UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 5, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 0-20022
POMEROY IT SOLUTIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1227808
- -------- ----------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares of common stock outstanding as of November 5, 2004 was
12,247,390.
1
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of 3
October 5, 2004 (Unaudited) and January
5, 2004
Consolidated Statements of Income for 5
the Three Months Ended October 5, 2004
and 2003 (Unaudited)
Consolidated Statements of 6
Comprehensive Income for the
Three Months Ended October 5, 2004
and 2003 (Unaudited)
Consolidated Statements of Income for 7
the Nine Months Ended October 5, 2004
and 2003 (Unaudited)
Consolidated Statements of 8
Comprehensive Income for the
Nine Months Ended October 5, 2004 and
2003 (Unaudited)
Consolidated Statements of Cash Flows 9
for the Nine Months Ended October 5,
2004 and 2003 (Unaudited)
Notes to Consolidated Financial 10
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 18
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure 23
about Market Risk
Item 4. Controls and Procedures 23
Part II. Other Information 24
SIGNATURE 25
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) October 5, January 5,
2004 2004
------------ -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 9,599 $ 40,200
Accounts receivable:
Trade, less allowance of $1,564 and $2,556 at October 5, 2004
and January 5, 2004, respectively . . . . . . . . . . . . . . 117,477 111,324
Vendor receivables, less allowance of $100 at
October 5, 2004 and January 5, 2004 . . . . . . . . . . . . . 5,052 7,226
Net investment in leases. . . . . . . . . . . . . . . . . . . . 4,377 2,056
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,148 2,043
------------ -----------
Total receivables . . . . . . . . . . . . . . . . . . . . . . 129,054 122,649
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,680 12,453
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,444 5,193
------------ -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . 162,777 180,495
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . . . . . . . 30,746 29,517
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . 6,304 6,438
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,050 35,955
Less accumulated depreciation . . . . . . . . . . . . . . . . . 21,158 19,696
------------ -----------
Net equipment and leasehold improvements. . . . . . . . . . . 15,892 16,259
Net investment in leases, net of current portion. . . . . . . . . 2,219 2,935
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . 120,403 67,664
Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 3,864 436
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,509 1,410
------------ -----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 308,664 $ 269,199
============ ===========
<FN>
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) October 5, January 5,
2004 2004
------------ -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . $ 912 $ 912
Short-term borrowings. . . . . . . . . . . . . . . . . . . . 2,853 -
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 63,325 50,051
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 3,487 3,988
Accrued restructuring and severance charges. . . . . . . . . 8,875 -
Other current liabilities. . . . . . . . . . . . . . . . . . 16,387 8,758
------------ -----------
Total current liabilities. . . . . . . . . . . . . . . . 95,839 63,709
Notes payable, less current portion. . . . . . . . . . . . . 250 913
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 5,446 4,780
Commitments and contingencies
Equity:
Preferred stock, $.01 par value; authorized 2,000 shares
(no shares issued or outstanding . . . . . . . . . . . . - -
Common stock, $.01 par value; authorized 20,000 shares
(13,021 and 12,943 shares issued at October 5, 2004
and January 5, 2004, respectively. . . . . . . . . . . . 130 130
Paid-in-capital. . . . . . . . . . . . . . . . . . . . . . 83,297 82,696
Accumulated other comprehensive loss . . . . . . . . . . . (36) -
Retained earnings. . . . . . . . . . . . . . . . . . . . . 132,484 125,250
------------ -----------
215,875 208,076
Less treasury stock, at cost ( 778 and 738 shares at
October 5, 2004 and January 5, 2004, respectively. . . . . 8,746 8,279
------------ -----------
Total equity . . . . . . . . . . . . . . . . . . . . . . 207,129 199,797
------------ -----------
Total liabilities and equity . . . . . . . . . . . . . . $ 308,664 $ 269,199
============ ===========
<FN>
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
--------------------------
October 5, October 5,
2004 2003
(unaudited) (unaudited)
------------ ------------
Net sales and revenues:
Sales-equipment, supplies and leasing. . . . . . . $ 139,403 $ 125,698
Service. . . . . . . . . . . . . . . . . . . . . . 61,101 32,374
------------ ------------
Total net sales and revenues . . . . . . . . . . 200,504 158,072
Cost of sales and service:
Sales-equipment, supplies and leasing. . . . . . . 129,621 116,825
Service. . . . . . . . . . . . . . . . . . . . . . 44,433 23,612
------------ ------------
Total cost of sales and service. . . . . . . . . 174,054 140,437
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . 26,450 17,635
Operating expenses:
Selling, general and administrative. . . . . . . 18,818 11,331
Rent expense . . . . . . . . . . . . . . . . . . 906 802
Depreciation . . . . . . . . . . . . . . . . . . 1,052 1,228
Amortization . . . . . . . . . . . . . . . . . . 122 63
Restructuring and severance charges. . . . . . . 2,423 -
------------ ------------
Total operating expenses . . . . . . . . . . . 23,321 13,424
------------ ------------
Income before other expense (income) and income tax. 3,129 4,211
Other expense (income):
Interest, net. . . . . . . . . . . . . . . . . . 32 (7)
Other. . . . . . . . . . . . . . . . . . . . . . 4 16
------------ ------------
Total other expense, net . . . . . . . . . . . 36 9
------------ ------------
Income before income tax. . . . . . . . . . . . . . 3,093 4,202
Income tax expense . . . . . . . . . . . . . . . . . 1,221 1,639
------------ ------------
Net income . . . . . . . . . . . . . . . . . . . $ 1,872 $ 2,563
============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . 12,240 12,226
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . 12,366 12,369
============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.21
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.21
============ ============
Dividends per common share, . . . . . . . . . . . . $ -- $ 0.80
============ ============
<FN>
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Three Months Ended
--------------------------
October 5, October 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,872 $ 2,563
Other comprehensive loss:
Foreign currency translation adjustment, net of tax. (36) -
------------ ------------
Comprehensive income . . . . . . . . . . . . . . . . . $ 1,836 $ 2,563
============ ============
<FN>
See notes to consolidated financial statements.
6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Nine Months Ended
--------------------------
October 5, October 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. . . . . . . $ 407,724 $ 341,879
Service. . . . . . . . . . . . . . . . . . . . . . 126,149 93,523
------------ ------------
Total net sales and revenues . . . . . . . . . . 533,873 435,402
Cost of sales and service:
Sales-equipment, supplies and leasing. . . . . . . 377,638 316,186
Service. . . . . . . . . . . . . . . . . . . . . . 91,685 67,887
------------ ------------
Total cost of sales and service. . . . . . . . . 469,323 384,073
------------ ------------
Gross profit . . . . . . . . . . . . . . . . . 64,550 51,329
Operating expenses:
Selling, general and administrative. . . . . . . 44,570 34,777
Rent expense . . . . . . . . . . . . . . . . . . 2,451 2,397
Depreciation . . . . . . . . . . . . . . . . . . 2,968 3,643
Amortization . . . . . . . . . . . . . . . . . . 201 360
Provision for doubtful accounts. . . . . . . . . - 200
Restructuring and severance charges. . . . . . . 2,423 -
------------ ------------
Total operating expenses . . . . . . . . . . . 52,613 41,377
------------ ------------
Income before other expense (income) and income tax. 11,937 9,952
Other expense (income):
Interest, net. . . . . . . . . . . . . . . . . . 1 (21)
Other. . . . . . . . . . . . . . . . . . . . . . 27 1
------------ ------------
Total other expense (income), net. . . . . . . 28 (20)
------------ ------------
Income before income tax. . . . . . . . . . . . . . 11,909 9,972
Income tax expense . . . . . . . . . . . . . . . . . 4,675 3,889
------------ ------------
Net income . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083
============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . 12,243 12,340
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . 12,419 12,390
============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . $ 0.59 $ 0.49
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . $ 0.58 $ 0.49
============ ============
Dividends per common share, . . . . . . . . . . . . $ -- $ 0.80
============ ============
<FN>
See notes to consolidated financial statements.
7
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net income . . . . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083
Other comprehensive loss:
Foreign currency translation adjustment, net of tax. (36) -
------------ ------------
Comprehensive income . . . . . . . . . . . . . . . . . $ 7,198 $ 6,083
============ ============
<FN>
See notes to consolidated financial statements.
8
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 2,968 3,643
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . 201 360
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 12 2,365
Effect of exchange rate changes on cash and cash equivalents. (36) -
Loss on sale of fixed assets. . . . . . . . . . . . . . . . . 30 73
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . 13,232 (1,624)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (5,959) (1,851)
Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . (2,210) 3,057
Net investment in leases. . . . . . . . . . . . . . . . . . 377 (561)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . 1,023 13,216
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . (501) 1,840
Income tax payable. . . . . . . . . . . . . . . . . . . . . 204 -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (669) 1,629
------------ ------------
Net operating activities. . . . . . . . . . . . . . . . . . . 15,906 28,230
------------ ------------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (1,495) (1,485)
Proceeds from sale of fixed assets. . . . . . . . . . . . . . 20 1
Acquisition of businesses, net of
cash acquired . . . . . . . . . . . . . . . . . . . . . . . (16,634) (5,097)
------------ ------------
Net investing activities. . . . . . . . . . . . . . . . . . . (18,109) (6,581)
------------ ------------
Cash flows from financing activities:
Proceeds from short-term borrowings . . . . . . . . . . . . . 2,853 -
Payments of acquisition notes payable. . . . . . . . . . . . (31,385) (541)
Proceeds from exercise of stock options
and related tax benefit . . . . . . . . . . . . . . . . . . 441 391
Purchase of treasury stock. . . . . . . . . . . . . . . . . . (467) (4,096)
Proceeds from employee stock purchase plan. . . . . . . . . . 160 165
Cash dividend paid. . . . . . . . . . . . . . . . . . . . . . - (9,809)
------------ ------------
Net financing activities. . . . . . . . . . . . . . . . . . . (28,398) (13,890)
------------ ------------
Change in cash and cash equivalents . . . . . . . . . . . . . . (30,601) 7,759
Cash and cash equivalents
Beginning of period . . . . . . . . . . . . . . . . . . . . . 40,200 32,505
------------ ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . $ 9,599 $ 40,264
============ ============
<FN>
See notes to consolidated financial statements.
9
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by US GAAP for
complete financial statements. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended January 5, 2004. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the interim periods have been made.
The results of operations for the nine-month period ended October 5, 2004
are not necessarily indicative of the results that may be expected for
future interim periods or for the year ending January 5, 2005.
2. Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses certain aspects of the accounting
by a vendor for arrangements under which the vendor will perform multiple
revenue generating activities. EITF No. 00-21 is effective for fiscal years
beginning after June 15, 2003. Adoption of EITF No. 00-21 did not have any
material impact on the Company's financial position or results of
operations.
In November 2002, the EITF reached a consensus on EITF 02-16, "Accounting
by a Customer (including a reseller) for Certain Consideration Received
from a Vendor." EITF 02-16 requires that cash payments, credits, or equity
instruments received as consideration by a customer from a vendor should be
presumed to be a reduction of cost of sales when recognized by the customer
in the income statement. In certain situations, the presumption could be
overcome and the consideration recognized either as revenue or a reduction
of a specific cost incurred. The consensus should be applied prospectively
to new or modified arrangements entered into after December 31, 2002.
The Company had been participating in a vendor program that expired in
November of 2003. Since this program was initiated prior to December 31,
2002, the Company has classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under new
agreements, the Company has classified these vendor program payments under
cost of sales in accordance with EITF 02-16.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation 46 (FIN 46), "Consolidation of Variable Interest
Entities." FIN 46 clarifies the application of Accounting Research Bulletin
51, Consolidated Financial Statements, for certain entities that do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties or in
which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 are required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected returns or
both. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise
10
obtains an interest after that date. It applies in the first fiscal year or
interim period beginning after December 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. Adoption of FIN 46 did not have any impact on the
Company's financial condition or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivatives instruments embedded in other
contracts, and for hedging activities under SFAS 133. The Company has
adopted the provisions of SFAS 149 and they had no material impact on our
financial position or results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
(SFAS 150). SFAS 150 clarifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
either debt or equity. The new Statement requires that those financial
instruments be classified as liabilities in statements of financial
position. The Company has adopted the provisions of SFAS 150 and they had
no material impact on our financial position or results of operations.
3. Cash and Short-Term Borrowings
On June 28, 2004, the Company finalized a new $165 million Syndicated
Credit Facility Agreement with GE Commercial Distribution Finance. The new
credit facility has a three-year term and its components include a maximum
of $75 million for inventory financing and a revolver, collateralized
primarily by accounts receivable, of up to $110 million. Under the new
agreement, the credit facility provides a letter of credit facility of $5
million.
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards balances
outstanding under the Company's credit facility. As of October 5, 2004, the
Company had an outstanding balance under the Company's credit facility of
$2.9 million. As of January 5, 2004, the Company did not have a balance
outstanding under the Company's previous credit facility.
4. Stock-Based Compensation
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", in
the fall of 1995. The statement encourages, but does not require, companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company elected to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock. The Company
adopted SFAS No. 123 for disclosure purposes and for non-employee stock
options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
11
(in thousands, except per Three Months Ended October 5,
share amounts) 2004 2003
--------------- ----------------
Net income - as reported $ 1,872 $ 2,563
Stock-based compensation expense-net of tax 299 206
--------------- ----------------
Net income - pro forma $ 1,573 $ 2,357
=============== ================
Net income per common share - as reported
Basic $ 0.15 $ 0.21
=============== ================
Diluted $ 0.15 $ 0.21
=============== ================
Net income per common share - pro forma
Basic $ 0.13 $ 0.19
=============== ================
Diluted $ 0.13 $ 0.19
=============== ================
(in thousands, except per Nine Months Ended October 5,
share amounts) 2004 2003
------------- -----------------
Net income - as reported $ 7,234 $ 6,083
Stock-based compensation expense-net of tax 1,099 1,011
------------- -----------------
Net income - pro forma $ 6,135 $ 5,072
============ =================
Net income per common share - as reported
Basic $ 0.59 $ 0.49
============ =================
Diluted $ 0.58 $ 0.49
============ =================
Net income per common share - pro forma
Basic $ 0.50 $ 0.41
============ =================
Diluted $ 0.49 $ 0.41
============ =================
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations: (in thousands, except per share data)
12
Three Months Ended October 5,
----------------------------------------
2004 2003
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS 12,240 $ 0.15 12,226 $ 0.21
Effect of dilutive
stock options 126 - 143 -
------ ----------- ------ -----------
Diluted EPS 12,366 $ 0.15 12,369 $ 0.21
====== =========== ====== ===========
Nine Months Ended October 5,
----------------------------------------
2004 2003
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
Basic EPS 12,243 $ 0.59 12,340 $ 0.49
Effect of dilutive
stock options 176 (0.01) 50 -
------ ----------- ------ -----------
Diluted EPS 12,419 $ 0.58 12,390 $ 0.49
====== =========== ====== ===========
6. Goodwill and Long-Lived Assets
Intangible assets with definite lives are amortized over their estimated
useful lives. The following table provides a summary of the Company's
intangible assets with definite lives as of October 5, 2004 and January 5,
2004:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
10/5/2004 10/5/2004 10/5/2004 1/5/2004 1/5/2004 1/5/2004
------------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 2,023 $ 1,722 $ 301 $ 1,844 $ 1,650 $ 194
Customer lists 2,877 485 2,392 627 385 242
Other intangibles 1,200 29 1,171 - - -
---------- ------------- ---------- --------- ------------- ---------
Total amortized intangibles $ 6,100 $ 2,236 $ 3,864 $ 2,471 $ 2,035 $ 436
========== ============= ========== ========= ============= =========
Amortized intangible assets are being amortized over periods ranging from 1
to 15 years for covenants not-to-compete, 7 to 15 years for customer lists
and 7 years for other intangibles. For the quarters ended October 5, 2004
and 2003, amortization expense related to intangible assets with definite
lives was $122 and $63 thousand, respectively. For the nine months ended
October 5, 2004 and 2003, amortization expense related to intangible assets
with definite lives was $201 and $360 thousand, respectively.
13
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal Years:
2004 $ 163 October 6, 2004 - January 5, 2005
2005 524
2006 417
2007 417
2008 417
2009 417
2010 and thereafter 1,509
-------
Total $3,864
=======
The change in the net carrying amount of goodwill for the nine months ended
October 5, 2004 by segment are as follows:
(in thousands) Products Services Consolidated
--------- --------- -------------
Net carrying amount as of 1/5/04 $ 35,862 $ 31,802 $ 67,664
Goodwill recorded during first quarter 130 116 246
--------- --------- -------------
Net carrying amount as of 4/5/04 35,992 31,918 67,910
Goodwill recorded during second quarter 66 59 125
--------- --------- -------------
Net carrying amount as of 7/5/04 36,058 31,977 68,035
Goodwill recorded during third quarter 1 52,367 52,368
--------- --------- -------------
Net carrying amount as of 10/5/04 $ 36,059 $ 84,344 $ 120,403
========= ========= =============
See footnote 10 for explanation of increase in goodwill for the third
quarter of fiscal 2004.
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows: (in thousands)
Nine Months Ended October 5,
--------------------------------
2004 2003
-------------- ----------------
Interest paid $ 270 $ 310
============== ================
Income taxes paid $ 3,787 $ 744
============== ================
Adjustments to purchase price
of acquisition assets and intangibles $ 70 $ 299
============== ================
Business combinations accounted for
as purchases:
Assets acquired $ 78,256 $ 10,497
Liabilities assumed 61,622 4,074
Notes payable - 1,326
-------------- ----------------
Net cash paid $ 16,634 $ 5,097
============== ================
8. Litigation
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
14
9. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended October 5, 2004
------------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- ----------------
Revenues $ 139,346 $ 61,101 $ 57 $ 200,504
Income before other expense (income) and income tax 1,097 1,990 42 3,129
Total assets 178,211 123,078 7,375 308,664
Capital expenditures 204 229 - 433
Depreciation and amortization 508 666 - 1,174
Three Months Ended October 5, 2003
------------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- ----------------
Revenues $ 125,685 $ 32,374 $ 13 $ 158,072
Income before other expense (income) and income tax 2,468 1,733 10 4,211
Total assets 169,879 86,849 8,149 264,877
Capital expenditures 160 159 - 319
Depreciation and amortization 644 647 - 1,291
Nine Months Ended October 5, 2004
------------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- ----------------
Revenues $ 407,635 $ 126,149 $ 89 $ 533,873
Income before other expense (income) and income tax 5,144 6,749 44 11,937
Total assets 178,211 123,078 7,375 308,664
Capital expenditures 764 731 - 1,495
Depreciation and amortization 1,559 1,608 2 3,169
Nine Months Ended October 5, 2003
------------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- ----------------
Revenues $ 341,715 $ 93,523 $ 164 $ 435,402
Income before other expense (income) and income tax 5,746 4,056 150 9,952
Total assets 169,879 86,849 8,149 264,877
Capital expenditures 737 748 - 1,485
Depreciation and amortization 2,073 1,930 - 4,003
10. Merger
On July 23, 2004, the Company and Pomeroy Acquisition Sub, Inc. ("PAS"), a
wholly owned subsidiary the Company, completed a merger with Alternative
Resources Corporation ("ARC"). On May 11, 2004, the parties entered into a
definitive merger agreement for PAS to acquire all of the issued and
outstanding shares of capital stock of ARC. The merger was approved by ARC
shareholders at a meeting held on July 22, 2004. As a result of the merger,
ARC is now a wholly-owned subsidiary of the Company.
15
The cash consideration paid at closing, including the cost of all stock,
stock options and warrants purchased and the amount of ARC net debt
retired, was approximately $46.1 million, which was funded from cash on
hand and borrowings from Pomeroy's existing line of credit. The Merger will
nearly double total service revenues for Pomeroy based on historical
performance. In addition, with the anticipated recovery of IT spending, it
is believed that the Merger represents an opportunity to increase revenue
growth. The Merger will add approximately 2,000 technical resources to
Pomeroy as well as some major new customers. The additional technical
personnel will also allow Pomeroy to add new services capabilities.
The operating results of ARC have been included in the Company's
consolidated financial statements since the acquisition date of July 23,
2004. On an unaudited pro forma basis, assuming the acquisition had
occurred at the January 6, 2004, the Company's consolidated results would
have been:
(in thousands, except per share data) For the three months ended For the nine months ended
October 5,2004 October 5, 2004
-------------------------- -------------------------
Actual Pro forma Actual Pro forma
------------- ----------- ------------ -----------
Net sales and revenues $ 200,504 $ 207,715 $ 533,873 $ 598,928
Income before other expense (income) and income tax 3,129 2,671 11,937 9,773
Net income 1,872 1,576 7,234 5,787
Earnings per common share, diluted 0.15 0.13 0.58 0.47
11. Restructuring and Severance Charges
During the third quarter of 2004, in connection with certain strategic
initiatives, the Company recorded restructuring and severance charges
aggregating $1.0 million. The restructuring and severance charge is
associated with legacy Pomeroy costs of facilities and processes that have
or will become duplicative or redundant as ARC operations are integrated
into the Company. These costs consist of facility closing and involuntary
employee reduction severance costs of $576 thousand and $400 thousand,
respectively. These costs are accounted for under FAS 146, "Accounting for
Costs Associated with Exit or Disposal Activities," and have been included
as a charge to the results of operations for the three and nine-month
periods ended October 5, 2004. Going forward, any changes to the estimates
of executing the currently approved plans of restructuring will be
reflected in current results of operations.
The Company also recorded a non-recurring, one-time charge for severance in
the amount of $1.447 million related to the retirement of founder and
former CEO David B. Pomeroy II. Mr. Pomeroy will continue to serve as board
chairman.
Also, in fiscal 2005, the Company plans to have an additional restructuring
charge related to exiting unutilized leased facility space of approximately
$292 thousand. This charge will be recorded when the leased facilities have
been vacated.
During the third quarter of fiscal 2004, the restructuring and severance
charges expensed consisted of the following:
16
(in thousands) Total Initial Cash Accrued balance
Accrual payments at October 5, 2004
-----------------------------------------------
Severance $ 1,847 $ (142) $ 1,705
Facility consolidations 576 - 576
-----------------------------------------------
$ 2,423 $ (142) $ 2,281
===============================================
Also, the Company's management recorded a restructuring charge liability on
the ARC opening balance sheet to eliminate certain duplicative activities
and reduced facility requirements. As a result, approximately $6.4 million
of costs were recorded as part of the ARC merger. The restructuring charge
consisted of costs of vacating duplicative leased facilities and severance
costs associated with exiting activities. These costs are accounted for
under EITF 95-3, "Recognition of Liabilities in Connection with Purchase
Business Combinations." These costs were recognized as a liability assumed
in the purchase business combination and included in the allocation of the
cost to acquire ARC. A portion of the restructuring liabilities are
classified as long-term liabilities in the accompanying consolidated
balance sheet at October 5, 2004. Changes to the estimates of executing the
currently approved plans of restructuring will be recorded as an increase
or decrease to goodwill.
(in thousands) Total Initial Cash Liability balance
Liability payments at October 5, 2004
-----------------------------------------------
Severance $ 2,682 $ (453) $ 2,229
Facility consolidations 3,715 (106) 3,609
-----------------------------------------------
$ 6,397 $ (559) $ 5,838
===============================================
Additionally, as part of the acquisition of ARC, the Company acquired the
remaining obligations of ARC's existing restructuring plans, which were
initially recorded in fiscal 2003 and fiscal 2002. The total obligations
acquired in connection with these restructuring plans was $2.1 million at
July 23, 2004. As of October 5, 2004, the Company had paid approximately
$1.3 million of the acquired accrued costs.
As of October 5, 2004, the balance of the ARC fiscal 2003 and fiscal 2002
accrued restructuring costs recorded consisted of the following:
(in thousands)
Fiscal 2003 Restructuring Charge
Total Accrual Cash Balance at
as of 7/23/04 payments October 5, 2004
--------------------------------------------
Severance $ 647 $ (461) $ 186
--------------------------------------------
$ 647 $ (461) $ 186
============================================
Fiscal 2002 Restructuring Charge
Total Accrual Cash Balance at
as of 7/23/04 payments October 5, 2004
--------------------------------------------
Facility consolidations $ 756 $ (226) $ 530
Other charges 696 (656) 40
--------------------------------------------
$ 1,452 $ (882) $ 570
============================================
17
Item 2-Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Cautionary Notice Regarding Forward-Looking Statements
--------------------------------------------------------------
Certain of the matters discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contain certain
forward-looking statements regarding future financial results of the Company.
The words "expect," "estimate," "anticipate," "predict," and similar expressions
are intended to identify forward-looking statements. Such statements are
forward-looking statements for purposes of the Securities Act of 1933 and the
Securities Exchange Act of 1934, as amended, and as such may involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause the actual
results, performance or achievements of the Company to differ materially from
the Company's expectations are disclosed in this document including, without
limitation, those statements made in conjunction with the forward-looking
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations". All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by such
factors.
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of income expressed as a percentage of net
sales and revenues:
18
Financial Results Percentage of net sales and revenues
Three months ended Nine months ended
October 5, October 5,
---------------------- ------------------------
2004 2003 2004 2003
---------- ---------- --------- -------------
Net sales and revenues:
Equipment, supplies and leasing 69.5% 79.5% 76.4% 78.5%
Service 30.5% 20.5% 23.6% 21.5%
---------- ---------- --------- -------------
Total net sales and revenues 100.0% 100.0% 100.0% 100.0%
========== ========== ========= =============
Cost of sales and servce:
Equipment, supplies and leasing 64.6% 73.9% 70.7% 72.6%
Service 22.2% 14.9% 17.2% 15.6%
---------- ---------- --------- -------------
Total cost of sales and service 86.8% 88.8% 87.9% 88.2%
========== ========== ========= =============
Gross profit:
Equipment, supplies and leasing 4.9% 5.6% 5.7% 5.9%
Service 8.3% 5.5% 6.4% 5.9%
---------- ---------- --------- -------------
Total gross profit 13.2% 11.2% 12.1% 11.8%
========== ========== ========= =============
Operating expenses:
Selling, general and administrative 9.4% 7.2% 8.3% 8.0%
Rent 0.4% 0.5% 0.5% 0.6%
Depreciation 0.5% 0.8% 0.6% 0.8%
Amortization 0.1% 0.0% 0.0% 0.1%
Provision for doubtful accounts 0.0% 0.0% 0.0% 0.0%
Restructuring and severance charges 1.2% 0.0% 0.5% 0.0%
---------- ---------- --------- -------------
Total operating expenses 11.6% 8.5% 9.9% 9.5%
========== ========== ========= =============
Income before other expense (income) and income tax 1.6% 2.6% 2.2% 2.3%
Net other expense 0.1% 0.0% 0.0% 0.0%
Income before income tax 1.5% 2.6% 2.2% 2.3%
Income tax expense 0.6% 1.0% 0.8% 0.9%
---------- ---------- --------- -------------
Net income 0.9% 1.6% 1.4% 1.4%
========== ========== ========= =============
19
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues increased $42.4
million, or 26.8%, to $200.5 million in the third quarter of fiscal 2004 from
$158.1 million in the third quarter of fiscal 2003. This increase was primarily
a result of increased industry-wide technology spending and the acquisition of
Alternative Resources Corporation on July 23, 2004. Excluding acquisitions
completed in fiscal years 2003 and 2004, total net sales and revenues increased
11.5%. Products and leasing sales increased $13.7 million, or 10.9% to $139.4
million in the third quarter of fiscal 2004 from $125.7 million in the third
quarter of fiscal 2003. Excluding acquisitions completed in fiscal years 2003
and 2004, products and leasing sales in the third quarter of fiscal 2004
increased 9.7% over the products and leasing sales in the third quarter of
fiscal 2003. Service revenues increased $28.7 million, or 88.7%, to $61.1
million in the third quarter of fiscal 2004 from $32.4 million in the third
quarter of fiscal year 2003, primarily as a result of the acquisition of
Alternative Resources Corporation. Excluding acquisitions completed in fiscal
years 2003 and 2004, service revenues in the third quarter of fiscal 2004
increased 18.6% over service revenues in the third quarter of fiscal 2003.
Total net sales and revenues increased $98.5 million, or 22.6%, to $533.9
million in the first nine months of fiscal 2004 from $435.4 million in the first
nine months of fiscal 2003. Excluding acquisitions completed in fiscal years
2003 and 2004, total net sales and revenues increased 15.9%. Products and
leasing sales increased $65.8 million, or 19.3%, to $407.7 million in the first
nine months of fiscal 2004 from $341.9 million in the first nine months of
fiscal 2003. Excluding acquisitions completed in fiscal years 2003 and 2004,
products and leasing sales in the first nine months of fiscal 2004 increased
17.8% over products and leasing sales in the first nine months of fiscal 2003.
Service revenues increased $32.6 million, or 34.9%, to $126.1 million in the
first nine months of fiscal 2004 from $93.5 million in the first nine months of
fiscal year 2003, primarily as a result of the acquisition of Alternative
Resources Corporation in the third quarter of fiscal 2004. Excluding
acquisitions completed in fiscal years 2003 and 2004, service revenues in the
first nine months of fiscal 2004 increased 8.8% over service revenues in the
first nine months of fiscal 2003.
GROSS PROFIT. Gross profit increased $8.8 million, or 50.0%, to $26.4 million in
the third quarter of fiscal 2004 from $17.6 million in the third quarter of
fiscal 2003. The increase was primarily due to increased total net sales and
revenues. Gross profit, as a percentage of revenue, increased to 13.2% in the
third quarter of fiscal 2004 as compared to 11.2% in the third quarter of fiscal
2003. This increase in gross margin resulted primarily from the increase in
service revenues as a percentage of total revenues and the increase in service
gross margin as a percentage of total gross margin due to the acquisition of
Alternative Resources Corporation. As a consequence of adopting EITF 02-16, the
Company recorded approximately $70 thousand during the third quarter of fiscal
2004 of vendor considerations as a reduction of product cost of sales, which
previously would have been recorded as a reduction of selling, general and
administrative expenses. Excluding the impact of EITF 02-16, and therefore on a
non-GAAP basis, the gross profit margin would have remained at 13.2% during the
third quarter of fiscal 2004 compared to 11.2% during the third quarter of
fiscal 2003. The non-GAAP gross profit margin is included in this discussion to
provide meaningful comparison to prior periods. On a forward looking basis, the
Company expects to be aggressive in product and service pricing in order to gain
existing market share which may have an unfavorable impact on overall gross
margin. Additionally, the Company expects to continue increasing the breadth
and depth of its service offerings, which should have a continued favorable
impact on service gross margin. Factors that may have an impact on gross margin
in the future include the continued changes in hardware margins, change in
personnel utilization rates, the mix of products sold and services provided, a
change in unit prices, the percentage of equipment or service sales with
lower-margin customers, the ratio of service revenues to total net sales and
revenues, and the Company's decision to aggressively price certain products and
services.
Gross profit increased $13.2 million, or 25.8%, to $64.5 million in the first
nine months of fiscal 2004 from $51.3 million in the first nine months of fiscal
2003. The increase was primarily due to increased total net sales and revenues.
Gross profit, as a percentage of revenue, increased to 12.1% in the first nine
months of fiscal 2004 as compared to 11.8% in the first nine months of fiscal
2003. This increase in gross margin resulted primarily from the increase in
service revenues as a percentage of total revenues and the increase in service
gross margin as a percentage of total gross margin due to the acquisition of
Alternative Resources Corporation. As a consequence of adopting EITF 02-16, the
Company recorded approximately $543 thousand during the first nine
20
months of fiscal 2004 of vendor considerations as a reduction of product cost of
sales, which previously would have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, the gross profit margin would have been 12.0%
during the first nine months of fiscal 2004 compared to 11.8% during the first
nine months of fiscal 2003. The non-GAAP gross profit margin is included in
this discussion to provide meaningful comparison to prior periods. On a forward
looking basis, the Company expects to be aggressive in product and service
pricing in order to gain existing market share which may have a continued
unfavorable impact on overall gross margin.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense) expressed as a percentage of total net sales and revenues
increased to 9.8% in the third quarter of fiscal 2004 from 7.7% in the third
quarter of fiscal 2003. Total operating expenses expressed as a percentage of
total net sales and revenues increased to 11.6% in the third quarter of fiscal
2004 from 8.5% in the third quarter of fiscal 2003. This increase is primarily
the result of the acquisition of Alternative Resources Corporation and recording
a $2.4 million restructuring charge offset by higher net sales and revenues in
the third quarter of fiscal 2004 as compared to the third quarter of fiscal
2003. As a result of adopting EITF 02-16, the Company reclassified
approximately $70 thousand of vendor consideration to a reduction of cost of
sales, which would previously have been recorded as a reduction of selling,
general and administrative expenses. Excluding the impact of EITF 02-16, and
therefore on a non-GAAP basis, operating expenses would have been 11.6% during
the third quarter of fiscal 2004 as compared to 8.5% during the third quarter of
fiscal 2003. This non-GAAP measurement is included to provide a more meaningful
comparison to prior periods.
Selling, general and administrative expenses (including rent expense and
provision for doubtful accounts) expressed as a percentage of total net sales
and revenues increased to 8.8% in the first nine months of fiscal 2004 from 8.6%
in the first nine months of fiscal 2003. Total operating expenses expressed as a
percentage of total net sales and revenues increased to 9.9% in the first nine
months of fiscal 2004 from 9.5% in the first nine months of fiscal 2003. This
increase is primarily the result of recording a $2.4 million restructuring
charge in the third quarter of fiscal 2004 offset by higher net sales and
revenues in the first nine months of fiscal 2004 as compared to the first nine
months of fiscal 2003. As a result of adopting EITF 02-16, the Company
reclassified approximately $543 thousand of vendor consideration to a reduction
of cost of sales, which would previously have been recorded as a reduction of
selling, general and administrative expenses. Excluding the impact of EITF
02-16, and therefore on a non-GAAP basis, operating expenses would have been
9.7% during the first nine months of fiscal 2004 as compared to 9.5% during the
first nine months of fiscal 2003. This non-GAAP measurement is included to
provide a more meaningful comparison to prior periods.
RESTRUCTURING AND SEVERANCE CHARGES. During the third quarter of 2004, in
connection with certain strategic initiatives, the Company recorded
restructuring and severance charges of $1.0 million. The restructuring charge
is associated with legacy Pomeroy costs of facilities and processes that have or
will become duplicative or redundant as ARC operations are integrated into the
Company. The Company also recorded a non-recurring, one-time charge for
severance in the amount of $1.4 million related to the retirement of founder and
former CEO David B. Pomeroy II.
INCOME BEFORE OTHER EXPENSE (INCOME) AND INCOME TAX. Income from operations
decreased $1.1 million, or 25.7%, to $3.1 million in the third quarter of fiscal
2004 from $4.2 million in the third quarter of fiscal 2003. The Company's
operating margin decreased to 1.6% in the third quarter of fiscal 2004 as
compared to 2.6% in the third quarter of fiscal 2003. This decrease is
primarily due to recording the non-recurring restructuring and severance charges
described above.
Income before other expense (income) and income tax increased $2.0 million, or
19.9%, to $11.9 million in the first nine months of fiscal 2004 from $9.9
million in the first nine months of fiscal 2003. The Company's operating margin
decreased to 2.2% in the first nine months of fiscal 2004 as compared to 2.3% in
the first nine months of fiscal 2003. This decrease is primarily due to
recording the restructuring and severance charges described above offset by
increase in service revenues as a percentage of total revenues and the increase
in service gross margin as a percentage of total gross margin due to the
acquisition of Alternative Resources Corporation.
NET INTEREST INCOME (EXPENSE). Net interest expense was $0.032 million during
the third quarter of fiscal 2004 as compared to net interest income of $0.007
million during the third quarter of fiscal 2003. This was primarily a result of
increased borrowings on the credit facility.
21
Net interest expense was $0.001 million in the first nine months of fiscal 2004
compared to net interest income of $0.02 million in the first nine months of
fiscal 2003. This increase in net interest expense was a result of increased
borrowings under our credit facility and lower interest rates on invested funds.
INCOME TAXES. The Company's effective tax rate was 39.5% in the third quarter
of fiscal 2004 compared to 39.0% in the third quarter of fiscal 2003.
The Company's effective tax rate was 39.3% in the first nine months of fiscal
2004 compared to 39.0% in the first nine months of fiscal 2003.
NET INCOME. Net income decreased $0.7 million, or 27.0%, to $1.9 million in the
third quarter of fiscal 2004 from $2.6 million in the third quarter of fiscal
2003 due to the factors described above.
Net income increased $1.1 million, or 18.9%, to $7.2 million in the first nine
months of fiscal 2004 from $6.1 million in the first nine months of fiscal 2003
due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $15.9 million in the first nine months
of fiscal 2004. Cash used in investing activities was $18.1 million, which
included payments of $16.6 million for current and prior year acquisitions and
$1.5 million for capital expenditures. Cash used in financing activities was
$28.4 million, which included $31.4 million for payments of acquisition notes
payable and $0.5 million for the purchase of treasury stock offset by $2.9
million of proceeds from short-term borrowings, $0.4 million of proceeds from
exercise of stock options and $0.2 million of proceeds from employee stock plan
purchases.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At October 5, 2004, these lines of credit
totaled $87.0 million, including $75.0 million with GE Commercial Distribution
Finance ("GECDF") and $10.0 million with IBM Credit Corporation ("ICC").
Borrowings under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on either thirty-day
or sixty-day notes. All such borrowings are secured by the related inventory.
Financing on substantially all of the arrangements is interest free due to
subsidies by manufacturers. Overall, the average rate on these arrangements is
less than 1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with GECDF. On June 28, 2004, the Company finalized a new $165
million syndicated credit facility with GECDF. This new $165 million syndicated
credit facility has a three-year term and supersedes the $240.0 million credit
facility that was in effect with GECDF prior to the closing of this transaction.
The new credit facility components include a maximum of $75 million for
inventory financing and a revolver, collateralized primarily by accounts
receivable, of up to $110 million. Under the new agreement, the credit facility
provides a letter of credit facility of $5 million. The accounts receivable
portion of the credit facility carries a variable interest rate based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid.
As of October 5, 2004 the Company had an outstanding balance on the working
capital component of this facility of $2.9 million. The credit facility is
collateralized by substantially all of the assets of the Company, except those
assets that collateralize certain other financing arrangements. Under the terms
of the credit facility, the Company is subject to various financial covenants.
Currently, the Company is in compliance with all financial covenants.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its common stock
and seller financing. The Company anticipates that future acquisitions will be
financed in a similar manner. The merger of Alternative Resources Corporation
with and into Pomeroy Acquisition Sub, Inc., a wholly owned subsidiary of the
Company, completed on July 23, 2004 was financed using cash on hand and
borrowings from Pomeroy's existing line of credit.
22
Aggregated information about the Company's contractual obligations and other off
balance sheet commitments as of October 5, 2004 are presented in the following
table:
MORE
THAN 5
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEARS
-------------------------------------------------------------
Acquisition notes $ 1,162 $ 912 $ 250 $ - $ - $ - $ -
Operating leases 20,320 5,991 3,979 3,375 3,014 2,719 1,242
-------------------------------------------------------------
Total contractual
cash obligations $21,482 $ 6,903 $ 4,229 $ 3,375 $ 3,014 $ 2,719 $ 1,242
=============================================================
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business.
Item 3-Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk for the third
quarter of fiscal 2004.
Currently, the Company does not have any significant financial investments for
trading or other speculative purposes or to manage interest rate exposure.
Item 4-Controls and Procedures
As of October 5, 2004, an evaluation was carried out under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are, to the best
of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
October 5, 2004, our Chief Executive Officer and Chief Financial Officer have
concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect our internal
controls.
23
PART II - OTHER INFORMATION
Item 1-Legal Proceedings
There are various legal actions arising in the normal course of business that
have been brought against the Company. Management believes these matters will
not have a material adverse effect on the Company's financial position or
results of operations.
Item 2-Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
(c) Total number (d) Maximum
of shares number of shares
(a) Total number (b) Average purchased as that may yet be
of shares price paid part of publicly purchased under
Period purchased per share announced plan the plan
7/6/04 - 8/5/04 10,000 $ 11.81 423,367 0
8/6/04 - 9/5/04 - - - -
9/6/04 - 10/5/04 - - - -
------------------------------------------------------------------
Total 10,000 423,367 0
==================================================================
Item 3-Defaults Upon Senior Securities
NONE
Item 4-Submission of Matters to a Vote of Security Holders
NONE
Item 5-Other Information
NONE
Item 6-Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
Item 2.02. Results of Operations and Financial Condition.
On November 11, 2004, Pomeroy IT Solutions, Inc. issued a press release
announcing financial results for the third quarter and nine months ended October
5, 2004. A copy of this press release is attached hereto as Exhibit 99.1.
Certain information in this press release was discussed by Stephen Pomeroy,
Chief Executive Officer and President and Michael Rohrkemper, Chief Financial
Officer and Chief Accounting Officer in our third quarter conference call that
was conducted following the public issuance of the press release.
Item 9.01 Financial Statements and Exhibits.
- ---------------------------------------------
99.1 Press Release, dated November 11, 2004, announcing financial results for
the third quarter and nine months ended October 5, 2004.
24
31.1 Section 302 CEO Certification
31.2 Section 302 CFO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO Certification
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
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(Registrant)
Date: November 15, 2004 By: /s/ Michael E. Rohrkemper
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Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
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