<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 3, 1997
POMEROY COMPUTER RESOURCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-20022 31-1227808
(State or other jurisdiction (Commission (IRS Employer
of incorporation) file number) Identification No.)
1020 PETERSBURG ROAD, HEBRON, KY 41048
(Address of principal executive offices)
Registrant's telephone number, including area code (606)586-0600
<PAGE>
Item 1. CHANGES IN CONTROL OF REGISTRANT
Not Applicable
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Not Applicable
Item 3. BANKRUPTCY OR RECEIVERSHIP
Not Applicable
Item 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not Applicable
Item 5. OTHER EVENTS
In conjunction with the filing of a Form S-3 on January 3, 1997
the Company is filing the attached audited financial statements
for the nine months ended October 5, 1996.
Item 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS
Not Applicable
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
Not Applicable
(b) Pro forma financial information
Not Applicable
(c) Exhibits
Not Applicable
Item 8. CHANGE IN FISCAL YEAR
Not Applicable
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Pomeroy Computer Resources, Inc.
We have audited the accompanying consolidated balance sheet of Pomeroy
Computer Resources, Inc. as of October 5, 1996 and the related consolidated
statements of income, equity, and cash flows for the nine months ended
October 5, 1996. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pomeroy Computer Resources, Inc. at October 5, 1996 and the consolidated
results of its operations and its consolidated cash flows for the nine months
ended October 5, 1996, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Cincinnati, Ohio
December 19, 1996
1
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 5,
1996
--------------
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 3,168,257
Accounts receivable:
Trade, less allowance of $406,688 at October 5, 1996........... 51,714,717
Vendor product returns, less allowance of
$80,423 at October 5, 1996................................... 4,330,187
Vendor incentive rebates....................................... 5,054,262
Amount due from stockholder.................................... 270,000
Other.......................................................... 182,300
--------------
Total receivables............................................ 61,551,466
--------------
Inventories...................................................... 24,452,710
Other............................................................ 735,915
--------------
Total current assets......................................... 89,908,348
--------------
Equipment and leasehold improvements:
Furniture, fixtures and equipment................................ 6,692,500
Leasehold improvements........................................... 4,041,152
--------------
Total........................................................ 10,733,652
Less accumulated depreciation.................................... 3,229,358
--------------
Net equipment and leasehold improvements..................... 7,504,294
--------------
Investment in lease residuals...................................... 2,946,462
Goodwill and other intangible assets............................... 7,091,301
Other assets....................................................... 630,500
--------------
Total assets................................................. $ 108,080,905
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 5,
1996
--------------
<S> <C>
LIABILITIES AND EQUITY
Current liabilities:
Notes payable.................................................... $ 606,550
Accounts payable:
Floor plan financing........................................... 26,407,542
Trade.......................................................... 12,507,843
--------------
Total accounts payable..................................... 38,915,385
Bank notes payable................................................. 16,580,965
Deferred revenue................................................... 2,215,974
Accrued liabilities:
Employee compensation and benefits............................... 1,732,077
Income taxes..................................................... 2,595,188
Interest......................................................... 70,716
Miscellaneous.................................................... 516,638
--------------
Total current liabilities.................................. 63,233,493
--------------
Notes payable...................................................... 1,523,800
Deferred income taxes.............................................. 627,000
Equity:
Preferred stock (no shares issued or outstanding)................ --
Common stock (6,397,346 shares issued
and outstanding at October 5, 1996)............................ 63,973
Paid-in capital.................................................. 33,621,933
Retained earnings................................................ 9,214,712
--------------
42,900,618
Less treasury stock, at cost (20,900 shares at
October 5, 1996)............................................... 204,006
--------------
Total equity............................................... 42,696,612
--------------
Total liabilities and equity............................... $ 108,080,905
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 5, 1996
---------------------------------
<S> <C>
Net sales and revenues:
Sales--equipment and supplies................ $ 214,091,570
Service...................................... 18,367,793
Other........................................ 1,575,640
--------------
Total net sales and revenues............. 234,035,003
--------------
Cost of sales and service:
Equipment and supplies....................... 192,540,997
Service...................................... 4,380,818
--------------
Total cost of sales and service.......... 196,921,815
--------------
Gross profit................................. 37,113,188
--------------
Operating expenses:
Selling, general and administrative.......... 23,052,149
Rent expense................................. 1,016,400
Depreciation................................. 1,277,586
Amortization................................. 425,516
Provision for doubtful accounts.............. 244,356
--------------
Total operating expenses................. 26,016,007
--------------
Income from operations......................... 11,097,181
--------------
Other expense (income):
Interest expense............................. 1,593,553
Litigation settlement and related costs...... 4,392,102
Miscellaneous................................ (132,841)
--------------
Total other expense...................... 5,852,814
--------------
Income before income tax....................... 5,244,367
Income tax expense............................. 2,127,000
--------------
Net income..................................... $ 3,117,367
--------------
--------------
Weighted average shares outstanding:
Primary...................................... 4,984,804
--------------
--------------
Fully diluted................................ 5,085,845
--------------
--------------
Net income per common share:
Primary...................................... $ 0.63
--------------
--------------
Fully diluted................................ $ 0.61
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 5, 1996
---------------------------------
<S> <C>
Cash Flows from Operating Activities:
Net income.............................................. $ 3,117,367
Adjustments to reconcile net income to net cash flows
from operating activities:
Depreciation.......................................... 1,277,586
Amortization.......................................... 425,516
Deferred income taxes................................. (38,000)
Net acquisition of lease residuals.................... (311,163)
Issuance of common shares for stock awards............ 40,000
Changes in working capital accounts, net of effects of
subsidiary companies purchased:
Accounts receivable................................. (21,028,124)
Inventories......................................... (4,024,561)
Floor plan financing................................ 8,730,616
Trade payables...................................... 4,657,964
Deferred revenue.................................... (151,890)
Income tax payable.................................. 1,477,333
Other, net.......................................... 303,816
--------------
Net operating activities.............................. (5,523,540)
--------------
Cash Flows from Investing Activities:
Capital expenditures.................................. (2,763,762)
Acquisition of reseller assets........................ (4,527,558)
--------------
Net investing activities.............................. (7,291,320)
--------------
Cash Flows from Financing Activities:
Payments on notes payable............................. (2,332,079)
Net proceeds of stock offering........................ 17,924,439
Net payments under bank notes payable................. (1,146,075)
Proceeds from exercise of stock options............... 1,270,511
Retirement of stock warrants.......................... (330,000)
--------------
Net financing activities.............................. 15,386,796
--------------
Increase in cash.......................................... 2,571,936
Cash:
Beginning of period................................... 596,321
--------------
End of period......................................... $ 3,168,257
--------------
--------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
CONSOLIDATED STATEMENT OF EQUITY
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL EQUITY
--------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 5, 1996..................... $ 26,259 $ 13,279,697 $ 6,097,902 $ (204,006) $ 19,199,852
Net income.................................... 3,117,367 3,117,367
3,076 common shares issued for stock awards... 31 39,969 40,000
113,316 common shares issued for
acquisitions................................ 1,133 1,473,867 1,475,000
Stock options exercised and related tax
benefit..................................... 1,270 1,269,241 1,270,511
Retirement of stock warrants.................. (330,000) (330,000)
Effect of 3 for 2 stock split................. 21,255 (21,255) (557) (557)
1,402,500 common shares issued by public
offering.................................... 14,025 17,910,414 17,924,439
--------- ------------- ------------ ----------- -------------
Balances at October 5, 1996..................... $ 63,973 $ 33,621,933 $ 9,214,712 $ (204,006) $ 42,696,612
--------- ------------- ------------ ----------- -------------
--------- ------------- ------------ ----------- -------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED OCTOBER 5, 1996
1. COMPANY DESCRIPTION
On February 13, 1992, Pomeroy Computer Resources, Inc. was formed and on
April 2, 1992 was merged with eight related businesses ("predecessor
businesses") (collectively the "Company"), five of which owned and operated
franchises of ComputerLand Corporation ("ComputerLand") in Ohio and Kentucky.
The Company has 10 million shares of $.01 par value common stock authorized,
with 6.4 million shares outstanding. The Company is also authorized to issue 2
million shares of $.01 par value preferred stock. Since the owner of the Company
and the predecessor businesses were the same, this transaction constituted a
combination of the predecessor businesses under common control and was accounted
for at historical cost in a manner similar to that followed for a pooling of
interests. The Company purchased C&N Corp. ("C&N") in fiscal 1992 and Xenas
Communications Corp. ("Xenas") in fiscal 1994 (see Note 12). In fiscal 1995 the
Company formed a wholly-owned subsidiary, Pomeroy Computer Leasing Company,
Inc., ("PCL"), for the purpose of leasing computer equipment to the Company's
customers.
The Company sells, installs and services microcomputers and microcomputer
equipment primarily for business, professional, educational and government
customers. The Company also derives revenue from customer support services,
including network analysis and design, systems configuration, cabling, custom
installation, training, maintenance and repair. The Company has ten branch
offices in Kentucky, Iowa, Indiana, Tennessee, Florida and Alabama and grants
credit to substantially all customers in these areas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries
C&N, Xenas and PCL. All significant intercompany accounts and transactions have
been eliminated in consolidation.
GOODWILL AND OTHER INTANGIBLE ASSETS--Goodwill is amortized using the
straight-line method over periods of fifteen to twenty-five years. In accordance
with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets," the
Company evaluates its goodwill on an ongoing basis to determine potential
impairment by comparing the carrying value to the undiscounted estimated
expected future cash flows of the related assets. Other intangible assets are
amortized using the straight-line method over periods up to ten years.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS--Equipment and leasehold improvements
are stated at cost. Depreciation on equipment is computed using the
straight-line method over estimated useful lives. Depreciation on leasehold
improvements is computed using the straight-line method over estimated useful
lives or the term of the lease, whichever is less. Expenditures for repairs and
maintenance are charged to expense as incurred and additions and improvements
that significantly extend the lives of assets are capitalized. Upon sale or
retirement of depreciable property, the cost and accumulated depreciation are
removed from the related accounts and any gain or loss is reflected in the
results of operations.
INCOME TAXES--Deferred income tax liabilities and assets are provided for
temporary differences between the tax basis and reported amounts of assets
and liabilities that will result in taxable or deductible amounts in future
years. The Company's temporary differences primarily result from revenue from
the
7
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
acquisitions of lease residuals not taxable until received, the use of
accelerated depreciation for tax purposes and accrued expenses not deductible
for tax purposes until paid.
VENDOR INCENTIVE REBATES--Certain vendors provide incentive rebates to
perform product training, advertising and other sales and market development
activities. The Company recognizes these rebates when it has completed its
obligation to perform under the specific incentive arrangement. Incentive
rebates are recorded as reductions of selling, general and administrative
expense or, if volume based, cost of sales.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined by the average cost method.
REVENUE RECOGNITION--The Company recognizes revenue on the sale of equipment
and supplies when the products are shipped. Service revenue is recognized when
the applicable services are provided.
DEFERRED REVENUE--Revenues received on maintenance contracts are recognized
ratably over the lives of the contracts. Costs related to maintenance contracts
are recognized when incurred.
STOCK-BASED COMPENSATION--The Financial Accounting Standards Board issued
SFAS No. 123-- Accounting for Stock-Based Compensation in the Fall of 1995. The
statement encourages, but does not require, companies to record compensation
cost for stock-based employee compensation plans at fair value beginning in
fiscal 1996. The Company elected to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25--Accounting for Stock Issued to Employees--and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of
grant over the amount an employee must pay to acquire the stock. The Company has
adopted SFAS No. 123 for disclosure purposes and for non-employee stock options.
This has no material effect on the results of operations or financial position
of the Company.
NET INCOME PER SHARE--The computation of primary net income per common and
common equivalent share is based upon the weighted average number of common
shares outstanding during the period plus, in periods in which they have a
dilutive effect, the effect of common shares contingently issuable, primarily
from stock options and warrants. Fully diluted net income per common share also
reflects dilution due to the use of the market price at the end of the period,
when higher than the average price for the period.
USE OF ESTIMATES IN FINANCIAL STATEMENTS--In preparing financial statements
in conformity with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE DISCLOSURES--The fair value of financial instruments approximates
carrying value.
8
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
3. ACCOUNTS RECEIVABLE
The following table summarizes the activity in the allowance for doubtful
accounts for the nine months ended October 5, 1996.
<TABLE>
<CAPTION>
TRADE OTHER
---------- -----------
<S> <C> <C>
Balance January 5, 1996.............................................. $ 200,737 $ 210,000
Provision 1996..................................................... 250,000 30,675
Accounts written-off............................................... (97,045) (588,474)
Recoveries......................................................... 52,996 428,222
---------- -----------
Balance October 5, 1996.............................................. $ 406,688 $ 80,423
---------- -----------
---------- -----------
</TABLE>
4. INVENTORIES
Inventories consist of items held for resale and are comprised of the
following components as of October 5, 1996:
<TABLE>
<S> <C>
Equipment and supplies......................... $ 23,288,825
Service parts.................................. 1,163,885
------------
Total...................................... $ 24,452,710
------------
------------
</TABLE>
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following as of
October 5, 1996, net of accumulated amortization of $913,551:
<TABLE>
<S> <C>
Goodwill........................................... $ 6,299,750
Covenants not to compete........................... 249,940
Customer lists..................................... 541,611
-------------
$ 7,091,301
-------------
-------------
</TABLE>
9
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
5. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
On April 29, 1996 the Company and Vanstar Corporation entered into a
settlement agreement in connection with the litigation between the parties,
which in effect terminated all agreements between the parties.
In the first nine months of 1996, the Company acquired The Computer Supply
Store, Inc. ("TCSS") a privately held computer reseller located in Des Moines,
Iowa and AA Microsystems, Inc. ("AA Micro"), a network service provider located
in Birmingham, Alabama (See Note 12). The Company recorded $5,690,000 and
$402,000 of goodwill in connection with those acquisitions, respectively.
6. BORROWING ARRANGEMENTS
The Company has an available line of credit up to the lesser of
$25,000,000 (or an amount based upon a formula of eligible trade receivables)
at an interest rate that varies based on the prime rate of the bank or the
LIBOR rate at the Company's election. At October 5, 1996, bank notes payable
include $880,965 of overdrafts in accounts with the Company's primary lender.
This amount was subsequently funded through the normal course of business.
The interest rate charged was 7.5% at October 5, 1996. The agreement, which
expires in April 1997, calls for the payment of a .25% commitment fee based
on the unused portion of the line of credit. The revolving credit agreement
is collateralized by substantially all assets of the Company, except those
assets which collateralize certain other financing arrangements. Under the
revolving credit agreement, the Company may not make any cash dividend
payments.
The maximum amount outstanding and the average amount outstanding on bank
revolving credit agreement for the period ending October 5, 1996, was
$26,687,000 and $17,408,000, respectively.
The above average amount outstanding is calculated by dividing the sum of
the average daily balances for each month by the number of months in the
period. The weighted average interest rate on the bank revolving credit
agreements was 8.2% in the nine months ended October 5, 1996.
In November 1994, the Company exercised an option in its revolving credit
agreement to borrow $500,000 on a term note with interest at a rate of 0.5%
above the bank's prime rate. The interest rate on this term note was revised to
the bank's prime rate in March, 1995. The term note matured July 31, 1996
10
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
6. BORROWING ARRANGEMENTS (CONTINUED)
and was paid off.
The Company finances inventory through floor plan arrangements with two
finance companies. As of October 5, 1996 the floor plan lines of credit were
$12,000,000 with IBM Credit Corporation ("ICC") and $25,000,000 with Deutsche
Financial Services ("DFS"). Borrowings are made on sixty day notes, with one-
half of the note amount due in thirty days. Financing on many of the
arrangements which are subsidized by manufacturers is interest free. The average
rate on the plans overall is less than 2.1%.
The maximum amount outstanding and the average amount outstanding on each of
the floor plan arrangements was as follows:
<TABLE>
<CAPTION>
ICC DFS
-------------------------- ----------------------------
MAXIMUM AVERAGE MAXIMUM AVERAGE
AMOUNT AMOUNT AMOUNT AMOUNT
PERIOD ENDING OUSTANDING OUSTANDING OUSTANDING OUSTANDING
- ----------------------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
October 5, 1996.................... $ 8,066,000 $ 5,371,000 $ 25,508,000 $ 16,979,000
</TABLE>
The average amount outstanding is calculated by dividing the sum of the
outstanding balances at the end of each month by the number of months in the
applicable period.
At October 5, 1996 subordinated debt in the amount of $1,700,000 was
outstanding related to the acquisition of TCSS as described in Note 12.
7. INCOME TAXES
The provision for income taxes for the nine months ended October 5, 1996
consists of the following:
<TABLE>
<S> <C>
Current:
Federal.................................... $ 1,645,000
State...................................... 520,000
------------------
Total current............................ 2,165,000
------------------
Deferred:
Federal.................................... (30,000)
State...................................... (8,000)
------------------
Total deferred........................... (38,000)
------------------
Total income tax provision................... $ 2,127,000
------------------
------------------
</TABLE>
11
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
7. INCOME TAXES (CONTINUED)
The approximate tax effect of the temporary differences giving rise to the
Company's deferred income tax assets (liabilities) at October 5, 1996 are:
<TABLE>
<S> <C>
Deferred Tax Asset:
Bad debt provision........................... $ 197,000
----------
Deferred Tax Liability:
Acquisition of lease residuals............... (702,000)
Other temporary differences.................. 75,000
----------
(627,000)
----------
Net deferred tax liability................... $ (430,000)
----------
----------
</TABLE>
The Company's effective income tax rate for the nine months ended
October 5, 1996 differs from the Federal statutory rate as follows:
<TABLE>
<S> <C>
Tax at Federal statutory rate........................... 34.0%
State taxes........................................... 6.4
Other................................................. 0.2
----
Effective tax rate.................................. 40.6%
----
----
</TABLE>
8. OPERATING LEASES
The Company leases office and warehouse space, vehicles and certain office
equipment from various lessors. Lease terms vary in duration and include various
option periods. The leases generally require the Company to pay taxes and
insurance. Future minimum lease payments under noncancelable operating leases
with initial or remaining terms in excess of one year as of October 5, 1996 are
as follows:
<TABLE>
<CAPTION>
12 MONTHS ENDED OCTOBER 5,
- --------------------------
<S> <C>
1997.......................................................................... $ 1,977,000
1998.......................................................................... 1,480,000
1999.......................................................................... 1,194,000
2000.......................................................................... 1,045,000
2001.......................................................................... 857,000
Thereafter.................................................................... 2,576,000
------------
Total minimum lease payments.................................................... $ 9,129,000
------------
------------
</TABLE>
12
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
9. EMPLOYEE BENEFIT PLANS
As of July 1, 1992 the Company converted its profit sharing plan, which
covers substantially all employees, to an Employee Stock Ownership Plan
("ESOP"). No less than a majority and no more than 75% of the assets of the ESOP
will be invested in common stock of the Company purchased on the open market. As
of October 5, 1996, the ESOP held 57,129 shares of Company stock. No
contributions were accrued in the nine months ended October 5, 1996.
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 does not contribute to the plan.
10. INVESTMENT IN LEASE RESIDUALS
The Company participates in a Remarketing and Agency Agreement ("Agreement")
with Information Leasing Corporation ("ILC") whereby the Company obtains rights
to 50% of lease residual values for services rendered in connection with
locating the lessee, selling the equipment to ILC and agreeing to assist in
remarketing the used equipment.
During the first nine months of 1996, the Company sold equipment and
related support services to ILC, for lease to ILC's customers, in the amount
of $6,072,000. The Company also obtained rights to lease residuals from ILC
in the amount of $325,000 in the first nine months of 1996. Such amount is
recorded as a reduction of the related cost of sales. Residuals acquired in
this manner are recorded at the estimated present value of interest retained.
The Company also purchases residuals associated with separate leasing
arrangements entered into by ILC. Such transactions do not involve the sale of
equipment and related support services by the Company to ILC. Residuals acquired
in this manner are accounted for at cost.
The carrying value of investments in lease residuals is evaluated on a
quarterly basis, and is subject only to downward market adjustments until
ultimately realized through a sale or re-lease of the equipment.
11. MAJOR CUSTOMERS
During the first nine months of 1996, sales to the largest customer
totaled approximately $29,452,000.
13
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
12. ACQUISITIONS
On March 14, 1996, the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of TCSS, a privately held computer
reseller located in Des Moines, Iowa. The purchase price consisted of $4,500,000
in cash, a $2,700,000 subordinated note and 100,000 unregistered shares of the
Company's common stock with an approximate value of $1,300,000. Interest on the
subordinated note, which is calculated at prime plus 0.5%, is payable quarterly
and principal is payable in four equal annual installments of $675,000. The
acquisition was accounted for as a purchase, accordingly the purchase price was
allocated to assets and liabilities based on their estimated value as of the
date of the acquisition. The results of TCSS's operations will be included in
the consolidated statement of income from the date of acquisition. The following
table summarizes, on an unaudited pro forma basis, adjusted to reflect a three-
for-two split of the Company's common stock in the form of a stock dividend paid
on October 4, 1996 and a 10% stock dividend paid on May 22, 1995, the estimated
combined results of the Company and TCSS assuming the acquisition had occurred
on January 6, 1995. These results include certain adjustments, primarily
goodwill amortization and interest expense, and are not necessarily indicative
of what results would have been had the Company owned TCSS during the period
presented:
<TABLE>
<CAPTION>
FISCAL YEAR
1995
-------------
<S> <C>
Net sales and revenues....................................................... $ 291,209,000
Net income................................................................... $ 4,794,000
Net income per common share:
Primary.................................................................... $ 1.15
Fully Diluted.............................................................. $ 1.14
</TABLE>
In August 1996, the Company acquired certain assets of AA Microsystems,
Inc ("AA Micro"), a network service provider located in Birmingham, Alabama.
The purchase price consisted of $67,464 in cash, a $200,000 note payable and
19,974 unregistered shares of the Company's common stock with an approximate
value of $200,000. Interest on the note, which is calculated at 8.25%, is
payable quarterly and principal is payable in three equal annual installments
of $66,667. In addition, the Company has entered into a three-year employment
contract with the former president. The acquisition was accounted for as a
purchase, accordingly the purchase price was allocated to assets based on
their estimated value as of the date of acquisition. The results of AA
Micro's operations will be included in the consolidated statement of income
from the date of acquisition.
13. RELATED PARTIES
During fiscal 1995 the Company entered into a ten year triple-net lease
agreement commencing in 1996 for a new headquarters and distribution facility
with a company that is controlled by the Chief
14
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
13. RELATED PARTIES (CONTINUED)
Executive Officer of the Company. The base rental for 1996 on an annualized
basis is $583,294. The annual rental for these properties was determined on
the basis of a fair market value rental opinion provided by an independent
real estate company.
During fiscal 1992 the Company loaned $100,000 to an officer of the Company.
This loan was evidenced by a promissory note with an annual interest rate of 1%
over the prime rate. In addition, a total of $106,000 was advanced to the
officer in fiscal years 1993 through 1995. The note plus accrued interest and
the advance were repaid during the nine months ended October 5, 1996.
During the nine months ended October 5, 1996, the Company made periodic
advances to a company that is controlled by the Chief Executive Officer of the
Company. At October 5, 1996, the amount advanced by the Company was $270,000. No
interest was charged on the advances which were repaid in December 1996.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities for the nine months ended October 5, 1996
are as follows:
Interest paid................................................. $ 1,565,000
---------------
---------------
Income taxes paid............................................. $ 688,000
---------------
---------------
Business combination accounted for as purchase:
Assets acquired............................................. $ 15,298,000
Liabilities assumed......................................... (6,395,000)
Note payable................................................ (2,900,000)
Stock issued................................................ (1,475,000)
---------------
Net cash paid............................................... $ 4,528,000
---------------
---------------
15. STOCK OPTION PLANS 1997
The Company's 1992 Non-Qualified and Incentive Stock Option Plan provides
certain employees of the Company with options to purchase common stock of the
Company through options at an exercise price equal to the market value on the
date of grant. 600,000 shares of the common stock of the Company are reserved
ofor issuance under the plan. The plan will terminate ten years from the date of
adoption. Stock options granted under the plan are exercisable in accordance
with various terms as authorized by the Compensation Committee. To the extent
not exercised, options will expire not more than ten years after the date of
grant.
The Company's 1992 Outside Directors' Stock Option Plan provides outside
directors of the Company with options to purchase common stock of the Company at
an exercise price equal to the market value of the shares at the date of grant.
75,000 shares of common stock of the Company are reserved for issuance under the
plan. The plan will terminate ten years from the date of adoption. Pursuant to
the plan, an option to purchase 10,000 shares of common stock automatically will
be granted on the first day of the initial term of a director. An additional
2,500 shares of common stock automatically will be granted to an eligible
director upon the first day of each consecutive year of service on the board.
Options may be exercised after one year from the date of grant for not more than
one-third of the shares subject to the option and an
15
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
15. STOCK OPTION PLANS (CONTINUED)
additional one-third of the shares subject to the option may be exercised for
each of the next two years thereafter. To the extent not exercised, options
will expire five years after the date of grant.
The following summarizes the stock option transactions under the plans
for the nine months ended October 5, 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Options outstanding January 5, 1996.............................. 218,540 $ 8.32
Granted........................................................ 149,600 13.83
Exercised...................................................... (126,075) 10.08
Stock split effect............................................. 121,082 7.21
----------
Options outstanding October 5, 1996.............................. 363,147 $ 7.21
----------
----------
</TABLE>
The following summarizes options outstanding and exercisable at October 5,
1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AT 10/5/96 CONTRACTUAL LIFE EXERCISE PRICE AT 10/5/96 EXERCISE PRICE
- -------------------------------- ----------- --------------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$4.01 to $5.99................. 166,747 1.7 $ 5.15 165,372 $ 5.14
$6.41 to $8.50................. 113,900 1.9 $ 7.47 105,599 $ 7.63
$9.50 to $11.92................. 82,500 3.5 $ 10.07 68,750 $ 9.98
----------- -----------
363,147 2.1 $ 7.21 339,721 $ 6.90
----------- -----------
----------- -----------
</TABLE>
The weighted average fair value at date of grant for options granted
during the first nine months of fiscal 1996 was $2.75. The fair value of
options at the date of grant was estimated using the Black-Scholes model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OCTOBER 5, 1996
-----------------
<S> <C>
Expected life (years)........................................ 1.7
Interest rate................................................ 5.8%
Volatility................................................... 55%
Dividend yield............................................... 0%
</TABLE>
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in the first
nine months of fiscal 1996 consistent with the
16
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
15. STOCK OPTION PLANS (CONTINUED)
provisions of SFAS No. 123, the Company's net income and earnings per share
for the nine months ended October 5, 1996 would have been reduced to the pro
forma amounts indicated below:
Net income--as reported..................................... $ 3,117,367
Net income--pro forma....................................... $ 2,647,572
Net income per common share--as reported
Primary................................................... $ 0.63
Fully diluted............................................. $ 0.61
Net income per common share--pro forma
Primary................................................... $ 0.53
Fully diluted............................................. $ 0.52
The initial application of SFAS No. 123 for pro forma disclosure may not be
representative of the future effects of applying the statement.
In the first nine months of 1996, shares of common stock were awarded to
officers of the Company totalling 3,076. Compensation expense resulting from
the awards was $30,000 for the first nine months of 1996.
16. LITIGATION
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
17. RISK OF LOSS FROM CONCENTRATIONS
During the first nine months of 1996, approximately 41% of the Company's
total net sales and revenues were derived from its top ten customers,
including one customer which accounted for 13% of total net sales and
revenues. A loss of one or more of the Company's major customers could have a
material adverse effect on the Company.
Due to the demand for the products sold by the Company, significant product
shortages occur from time to time because manufacturers are unable to produce
sufficient quantities of certain products to meet increased demand. Failure to
obtain adequate product shipments could have a material adverse effect on the
Company's operations and financial results.
The Company is required to have authorizations from manufacturers in order
to sell their products. The loss of a significant vendor's authorization could
have a material adverse effect on the Company's business.
18. SUBSEQUENT EVENT
On October 11, 1996 the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of Communications Technology, Inc.,
d/b/a DILAN ("DILAN"), a privately held network integrator located in Hickory,
North Carolina. The purchase price consisted of $2.6 million in
17
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED OCTOBER 5, 1996
18. SUBSEQUENT EVENT (CONTINUED)
cash, a $1.1 million subordinated note and $5.5 million of assumed
liabilities. Interest on the subordinated note, which is calculated at 10%
per annum, is payable quarterly and principal is payable in three equal
annual installments of $365,000. The acquisition will be accounted for as a
purchase, accordingly the purchase price will be allocated to assets and
liabilities based on their estimated value as of the date of the acquisition.
The results of DILAN'S operations will be included in the consolidated
statement of income from the date of acquisition.
18
<PAGE>
POMEROY COMPUTER RESOURCES, INC.
PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT (UNAUDITED)
NINE MONTHS ENDED OCTOBER 5, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 5, 1996
---------------------------------------------------
HISTORICAL(1)
-------------------- PRO FORMA
COMPANY TCSS ADJUSTMENTS PRO FORMA
-------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales and revenues................... $234,035 $11,817 $245,852
Cost of sales and service................ 196,922 10,342 (2) 207,264
-------- ------- --------
Gross profit........................... 37,113 1,475 $ 38,588
Operating expenses....................... 26,016 951 $ 83 (3) 27,050
-------- ------- ---- --------
Income from operations................. 11,097 524 (83) 11,538
Interest expense......................... 1,594 15 1,609
Litigation settlement and related costs.. 4,392 -- -- 4,392
Miscellaneous income..................... (133) 2 (131)
-------- ------- ---- --------
Income before income taxes............. 5,244 507 (83) 5,668
Income tax expense....................... 2,127 203 (33) 2,297
-------- ------- ---- --------
Net income............................... $ 3,117 $ 304 $(50) $ 3,371
-------- ------- ---- --------
-------- ------- ---- --------
Weighted average shares outstanding...... 4,985 $ 5,023
-------- --------
-------- --------
Primary net income per common share....... $ 0.63 $ 0.67
-------- --------
-------- --------
</TABLE>
- ------------------
(1) Based on the financial statements of the Company for the nine months ended
October 5, 1996 and the financial statements of TCSS for the two months
ended February 29, 1996.
(2) The pro forma information does not assume any reduction of TCSS's historical
costs or expenses due to synergies with the Company's operations.
(3) Reflects additional payroll for former owners of TCSS based on new
employment agreements, rent on building not purchased and amortization of
estimated goodwill over a 15 year period.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
POMEROY COMPUTER RESOURCES, INC.
Date: January 6, 1997 By: /s/ Edwin S. Weinstein
-------------------------------------------
Edwin S. Weinstein, Chief Financial Officer
20
