acquisition Sub, Inc.
("PAS"), a wholly owned subsidiary the Company, completed a merger with
Alternative Resources Corporation ("ARC"). On May 11, 2004, the parties
entered into a definitive merger agreement for PAS to acquire all of the
issued and outstanding shares of capital stock of ARC. The merger was
approved by ARC shareholders at a meeting held on July 22, 2004. As a
result of the merger, ARC is now a wholly-owned subsidiary of the Company.
The cash consideration paid at closing, including the cost of all stock,
stock options and warrants purchased and the amount of ARC net debt
retired, was approximately $46.1 million, which was funded from cash on
hand and borrowings from Pomeroy's existing line of credit. The Company
recorded $41.9 million of goodwill, which included, among other things, the
value of an assembled workforce, related to the acquisition during fiscal
2004. Also during fiscal 2004, the Company recorded $0.3 million of
goodwill associated primarily with earn-out payments made in conjunction
with prior acquisitions.
During fiscal 2003, the Company acquired all of the outstanding common
stock of Micrologic Business Systems of K.C., Inc. ("Micrologic"), a Kansas
City based IT solutions and professional services provider. Their primary
services include systems network integration, project management, and
telephony integration. The Company recorded $3.2 million of goodwill
related to the acquisition. In addition, the Company acquired certain
assets of eServ Solutions Group, LLC ("eServ"), a Rock Island, Illinois
based IT solutions and professional services provider. eServ's primary
service offerings include network infrastructure, enterprise storage and
server solutions. The Company recorded $1.1 million of goodwill related to
the acquisition. Also during fiscal 2003, the Company recorded $2.7 million
of goodwill associated with earn-out payments made in conjunction with
prior acquisitions.
7. Borrowing Arrangements
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At January 5, 2005, these lines of credit
totaled $85.0 million, including $75.0 million with GE Commercial
Distribution Finance ("GECDF") and $10.0 million with IBM Credit
Corporation ("ICC"). Borrowings under the GECDF floor plan arrangements are
made on thirty-day notes. Borrowings under the ICC floor plan arrangements
are made on fifteen-day notes. All such borrowings are secured by the
related inventory. Financing on substantially all of the arrangements is
interest free due to subsidies by manufacturers. Overall, the average rate
on these arrangements is less than 1.0%. The Company classifies amounts
outstanding under the floor plan arrangements as accounts payable.
F-14
On June 28, 2004, the Company finalized a new $165 million Syndicated
Credit Facility Agreement with GECDF. The new credit facility has a
three-year term and its components include a maximum of $75 million for
inventory financing and a revolving line of credit, collateralized
primarily by accounts receivable, of up to $110 million; provided that the
total amount outstanding at any time under the inventory financing facility
and the revolving line of credit may not exceed $165 million. Under the new
agreement, the credit facility provides a letter of credit facility of $5
million. Under the credit facility, the interest rate is based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid. As of January
5, 2005, the adjusted LIBOR rate was 4.4%. This credit facility expires
June 28, 2007.
At January 5, 2005, the Company's balance outstanding under the
revolving line of credit portion of the credit facility was $20.2 million.
At January 5, 2004, the Company did not have an outstanding balance under
its previous credit facility. The credit facility is collateralized by
substantially all of the assets of Pomeroy, except those assets that
collateralize certain other financing arrangements. Under the terms of the
credit facility, Pomeroy is subject to various financial covenants
including maintenance of a minimum level of tangible net worth, a minimum
fixed charge coverage ratio and a maximum ratio of total funded
indebtedness to EBITDA. As of January 5, 2005, Pomeroy was in compliance
with those financial covenants.
Notes payable - Notes payable consist of the following:
(in thousands) Fiscal Years
---------------
2004 2003
Acquisition notes payable at various interest rates, ranging from 4.00%
to 4.25%, and unsecured. Principal payments are made in equal
annual installments, ranging from one to two years, through 2005 $1,162 $1,825
Less current maturities 912 912
------- ------
Long-term notes payable $ 250 $ 913
======= ======
8. Restructuring and Severance Charges
During fiscal 2004, in connection with certain strategic initiatives,
the Company recorded restructuring and severance charges aggregating $1.0
million. The restructuring and severance charges are associated with legacy
Pomeroy costs of facilities and processes that have or will become
duplicative or redundant as ARC operations are integrated into the Company.
These costs consist of facility closing and involuntary employee
termination costs of $576 thousand and $400 thousand, respectively. These
costs are accounted for under FAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," and were included as a charge to the
results of operations for the year ended January 5, 2005. Any subsequent
changes to the estimates of executing the currently approved plans of
restructuring will be reflected in current results of operations.
The Company also recorded a non-recurring, one-time charge for
severance in the amount of $1.447 million related to the resignation of
David B. Pomeroy II as CEO of the Company. Mr. Pomeroy will continue to
serve as Chairman of the Board of the Company.
During fiscal 2004, the Company restructuring and severance charges
expensed consisted of the following:
(in thousands) Total Initial Cash Accrual balance
Accrual payments at January 5, 2005
------------- -------- ------------------
Severance $ 1,847 $ (440) $ 1,407
Facility consolidations 576 (200) 376
------------- -------- ------------------
$ 2,423 $ (640) $ 1,783
============= ======== ==================
Also, the Company's management recorded a restructuring charge
liability in connection with the ARC acquisition to eliminate certain
duplicative activities and reduced facility requirements. As a result,
approximately $6.4 million of costs were recorded as part of the
liabilities assumed in the ARC acquisition. The restructuring charge
consisted of costs of vacating duplicative leased facilities of ARC and
severance costs associated with exiting activities. These costs are
F-15
accounted for under EITF 95-3, "Recognition of Liabilities in
Connection with Purchase Business Combinations." These costs were
recognized as a liability assumed in the purchase business combination and
included in the allocation of the cost to acquire ARC. A portion of the
restructuring liabilities are classified as long-term liabilities in the
accompanying consolidated balance sheet at January 5, 2005. Changes to the
estimates of executing the currently approved plans of restructuring
through July 23, 2005 will be recorded as an increase or decrease in
goodwill with any increases in estimates thereafter charged to operations.
(in thousands) Total Initial Cash Accrual balance
Accrual payments at January 5, 2005
------------- -------- ------------------
Severance $ 2,682 $ (760) $ 1,922
Facility consolidations 3,715 (260) 3,455
------------- -------- ------------------
$ 6,397 $(1,020) $ 5,377
============= ======== ==================
Additionally, as part of the acquisition of ARC, the Company acquired
the remaining obligations of ARC's existing restructuring plans, which were
initially recorded by ARC in fiscal 2003 and fiscal 2002. The total
obligations assumed in connection with these restructuring plans was $2.1
million at July 23, 2004.
As of January 5, 2005, the balance of the ARC fiscal 2003 and fiscal
2002 accrued restructuring costs recorded consisted of the following:
(in thousands)
Fiscal 2003 Restructuring Charge
Total Accrual as Cash Balance at
of 7/23/04 payments January 5, 2005
----------------- ---------- ---------------
Severance $ 647 $ (594) $ 53
----------------- ---------- ---------------
$ 647 $ (594) $ 53
================= ========== ===============
Fiscal 2002 Restructuring Charge
Total Accrual as Cash Balance at
of 7/23/04 payments January 5, 2005
----------------- ---------- ---------------
Facility consolidations $ 756 $ (424) $ 332
Other charges 696 (656) 40
----------------- ---------- ---------------
$ 1,452 $ (1,080) $ 372
================= ========== ===============
During fiscal 2002, the Company approved a plan to consolidate and
relocate operations in various geographical locations and to abandon
certain assets associated with modification to strategic initiatives.
The plan resulted in a pre-tax restructuring charge of $714 thousand
($493 thousand after tax). The restructuring costs consist of $484 thousand
of losses on equipment and leasehold improvement dispositions, $126
thousand in involuntary employee severance costs, and $104 thousand in
lease terminations. Under the plan, the Company eliminated approximately 40
employees.
The execution of the plan began and was completed during fiscal 2002.
As of January 5, 2003, the Company had $41 thousand in accrued and unpaid
restructuring costs which were paid during fiscal 2003.
9. Income Taxes
The provision for income taxes consists of the following:
F-16
(in thousands) Fiscal Years
-------------------------------
2004 2003 2002
------ ------------- --------
Current:
Federal $3,072 $ 2,623 $(1,219)
State 1,378 688 (33)
------ ------------- --------
Total current 4,450 3,311 (1,252)
------ ------------- --------
Deferred:
Federal 2,440 2,197 7,402
State 323 291 592
------ ------------- --------
Total deferred 2,763 2,488 7,994
------ ------------- --------
Total income tax provision $7,213 $ 5,799 $ 6,742
====== ============= ========
During fiscal 2002, the Company recorded an income tax benefit of $1.6
million associated with an increase in the tax basis of leased assets as a
result of an accounting method change for tax purposes. This amount is
included in the 2002 income tax provision shown above.
The approximate tax effect of the temporary differences giving rise to
the Company's deferred income tax assets (liabilities) are:
(in thousands) Fiscal Years
-------------------
2004 2003
-------- ---------
Deferred Tax Assets:
Receivables allowances $ 1,012 $ 1,084
Depreciation 359 83
Leases - 240
Deferred compensation 390 321
Non-compete agreements 535 545
Restructuring charges 2,234 -
State net operating losses 456 -
Federal net operating losses 5,558 -
Other 1,289 124
-------- ---------
Total deferred tax assets 11,833 2,397
-------- ---------
Deferred Tax Liabilities:
Depreciation (1,636) (1,517)
Intangibles (6,513) (5,249)
Leases (534) -
Other (1,310) (1,809)
-------- ---------
Total deferred tax liabilities (9,993) (8,575)
-------- ---------
Net deferred tax assets ( liabilities) $ 1,840 $ (6178)
======== =========
As of January 5, 2005, the Company's net current deferred tax assets
($1,937) are included in other current assets and the net noncurrent
deferred tax liabilities ($97) are presented as such on the balance sheet.
As of January 5, 2004, the Company's net current deferred tax liabilities
($1,398) are included in other accrued liabilities and the net noncurrent
deferred tax liabilities ($4,780) are presented as such on the balance
sheet.
The Company acquired $10,781 of net deferred tax assets, primarily
related to the tax effect of federal and state net operating loss
carryforwards and restructuring charges, in connection with the acquisition
of ARC in July 2004. The Company's ability to use the federal and state net
operating loss carryforwards of ARC to reduce its future taxable income is
subject to limitations under Section 382 of the Internal Revenue Code
associated with acquired federal and state net operating loss
carryforwards. The federal net operating loss carryforwards of ARC
aggregate $15,880 of which $2,516 will expire in 2020, $8,010 in 2022 and
$5,354 in 2023. The Company currently believes it will fully utilize ARC's
acquired net operating loss carry forwards and, accordingly, no valuation
allowance has been provided as of January 5, 2005. To the extent these ARC
net operating loss carryforwards are not utilized to reduce the Company's
taxable income in future periods or expire unused, goodwill recorded in
connection with the acquisition of ARC will be adjusted accordingly. In
addition,
F-17
the recorded amounts of acquired deferred tax assets and liabilities
may be adjusted during fiscal 2005 upon completion of ARC's final income
tax returns for the period prior to its acquisition by the Company.
The Company's effective income tax rate differs from the federal
statutory rate as follows:
Fiscal Years
---------------------
2004 2003 2002
----- ------- -----
Tax at federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 6.1 4.3 3.2
Change in tax accounting method - TIFS - - (7.4)
Other (1.4) (0.3) 0.2
----- ------- -----
Effective tax rate 39.7% 39.0% 31.0%
===== ======= =====
10. Operating Leases and Commitments
Operating Leases- The Company leases office and warehouse space,
vehicles and certain office equipment from various lessors including a
related party. See Note 15 of Notes to Consolidated Financial Statements
for information regarding related parties. Lease terms vary in duration and
include various option periods. The leases generally require the Company to
pay taxes and insurance. Future minimum lease payments under noncancelable
operating leases with initial or remaining terms in excess of one year as
of January 5, 2005, including the lease with the related party, are as
follows:
(in thousands)
Fiscal Year
------------------------
2005 $ 5,632
2006 3,534
2007 2,878
2008 2,638
2009 2,012
Thereafter 828
-------
Total minimum lease payments $17,522
=======
Employment Agreements- The Company is party to employment agreements
with certain executives, which provide for compensation and certain other
benefits. The agreements also provide for severance payments under certain
circumstances.
Rental expense was $3.4 million, $3.1 million and $3.3 million for
2004, 2003 and 2002 respectively.
11. Employee Benefit Plans
The Company has a savings plan intended to qualify under sections
401(a) and 401(k) of the Internal Revenue Code. The plan covers
substantially all employees of the Company. The Company makes contributions
to the plan based on a participant's annual pay. Contributions made by the
Company for fiscal 2004, 2003 and 2002 were approximately $236 thousand,
$136 thousand and $408 thousand, respectively.
The Company has a stock purchase plan (the "1998 plan") under Section
423 of the Internal Revenue Code of 1986, as amended. The 1998 plan, as
amended, provides substantially all employees of the Company with an
opportunity to purchase through payroll deductions up to 2,000 shares of
common stock of the Company with a maximum market value of $25,000. The
purchase price per share is determined by whichever of two prices is lower:
85% of the closing market price of the Company's common stock in the first
trading date of an offering period (grant date), or 85% of the closing
market price of the Company's common stock in the last trading date of an
offering period (exercise date). 600,000 shares of common stock of the
Company are reserved for issuance under the 1998 plan. The Board of
Directors of the Company may at any time terminate or amend the 1998 plan.
The 1998 plan will terminate twenty years from the effective date unless
sooner terminated.
12. Major Customers
F-18
During fiscal 2004, 2003, and 2002 no customer accounted for more than
10% of the Company's total net sales and revenues.
13. Acquisitions
During fiscal 2004, the Company completed one acquisition. The Company
and Pomeroy Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary of the
Company, completed a merger with Alternative Resources Corporation ("ARC").
On May 11, 2004, the parties entered into a definitive merger agreement for
PAS to acquire all of the issued and outstanding shares of capital stock of
ARC. The merger was approved by ARC shareholders at a meeting held on July
22, 2004. As a result of the merger, ARC is now a wholly-owned subsidiary
of the Company. The cash consideration paid at closing, including the cost
of all stock, stock options and warrants purchased and the amount of ARC
net debt retired, was approximately $46.1 million, which was funded from
cash on hand and borrowings from Pomeroy's existing line of credit.
The following summarizes the assets purchased and liabilities assumed:
(in thousands)
Cash $ 2,349
Accounts receivable 19,303
Other current assets 4,871
Property and equipment, net 193
Intangible assets 3,530
Goodwill 41,864
Other assets 7,051
-------
Assets acquired 79,161
-------
Current portion of notes payable 15,487
Accounts payable and accrued expenses 29,961
Notes payable, net of current portion 15,236
-------
Liabilities assumed 60,684
-------
Net assets acquired $18,477
=======
The results of operations of ARC are included in the Company's fiscal
2004 consolidated financial statements from the date of acquisition. If the
fiscal 2004 acquisition of ARC and the 2003 acquisitions described below
had all occurred on January 6, 2003, the unaudited pro forma results of
operations of the Company would have been as follows:
(in thousands, except per share data) For the year ended For the year ended
January 5, 2005 January 5, 2004
--------------------- ---------------------
Actual Pro forma Actual Pro forma
--------------------- ---------------------
Net sales and revenues $742,290 $ 807,345 $598,423 $ 736,894
Income from operations 18,423 16,259 14,806 8,870
Net income 10,933 9,501 9,071 5,103
Earnings per common share, diluted 0.88 0.76 0.73 0.41
During fiscal 2003, the Company completed two acquisitions. The total
consideration paid consisted of $4.9 million in cash and subordinated notes
of $1.8 million. Additionally, the purchase price will be adjusted for any
potential earn outs. The Company shall pay fifty percent of the net profit
before taxes ("NPBT") to the purchaser in excess of the NPBT threshold for
the applicable year, subject to a cumulative limitation of $5.5 million
during such aggregate earn out period. Interest on the subordinated notes
is payable quarterly. Principal in the amount of $1.8 million is payable in
two annual installments commencing on the first anniversary of closing. The
results of operations of the acquisitions are included in the fiscal 2003
consolidated statement of income from the respective dates of acquisition.
During fiscal 2002, the Company completed one acquisition. The total
consideration paid consisted of $0.3 million in cash and subordinated notes
of $0.2 million. Additionally, the purchase price will be adjusted for any
F-19
potential earn outs. The Company shall pay fifty percent of the net
profit before taxes ("NPBT") to the purchaser in excess of the NPBT
threshold for the applicable year, subject to a cumulative limitation of
$1.0 million dollars during such aggregate period as earn outs. The results
of operations of the acquisition are included in the fiscal 2002
consolidated statement of income from the date of acquisition. If the
fiscal 2002 acquisition had occurred on January 6, 2002, the pro forma
results of operations of the Company would not have been materially
different than that reported in the accompanying fiscal 2002 consolidated
statement of income.
14. Sale of Technology Integration Financial Services, Inc. ("TIFS")
In April 2002, the Company sold for book value substantially all of
the net assets of its wholly owned subsidiary - Technology Integration
Financial Services, Inc. ("TIFS") to Information Leasing Corporation
("ILC"), the leasing division of the Provident Bank of Cincinnati, Ohio.
Vincent D. Rinaldi, a Director of the Company, is the President of ILC. In
addition, ILC assumed and liquidated at the time of the closing
approximately $20.0 million of the Company's debt related to leased assets
owed by TIFS. As part of the transaction, the Company signed an exclusive
seven-year vendor agreement whereby the Company is appointed as an agent
for remarketing and reselling of the leased equipment sold. The Company
will be paid a commission on future lease transactions referred to and
accepted by ILC and will act as the remarketing and reselling agent for
such future leased equipment.
15. Related Party Transactions
Leases- The Company leases its headquarters, distribution facility and
the national training center from a company that is controlled by the
former Chief Executive Officer of the Company. It is a triple net lease
agreement, which expires in the year 2010. Base rental for fiscal 2004,
2003 and 2002 was approximately $1.2 million each year. The annual rental
for these properties was determined on the basis of a fair market value
rental opinion provided by an independent real estate company, which was
updated in 2000. In addition, the Company pays for the business use of
other real estate that is owned by the former Chief Executive Officer of
the Company. During fiscal years 2004, 2003 and 2002, the Company paid $95
thousand each year in connection with this real estate.
The lessor of the headquarters, distribution facility and national
training center does not meet the conditions to be considered a variable
interest entity in accordance with FIN 46.
A director of the Company is President of ILC. See Note 14 of Notes to
Consolidated Financial Statements for information regarding the sale of
substantially all of the assets of TIFS to ILC.
Investment in Lease Residuals - The Company participates in a
Remarketing and Agency Agreement ("Agreement") with ILC whereby the Company
obtains rights to 50% of lease residual values for services rendered in
connection with locating the lessee, selling the equipment to ILC and
agreeing to assist in remarketing the used equipment.
During fiscal 2004, 2003, and 2002, the Company sold equipment and
related support services to ILC, for lease to ILC's customers, in amounts
of $22.0 million, $19.5 million and $32.6 million, respectively.
The Company also purchases residuals associated with separate leasing
arrangements entered into by ILC. Such transactions do not involve the sale
of equipment and related support services by the Company to ILC. Residuals
acquired in this manner are accounted for at cost.
The Company signed an exclusive seven-year vendor agreement whereby
the Company is appointed as an agent for remarketing and reselling of the
leased equipment sold. The Company will be paid a commission on future
lease transactions referred to and accepted by ILC and will act as the
remarketing and reselling agent for such future leased equipment.
The carrying value of investments in lease residuals is $0.9 million
as of January 5, 2005 and 2004, and is included in long-term net investment
in leases. Investments in lease residuals are evaluated on a quarterly
basis, and are subject only to downward market adjustments until ultimately
realized through a sale or re-lease of the equipment.
16. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and
non-cash investing and financing activities are as follows:
F-20
(in thousands) Fiscal Years
-----------------------------------
2004 2003 2002
--------- -------------- --------
Interest paid $ 558 $ 387 $ 556
========= ============== ========
Income taxes paid $ 5,116 $ 1,342 $10,623
========= ============== ========
Additions to goodwill for adjustments
to acquisition assets and intangibles $ 171 $ 322 $ 2,014
========= ============== ========
Business combinations accounted
for as purchases:
Assets acquired $ 78,063 $ 12,070 $ 2,099
Liabilities assumed (61,622) (4,387) (260)
Notes payable issued - (1,825) (184)
--------- -------------- --------
Net cash paid $ 16,441 $ 5,858 $ 1,655
========= ============== ========
17. Treasury Stock
During fiscal 2004, the Company repurchased 40,000 shares of common
stock at a cost of $0.5 million under the repurchase program that expired
June 1, 2004.
During fiscal 2003, the Company's Board of Directors authorized a
program to repurchase up to 1.1 million shares of the Company's outstanding
common stock at market price. During fiscal 2003, the Company repurchased
383,000 shares of common stock at a cost of $4.1 million. This repurchase
program expired June 1, 2004.
During fiscal 2002, the Company's Board of Directors authorized a
program to repurchase up to 350,000 shares of the Company's outstanding
common stock at market price. During fiscal 2002, the Company repurchased
280,000 shares of common stock at a cost of $3.4 million.
18. Dividends
On August 7, 2003, the Company paid a one-time cash dividend of $9.8
million or $0.80 per share to shareholders of record as of July 28, 2003.
19. Stockholders' Equity and Stock Option Plans
On March 27, 2002, the Company adopted the 2002 Non-Qualified and
Incentive Stock Option Plan and it was approved by the shareholders on June
13, 2002. The plan was amended and renamed the 2002 Amended and Restated
Stock Incentive Plan on March 11, 2004 and approved by the Company's
shareholders on June 10, 2004. The Company's 2002 Amended and Restated
Stock Incentive Plan provides certain employees of the Company with options
to purchase common stock of the Company through options at an exercise
price equal to the market value on the date of grant. The plan, as amended,
also provides for the granting of awards of restricted stock and stock
appreciation rights. The maximum aggregate number of shares which may be
optioned and sold under the plan is 4,410,905. The plan will terminate on
June 13, 2012. Stock options granted under the plan are exercisable in
accordance with various terms as authorized by the Compensation Committee.
To the extent not exercised, options will expire not more than ten years
after the date of grant.
On March 27, 2002, the Company adopted the 2002 Outside Directors'
Stock Option Plan and it was approved by the shareholders on June 13, 2002.
The plan was amended on March 11, 2004 and approved by the Company's
shareholders on June 10, 2004. The Company's 2002 Outside Directors' Stock
Option Plan, as amended, provides outside directors of the Company with
options to purchase common stock of the Company at an exercise price equal
to the market value of the shares at the date of grant. The maximum
aggregate number of shares which may be optioned and sold under the plan is
281,356. The plan will terminate on March 26, 2012. Pursuant to the plan,
an option to purchase 10,000 shares of common stock will automatically be
granted on the first day of the initial term of a director. An additional
5,000 shares of common stock will automatically be granted to an eligible
director upon the first day of each consecutive year of service on the
F-21
board. Options are fully vested as of the date of grant and must be
exercised within two years of the date of grant, subject to earlier
termination in the event of termination of the director's service on the
Board.
The following summarizes the stock option transactions under the plans
for the three fiscal years ended January 5, 2005:
Weighted Average
Shares Exercise price
---------- ----------------
Options outstanding January 6, 2002 1,918,650 $ 14.64
Granted 345,305 13.98
Exercised (61,308) 13.61
Forfeitures (234,108) 14.79
----------
Options outstanding January 5, 2003 1,968,539 14.43
Granted 537,360 9.75
Exercised (55,509) 9.00
Forfeitures (382,872) 14.47
----------
Options outstanding January 5, 2004 2,067,518 13.41
Granted 1,173,250 13.32
Exercised (185,765) 9.91
Forfeitures (321,084) 15.62
----------
Options outstanding January 5, 2005 2,733,919 $ 13.34
==========
The following summarizes options outstanding and exercisable at
January 5, 2005:
Options Outstanding Options Exercisable
---------------------------------------------- ---------------------------
Number Weighted Avg. Number
Range of Outstanding Remaining Weighted Avg. Exercisable Weighted Avg.
Exercise Prices at 1/5/05 Contractual Life Exercise Price at 1/5/05 Exercise Price
- ---------------------------------------------------------------------------------------------
5.66 to $8.48 149,944 2.90 $ 6.88 63,323 $ 6.59
8.49 to $11.30 256,648 3.60 $ 10.27 219,489 $ 10.23
11.31 to $14.13 1,230,586 2.60 $ 13.06 1,046,255 $ 13.13
14.14 to $16.95 928,947 3.40 $ 14.82 727,194 $ 14.82
16.96 to $19.78 167,794 2.20 $ 17.65 139,495 $ 17.65
----------- -----------
2,733,919 2,195,756
=========== ===========
The weighted average fair value at date of grant for options granted
during fiscal 2004, 2003 and 2002 was $3.48, $4.09 and $4.56, respectively.
The unissued preferred stock carries certain voting rights and has
preferences with respect to dividends and liquidation proceeds.
20. Litigation
During fiscal 2003 and 2002, the Company made litigation settlement
payments of $ 0.2 million and $0.3 million, respectively.
There are various other legal actions arising in the normal course of
business that have been brought against the Company. Management believes
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
21. Segment Information and Concentrations
Segment Information - The operates in three industry segments:
products, services and leasing.
F-22
The Company's products segment is comprised of the sale of a broad
range of Information Technology products that include desktop computing
equipment, servers, infrastructure devices and peripherals.
The services segment entails providing information technology
services, which support such computer products. As a service solution
provider, the Company offers three groups of services: enterprise
consulting, infrastructure solutions, and lifecycle services. The
enterprise consulting group offerings consist of: application development,
business process re-engineering, ERP solutions, CRM solutions, e-business,
business intelligence, and outsourcing. The infrastructure solutions group
offerings consist of: high performance file servers, voice, video, data and
network integration, storage strategies, security solutions, thin client,
managed services, and cabling solutions. Pomeroy's lifecycle services group
offers the following comprehensive portfolio of services: strategic
sourcing, integration and distribution logistics, implementation services,
technical support services, DoD drive wiping services, and technology
disposition.
The Company also offers leasing solutions to its customers via an
agency agreement with a Cincinnati based regional bank. This bank, in 2002,
acquired certain assets and liabilities of the Company's leasing
subsidiary. See Note 14 of Notes to Consolidated Financial Statements for
information regarding the sale of substantially all of the assets of TIFS,
the Company's leasing subsidiary.
The Company has no significant operations outside the United States.
The accounting policies of the segments are the same as those discussed in
the summary of significant accounting policies. The Company evaluates
performance based on operating earnings of the respective business units.
Intersegment sales and transfers are not significant.
During the first quarter of fiscal 2003, the Company revised its
segment methodologies for allocating operating expenses between segments to
reflect ongoing changes in the operating activities giving rise to such
expenses. This change resulted in a decrease of approximately $6.0 million
year-to-date of allocated operating expenses to the product segment and a
corresponding increase by the same amount to the services segment. In
addition, the Company revised its allocation of assets between segments to
reflect the use of assets in those segments. The assets affected were
principally goodwill, tax-related assets and equipment and leasehold
improvements.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Fiscal 2004
------------------------------------------------
Products Services Leasing Consolidated
--------- ------------ -------- -------------
Revenue $ 545,002 $ 197,175 $ 113 $ 742,290
Income from operations $ 7,993 $ 10,386 $ 44 $ 18,423
Total assets $ 195,358 $ 130,907 $ 6,623 $ 332,888
Capital expenditures $ 1,087 $ 1,263 $ - $ 2,350
Depreciation and amortization $ 2,100 $ 2,290 $ 3 $ 4,393
Fiscal 2003
------------------------------------------------
Products Services Leasing Consolidated
--------- ------------ -------- -------------
Revenue $ 470,336 $ 127,905 $ 182 $ 598,423
Income from operations $ 8,167 $ 6,512 $ 127 $ 14,806
Total assets $ 169,461 $ 92,211 $ 7,527 $ 269,199
Capital expenditures $ 833 $ 837 $ - $ 1,670
Depreciation and amortization $ 2,738 $ 2,578 $ 3 $ 5,319
Fiscal 2002
------------------------------------------------
Products Services Leasing Consolidated
--------- ------------ -------- -------------
Revenue $ 568,194 $ 131,293 $ 3,313 $ 702,800
Income from operations $ 5,773 $ 15,116 $ 1,340 $ 22,229
Total assets $ 188,937 $ 52,424 $ 7,134 $ 248,495
Capital expenditures $ 5,379 $ 2,357 $ 84 $ 7,820
Depreciation and amortization $ 5,260 $ 881 $ 229 $ 6,370
F-23
Concentrations - During fiscal 2004, 2003, and 2002 approximately
23.4%, 20.9%, and 28.1%, respectively, of the Company's total net sales and
revenues were derived from its top ten customers.
During fiscal 2004, 2003 and fiscal 2002, no customer accounted for
more than 10% of the Company's net sales and revenues for either the
products or services segments.
F-24