UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 5, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20022
POMEROY IT SOLUTIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
- -------- ----------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares of common stock outstanding as of August 5, 2004 was
12,239,459
1
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of July 3
5, 2004 (Unaudited) and January 5, 2004
Consolidated Statements of Income for 5
the Three Months Ended July 5, 2004 and
2003 (Unaudited)
Consolidated Statements of Income for 6
the Six Months Ended July 5, 2004 and
2003 (Unaudited)
Consolidated Statements of Cash Flows 7
for the Six Months Ended July 5, 2004
and 2003 (Unaudited)
Notes to Consolidated Financial 8
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 14
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure 19
about Market Risk
Item 4. Controls and Procedures 19
Part II. Other Information 20
SIGNATURE 22
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) July 5, January 5,
2004 2004
------------ -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . $ 45,373 $ 40,200
------------ -----------
Accounts receivable:
Trade, less allowance of $2,556 at July 5, 2004
and January 5, 2004 . . . . . . . . . . . . . 111,779 111,324
Vendor receivables, less allowance of $100 at
July 5, 2004 and January 5, 2004. . . . . . . 4,491 7,226
Net investment in leases. . . . . . . . . . . . . 4,427 2,056
Other . . . . . . . . . . . . . . . . . . . . . . 1,668 2,043
------------ -----------
Total receivables . . . . . . . . . . . . . . 122,365 122,649
------------ -----------
Inventories . . . . . . . . . . . . . . . . . . . . . 17,710 12,453
Other . . . . . . . . . . . . . . . . . . . . . . . . 5,655 5,193
------------ -----------
Total current assets. . . . . . . . . . . . . 191,103 180,495
------------ -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . 29,967 29,517
Leasehold Improvements . . . . . . . . . . . . . . 6,384 6,438
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . 36,351 35,955
Less accumulated depreciation. . . . . . . . . . . 20,467 19,696
------------ -----------
Net equipment and leasehold improvements. . . 15,884 16,259
------------ -----------
Net investment in leases, net of current portion. . . 2,292 2,935
Goodwill. . . . . . . . . . . . . . . . . . . . . . . 68,035 67,664
Intangible assets, net. . . . . . . . . . . . . . . . 457 436
Other assets. . . . . . . . . . . . . . . . . . . . . 1,757 1,410
------------ -----------
Total assets. . . . . . . . . . . . . . . . . $ 279,528 $ 269,199
============ ===========
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) July 5, January 5,
2004 2004
------------ -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . . $ 912 $ 912
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 55,383 50,051
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 3,080 3,988
Other current liabilities. . . . . . . . . . . . . . . . . . . 9,703 8,758
------------ -----------
Total current liabilities. . . . . . . . . . . . . . . . 69,078 63,709
------------ -----------
Notes payable, less current portion. . . . . . . . . . . . . . 250 913
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 4,834 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,
(13,017 and 12,943 shares issued at July 5, 2004 and
January 5, 2004, respectively) . . . . . . . . . . . . . 130 130
Paid-in-capital . . . . . . . . . . . . . . . . . . . . . . 83,252 82,696
Retained earnings . . . . . . . . . . . . . . . . . . . . . 130,612 125,250
------------ -----------
213,994 208,076
Less treasury stock, at cost ( 768 and 738 shares at
July 5, 2004 and January 5, 2004, respectively) . . . . . 8,628 8,279
------------ -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 205,366 199,797
Total liabilities and equity. . . . . . . . . . . . . $ 279,528 $ 269,199
============ ===========
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
--------------------------
July 5, July 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. $ 143,722 $ 116,195
Service. . . . . . . . . . . . . . . . 34,433 31,157
------------ ------------
Total net sales and revenues. . . . 178,155 147,352
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing. 133,444 107,291
Service. . . . . . . . . . . . . . . . 24,980 22,744
------------ ------------
Total cost of sales and service . . 158,424 130,035
------------ ------------
Gross profit . . . . . . . . . 19,731 17,317
------------ ------------
Operating expenses:
Selling, general and administrative. 12,785 11,958
Rent expense . . . . . . . . . . . . 777 809
Depreciation . . . . . . . . . . . . 1,027 1,250
Amortization . . . . . . . . . . . . 39 73
------------ ------------
Total operating expenses . . . 14,628 14,090
------------ ------------
Income from operations. . . . . . . . . 5,103 3,227
------------ ------------
Other expense (income):
Interest, net. . . . . . . . . . . . (19) (81)
Other. . . . . . . . . . . . . . . . 21 8
------------ ------------
Total other expense (income) . 2 (73)
------------ ------------
Income before income tax . . . . . . . 5,101 3,300
Income tax expense. . . . . . . . . . . 2,015 1,287
------------ ------------
Net income . . . . . . . . . . . . . $ 3,086 $ 2,013
============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . 12,258 12,346
============ ============
Diluted. . . . . . . . . . . . . . . 12,401 12,379
============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . $ 0.25 $ 0.16
============ ============
Diluted. . . . . . . . . . . . . . . $ 0.25 $ 0.16
============ ============
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Six Months Ended
--------------------------
July 5, July 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. $ 268,321 $ 216,181
Service. . . . . . . . . . . . . . . . 65,048 61,149
------------ ------------
Total net sales and revenues. . . . 333,369 277,330
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing. 248,017 199,361
Service. . . . . . . . . . . . . . . . 47,252 44,275
------------ ------------
Total cost of sales and service . . 295,269 243,636
------------ ------------
------------ ------------
Gross profit . . . . . . . . . 38,100 33,694
------------ ------------
Operating expenses:
Selling, general and administrative. 25,752 23,448
Rent expense . . . . . . . . . . . . 1,545 1,595
Depreciation . . . . . . . . . . . . 1,916 2,414
Amortization . . . . . . . . . . . . 79 296
Provision for doubtful accounts. . . - 200
------------ ------------
Total operating expenses . . . 29,292 27,953
------------ ------------
Income from operations. . . . . . . . . 8,808 5,741
------------ ------------
Other expense (income):
Interest . . . . . . . . . . . . . . (31) (15)
Miscellaneous. . . . . . . . . . . . 23 (14)
------------ ------------
Net other expense (income) . . (8) (29)
------------ ------------
Income before income tax . . . . . . . 8,816 5,770
Income tax expense. . . . . . . . . . . 3,454 2,250
------------ ------------
Net income . . . . . . . . . . . . . $ 5,362 $ 3,520
============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . 12,245 12,399
============ ============
Diluted. . . . . . . . . . . . . . . 12,362 12,422
============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . $ 0.44 $ 0.28
============ ============
Diluted. . . . . . . . . . . . . . . $ 0.43 $ 0.28
============ ============
See notes to consolidated financial statements
6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
--------------------------
July 5, July 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 5,362 $ 3,520
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 1,916 2,414
Amortization . . . . . . . . . . . . . . . . . . 79 296
Deferred income taxes. . . . . . . . . . . . . . (395) 1,617
Loss on sale of fixed assets . . . . . . . . . . 22 19
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable . . . . . . . . . . . . . 668 17,736
Inventories . . . . . . . . . . . . . . . . . (5,793) (339)
Prepaids. . . . . . . . . . . . . . . . . . . (462) 1,834
Net investment in leases. . . . . . . . . . . 254 (1,156)
Accounts payable. . . . . . . . . . . . . . . 5,332 6,205
Deferred revenue. . . . . . . . . . . . . . . (908) 376
Income tax payable. . . . . . . . . . . . . . 290 -
Other, net. . . . . . . . . . . . . . . . . . 847 23
------------ ------------
Net operating activities . . . . . . . . . . . . 7,212 32,545
------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . (1,062) (1,166)
Proceeds from sale of fixed assets . . . . . . . 20 1
Acquisition of businesses, net of
cash acquired . . . . . . . . . . . . . . . . (541) (3,499)
------------ ------------
Net investing activities . . . . . . . . . . . . (1,583) (4,664)
------------ ------------
Cash flows from financing activities:
Payments of notes payable. . . . . . . . . . . . (663) -
Proceeds from exercise of stock options
and related tax benefit . . . . . . . . . . . 396 34
Purchase of treasury stock . . . . . . . . . . . (349) (2,686)
Proceeds from employee stock purchase plan . . . 160 166
------------ ------------
Net financing activities . . . . . . . . . . . . (456) (2,486)
------------ ------------
Increase in cash. . . . . . . . . . . . . . . . . . 5,173 25,395
Cash and cash equivalents
Beginning of period. . . . . . . . . . . . . . . 40,200 32,505
------------ ------------
End of period. . . . . . . . . . . . . . . . . . $ 45,373 $ 57,900
============ ============
See notes to consolidated financial statements.
7
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by US GAAP for
complete financial statements. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended January 5, 2004. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the interim periods have been made.
The results of operations for the six month period ended July 5, 2004 are
not necessarily indicative of the results that may be expected for future
interim periods or for the year ending January 5, 2005.
2. Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses certain aspects of the accounting
by a vendor for arrangements under which the vendor will perform multiple
revenue generating activities. EITF No. 00-21 is effective for fiscal years
beginning after June 15, 2003. Adoption of EITF No. 00-21 did not have any
material impact on the Company's financial position or results of
operations.
In November 2002, the EITF reached a consensus on EITF 02-16, "Accounting
by a Customer (including a reseller) for Certain Consideration Received
from a Vendor." EITF 02-16 requires that cash payments, credits, or equity
instruments received as consideration by a customer from a vendor should be
presumed to be a reduction of cost of sales when recognized by the customer
in the income statement. In certain situations, the presumption could be
overcome and the consideration recognized either as revenue or a reduction
of a specific cost incurred. The consensus should be applied prospectively
to new or modified arrangements entered into after December 31, 2002.
The Company had been participating in a vendor program that expired in
November of 2003. Since this program was initiated prior to December 31,
2002, the Company has classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under new
agreements, the Company has classified these vendor program payments under
cost of sales in accordance with EITF 02-16.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin
51, Consolidated Financial Statements, for certain entities that do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties or in
which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 are required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected returns or
both. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise
8
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. Adoption of FIN 46 did not have any impact on the
Company's financial condition or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivatives instruments embedded in other
contracts, and for hedging activities under SFAS 133. The Company has
adopted the provisions of SFAS 149 and they had no material impact on our
financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
(SFAS 150). SFAS 150 clarifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
either debt or equity. The new Statement requires that those financial
instruments be classified as liabilities in statements of financial
position. The Company has adopted the provisions of SFAS 150 and they had
no material impact on our financial position or results of operations.
3. Cash and Bank Notes Payable
On June 28, 2004, the Company finalized a new $165 million Syndicated
Credit Facility Agreement with GE Commercial Distribution Finance
("GECDF"). The new credit facility has a three-year term and its components
include a maximum of $75 million for inventory financing and a revolver,
collateralized primarily by accounts receivable, of up to $110 million.
Under the new agreement, the credit facility provides a letter of credit
facility of $5 million.
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards the Company's
credit facility. As of July 5, 2004 and January 5, 2004, the Company did
not have a balance outstanding under the Company's credit facility.
4. Stock-Based Compensation
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", in
the fall of 1995. The statement encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock. The Company
adopted SFAS No. 123 for disclosure purposes and for non-employee stock
options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
9
(in thousands, except per Three Months Ended July 5,
share amounts) 2004 2003
------------- --------------
Net income - as reported $ 3,086 $ 2,013
Stock-based compensation expense-net of tax 261 253
------------- --------------
Net income - pro forma $ 2,825 $ 1,760
============= ==============
Net income per common share - as reported
Basic 0.25 $ 0.16
============= ==============
Diluted 0.25 $ 0.16
============= ==============
Net income per common share - pro forma
Basic $ 0.23 $ 0.14
============= ==============
Diluted $ 0.23 $ 0.14
============= ==============
(in thousands, except per Six Months Ended July 5,
share amounts) 2004 2003
----------- --------------
Net income - as reported $ 5,362 $ 3,520
Stock-based compensation expense-net of tax 800 805
----------- --------------
Net income - pro forma $ 4,562 $ 2,715
=========== ==============
Net income per common share - as reported
Basic 0.44 $ 0.28
=========== ==============
Diluted 0.43 $ 0.28
=========== ==============
Net income per common share - pro forma
Basic 0.37 $ 0.22
=========== ==============
Diluted 0.37 $ 0.22
=========== ==============
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations: (in thousands, except per share data)
10
Three Months Ended July 5,
---------------------------------------
2004 2003
------------------- ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
Basic EPS 12,258 $ 0.25 12,346 $ 0.16
Effect of dilutive
stock options 143 - 33 -
------ ----------- ------ ----------
Diluted EPS 12,401 $ 0.25 12,379 $ 0.16
====== =========== ====== ==========
Six Months Ended July 5,
---------------------------------------
2004 2003
------------------- ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
Basic EPS 12,245 $ 0.44 12,399 $ 0.28
Effect of dilutive
stock options 117 (0.01) 23 -
------ ----------- ------ ----------
Diluted EPS 12,362 $ 0.43 12,422 $ 0.28
====== =========== ====== ==========
6. Goodwill and Long-Lived 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 April 5, 2004 and January 5,
2004:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
7/5/2004 7/5/2004 7/5/2004 1/5/2004 1/5/2004 1/5/2004
----------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 1,894 $ 1,687 $ 207 $ 1,844 $ 1,650 $ 194
Customer lists 677 427 250 627 385 242
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,571 $ 2,114 $ 457 $ 2,471 $ 2,035 $ 436
========= ============= ========= ========= ============= =========
Amortized intangible assets are being amortized over periods ranging from 3
to 15 years for covenants not-to-compete and 10 to 15 years for customer
lists. The weighted average amortization period for all amortized
intangible assets acquired in fiscal 2004 is 15 years. For the quarters
ended July 5, 2004 and 2003, amortization expense related to intangible
assets with definite lives was $39 and $73 thousand, respectively. For the
six months ended July 5, 2004 and 2003, amortization expense related to
intangible assets with definite lives was $79 and $296 thousand,
respectively.
11
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal Years:
2004 $ 68 July 6, 2004 - January 5, 2005
2005 57
2006 26
2007 26
2008 26
2009 and thereafter 254
------
Total $ 457
======
The change in the net carrying amount of goodwill for the six months ended
July 5, 2004 by segment are as follows:
(in thousands) Products Services Consolidated
--------- --------- -------------
Net carrying amount as of 1/5/04 $ 35,862 $ 31,802 $ 67,664
Goodwill recorded during first quarter 130 116 246
--------- --------- -------------
Net carrying amount as of 4/5/04 35,992 31,918 67,910
Goodwill recorded during second quarter 66 59 125
--------- --------- -------------
Net carrying amount as of 7/5/04 $ 36,058 $ 31,977 $ 68,035
========= ========= =============
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows: (in thousands)
Six Months Ended July 5,
----------------------------
2004 2003
----------- ---------------
Interest paid $ 162 $ 211
=========== ===============
Income taxes paid $ 2,364 $ 684
=========== ===============
Adjustments to purchase price
of acquisition assets and intangibles $ 70 $ 1,624
=========== ===============
Business combinations accounted for
as purchases:
Assets acquired $ 541 $ 7,573
Liabilities assumed - (4,074)
----------------------------
Net cash paid $ 541 $ 3,499
============================
8. 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 financial
position or results of operations.
12
9. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended July 5, 2004
-----------------------------------------------
Products Services Leasing Consolidated
--------- --------- ---------- -------------
Revenues $ 143,703 $ 34,433 $ 19 $ 178,155
Income from operations 2,514 2,588 1 5,103
Total assets 175,926 96,586 7,016 279,528
Capital expenditures 423 388 - 811
Depreciation and amortization 546 519 1 1,066
Three Months Ended July 5, 2003
-----------------------------------------------
Products Services Leasing Consolidated
--------- --------- ---------- -------------
Revenues $ 116,150 $ 31,157 $ 45 $ 147,352
Income from operations 2,008 1,180 39 3,227
Total assets 168,966 87,677 6,416 263,059
Capital expenditures 195 183 - 378
Depreciation and amortization 671 652 1,323
Six Months Ended July 5, 2004
-----------------------------------------------
Products Services Leasing Consolidated
--------- --------- ---------- -------------
Revenues $ 268,289 $ 65,048 $ 32 $ 333,369
Income from operations 4,047 4,759 2 8,808
Total assets 175,926 96,586 7,016 279,528
Capital expenditures 560 502 - 1,062
Depreciation and amortization 1,051 942 2 1,995
Six Months Ended July 5, 2003
-----------------------------------------------
Products Services Leasing Consolidated
--------- --------- ---------- -------------
Revenues $ 216,030 $ 61,149 $ 151 $ 277,330
Income from operations 3,278 2,323 140 5,741
Total assets 168,966 87,677 6,416 263,059
Capital expenditures 577 589 - 1,166
Depreciation and amortization 1,427 1,283 - 2,710
10. Merger
On July 23, 2004, Pomeroy IT Solutions, Inc. ("Pomeroy") and Pomeroy
Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary of Pomeroy,
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
Pomeroy.
The cash consideration paid, 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.
13
Item 2-Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contain certain
forward looking statements regarding future financial results of the Company.
The words "expect," "estimate," "anticipate," "predict," and similar expressions
are intended to identify forward-looking statements. Such statements are
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 including, without
limitation, those statements made in conjunction with the forward-looking
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by such
factors.
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:
14
Percentage of net sales and revenues
Financial Results Three months ended July 5, Six months ended
- ------------------------------------- July 5, July 5,
------------- -------------- ----------- -----------
2004 2003 2004 2003
------------- -------------- ----------- -----------
Net sales and revenues:
Equipment, supplies and leasing 80.7% 78.9% 80.5% 78.0%
Service 19.3% 21.1% 19.5% 22.0%
------------- -------------- ----------- -----------
Total net sales and revenues 100.0% 100.0% 100.0% 100.0%
============= ============== =========== ===========
Cost of sales and servce:
Equipment, supplies and leasing 74.9% 72.8% 74.4% 71.9%
Service 14.0% 15.4% 14.2% 15.9%
------------- -------------- ----------- -----------
Total cost of sales and service 88.9% 88.2% 88.6% 87.8%
============= ============== =========== ===========
Gross profit:
Equipment, supplies and leasing 5.8% 6.1% 6.1% 6.1%
Service 5.3% 5.7% 5.3% 6.1%
------------- -------------- ----------- -----------
Total gross profit 11.1% 11.8% 11.4% 12.2%
============= ============== =========== ===========
Operating expenses:
Selling, general and administrative 7.2% 8.1% 7.7% 8.4%
Rent 0.4% 0.6% 0.5% 0.6%
Depreciation 0.6% 0.9% 0.6% 0.9%
Amortization 0.0% 0.0% 0.0% 0.1%
Provision for doubtful accounts 0.0% 0.0% 0.0% 0.1%
------------- -------------- ----------- -----------
Total operating expenses 8.2% 9.6% 8.8% 10.1%
============= ============== =========== ===========
Income from operations 2.9% 2.2% 2.6% 2.1%
Net other expense 0.0% 0.0% 0.0% 0.0%
Income before income tax 2.9% 2.2% 2.6% 2.1%
Income tax expense 1.2% 0.8% 1.0% 0.8%
------------- -------------- ----------- -----------
Net income 1.7% 1.4% 1.6% 1.3%
============= ============== =========== ===========
15
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues increased $30.8
million, or 20.9%, to $178.2 million in the second quarter of fiscal 2004 from
$147.4 million in the second quarter of fiscal 2003. This increase was primarily
a result of increased, industry-wide technology spending. Excluding
acquisitions completed in fiscal year 2003, total net sales and revenues
increased 18.2%. Products and leasing sales increased $27.5 million, or 23.7% to
$143.7 million in the second quarter of fiscal 2004 from $116.2 million in the
second quarter of fiscal 2003. Excluding acquisitions completed in fiscal year
2003, products and leasing sales in the second quarter of fiscal 2004 increased
21.6% over the products and leasing sales in the second quarter of fiscal 2003.
Service revenues increased $3.2 million, or 10.5%, to $34.4 million in the
second quarter of fiscal 2004 from $31.2 million in the second quarter of fiscal
year 2003. Excluding acquisitions completed in fiscal year 2003, service
revenues in the second quarter of fiscal 2004 increased 5.6% over service
revenues in the second quarter of fiscal 2003.
Total net sales and revenues increased $56.1 million, or 20.2%, to $333.4
million in the first six months of fiscal 2004 from $277.3 million in the first
six months of fiscal 2003. Excluding acquisitions completed in fiscal year
2003, total net sales and revenues increased 18.3%. Products and leasing sales
increased $52.1 million, or 24.1% to $268.3 million in the first six months of
fiscal 2004 from $216.2 million in the first six months of fiscal 2003.
Excluding acquisitions completed in fiscal year 2003, products and leasing sales
in the first six months of fiscal 2004 increased 22.5% over products and leasing
sales in the first six months of fiscal 2003. Service revenues increased $3.9
million, or 6.4%, to $65.0 million in the first six months of fiscal 2004 from
$61.1 million in the first six months of fiscal year 2003. Excluding
acquisitions completed in fiscal year 2003, service revenues in the first six
months of fiscal 2004 increased 3.6% over service revenues in the first six
months of fiscal 2003.
GROSS PROFIT. Gross profit increased $2.4 million, or 13.9%, to $19.7 million in
the second quarter of fiscal 2004 from $17.3 million in the second quarter of
fiscal 2003. The increase was primarily due to increased total net sales and
revenues offset somewhat by lower product gross profit margins in 2004. Gross
profit, as a percentage of revenue, decreased to 11.1% in the second quarter of
fiscal 2004 as compared to 11.8% in the second quarter of fiscal 2003. This
decrease in gross margin resulted primarily from the decrease in product
margins, decrease in service revenues as a percentage of total revenues and the
decrease in service gross margin as a percentage of total gross margin. As a
consequence of adopting EITF 02-16, the Company recorded approximately $208
thousand during the second quarter of fiscal 2004 of vendor considerations as a
reduction of product cost of sales, which previously would 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 margin
would have been 11.0% during the second quarter of fiscal 2004 compared to 11.8%
during the second quarter of fiscal 2003. The non-GAAP gross profit margin is
included in this discussion to provide meaningful comparison to prior periods.
On a forward looking basis, the Company expects to be aggressive in product and
service pricing in order to gain existing market share which may have a
continued unfavorable impact on overall gross margin. 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. 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.
Gross profit increased $4.4 million, or 13.1%, to $38.1 million in the first six
months of fiscal 2004 from $33.7 million in the first six months of fiscal 2003.
The increase was primarily due to increased total net sales and revenues offset
somewhat by lower product and service gross profit margins in 2004. Gross
profit, as a percentage of revenue, decreased to 11.4% in the first six months
of fiscal 2004 as compared to 12.2% in the first six months of fiscal 2003.
This decrease in gross margin resulted primarily from the decrease in product
and service gross profit margins, decrease in service revenues as a percentage
of total revenues and decrease in service gross margin as a percentage of total
gross margin. As a consequence of adopting EITF 02-16, the Company recorded
approximately $473 thousand during the first six months of fiscal 2004 of vendor
considerations as a reduction of product cost of sales, which previously would
have been recorded as a
16
reduction of selling, general and administrative expenses. Excluding the impact
of EITF 02-16, and therefore on a non-GAAP basis, the gross profit margin would
have been 11.3% during the first six months of fiscal 2004 compared to 12.2%
during the first six months of fiscal 2003. The non-GAAP gross profit margin is
included in this discussion to provide meaningful comparison to prior periods.
On a forward looking basis, the Company expects to be aggressive in product and
service pricing in order to gain existing market share which may have a
continued unfavorable impact on overall gross margin.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues decreased to 7.6% in the second quarter of fiscal
2004 from 8.7% in the second quarter of fiscal 2003. Total operating expenses
expressed as a percentage of total net sales and revenues decreased to 8.2% in
the second quarter of fiscal 2004 from 9.6% in the second quarter of fiscal
2003. This decrease is primarily the result of higher net sales and revenues in
the second quarter of fiscal 2004 as compared to the second quarter of fiscal
2003. As a result of adopting EITF 02-16, the Company reclassified
approximately $208 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 8.1% during
the second quarter of fiscal 2004 as compared to 9.6% during the second quarter
of fiscal 2003. This non-GAAP measurement is included to provide a more
meaningful comparison to prior periods.
Selling, general and administrative expenses (including rent expense and
provision for doubtful accounts) expressed as a percentage of total net sales
and revenues decreased to 8.2% in the first six months of fiscal 2004 from 9.1%
in the first six months of fiscal 2003. Total operating expenses expressed as a
percentage of total net sales and revenues decreased to 8.8% in the first six
months of fiscal 2004 from 10.1% in the first six months of fiscal 2003. This
decrease is primarily the result of higher net sales and revenues in the first
six months of fiscal 2004 as compared to the first six months of fiscal 2003.
As a result of adopting EITF 02-16, the Company reclassified approximately $473
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 8.6% during the first six
months of fiscal 2004 as compared to 10.1% during the first six months of fiscal
2003. This non-GAAP measurement is included to provide a more meaningful
comparison to prior periods.
INCOME FROM OPERATIONS. Income from operations increased $1.9 million, or
58.1%, to $5.1 million in the second quarter of fiscal 2004 from $3.2 million in
the second quarter of fiscal 2003. The Company's operating margin increased to
2.9% in the second quarter of fiscal 2004 as compared to 2.2% in the second
quarter of fiscal 2003. This increase is primarily due to higher net sales and
revenues and decreased operating expenses as a percentage of total net sales and
revenues.
Income from operations increased $3.1 million, or 53.4%, to $8.8 million in the
first six months of fiscal 2004 from $5.7 million in the first six months of
fiscal 2003. The Company's operating margin increased to 2.6% in the first six
months of fiscal 2004 as compared to 2.1% in the first six months of fiscal
2003. This increase is primarily due to higher net sales and revenues and
decreased operating expenses as a percentage of total net sales and revenues.
NET INTEREST INCOME. Net interest income was $19 thousand during the second
quarter of fiscal 2004 as compared to $81 thousand during the second quarter of
fiscal 2003. This was a result of reduced cash available to invest.
Interest income was $31 thousand in the first six months of fiscal 2004 compared
to $15 thousand in the first six months of fiscal 2003. This increase in
interest income was a result of improved net cash flow and interest income
earned on cash balances.
INCOME TAXES. The Company's effective tax rate was 39.5% in the second quarter
of fiscal 2004 compared to 39.0% in the second quarter of fiscal 2003.
17
The Company's effective tax rate was 39.2% in the first six months of fiscal
2004 compared to 39.0% in the first six months of fiscal 2003.
NET INCOME. Net income increased $1.1 million, or 53.3%, to $3.1 million in the
second quarter of fiscal 2004 from $2.0 million in the second quarter of fiscal
2003 due to the factors described above.
Net income increased $1.9 million, or 52.3%, to $5.4 million in the first six
months of fiscal 2004 from $3.5 million in the first six months of fiscal 2003
due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $7.2 million in the first six months
of fiscal 2004. Cash used in investing activities was $1.6 million, which
included payments of $0.5 million for prior year acquisitions and $1.1 million
for capital expenditures. Cash used in financing activities was $0.5 million,
which included $0.7 million for payments of notes payable and $0.3 million for
the purchase of treasury stock offset by $0.4 million of proceeds from exercise
of stock options and $0.2 million of proceeds from employee stock plan
purchases.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At July 5, 2004, these lines of credit totaled
$87.0 million, including $75.0 million with GE Commercial Distribution Finance
("GECDF") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on either thirty-day
or sixty-day notes. All such borrowings are secured by the related inventory.
Financing on substantially all of the arrangements is interest free due to
subsidies by manufacturers. Overall, the average rate on these arrangements is
less than 1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with GECDF. On June 28, 2004, the Company finalized a new $165
million syndicated credit facility with GECDF. This new $165 million syndicated
credit facility has a three-year term and supersedes the $240.0 million credit
facility that was in effect with GECDF prior to the closing of this transaction.
The new credit facility components include a maximum of $75 million for
inventory financing and a revolver, collateralized primarily by accounts
receivable, of up to $110 million. Under the new agreement, the credit facility
provides a letter of credit facility of $5 million. The accounts receivable
portion of the credit facility carries a variable interest rate based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid.
At July 5, 2004, the Company did not have a balance outstanding under the
working capital component of this facility. The credit facility is
collateralized by substantially all of the assets of the Company, except those
assets that collateralize certain other financing arrangements. Under the terms
of the credit facility, the Company is subject to various financial covenants.
Currently, the Company is in compliance with all financial covenants.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. The merger of Alternative Resources Corporation with and
into Pomeroy Acquisition Sub, Inc., a wholly owned subsidiary of the Company,
completed on July 23, 2004 was financed using cash on hand and borrowings from
Pomeroy's existing line of credit. The Company anticipates that future
acquisitions will be financed in a similar manner.
Aggregated information about the Company's contractual obligations and other off
balance sheet commitments as of July 5, 2004 are presented in the following
table:
18
MORE THAN
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
---------------------------------------------------------------
Acquisition notes $ 1,162 $ 912 $ 250 $ - $ - $ - $ -
Operating leases 13,136 3,869 2,901 1,883 1,646 1,383 1,454
---------------------------------------------------------------
Total contractual cash obligations $14,298 $ 4,781 $ 3,151 $ 1,883 $ 1,646 $ 1,383 $ 1,454
===============================================================
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business.
Item 3-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 for the second
quarter of fiscal 2004.
Currently, the Company does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.
Item 4-Controls and Procedures
As of July 5, 2004, an evaluation was carried out under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are, to the best
of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
July 5, 2004, our Chief Executive Officer and Chief Financial Officer have
concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect our internal
controls.
19
PART II - OTHER INFORMATION
Item 1-Legal Proceedings
There are various legal actions arising in the normal course of business that
have been brought against the Company. Management believes these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
Item 2-Changes in Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(c) Total number (d) Maximum
of shares number of shares
(a) Total number (b) Average purchased as that may yet be
of shares price paid part of publicly purchased under
Period purchased per share announced plan the plan
4/6/04 - 5/5/04 -
5/6/04 - 6/5/04 -
6/6/04 - 7/5/04 30,000 $ 11.64 413,367 586,633
------------------------------------------------------------------
Total 30,000 $ 11.64 413,367 586,633
==================================================================
Item 3-Defaults Upon Senior Securities
NONE
Item 4-Submission of Matters to a Vote of Security Holders
On June 10, 2004, the Company held its annual meeting of stockholders for the
following purposes:
1. To elect nine directors; and
2. To approve the amendment to the Company's 1998 Employee Stock
Purchase Plan; and
3. To approve the amendments to the Company's 2002 Outside
Director's Stock option Plan; and
4. To approve the Company's 2002 Amended and Restated Stock
Incentive Plan.
The voting on the above matters by the stockholders was as follows:
Matter
------
Election of Directors: For Withheld
---------------------- ---------- ---------
David B. Pomeroy, II 6,937,918 4,941,894
James H. Smith III 6,867,790 5,012,022
Michael E. Rohrkemper 6,908,252 4,971,560
Stephen E. Pomeroy 6,924,375 4,955,437
William H. Lomicka 10,529,259 1,350,553
Vincent D. Rinaldi 6,988,240 4,891,572
Debra E. Tibey 10,217,221 1,662,591
Edward E. Faber 10,268,514 1,611,298
Kenneth R. Waters 10,581,026 1,298,786
20
Approve the Amendment to the Company's 1998 Employee Stock Purchase
----------------------------------------------------------------------
Plan
----
10,178,853 shares were voted in favor of the forgoing proposal and 295,019
shares were voted against the forgoing proposal. Stockholders holding
49,785 shares abstained from voting in this proposal. The number of shares
voted in favor of the proposal was sufficient for its passage.
Approve the Amendment to the Company's 2002 Outside Director's Stock
----------------------------------------------------------------------
Option Plan
------------
8,377,604 shares were voted in favor of the forgoing proposal and 2,095,098
shares were voted against the forgoing proposal. Stockholders holding
50,955 shares abstained from voting in this proposal. The number of shares
voted in favor of the proposal was sufficient for its passage.
Approve the Company's 2002 Amended and Restated Stock Incentive Plan
----------------------------------------------------------------------
6,380,860 shares were voted in favor of the forgoing proposal and 4,091,537
shares were voted against the forgoing proposal. Stockholders holding
51,260 shares abstained from voting in this proposal. The number of shares
voted in favor of the proposal was sufficient for its passage.
Item 5-Other Information
NONE
Item 6-Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On May 11, 2004, Pomeroy IT Solutions, Inc. announced that Pomeroy
Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary of Pomeroy
and Alternative Resources Corporation ("ARC") entered into an
Agreement and Plan of Merger pursuant to which PAS will be merged with
and into ARC.
On July 23, 2004, Pomeroy IT Solutions, Inc. ("Pomeroy") announced
that Pomeroy and PAS completed the merger with Alternative Resources
Corporation ("ARC"). On May 11, 2004, the parties entered into a
definitive merger agreement for PAS to acquire ARC. The merger was
approved by ARC shareholders at a meeting held on July 22, 2004.
(b) Exhibits
10 (I) Material Agreements
(mm)(1) The Credit Facilities Agreement dated June 28, 2004 by,
between, and among Pomeroy IT Solutions, Inc. (formerly
known as, Pomeroy Computer Resources, Inc.), Pomeroy
Select Integration Solutions, Inc., Pomeroy Select
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".
21
31.1 Section 302 CEO Certification
31.2 Section 302 CFO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO Certification
SIGNATURE
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 thereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
--------------------------
(Registrant)
Date: August 16, 2004 By: /s/ Michael E. Rohrkemper
----------------------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
22