UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 23, 2004
POMEROY IT SOLUTIONS, 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 and Zip Code)
Registrant's telephone number, including area code (859) 586-0600
--------------
Check the appropriate box below if the Form 8-K/A filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On July 23, 2004, Pomeroy IT Solutions, Inc. ("Pomeroy" or the "Company") and
Pomeroy Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary of Pomeroy,
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.
The Company filed a Current Report on Form 8-K on August 9, 2004 to provide the
information called for by Item 2 regarding the acquisition. The Company is
filing this Amendment No. 1 on Form 8-K/A to Form 8-K to include the financial
statements and pro forma financial information required by Item 9.01 of Form
8-K.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Financial Statements of ARC as follows:
(i) Unaudited consolidated balance sheet as of June 30, 2004.
(ii) Unaudited consolidated statements of operations for the six months ended
June 30, 2004 and June 30, 2003.
(iii) Unaudited consolidated statements of comprehensive loss for the six months
ended June 30, 2004 and June 30, 2003.
(iv) Unaudited consolidated statements of cash flows for the six months ended
June 30, 2004 and June 30, 2003.
(v) Notes to Consolidated Financial Statements (Unaudited)
(vi) Audited consolidated balance sheets as of December 31, 2003 and December
31, 2002.
(vii) Audited consolidated statements of operations for the years ended December
31, 2003, December 31, 2002 and December 31, 2001.
(viii) Audited consolidated statements of comprehensive loss for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001.
(ix) Audited Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 2003, December 31, 2002 and December 31, 2001.
(x) Audited consolidated statements of cash flows for the years ended December
31, 2003, December 31, 2002 and December 31, 2001.
(xi) Notes to Consolidated Financial Statements
(xii) Report of Independent Registered Public Accounting Firm.
(b) Pro Forma Financial Information
(i) Unaudited pro forma condensed consolidated balance sheet as of July 5,
2004, and unaudited pro forma condensed consolidated statements of earnings for
the six months ended July 5, 2004 and for the year ended January 5, 2004, giving
pro forma effect to the purchase of ARC as if the acquisition had occurred on
July 5, 2004 related to the unaudited pro forma condensed consolidated balance
sheet, January 6, 2004 for the six month unaudited pro forma condensed
consolidated statement of income and January 6, 2003 for the year ended
unaudited pro forma condensed consolidated statement of income.
(ii) Notes to unaudited pro forma condensed consolidated balance sheet as of
July 5, 2004 and the unaudited pro forma condensed consolidated statements of
income for the six months ended July 5, 2004 and for the year ended January 5,
2004.
(c) Exhibits
None.
Item 9.01 (a)(i)
UNAUDITED CONSOLIDATED BALANCE SHEET
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands)
June 30,
2004
----------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . $ 15
Trade accounts receivable, net of allowance. 20,212
Other. . . . . . . . . . . . . . . . . . . . 1,637
----------
Total current assets . . . . . . . . . . 21,864
Net property and equipment . . . . . . . . . 5,948
Other assets . . . . . . . . . . . . . . . . 183
Goodwill, net. . . . . . . . . . . . . . . . 2,723
----------
Total assets . . . . . . . . . . . . . . $ 30,718
==========
LIABILITIES AND EQUITY
Current Liabilities:
Short-term debt. . . . . . . . . . . . . . . $ 13,709
Accounts payable . . . . . . . . . . . . . . 9,915
Cash overdraft . . . . . . . . . . . . . . . 3,403
Payroll and related expenses . . . . . . . . 4,089
Accrued expenses.. . . . . . . . . . . . . . 3,499
Other current liabilities. . . . . . . . . . 533
----------
Total current liabilities. . . . . . . . 35,148
Long-term debt . . . . . . . . . . . . . . . 15,999
Other liabilities. . . . . . . . . . . . . . 442
Total equity (deficit). . . . . . . . . . . (20,871)
----------
Total liabilities and equity . . . . . . $ 30,718
==========
Item 9.01 (a)(ii)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands, except per share data)
For the six months ended
June 30, June 30,
2004 2003
------------- --------------
Revenue $ 57,844 $ 70,732
Cost of services 44,842 53,955
------------- --------------
Gross profit 13,002 16,777
------------- --------------
Selling, general and administrative expenses 15,188 17,671
Restructuring and other charges 283 1,853
------------- --------------
Operating expenses 15,471 19,524
------------- --------------
Loss from operations (2,469) (2,747)
Other expense, net 2,011 2,160
------------- --------------
Loss before income tax (4,480) (4,907)
Income tax expense 4 1
------------- --------------
Net loss $ (4,484) $ (4,908)
============= ==============
Weighted average shares outstanding:
Basic 17,117 17,117
============= ==============
Diluted 17,117 17,117
============= ==============
Loss per common share:
Basic $ (0.26) $ (0.29)
============= ==============
Diluted $ (0.26) $ (0.29)
============= ==============
Item 9.01 (a)(iii)
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
OF ALTERNATIVE RESOURCES CORPORATION
For the six months ended
June 30, June 30,
2004 2003
------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (4,484) $ (4,908)
Foreign currency translation adjustment, net of tax. (2) 86
------------- --------------
Comprehensive loss . . . . . . . . . . . . . . . . . . $ (4,484) $ (4,822)
============= ==============
Item 9.01 (a)(iv)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands)
For the six months ended
June 30, June 30,
2004 2003
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,484) $ (4,908)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 1,706 1,853
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . 98 290
Non-cash interest expense on deferred financing costs. . . . . . . . . 250 293
Non-cash interest expense from security purchase agreement . . . . . . 1,274 -
Non-cash interest expense from accretion of warrants . . . . . . . . . - 241
Change in assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . 494 9,580
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . (76) 173
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . - (584)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) 87
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (1,308) (769)
Payroll and related expenses . . . . . . . . . . . . . . . . . . . (571) (393)
Accrued expenses and other liabilities . . . . . . . . . . . . . . (495) (757)
------------- --------------
NET OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . (2,982) 5,106
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . (130) (139)
------------- --------------
NET INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . (130) (139)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt. . . . . . . . . . . . . . . . . . . . . 89,896 -
Payments on short-term debt. . . . . . . . . . . . . . . . . . . . . . (87,976) -
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . - 106,935
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . - (111,806)
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,190 -
------------- --------------
NET FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,110 (4,871)
------------- --------------
Effect of exchange rate changes on cash and cash equivalents . . . . . . (2) (86)
------------- --------------
Net increase (decrease) in cash and cash equilvalents. . . . . . . . . . (4) 10
Cash and cash equivalents at the beginning of the period . . . . . . . . 19 54
------------- --------------
Cash and cash equivalents at the end of the period . . . . . . . . . . . $ 15 $ 64
============= ==============
Item 9.01 (a)(v)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The interim consolidated financial statements presented are unaudited, but in
the opinion of management, have been prepared in conformity with accounting
principles generally accepted in the United States of America applied on a basis
consistent with those of the annual financial statements. Such interim
consolidated financial statements reflect all adjustments (consisting
principally of normal recurring accruals) necessary for a fair presentation of
the financial position and the results of operations for the interim periods
presented. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for any other interim
period or for the year ending December 31, 2004. The interim consolidated
financial statements should be read in connection with the audited consolidated
financial statements for the year ended December 31, 2003, included in the 2003
Form 10-K of Alternative Resources Corporation.
Certain prior year balances have been reclassified in order to conform to the
current year presentation.
Item 9.01 (a)(vi)
The following consolidated financial statements should be read in conjunction
with the historical consolidated financial statements and accompanying notes
contained in the ARC Annual Report on Form 10-K for its fiscal year ended
December 31, 2003.
AUDITED CONSOLIDATED BALANCE SHEETS
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands)
Year Ended
------------------------------
December 31, December 31,
2003 2002
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . $ 19 $ 54
Trade accounts receivable, net of allowance. . . 21,423 34,497
Other. . . . . . . . . . . . . . . . . . . . . . 1,335 2,059
-------------- --------------
Total current assets . . . . . . . . . . . . 22,777 36,610
Net property and equipment . . . . . . . . . . . 7,533 10,998
Other assets . . . . . . . . . . . . . . . . . . 780 2,399
Goodwill, net. . . . . . . . . . . . . . . . . . 2,723 2,723
-------------- --------------
Total assets . . . . . . . . . . . . . . . . $ 33,813 $ 52,730
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term debt. . . . . . . . . . . . . . . . . $ 11,789 $ 18,501
Accounts payable . . . . . . . . . . . . . . . . 11,223 12,236
Payroll and related expenses . . . . . . . . .. 4,660 5,920
Other current liabilities. . . . . . . . . . . . 7,363 10,464
-------------- --------------
Total liabilities. . . . . . . . . . . . . . 35,035 47,121
Long-term debt . . . . . . . . . . . . . . . . . 14,725 8,606
Other liabilities. . . . . . . . . . . . . . . . 438 384
-------------- --------------
Total current liabilities. . . . . . . . . . 50,198 56,111
-------------- --------------
Stockholders' Equity (Deficit):
Preferred stock($.01 par value, 1,000,000
shares authorized; none issued and outstanding. - -
Common stock ($.01 par value 50,000,000 shares
authorized; 17,703,104 and 17,702,819
issued and 17,117,304 and 17,117,019 outstanding
at December 31, 2003 and 2002, respectively) . . 178 178
Additional paid-in capital. . . . . . . . . . . 30,764 30,695
Accumulated other comprehensive income (loss). . (56) (64)
Accumulated deficit. . . . . . . . . . . . . . . (42,474) (29,393)
--------------- --------------
(11,588) 1,416
Treasury shares, at cost (585,800 shares in
2003 and 2002, respectively). . . . . . . . . . (4,797) (4,797)
--------------- --------------
Total stockholders' deficit. . . . . . . . . (16,385) (3,381)
--------------- --------------
Total liabilities and stockholders' deficit. $ 33,813 $ 52,730
=============== ==============
Item 9.01 (a)(vii)
AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR ALTERNATIVE RESOURCES CORPORATION
(in thousands, except per share data) Year Ended
----------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
-------------- -------------- --------------
Revenue. . . . . . . . . . . . . . . . . . . . $ 138,146 $ 158,693 $ 209,036
Cost of services . . . . . . . . . . . . . . . 105,449 115,955 149,127
-------------- -------------- --------------
Gross profit . . . . . . . . . . . . . . . 32,697 42,738 59,909
-------------- -------------- --------------
Selling, general and administrative expenses . 37,438 45,235 59,386
Restructuring and other charges. . . . . . . . 4,809 6,055 0
-------------- -------------- --------------
Operating expenses . . . . . . . . . . . . . . 42,247 51,290 59,386
-------------- -------------- --------------
Loss from operations . . . . . . . . . . . . . (9,550) (8,552) 523
Other expense, net . . . . . . . . . . . . . . 4,345 3,677 3,597
-------------- -------------- --------------
Loss before income tax benefit . . . . . . . . (13,895) (12,229) (3,074)
Income tax benefit . . . . . . . . . . . . . . (814) (1,094) 0
-------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . . . . $ (13,081) $ (11,135) $ (3,074)
============== ============== ==============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 17,117 17,095 16,779
============== ============== ==============
Diluted. . . . . . . . . . . . . . . . . . . 17,117 17,095 16,779
============== ============== ==============
Loss per common share:
Basic. . . . . . . . . . . . . . . . . . . . $ (0.76) $ (0.65) $ (0.18)
============== ============== ==============
Diluted. . . . . . . . . . . . . . . . . . . $ (0.76) $ (0.65) $ (0.18)
============== ============== ==============
Item 9.01 (a)(viii)
AUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands) Year Ended
December 31, December 31, December 31,
2003 2002 2001
-------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,081) $ (11,135) $ (3,074)
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax. . . . . . . . 8 (20) 5
Unrealized holding gain on security, net of tax:
Reclassification adjustment for gain included in loss, net of tax. - - (221)
-------------- -------------- --------------
Other comprehensive income (loss . . . . . . . . . . . . . . . . . . . 8 (20) (216)
-------------- -------------- --------------
Comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13,073) $ (11,155) $ (3,290)
============== ============== ==============
Item 9.01 (a)(ix)
AUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands)
PREFERRED STOCK COMMON STOCK TREASURY STOCK
--------------- ----------------- -----------------
ADDITIONAL
PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------- ------- -------- ------- -------- ------------
BALANCE AT DECEMBER 31, 2000. . . . . . . . . . - $ - 17,391 $ 174 (586) $(4,797) $ 27,425
Amortization of restricted stock deferred
compensation. . . . . . . . . . . . . . . . . - - - - - - -
Cancellation of restricted common stock . . . . - - (130) (1) - - (13)
Issuance of common stock to employee stock
purchase plan . . . . . . . . . . . . . . . . - - 296 3 - - 146
Payments to employee stock purchase plan. . . . - - - - - - (50)
Translation adjustment, net of tax. . . . . . . - - - - - - -
Realized gain on available-for-sale securities,
net of tax. . . . . . . . . . . . . . . . . . - - - - - - -
Net loss. . . . . . . . . . . . . . . . . . . . - - - - - - -
------ ------- ------- -------- ------- -------- ------------
BALANCE AT DECEMBER 31, 2001. . . . . . . . . . - - 17,557 176 (586) (4,797) 27,508
Amortization of restricted stock deferred
compensation. . . . . . . . . . . . . . . . . - - - - - - -
Cancellation of restricted common stock . . . . - - - - - - (31)
Issuance of common stock to employee stock
purchase plan . . . . . . . . . . . . . . . . - - 146 2 - - 83
Value assigned to warrants issued . . . . . . . - - - - - - 3,135
Dividends paid, stockholder rights plan . . . . - - - - - - -
Translation adjustment, net of tax. . . . . . . - - - - - - -
Net loss. . . . . . . . . . . . . . . . . . . . - - - - - - -
------ ------- ------- -------- ------- -------- ------------
BALANCE AT DECEMBER 31, 2002. . . . . . . . . . - - 17,703 178 (586) (4,797) 30,695
Value assigned to warrants issued . . . . . . . - - - - - - 69
Translation adjustment, net of tax. . . . . . . - - - - - - -
Net loss. . . . . . . . . . . . . . . . . . . . - - - - - - -
------ ------- ------- -------- ------- -------- ------------
BALANCE AT DECEMBER 31, 2003. . . . . . . . . . - $ - 17,703 $ 178 (586) $(4,797) $ 30,764
====== ======= ======= ======== ======= ======== ============
ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED
RETAINED GAIN
EARNINGS (LOSS) ON CUMULATIVE
DEFERRED (ACCUMULATED AVAILABLE- TRANSLATION
COMPENSATION DEFICIT) FOR-SALE SECURITIES ADJUSTMENT TOTAL
-------------- -------------- --------------------- ------------- ---------
BALANCE AT DECEMBER 31, 2000. . . . . . . . . . $ (318) $ (15,013) $ 221 $ (49) $ 7,643
Amortization of restricted stock deferred
compensation. . . . . . . . . . . . . . . . . 221 - - - 221
Cancellation of restricted common stock . . . . - - - - (14)
Issuance of common stock to employee stock
purchase plan . . . . . . . . . . . . . . . . - - - - 149
Payments to employee stock purchase plan. . . . - - - - (50)
Translation adjustment, net of tax. . . . . . . - - - 5 5
Realized gain on available-for-sale securities,
net of tax. . . . . . . . . . . . . . . . . . - - (221) - (221)
Net loss. . . . . . . . . . . . . . . . . . . . - (3,074) - - (3,074)
-------------- -------------- --------------------- ------------- ---------
BALANCE AT DECEMBER 31, 2001. . . . . . . . . . (97) (18,087) - (44) 4,659
Amortization of restricted stock deferred
compensation. . . . . . . . . . . . . . . . . 97 - - - 97
Cancellation of restricted common stock . . . . - - - - (31)
Issuance of common stock to employee stock
purchase plan . . . . . . . . . . . . . . . . - - - - 85
Value assigned to warrants issued . . . . . . . - - - - 3,135
Dividends paid, stockholder rights plan . . . . - (171) - - (171)
Translation adjustment, net of tax. . . . . . . - - - (20) (20)
Net loss. . . . . . . . . . . . . . . . . . . . - (11,135) - - (11,135)
-------------- -------------- --------------------- ------------- ---------
BALANCE AT DECEMBER 31, 2002. . . . . . . . . . - (29,393) - (64) (3,381)
Value assigned to warrants issued . . . . . . . - - - - 69
Translation adjustment, net of tax. . . . . . . - - - 8 8
Net loss. . . . . . . . . . . . . . . . . . . . - (13,081) - - (13,081)
-------------- -------------- --------------------- ------------- ---------
BALANCE AT DECEMBER 31, 2003. . . . . . . . . . $ - $ (42,474) $ - $ (56) $(16,385)
============== ============== ===================== ============= =========
Item 9.01 (a)(x)
AUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
OF ALTERNATIVE RESOURCES CORPORATION
(in thousands) Year Ended
----------------------------------------------
December 31, December 31, December 31,
2003 2002 2001
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash from operating activities. . . . $ (13,081) $ 11,135) $ (3,074)
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . 3,605 4,143 5,423
Realized net gain on sales of securities . . . . . . . . . . . . . . . . . . - - (221)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (218)
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . 125 1,257 324
Deferred compensation on restricted shares . . . . . . . . . . . . . . . . . - 97 221
Non-cash interest expense from deferred financing costs. . . . . . . . . . . 551 509 -
Non-cash interest expense from accretion of warrants . . . . . . . . . . . . 293 409 -
Non-cash interest expense from security purchase agreement . . . . . . . . . 2,354 1,330 -
Non-cash expense of debt modification charge and origination fee write-off. 4,463 - -
Impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . - 24 19
Change in assets and liabilities:
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . 12,949 735 20,311
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 304 (766)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1,403 5,562
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 56 61
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 (1,269) (520)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,013) (647) (1,170)
Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . (1,260) (1,941) (3,066)
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . (2,058) 4,938 (3,494)
----------------------------------------------
NET OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,797 213 19,392
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . (140) (572) (1,843)
Proceeds from sale iof investment. . . . . . . . . . . . . . . . . . . . . . - - 639
----------------------------------------------
NET INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . (140) (572) (1,204)
----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt. . . . . . . . . . . . . . . . . . . . . . . . 209,836 230,325 306,162
Payments on short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . (216,548) (238,701) (323,251)
Proceeds from issuance of debt and warrants. . . . . . . . . . . . . . . . . - 10,000 -
Cash paid for cancellation of stockholder rights plan. . . . . . . . . . . . - (171) -
Payments to the employee stock purchase plan . . . . . . . . . . . . . . . . - - (50)
Proceeds from issuance of shares to the employee stock purchase. . . . . . . - 55 146
plan
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (989) (1,202) (1,108)
----------------------------------------------
NET FINANCING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,701) 306 (18,101)
----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . 9 (20) (74)
Net increase (decrease) in cash and cash equilvalents. . . . . . . . . . . . . (35) (73) 13
Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . 54 127 114
----------------------------------------------
Cash and cash equivalents at the end of the year . . . . . . . . . . . . . . . $ 19 $ 54 $ 127
==============================================
Item 9.01 (a)(xi)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Alternative Resources Corporation ("ARC" or the "Company") was incorporated
in Delaware on March 8, 1988 and is a leading provider of information technology
services. The Company has developed a significant, high quality business in the
IT staffing industry with an emphasis on Help Desk, Desktop Support, Technology
Deployment Service, and Field Service offerings. The Company also has a
consulting practice that supports those service offerings. The Company operates
through 8 field offices with over 55 personnel in field sales, supported by 35
recruiters. The majority of the Company's sales and recruiting personnel operate
from home, creating a virtual network. The Company serves Fortune 1000 and
mid-sized clients throughout the United States and Canada.
Principles of Consolidation
The operations of the Company are conducted through a parent holding
company, three operating subsidiaries and three affiliates. The accompanying
financial statements include the consolidated financial position and results of
operations of the Company and its subsidiaries with all intercompany
transactions eliminated.
Segment Information
Management has considered the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information," and has determined that the Company has one
operating segment. ARC provides its services through two primary service lines
called ARC Staffing Services and ARC Solutions Services. These service lines do
not meet the definition of a "segment" within the meaning of SFAS No. 131, as
discrete financial information is unavailable. To date, discrete information by
service line has not been considered relevant by management for purposes of
making decisions about allocations of resources, as both service lines share the
same pool of technical resources and client base, as well as the same
distribution model.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash equivalents include all deposits in banks and highly liquid
investments with original maturities of three months or less.
Goodwill
Through December 31, 2001, goodwill representing the excess of purchase
price over fair market value of net assets acquired, was amortized on a
straight-line basis over 40 years. Adjustments to the carrying value of goodwill
were made when the sum of expected future discounted cash flows from the
business acquired was less than book value.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company ceased amortization of goodwill effective January 1, 2002. Goodwill
is now reviewed for impairment on an annual basis, or more frequently if events
or circumstances indicate that the carrying value may not be recoverable. The
review is a two-step process beginning with an estimation of the fair value of
the reporting unit. The first step is a screen for impairment and the second
step measures the amount of any impairment. The fair value amounts are
determined by discounting future cash flows of the reporting unit as developed
by management. The Company performed its annual impairment test on December 31,
2003, the results of which did not indicate an impairment.
The following table illustrates the pro-forma impact of the goodwill
amortization on the Company's 2001 net loss:
2001
(in thousands)
$ (3,074)
Reported net loss
Add: goodwill amortized (net of tax) 76
---------------
Adjusted net loss $ (2,998)
===============
Reported loss per share $ (0.18)
Impact on loss per share -
---------------
Adjusted loss per share $ (0.18)
===============
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets
ranging from two to seven years. Software includes development costs for
internal IT projects currently in progress and will be amortized upon completion
over two to seven years. Leasehold improvements are amortized using the
straight-line method over the life of the related leases, generally three to
five years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment in accordance with the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash flows
expected to be generated by the asset. If the carrying amount of the assets is
less then the sum of the future undiscounted cash flows such assets are
considered to be impaired. The impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the discounted cash
flows of the assets. The discount rate used is the Company's expected rate of
return. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Deferred Financing Costs
Included in other assets are deferred financing costs associated with the
Company's debt. These financing costs are being amortized using a straight-line
method over the lives of the respective agreements.
Translation of Foreign Currencies
Assets and liabilities of the Company's Canadian operations are translated
at the rate of exchange in effect on the balance sheet date; income and expenses
are translated at the weighted average rates of exchange prevailing during the
year. The related translation adjustments are reflected as a foreign currency
translation adjustment in stockholders' equity. Foreign currency transaction
gains and losses for the years presented were not material.
Revenue Recognition
Revenues are recognized as services are performed, utilizing four different
billing methodologies, as follows: (1) time and material billing, whereby the
client is billed by the hour on a weekly basis for past services performed; (2)
project-based billing, for which fees are fixed and are based on specific
contracts; (3) per-incident billing, whereby the Company charges a fee for each
specific task related to certain services; (4) and fee-based billing, which is
used for candidate placement/recruiting fees and vendor management fees. The
Company typically provides discounts on staffing services to its largest clients
in exchange for the opportunity to sell more volume, as well as the opportunity
to sell its higher-margin, value-added services. All revenues are recognized net
of such discounts and after services have been completed.
In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in Financial
Statements," which updated Topic 13, "Revenue Recognition," to be consistent
with other authoritative literature. The Company adopted SAB 104 in the fourth
quarter of 2003. The implementation of SAB 104 did not have a material effect on
the financial position or results of operations of the Company.
In December 2001, the FASB staff issued Topic No. D-103, "Income Statement
Characterization of Reimbursements Received for "Out-of-Pocket" Expenses
Incurred" ("Topic D-103"), subsequently recharacterized as Emerging Issues Task
Force "EITF" No. 01-14, which is effective for fiscal years beginning after
December 15, 2001. EITF No. 01-14 requires that certain out-of-pocket expenses
rebilled to customers be recorded as revenue versus an offset to the related
expense. Comparative financial statements for prior periods must be conformed to
this presentation. The Company historically recorded rebilled out-of-pocket
expenses as an offset to the related expense. Effective January 1, 2002, the
Company changed its presentation to reflect rebilled expenses as revenue and
also conformed the presentation for prior periods. The impact of adopting this
pronouncement resulted in the reclassification of $7.3 million of expenses to
2001.
Concentration of Credit Risk
The Company provides services to clients including systems integrators,
telecommunications companies, banking and financial services entities,
manufacturers, distributors, health care providers, and utilities throughout the
United States. In 2003, 2002 and 2001, the largest client accounted for
approximately 22%, 25% and 20%, the second largest client accounted for
approximately 21%, 17% and 17% and the third largest client accounted for 4%, 5%
and 5% of the Company's total revenues, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and tax loss carryforwards and
credits and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Stock Options
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations. Under APB 25, no
compensation cost has been recognized for the Company's stock-based compensation
plans. The Company continues to apply the provisions of APB 25 and provides the
pro forma disclosures required by SFAS No. 123 and SFAS No. 148.
Historically, the pro forma effects noted below included the impact of
restricted shares issued in November 2000. The current table excludes the impact
of restricted shares.
The following data reflect the pro forma effects of the stock-based
compensation cost for the Company's stock option transactions in accordance with
SFAS No. 123 and SFAS No. 148:
2003 2002 2001
(in thousands, except per share data)
Net loss, as reported $ (13,081) $ (11,135) $ (3,074)
Pro forma compensation expense (312) (399) (510)
--------------------------------------------
Pro forma net loss $ (13,393) $ (11,534) $ (3,584)
============================================
Diluted loss per share:
As reported $ (0.76) $ (0.65) $ (0.18)
Pro forma (0.78) (0.67) (0.21)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, respectively: risk-free
interest rates of 3.8%, 4.3%, and 4.6%; expected lives of 7, 7 and 4 years;
expected volatility of 165%, 112% and 101%; and no dividends expected to be
paid.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, except for
debt, approximate their fair values due to the short maturity of these
instruments. The carrying amount of debt approximates its fair value given its
interest rate is comparable to a similar rate that could be obtained on other
debt instruments.
Computation of Earnings Per Share
Basic earnings (loss) per share is based on the weighted average number of
common shares outstanding for the year. Diluted earnings (loss) per share is
based on the weighted average number of common shares outstanding and includes
the dilutive effect of unexercised stock options and warrants which are
in-the-money using the treasury stock method. Dilutive securities have not been
included in the weighted average shares used for the calculation of earnings per
share in periods of net loss because the effect of such securities would be
anti-dilutive. At December 31, 2003, 2002 and 2001, potentially dilutive
securities consisted of options to purchase 1,490 thousand, 30 thousand and 60
thousand shares of common stock, respectively. In addition, the Company issued
11.0 million warrants to purchase common stock in connection with its debt
refinancing described in Note 3. These warrants are also potentially dilutive
securities as of December 31, 2003 and 2002.
Reclassification
Certain prior year balances have been reclassified in order to conform to
the current year presentation.
2. RESTRUCTURING AND OTHER CHARGES
Restructuring and Other Charges-2003
During the third quarter of 2003, the Company incurred a $0.5 million
restructuring charge representing severance costs associated with the
restructuring of the Company's sales, delivery and corporate staff. A total of
33 positions were eliminated, comprised of 11 in sales, 9 in delivery and 13 in
corporate staff positions. The Company recorded an additional restructuring
charge of $0.4 million in the fourth quarter of 2003 related to the severance
cost of two executive employees.
The primary components of the restructuring charge can be summarized as follows:
Total Initial 2003 Cash Balance at
Reserve Payments December 31, 2003
(in thousands)
Severance $ 952 $ (270) $ 682
The remaining severance balance at December 31, 2003 will be paid primarily
during the first quarter of 2004 with the exception of three employees. Included
in this charge is the severance of three executive employees that will be paid
out in accordance with their respective employment agreements through December
2007.
During the third quarter of 2003, the Company reassessed its 2002 restructuring
accrual requirements. Based on this review, the Company determined the remaining
reserve was overstated by $0.6 million due to various real estate cost
assumptions made versus actual activity. The majority of this adjustment relates
to the successful early termination negotiated on the lease of the Company's
previous headquarters.
Additionally, the Company recorded a charge for a debt modification and the
write-off of origination fees of $4.5 million related to changes made to the
terms of the Senior Subordinated Convertible Notes. This was comprised of a $3.5
million debt modification charge and $1.0 million of origination fees written
off. The debt modification and origination fees write-off expense represents a
non-cash adjustment and has no impact on the amount of debt ultimately owed to
Wynnchurch Capital Partners, L.P. The valuation of the notes was determined
based on advice from a third-party valuation specialist who utilized a valuation
model. Based on the results, the fair value of the notes was determined to be
$13.2 million versus the carrying value of $9.7 million. As such, a $3.5 million
charge was recognized for the debt modification to recognize the fair value of
the notes in the financial statements. Additionally, origination fees of $0.9
million related to these notes and $0.1 million related to the revolving credit
commitment were written off due to the modifications.
Restructuring and Other Charges-2002
The Company recorded restructuring and other charges in the aggregate
amount of $6.1 million during 2002. During the second quarter of 2002, the
Company recorded a charge of $1.1 million, classified as other charges,
representing the severance pay associated with the departure of the Company's
former Chief Executive Officer. During the third quarter of 2002, the Company
recorded a $4.7 million restructuring charge due to excess office space and the
restructuring of the service delivery function. An additional $0.3 million
restructuring charge was recorded in the fourth quarter, which was also due to
the restructuring of the service delivery function. The primary components of
the restructuring and other charges can be summarized as follows:
The primary activity in the restructuring reserve can be summarized as follows:
Total 2002 Balance at 2003 Balance at
Initial Cash December 31, Cash Adjustment to December 31,
Reserve Payments 2002 Payments reserve 2003
---------------------------------------------------------------------------------
(in thousands)
Real estate costs $ 4,328 $ (569) $ 3,759 $ (1,659) $ (605) $ 1,495
Severance 627 (362) 265 (200) 65
Other charges 1,100 (202) 898 (121) 777
---------------------------------------------------------------------------------
Total restructuring
Reserve $ 6,055 $ (1,133) $ 4,922 $ (1,980) $ (605) $ 2,337
=================================================================================
The portion of the charge related to real estate costs, which totaled $4.3
million, relates to lease costs associated with decreased requirements for
office space as the Company restructured its service delivery organization. The
costs associated with this charge related primarily to the value of ongoing
lease obligations for vacated offices, net of anticipated sublease income. A
portion of the charge also related to broker commissions and estimated leasehold
improvement costs necessary to sublease vacated offices.
During the third quarter of 2003, the Company reassessed its 2002 restructuring
accrual requirements. Based on this review, the Company determined the remaining
reserve was overstated by $0.6 million due to various real estate cost
assumptions made versus actual activity. The majority of this adjustment relates
to the successful early termination negotiated on the lease of the Company's
previous headquarters.
The $0.6 million severance charge related to head-count reductions
associated with centralizing the service delivery organization as part of a
re-engineering exercise. A total of 60 positions were eliminated with the
largest group being the client staffing managers. The remainder of positions
eliminated was a mix of corporate staff and recruiting personnel. The remaining
severance balance at December 31, 2003 relates to an employee with an employment
agreement. It is anticipated that this amount will be paid out through July
2004.
The $1.1 million other charges related to the severance pay associated with the
departure of the Company's former Chief Executive Officer. The remaining balance
at December 31, 2003 is required to be paid in full by July 2004.
BORROWINGS
Short-Term Borrowings:
On January 31, 2002, the Company replaced its existing bank line with a $30.0
million senior secured revolving credit facility with Fleet Capital Corporation,
a subsidiary of the FleetBoston Financial Corporation.
The $30.0 million revolving credit facility is secured by the assets of the
Company, principally consisting of accounts receivable. The credit facility has
a three-year term and bears interest at LIBOR plus 3.25% or the bank's base rate
plus 2.00%.
Although the Senior Secured Revolving Credit facility is classified as
short-term, the facility has an expiration date of January 31, 2005. The Company
has classified this instrument as current based on the requirements of EITF
Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement."
Throughout 2002, the Company and Fleet Capital Corporation executed four
amendments to the revolving credit agreement. These amendments were required to
waive events of default that occurred relative to the fixed charge and tangible
net worth covenants. Both covenants were reset with tangible net worth
reestablished at $2.8 million and the fixed charge covenant reestablished at an
allowable shortfall of $0.7 million through October 1, 2002 and a ratio of 1:1,
thereafter. In addition, the borrowing limit subject to pledged accounts
receivable as collateral was reduced to $28.0 million and certain restrictions
were placed on the amount of capital spending in consideration for the waiver of
existing financial loan covenants.
In 2003, the Company and Fleet Capital Corporation executed additional
amendments to the revolving credit agreement. The Fifth Amendment addressed the
fact that the Company had entered into litigation with a major customer,
Bluecurrent. This action eliminated that account from the Company's borrowing
base creating a borrowing overadvance. The amendment allows for an overadvance
of $2.0 million through December 31, 2003. In addition, the amendment waived the
events of default relative to the fixed charge and tangible net worth covenants
that occurred at December 31, 2002. The tangible net worth covenant was reset at
($1.0) million and the fixed charge shortfall was set to $1.0 million through
March 31, 2003 and $1.4 million up through June 30, 2003 and a ratio of 1:1,
thereafter. The Sixth Amendment eliminated the requirement that any amounts
received as a result of the settlement with Bluecurrent reduce the Wynnchurch
Capital Partners, L.P. guarantee as discussed below. The Seventh Amendment
waived the events of default as of June 30, 2003 relating to the tangible net
worth and fixed charge covenants. Additionally, the covenants were reset for the
remainder of 2003 as follows; the tangible net worth covenant was reset to
($5.0) million with the fixed charge covenant reset to an allowable shortfall of
$0.7 million for the three months ended September 30, 2003, and $1.0 million for
the six months ended December 31, 2003. The fixed charge covenant will be 1:1,
thereafter. In addition, the interest rate was changed effective August 1, 2003
from the bank's base rate plus 1.00% to the base rate plus 2.00%. As of December
31, 2003, the applicable rate is 6.00%, which represents the bank's base rate
plus 2.00%. The Seventh Amendment also reduced the maximum revolving credit
commitment from $28.0 million to $23.0 million. The Eighth Amendment waived the
events of default as of September 30, 2003 relating to the tangible net worth
and fixed charge covenants. Additionally, the covenants were reset for future
periods as follows: the tangible net worth covenant was reset to ($8.5) million
for the quarter ending December 31, 2003 and each quarter thereafter. The fixed
charge covenant was reset to an allowable shortfall of $1.0 million for the
three months ending December 31, 2003, $1.8 million for the six months ended
March 31, 2004, and $1.9 million for the nine months ending June 30, 2004. The
fixed charge covenant will be 1:1, thereafter. Capital expenditures will also be
limited to $50,000 per quarter commencing with the quarter ended December 31,
2003. The Company was in compliance with its covenants as of December 31, 2003.
Long-Term Borrowings:
On January 31, 2002, $10.0 million principal amount of Senior Subordinated
Convertible Notes was sold to Wynnchurch Capital Partners, L.P., a private
equity investor.
The Senior Subordinated Convertible Notes originally bore interest at 15% and
are due January 31, 2009. These notes were initially convertible into common
stock anytime after January 31, 2002 at a conversion price of $2.50 per share.
At the Company's election, one-half of the interest could be deferred during the
first four years, subject to certain conditions. In conjunction with the sale of
these notes, the Company issued 10.0 million warrants to purchase shares of the
Company's common stock at $0.55 per share. An additional 1.0 million warrants to
purchase its common stock at $0.73 per share were not exercisable for one year
contingent upon the Company meeting certain performance measures, however, the
warrants would expire if such performance measures were met. As of December 31,
2002, the Company did not meet the specific performance measures related to the
1.0 million contingent warrants and these warrants did not expire.
Throughout 2002, the Company and Wynnchurch Capital Partners, L.P. executed four
amendments to the securities purchase agreement. These amendments were required
to waive events of default that occurred relative to the fixed charge and
tangible net worth covenants. Both covenants were reset with tangible net worth
reestablished at $2.6 million and the fixed charge covenant reestablished at an
allowable shortfall of $0.7 million through October 1, 2002 and a ratio of
..95:1, thereafter. In addition, the Company and Wynnchurch Capital, L.P. agreed
to defer all quarterly cash interest payments until the Company satisfied the
covenants with the senior lender, Fleet Capital Corporation.
In 2003, in connection with an amendment to the Company's credit agreement with
Fleet Capital Corporation, Wynnchurch Capital Partners, L.P. executed a
guarantee with Fleet Capital Corporation to allow overadvances of up to $2.0
million through December 31, 2003, reduced by any payments received from
Bluecurrent. In consideration, Wynnchurch Capital Partners, L.P. and the Company
amended their agreements. The 15% Senior Subordinated Convertible Notes
conversion price was reduced from $2.50 to $1.50 per share of common stock. The
exercise price of all outstanding warrants was reduced to $0.26 per share.
Additionally, a provision was made that any draw on the guarantee by the Company
could be satisfied with a purchase by Wynnchurch Capital Partners, L.P. of
additional 15% Senior Subordinated Convertible Notes having a principal amount
equal to the Company's draw and having terms equal to the outstanding 15% Senior
Convertible Notes, and provided for a $0.3 million fee to Wynnchurch Capital
Partners, L.P. in the event of a draw upon their guarantee. The $0.3 million fee
would be payable through the issuance of additional 15% Senior Subordinated
Convertible Notes. As of December 31, 2003, the Company has not been required to
draw on the guarantee, and no additional Convertible Notes have been issued. In
July 2003, Wynnchurch Capital Partners, L.P. agreed to waive the agreed
requirement that their guarantee be reduced by any amounts received from
Bluecurrent. Consequently, Bluecurrent's initial payment of $0.9 million did not
reduce the $2.0 million guarantee. However, all subsequent payments from
Bluecurrent will continue to reduce the outstanding guarantee. In consideration
for this waiver, Wynnchurch Capital Partners, L.P. received a fee of $0.1
million payable as interest and added to the principal amount of the notes.
Under the Sixth Amendment to the securities purchase agreements, Wynnchurch
Capital Partners, L.P. waived the events of default as of June 30, 2003,
relating to the tangible net worth and fixed charge covenants. Additionally, the
covenants were reset for the remainder of 2003 as follows; the tangible net
worth covenant was reset to ($5.2) million with the fixed charge covenant reset
to an allowable shortfall of $0.7 million for the three months ended September
30, 2003 and $1.0 million for the six months ending December 31, 2003. The fixed
charge covenant will be 0.95:1 thereafter. In addition, the interest rate of the
Senior Subordinated Convertible Notes was changed effective July 1, 2003 from
15% to 16% per annum. In September 2003, Wynnchurch Capital Partners L.P. agreed
to maintain its $2.0 million guarantee and not to reduce such guarantee by any
payments received from Bluecurrent. In consideration for maintaining the
guarantee, the Company agreed to pay Wynnchurch Capital Partners, L.P. $0.3
million payable as additional interest and added to the principal amount of the
notes. The Company also executed a Seventh Amendment to the securities purchase
agreement that waived the events of default that occurred as of September 30,
2003 and reset the financial covenants for future quarters. The covenants were
reset for future quarters as follows; the tangible net worth covenant was reset
to ($8.9) million for the quarter ended December 31, 2003 and each quarter
thereafter. The fixed charge covenant was reset to an allowable shortfall of
$1.0 million for the three months ended December 31, 2003, $1.8 million for the
six months ended March 31, 2004, and $1.9 million for the nine months ended June
30, 2004. The fixed charge covenant will be 0.95:1 thereafter. Capital
expenditures will also be limited to $52,500 per quarter commencing with the
quarter ended December 31, 2003. In consideration for this waiver and for
continuing to maintain the $2.0 million guarantee, Wynnchurch Capital Partners,
L.P. will receive a monthly fee of $30,000 for each month such guarantee is in
effect. This fee will be payable as additional interest and added to the
principal amount of the notes. On March 29, 2004, a letter of agreement was
executed to maintain the $2.0 million guarantee until June 30, 2004. The Company
was in compliance with its covenants as of December 31, 2003. Wynnchurch Capital
Partners, L.P. has waived compliance by the Company with respect to the
financial covenants through January 1, 2005. Additionally, Wynnchurch Capital
Partners, L.P. has provided a commitment up to $5.0 million of additional
financing, should the need arise, on such terms as the Company, its Board of
Directors and Wynnchurch Capital Partners, L.P. may agree.
Due to the change in the underlying terms of the Convertible Notes and Warrants,
the original valuation of the warrants was reassessed during the second quarter
of 2003. The fair value ascribed to these warrants was determined to be
approximately $2.3 million prior to the price change and $2.4 million subsequent
to the price change. This change in value ascribed to the price change of
approximately $69,000 is being amortized over the seven-month life of the
guarantee as a non-cash interest charge. The valuation of the warrants was
determined based on advice from a third-party valuation specialist who utilized
a valuation model with the following inputs: measurement date of April 14, 2003;
fair value of $0.23; exercise price of $0.55 prior to the price change ($0.73
for contingent warrants) and $0.26 subsequent to the price change; contractual
term of 10 years from the original issue date; dividend rate of zero; volatility
rate of 123.5%; and risk-free interest rate of 3.76%. A non-cash interest charge
of approximately $0.4 million and $0.3 million was recorded for the years ended
December 31, 2002 and 2003, respectively, related to the original valuation of
the warrants in January 2002, plus the amortization of the guarantee value.
During the third quarter of 2003, the Company concluded that the change in
interest rate combined with the change in conversion price of the convertible
notes in the second quarter of 2003 met the criteria of an extinguishment of
debt per EITF 96-19 "Debtors Accounting for a Modification or Exchange of Debt
Instruments," as the change in the present value of the notes exceeded the
present value prior to the modifications by more than 10%. The debt modification
and origination fees write-off expense represents a non-cash adjustment and has
no impact on the amount of debt ultimately owed to Wynnchurch Capital Partners,
L.P. The valuation of the notes was determined based on advice from a
third-party valuation specialist who utilized a valuation model. Based on the
results, the fair value of the notes was determined to be $13.2 million versus
the carrying value of $9.7 million. As such, a $3.5 million charge was
recognized for the modification of debt to recognize the fair value of the notes
in the financial statements. Additionally, origination fees of $0.9 million
related to these notes and $0.1 million related to the revolving credit
commitment were written off due to the modifications.
As of December 31, 2003, the Company has three irrevocable standby letters of
credit for $1.8 million, which expire as follows: $0.5 million on November 1,
2004, $0.5 million on November 15, 2004, and $0.8 million on December 31, 2004.
The principal portion of long-term debt becomes due as follows:
Year ending December 31,
(in thousands)
2004 $11,789
2005
2006
2007
2008
2009 and thereafter 13,727
-------
Total $25,516
=======
Although the senior secured revolving credit facility is listed above as
due within one year, the facility has an expiration date of January 31, 2005.
The Company has classified this instrument as current based on the requirements
of EITF Issue No. 95-22, "Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements That Include both a Subjective Acceleration
Clause and a Lock-Box Arrangement."
4. LEASES
The Company leases its office facilities under noncancelable operating
leases. Rental expense for operating leases during 2003, 2002 and 2001 was $1.2
million, $2.5 million and $2.8 million, respectively.
Future minimum lease payments and sublease income under noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of December 31, 2003, are:
OPERATING LEASE OPERATING SUBLEASE
YEAR ENDING DECEMBER 31, PAYMENTS INCOME
- ------------------------ -------- ------
(IN THOUSANDS)
2004 . . . . . . . . . . $ 2,882 $ (838)
2005 . . . . . . . . . . 1,796 (219)
2006 . . . . . . . . . . 1,266 (25)
2007 . . . . . . . . . . 1,186 -
2008 . . . . . . . . . . 1,221 -
Thereafter . . . . . . . 936 -
---------------------------------------
Total. . . . . . . . . . $ 9,287 $ (1,082)
=======================================
5. OTHER EXPENSE, NET
Other expense, net, for the years ended December 31, 2003, 2002 and 2001 is
comprised of the following:
2003 2002 2001
---- ---- ----
(IN THOUSANDS)
Interest income. . . . . $ 9 $ 72 $ 373
Interest expense . . . . (4,354) (3,749) (4,319)
Gain on sale of security 349
----------------------------
$(4,345) $(3,677) $(3,597)
============================
6. INCOME TAXES
Income tax expense (benefit) is summarized as follows for the years ended
December 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
(IN THOUSANDS)
Current:
Federal. . . $(817) $(1,068) $ 120
State. . . . 3 (26) 98
Foreign. . . 0 0 0
------------------------
Total current. (814) (1,094) 218
------------------------
Deferred:
Federal. . . 0 0 (728)
State. . . . 0 0 510
------------------------
Total deferred 0 0 (218)
------------------------
$(814) $(1,094) $ 0
========================
The reasons for the difference between the effective tax rate and the corporate
federal income tax rate for the years ended December 31, 2003, 2002 and 2001 are
as follows:
2003 2002 2001
(in thousands)
Federal income tax rate. . . . . . . . . . . . . . . . . (35.0)% (35.0)% (35.0)%
Items affecting federal income tax rate:
State income taxes, net of federal tax benefits. . . . (3.0)% (3.3)% 5.0%
Valuation allowance. . . . . . . . . . . . . . . . . . 41.9% 14.1% 28.8%
Nondeductible amortization and impairment charges. . . 0% 0% 0.9%
Nondeductible original issue discount interest expense 1.6% 1.2% 0%
Nondeductible accretion of warrants. . . . . . . . . . 0.8% 1.1% 0%
Receipt of prior year refund . . . . . . . . . . . . . (9.9)% 0% 0%
Tax liability. . . . . . . . . . . . . . . . . . . . . 4.1% 0% 0%
Reduction of prior year net operating loss . . . . . . 0% 6.2% 0%
Other permanent differences. . . . . . . . . . . . . . (6.4)% 6.7% 0.3%
---------------------------
Effective income tax rate. . . . . . . . . . . . . . . . (5.9)% (9.0)% 0%
---------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2003 and
2002 are as follows:
2003 2002
(in thousands)
Deferred tax assets:
Property and equipment-depreciation $ 627 $ 37
Net operating loss. . . . . . . . . 4,980 1,938
Lease cancellation accrual. . . . . 923 1,903
Receivable reserves . . . . . . . . 130 801
Deferred rent payable . . . . . . . 155 141
Accrued liabilities . . . . . . . . 3,453 797
--------------------
Gross deferred tax assets . . . . . . 10,268 5,617
Valuation allowance . . . . . . . . (8,451) (2,623)
--------------------
Net deferred tax assets . . . . . . . 1,817 2,994
--------------------
Deferred tax liabilities:
Software development costs. . . . . (1,750) (2,723)
Prepaid assets. . . . . . . . . . . (67) (271)
--------------------
Gross deferred tax liabilities. . . . (1,817) (2,994)
--------------------
Net deferred tax liability. . . . . . $ 0 $ 0
====================
At December 31, 2003, the Company had gross federal and state net operating loss
carryforwards of $10.6 million and $26.4 million, respectively, which are
available to offset taxable income through 2023. The Company recognized a net
tax benefit of $0.8 million. The net tax benefit is comprised of a refund of
$1.4 million received due to a change in the tax law, offset by $0.6 million in
taxes assessed for prior years as the result of an IRS audit in 2003.
Prior to 2001, no valuation allowance for deferred tax assets had been recorded
as the Company believed it was more likely than not that the deferred tax assets
would be realized in the future. Beginning in 2001, a valuation allowance was
established for the net deferred tax asset given the uncertainty with respect to
the future realization of deferred tax assets. This valuation allowance is
required given that the net operating losses have no remaining carryback
potential and the lack of ability to accurately forecast taxable income over the
20 year net operating loss carryforward period. The change in the valuation
allowance was $5.8 million.
7. EMPLOYEE SAVINGS PLAN
The Company sponsors a 401(k) plan ("the Plan"). The Plan covers each employee
who has completed 1,000 hours of service in a 12-month period commencing with
the start of employment. The Company, in an amount to be determined at the
Company's discretion, bases contributions to the Plan on percentages of employee
salaries, plus a matching contribution, which was discontinued by the Company
effective March 31, 2002. Vesting in the Company's contributions is based on
length of service over a five-year period. Contributions by the Company on
behalf of all employees approximated $0.0, $0.2 million and $0.6 million during
2003, 2002 and 2001, respectively.
8. STOCK OPTIONS
During 1994, the Company amended and restated the stock option plan adopted in
1992. Under the amended and restated Incentive Stock Option Plan ("Option
Plan"), officers and key employees may be granted non-qualified stock options,
incentive stock options, performance units, and stock appreciation rights. The
Option Plan also provides for automatic annual grants to each non-affiliate
director of non-qualified stock options to purchase up to 5,000 shares of common
stock. The purchase price per share for such options will be equal to the fair
market value of a share of common stock on the date of grant. As such, there has
been no compensation cost recognized in operations. Any such options will be
exercisable one year after the date of grant and will terminate upon the earlier
of 90 days following the date on which such director ceases to serve on the
Board or 10 years after the date of grant.
The exercise price of incentive stock options granted under the Option Plan must
be equal to at least 100% of the fair market value of the Company's common stock
subject to the option on the date of the grant. The incentive stock options
granted by the Company may not be exercised during the first six months from the
date granted and, thereafter, generally become exercisable at a rate of 2.38% of
the total shares subject to the option on and after the first day of each
calendar month. The maximum term of a stock option under the Option Plan is 10
years.
In the event employment is terminated for any reason other than gross and
willful misconduct, death or disability, vested options are exercisable within
30 days after such termination of employment. Termination due to gross and
willful misconduct terminates the option as of the date of the misconduct. Upon
death or disablement, vested options are exercisable within six months after the
date of death or disablement by the executors, administrators or applicable
guardian of optionee.
During 2000, the Company issued 1,240,000 restricted shares of the Company's
stock pursuant to the Option Plan. The shares were issued with certain
restrictions relating to each employee remaining employed with the Company. The
restrictions lapsed in April and July of 2001, with a remaining portion lapsing
in July 2002. In connection with the issuance of the restricted stock, 945,000
previously issued stock options were cancelled. Total deferred compensation
related to the restricted stock issuance was $378,000; of which, $97,000 and
$221,000 was amortized as an operating expense in 2002 and 2001, respectively.
During 2001, the Company issued 83,000 and 175,000 stock options and
non-qualified stock options, respectively, pursuant to the Option Plan. These
options were granted at fair market value and thus, the Company did not record
compensation expense as a result of these option grants.
During 2002, the Company issued 1,550,000 non-qualified stock options outside
the Option Plan in connection with executive management and director changes.
These options were issued at the fair market value as of the date of the grant.
The terms and conditions of these grants are similar to the terms and conditions
of options granted under the Option Plan with the exception that they provide
for accelerated vesting upon a change in control of the Company. In addition to
the non-qualified stock options issued outside of the Option Plan, the Company
issued 615,000 non-qualified stock options, pursuant to the Option Plan.
During 2003, the Company issued 731,500 stock options, pursuant to the Option
Plan.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2003, 2002 and 2001, respectively: risk-free
interest rates of 3.8%, 4.3%, and 4.6%; expected lives of 7, 7 and 4 years;
expected volatility of 165%, 112% and 101%; and no dividends expected to be
paid.
Historically, the following table included the impact of restricted shares
issued in November 2000. The table excludes the impact of restricted shares.
Stock option transactions for the years ended December 31, 2001, 2002 and 2003
are summarized as follows:
Weighted Average
Shares Exercise Price
(in thousands, except per share data)
Balance at December 31, 2000 1,620 8.48
Options granted. . . . . . . 258 0.51
Options cancelled. . . . . . (457) 2.22
Options exercised. . . . . . - -
-------------------------------------
Balance at December 31, 2001 1,421 8.13
Options granted. . . . . . . 2,165 1.21
Options cancelled. . . . . . (1,044) 7.67
Options exercised. . . . . . - -
-------------------------------------
Balance at December 31, 2002 2,542 2.31
Options granted. . . . . . . 731 0.36
Options cancelled. . . . . . (769) 2.03
Options exercised. . . . . . - -
-------------------------------------
Balance at December 31, 2003 2,504 $ 1.77
=====================================
As of December 31, 2003, 2002 and 2001, there were 1.1 million, 0.4 million and
0.5 million options exercisable, with weighted average exercise prices of $3.44,
$7.71 and $9.81, respectively. As of December 31, 2003, there were 0.4 million
stock options available for future grants under the Company's Incentive Stock
Option Plan.
The following table summarizes information about stock options outstanding as of
December 31, 2003:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life (in years) Price Exercisable Price
(shares in thousands)
$0.28-$0.45. . . . . . . 1,535 8.95 $ 0.38 319 $ 0.38
$0.46-$0.90. . . . . . . 270 8.46 0.56 163 0.57
$0.91-$1.35. . . . . . . 159 6.44 1.23 141 1.23
$1.36-$2.50. . . . . . . 301 8.50 2.41 194 2.37
$2.51-$9.99. . . . . . . 10 5.38 7.88 10 7.88
$10.00-$20.00. . . . . . 214 4.53 10.83 214 10.83
$20.01-$38.12. . . . . . 15 3.52 26.35 15 26.35
$0.28-$38.12 . . . . . . 2,504 8.26 $ 1.77 1,056 $ 3.44
====================================================================
9. EMPLOYEE STOCK PURCHASE PLAN
In 1995, the stockholders of the Company approved the Alternative Resources
Corporation Employee Stock Purchase Plan (the "Stock Purchase Plan"). An
aggregate of 300,000 shares of the Company's common stock (subject to
adjustment for any dividend, stock split or other relevant changes in the
Company's capitalization) were originally authorized to be sold pursuant to
the Stock Purchase Plan. In 1999, an additional 300,000 shares of the
Company's common stock were approved by the stockholders for sale through
the Employee Stock Purchase Plan. The Stock Purchase Plan covered each
employee who had completed 1,000 hours of service during the last 12
calendar months preceding the enrollment date. The Stock Purchase Plan
enabled employees to purchase the Company's common stock at 85% of the
market price. Employees were allowed to purchase the Company's common stock
through the Stock Purchase Plan only by payroll deduction. Payroll
deductions could not exceed 20% of the employees' gross pay or $21,250 in
any one-year. In 2001, the Company's matching portion to the Stock Purchase
Plan amounted to $0.1 million and was in the form of cash contributions and
direct issuance of common stock. In 2002, the Company's matching portion to
the Stock Purchase Plan was in the form of direct issuance of common stock.
The number of shares purchased was approximately 296,000, and 146,000 for
the years ended December 31, 2001 and 2002, respectively. Effective March
31, 2002, the Stock Purchase Plan was terminated.
Item 9.01 (a)(xii)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Alternative Resources Corporation:
We have audited the accompanying consolidated balance sheets of Alternative
Resources Corporation and subsidiaries (the "Company") as of December 31, 2003
and 2002, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity (deficit) and cash flows for each of the years in the
three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Alternative
Resources Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, on January 1, 2002.
Chicago, Illinois
March 30, 2004
9.01 (b)(i)
The following unaudited pro forma condensed consolidated balance sheet as of
July 5, 2004 and the unaudited pro forma condensed consolidated statements of
income for the six months ended July 5, 2004 and for the year ended January 5,
2004 are based on the historical financial statements of Pomeroy IT Solutions,
Inc. ("Pomeroy") and Alternative Resources Corporation ("ARC") after giving
effect to the purchase of ARC by Pomeroy using the purchase method of accounting
and the assumptions and adjustments described in the accompanying notes to the
unaudited pro forma condensed consolidated financial statements.
The unaudited pro forma condensed consolidated balance sheet as of July 5, 2004
is presented to give effect to the proposed merger as if it occurred on July 5,
2004 and, due to different fiscal period ends, combines the historical balance
sheet for Pomeroy at July 5, 2004 and the historical balance sheet of ARC at
June 30, 2004. The unaudited pro forma condensed consolidated statement of
income for the six months ended July 5, 2004 is presented as if the combination
had taken place on January 6, 2004 and, due to different fiscal period ends,
combines the historical results of Pomeroy for the six months ended July 5, 2004
and the historical results of ARC for the six months ended June 30, 2004. The
unaudited pro forma condensed consolidated statement of income for the twelve
months ended January 5, 2004 is presented as if the combination had taken place
on January 6, 2003 and, due to different fiscal period ends, combines the
historical results of Pomeroy for the twelve months ended January 5, 2004 and
the historical results of ARC for the twelve months ended December 31, 2003.
Under the purchase method of accounting, the total estimated purchase price is
allocated to the net tangible and intangible assets of ARC acquired in
connection with the purchase, based on their fair values as of the completion of
the purchase. Management is in the process of assessing the impact of deferred
tax assets and liabilities of the combined companies. The impact may be material
and has not been included in the unaudited pro forma condensed consolidated
financial statements. Independent valuation specialists are conducting an
independent valuation in order to assist management of Pomeroy in determining
the fair values of a significant portion of these assets. The preliminary work
performed by the independent valuation specialists has been considered in
management's estimates of the fair values reflected in these unaudited pro forma
condensed consolidated financial statements. These estimates are preliminary and
subject to change based on finalization of the independent valuation.
ARC opening balance sheet includes accruals for costs associated with the
centralization of common tasks and reduced facility requirements of ARC of $6.0
million consisting of $2.7 million for severance or relocation costs related to
ARC employees and $3.3 million for costs of vacating ARC leased facilities. An
adjustment for an estimate of the restructuring costs to be incurred by Pomeroy
has not been included in the unaudited pro forma condensed consolidated
statements of income since such adjustment is non-recurring in nature. Pomeroy
expects to incur in subsequent quarters restructuring cost for severance costs
related to Pomeroy employees, costs of vacating some leased facilities of
Pomeroy, or other costs associated with exiting activities of Pomeroy. These
estimates are preliminary and subject to change based on finalization of its
restructuring and integration plans.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the historical consolidated financial statements and
accompanying notes contained in Pomeroy's Annual Report on Form 10-K for its
fiscal year ended January 5, 2004 and Quarterly Report on Form 10-Q for its
quarter ended July 5, 2004 and ARC's Annual Report on Form 10-K for its fiscal
year ended December 31, 2003 and Quarterly Report on from 10-Q for the quarter
ended March 31, 2004. The unaudited pro forma condensed consolidated financial
statements are not intended to represent or be indicative of the consolidated
results of operations or financial condition of Pomeroy that would have been
reported had the purchase been completed as of the dates presented, and should
not be taken as representative of the future consolidated results of operations
or financial condition of Pomeroy.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
POMEROY IT SOLUTIONS, INC. AND ALTERNATIVE RESOURCES CORPORATION
(in thousands) Historical
-----------------------
Pomeroy ARC Pro forma Pro Pro forma
July 5, June 30, Adjustments forma Consolidated
2004 2004 notes
----------- ---------- ------------- ------ -------------
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . $ 45,373 $ 15 $ (35,373) (a) $ 10,015
Accounts receivable, net.. . . . . . . . . . 122,365 20,212 - 142,577
Inventories. . . . . . . . . . . . . . . . . 17,710 - - 17,710
Other. . . . . . . . . . . . . . . . . . . . 5,655 1,637 (233) (a) 7,059
----------- ---------- ------------- -------------
Total current assets . . . . . . . . . . 191,103 21,864 (35,606) 177,361
Net equipment and leasehold improvements . . 15,884 5,948 (5,502) (b) 16,330
Long-term investments and other assets.. . . 4,049 183 - 4,232
Goodwill.. . . . . . . . . . . . . . . . . . 68,035 2,723 46,435 (d) 117,193
Intangible assets, net.. . . . . . . . . . . 457 - 4,483 (c) 4,940
----------- ---------- ------------- -------------
Total assets . . . . . . . . . . . . . . $ 279,528 $ 30,718 $ 9,810 $ 320,056
=========== ========== ============= =============
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . $ 912 $ 13,709 $ (13,709) (a) $ 912
Bank note, current portion.. . . . . . . . . - - 12,646 (a) 12,646
Accounts payable . . . . . . . . . . . . . . 55,383 9,915 - 65,298
Deferred revenue . . . . . . . . . . . . . . 3,080 - - 3,080
Cash overdraft . . . . . . . . . . . . . . . - 3,403 - 3,403
Payroll related costs. . . . . . . . . . . . 2,139 4,089 - 6,228
Accrued expenses.. . . . . . . . . . . . . . 7,229 3,499 6,397 (f) 17,125
Other current liabilities. . . . . . . . . . 335 533 - 868
----------- ---------- ------------- -------------
Total current liabilities. . . . . . . . 69,078 35,148 5,334 109,560
Notes payable, less current portion. . . . . 250 15,999 (15,999) (a) 250
Deferred income taxes and other liabilities. 4,834 442 (396) (f) 4,880
Total equity (deficit).. . . . . . . . . . . 205,366 (20,871) 20,871 (e) 205,366
----------- ---------- ------------- -------------
Total liabilities and equity . . . . . . $ 279,528 $ 30,718 $ 9,810 $ 320,056
=========== ========== ============= =============
<FN>
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
POMEROY IT SOLUTIONS,INC. AND ALTERNATIVE RESOURCES CORPORATION
(in thousands, except per share data) Six months ended
-----------------------------------------------------------
Pomeroy ARC Pro forma Pro Pro forma
July 5, June 30, Adjustments forma Consolidated
2004 2004 notes
--------- ---------- ------------- ------ -------------
Net sales and revenues. . . . . . . . . . . . $333,369 $ 57,844 - $ 391,213
Cost of sales and service . . . . . . . . . . 295,269 44,842 - 340,111
--------- ---------- ------------- -------------
Gross profit. . . . . . . . . . . . . . . 38,100 13,002 - 51,102
--------- ---------- ------------- -------------
Selling, general and administrative expenses. 29,292 15,188 (1,828) (g) 42,652
Restructuring and other charges.. . . . . . . - 283 - 283
--------- ---------- ------------- -------------
Operating expenses. . . . . . . . . . . . 29,292 15,471 (1,828) 42,935
--------- ---------- ------------- -------------
Income (loss) from operations . . . . . . . . 8,808 (2,469) 1,828 8,167
Net other expense (income). . . . . . . . . . (8) 2,011 (1,829) (h) 174
--------- ---------- ------------- -------------
Income (loss) before income tax. . . . . . . 8,816 (4,480) 3,657 7,993
Income tax expense (benefit). . . . . . . . . 3,454 4 (301) (i) 3,157
--------- ---------- ------------- -------------
Net income (loss) . . . . . . . . . . . . $ 5,362 $ (4,484) $ 3,958 $ 4,836
========= ========== ============= =============
Weighted average shares outstanding:
Basic.. . . . . . . . . . . . . . . . . . . 12,245 12,245
========= =============
Diluted . . . . . . . . . . . . . . . . . . 12,362 12,362
========= =============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.44 $ 0.39
========= =============
Diluted . . . . . . . . . . . . . . . . . . $ 0.43 $ 0.39
========= =============
<FN>
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
POMEROY IT SOLUTIONS, INC. AND ALTERNATIVE RESOURCES CORPORATION
(in thousands, except per share data) Year Ended
------------------------------------------------------------------
Pomeroy ARC Pro forma Pro Pro forma
January 5, December 31, Adjustments forma Consolidated
2004 2003 notes
------------ -------------- ------------- ------ -------------
Net sales and revenues. . . . . . . . . . . . $ 598,423 $ 138,146 $ - $ 736,569
Cost of sales and service . . . . . . . . . . 528,030 105,449 - 633,479
------------ -------------- ------------- -------------
Gross profit. . . . . . . . . . . . . . . 70,393 32,697 - 103,090
------------ -------------- ------------- -------------
Selling, general and administrative expenses. 55,587 37,438 (3,655) (g) 89,370
Restructuring and other charges . . . . . . . - 4,809 - 4,809
------------ -------------- ------------- -------------
Operating expenses. . . . . . . . . . . . 55,587 42,247 (3,655) 94,179
------------ -------------- ------------- -------------
Income (loss) from operations . . . . . . . . 14,806 (9,550) 3,655 8,911
Net other expense (income). . . . . . . . . . (64) 4,345 (3,776) (h) 505
------------ -------------- ------------- -------------
Income (loss) before income tax. . . . . . . 14,870 (13,895) 7,431 8,406
Income tax expense (benefit). . . . . . . . . 5,799 (814) (1,707) (i) 3,278
------------ -------------- ------------- -------------
Net income (loss) . . . . . . . . . . . . . $ 9,071 $ (13,081) $ 9,138 $ 5,128
============ ============== ============= =============
Weighted average shares outstanding:
Basic.. . . . . . . . . . . . . . . . . . . 12,305 - 12,305
============ ============= =============
Diluted . . . . . . . . . . . . . . . . . . 12,375 6 12,381
============ ============= =============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.74 $ 0.42
============ =============
Diluted . . . . . . . . . . . . . . . . . . $ 0.73 $ 0.41
============ =============
<FN>
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
Item 9.01 (b)(ii)
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JULY 5,
2004 AND THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR
THE SIX MONTHS ENDED JULY 5, 2004 AND FOR THE YEAR ENDED JANUARY 5, 2004.
Pro forma adjustments are necessary to reflect the estimated purchase price, to
adjust amounts related to ARC net tangible and intangible assets to a
preliminary estimate of their fair values, to reflect the amortization expense
related to the estimated amortizable intangible assets, to reflect changes in
depreciation and amortization expense resulting from the estimated fair value
adjustments to net tangible assets, to reduce operating expenses for an estimate
of costs associated with exiting activities and to reflect the income tax effect
related to the pro forma adjustments.
No pro forma adjustments were required to conform ARC accounting policies to
Pomeroy accounting policies. Certain reclassifications have been made to conform
ARC historical amounts to Pomeroy's presentation.
The pro forma consolidated provision for income taxes does not reflect the
amounts that would have resulted had Pomeroy IT Solutions, Inc. and Alternative
Resources Corporation filed consolidated income tax returns during the periods
presented.
The pro forma adjustments included in the unaudited pro forma condensed
consolidated financial statements are as follows:
(a) Estimated total purchase price of ARC based upon June 30, 2004 balance
sheet is as follows:
Estimated total purchase price:
Value of ARC common stock purchased $11,982
Assumption of ARC accelerated options 441
Warrants purchased 4,840
-------
Total value of securities 17,263
Retiring interest-bearing debt 29,708
Estimated direct transaction costs 1,048
-------
$48,019
=======
Funded from:
Cash on hand $35,373
Borrowings from line of credit 12,646
-------
$48,019
=======
In addition deferred financing costs of $0.2 million associated with the retired
debt were written off.
The actual total purchase price as of July 23, 2004 was $49.0 million, which was
comprised of $12.0 million for common stock, $0.4 million for options, $4.8
million for warrants, $30.7 million for retiring interest-bearing debt versus
the $30.0 million reflected in the June 30, 2004 pro forma balance sheet and
$1.1 million for direct transaction costs. Based on cash generated subsequent to
June 30, 2004, the actual purchase was funded from cash on hand of $39.0 million
and borrowings from line of credit of $10.0 million. As reflected in the June
30, 2004 pro forma balance sheet, Pomeroy retained $10.0 million in cash on hand
subsequent to the purchase.
Under the purchase method of accounting, the total estimated purchase price is
allocated to ARC net tangible and intangible assets based on their estimated
fair values as of the date of the completion of the purchase. Based on the
preliminary independent valuation, and subject to material changes upon receipt
of the final valuation and other factors as described in the introduction to
these unaudited pro forma condensed consolidated financial statements, the
preliminary estimated purchase price is allocated as follows (in thousands):
Preliminary estimated purchase price allocation:
Net tangible liabilities assumed $(5,622)
Amortizable intangible assets:
Customer contract and lists 3,000
Personnel database 1,200
Non-compete agreements 283 4,483
-----
Goodwill 49,158
--------
Total preliminary estimated purchase price allocation $48,019
========
Of the total estimated purchase price, a preliminary estimate of approximately
($5.6) million has been allocated to net tangible liabilities assumed and
approximately $4.5 million has been allocated to amortizable intangible assets
acquired. The depreciation and amortization related to the fair value adjustment
to net tangible assets and the amortization related to the amortizable
intangible assets are reflected as pro forma adjustments to the unaudited pro
forma condensed consolidated statements of income.
(b) Adjustment to record the difference between the preliminary estimate of
the fair value, particularly for a write-down of ARC's capitalized software
investment, and the historical amount of ARC property, plant and equipment (in
thousands):
Net Equipment
Historical and Leasehold Decrease in
Amount, Net Improvements Pro Annual
as of 6/30/04 Fair Value forma Adjustment Depreciation
-------------------------------------------------------------
Software $ 4,944 $ 250 $ 4,694 $ 2,590
Leasehold improvements 780 50 730 180
Furniture and fixtures 224 146 78 268
-------------------------------------------------------------
$ 5,948 $ 446 $ 5,502 $ 3,038
=============================================================
(c) In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 141, Pomeroy has engaged a third party valuation firm to estimate the fair
value of certain intangible assets acquired in connection with the acquisition.
Amortizable intangible assets acquired consist primarily of the estimated fair
value allocated to customer contracts/lists, non-compete agreements in place and
an ARC personnel database. Customer contracts/lists represent existing contracts
that relate primarily to underlying customer relationships pertaining to the
services provided by ARC. Pomeroy expects to amortize the fair value of the
customer contracts/lists on a straight-line basis over an average estimated life
of 10 years and to amortize the fair value of the non-compete agreements on a
straight-line basis over one year and the personnel database on a straight-line
basis over an average estimated life of 7 years. The adjustments to reflect the
preliminary estimate of the fair value of amortizable intangible assets and the
resulting increase in amortization expense, is as follows (in thousands):
Intangible
Assets, Net Six Months Ended Year Ended 1/5/04
Pro Forma Useful life 7/5/04 Amortization Pro Amortization Pro Forma
Adjustment (years) Forma Adjustment Adjustment
------------ ------------ ------------------------ -----------------------
Customer contracts and lists $ 3,000 10 $ 150 $ 300
Personnel database 1,200 7 86 171
Non-compete agreements 283 1 141 283
------------ ------------------------ -----------------------
$ 4,483 $ 377 $ 754
============= ======================== =======================
(d) Of the total estimated purchase price, approximately $49.2 million has
been allocated to goodwill. Goodwill represents the excess of the purchase price
of an acquired business over the fair value of the underlying net tangible and
intangible assets.
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," goodwill and intangible assets with
indefinite lives resulting from business combinations completed subsequent to
June 30, 2001 will not be amortized but instead will be tested for impairment at
least annually (more frequently if certain indicators are present). In the event
that the management of Pomeroy determines that the value of goodwill or
intangible assets with indefinite lives has become impaired, Pomeroy will incur
an accounting charge for the amount of impairment during the fiscal quarter in
which the determination is made.
Adjustments to reflect the preliminary estimate of goodwill, is as follows (in
thousands):
Purchase Price
ARC Pro forma Amount Allocated
Historical Adjustment to Goodwill
Goodwill $ 2,723 $ 46,435 $ 49,158
(e) Adjustments to stockholders' equity (in thousands):
To eliminate ARC historical stockholders' deficit $20,871
(f) Accrued restructuring charge adjustments at June 30, 2004 associated with
the following activities of ARC (in thousands):
Facility lease costs related to $3,715
vacating facilities
Severance and relocation costs 2,682
-------
6,397
Eliminate facility lease deferred
rent balance (396)
-------
$6,001
=======
(g) Estimated pro forma adjustments in operating expenses associated with the
following activities of ARC (in thousands):
Six Months Ended Year Ended 1/5/04
7/5/04 Pro Forma Pro Forma
Adjustment Adjustment
---------------------------------------
Reduction of facility costs related to vacating
facilities $ (686) $ (1,371)
Reduction in depreciation expense due to write
down of capitalized software investment -See note
(b) (1,519) (3,038)
Increase in amortization expense related to
acquired intangible assets - See note (c) 377 754
---------------------------------------
$ (1,828) $ (3,655)
=======================================
(h) Estimated pro forma reduction in net other expense associated with the
following activities of ARC (in thousands):
Six Months Year Ended
Ended 7/5/04 1/5/04 Pro
Pro Forma Forma
Adjustment Adjustment
----------------------------
Elimination of financing costs related to retiring
interest-bearing debt, offset by interest on debt
used to finance the purchase $ (1,829) $ (3,776)
============================
(i) Adjustment to record the income tax effect of the pro forma adjustments and
the tax benefit of ARC's historical pre-tax loss for the applicable periods.
Management is in the process of assessing the impact of deferred tax assets and
liabilities of the combined companies. The impact may be material and has not
been included in the unaudited pro forma condensed consolidated financial
statements. A preliminary estimated combined effective tax rate of 39.5% and
39.0% was utilized for income tax expense for the six months ended July 5, 2004
and year ended January 5, 2004, respectively. Upon completion of a final
assessment of deferred tax assets and liabilities, goodwill will be adjusted
accordingly.
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 hereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
--------------------------
Date: October 6, 2004 By:
-----------------------------------
Michael E. Rohrkemper,
Chief Financial Officer and
Chief Accounting Officer