UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 5, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-20022
POMEROY IT SOLUTIONS, INC.
--------------------------
(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 NO X
--- ---
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
The number of shares of common stock outstanding as of August 5, 2005 was
12,579,159
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of July
5, 2005 (Unaudited) and January 5, 2005 2
Consolidated Statements of Income and
Comprehensive Income for the Three
Months Ended July 5, 2005 and 2004
(Unaudited) 4
Consolidated Statements of Income for
the Six Months Ended July 5, 2005 and
2004 (Unaudited) 5
Consolidated Statements of
Comprehensive Income for the Six
Months Ended July 5, 2005 and 2004
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Six Months Ended July 5, 2005
and 2004 (Unaudited) 7
Notes to Consolidated Financial
Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 17
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits 26
SIGNATURES 27
EXPLANATORY NOTE
Pomeroy IT Solutions, Inc. (the "Company") is filing this amendment No. 1
(the "Amendment") to its quarterly report on form 10-Q for the quarterly period
ended July 5, 2005, originally filed on August 15, 2005 (the "original filing
date"), As described in Note 12 to the Consolidated Financial Statements, the
Company is restating its previously filed consolidated financial statements as
of and for the three months and six months ended July 5, 2005 Form 10-Q dated
August 15, 2005, Subsequent to the filing of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended July 5, 2005, the Company determined
that there were accounting errors related to service revenue and cost
calculations and capitalized costs and depreciation expense related to
internal-use software.
The Company reviewed the service revenue and cost calculations and has
concluded that they were improperly recorded as of and for the three and six
months ended July 5, 2005. The errors primarily related to problems with new
information technology systems and processes for service revenues and costs,
which were implemented during the quarterly period ended April 5, 2005. The new
information technology systems converted and integrated the prior systems and
processes used by the Company and Alternative Resources Corporation, the
services business acquired by the Company during its fiscal year ended January
5, 2005. In addition, the Company has reviewed and adjusted depreciation
expense related to internal use software.
During the fourth quarter of 2005, the Company re-aligned the structure of
its internal organization and began operating under one business segment.
Previously, the Company operated under three operating segments: products,
services and leasing. The aggregation of segments reflects the manner in which
management and the board of directors now evaluate operating results in
accordance with Statement of Financial Accounting Standards No.131, "Disclosures
about Segments of an Enterprise and Related Information". The consolidated
financial statements for the three and six months ended July 5, 2005 contained
in this Amendment have been amended to reflect this change.
The restatement affects disclosures and tabular amounts in Part I Item 1,
Financial Statements and Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations. This Amendment speaks as of the
original filing date. This Amendment should be read together with other
documents that the Company has filed with the Securities and Exchange Commission
subsequent to the original filing.
1
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) July 5, January 5,
2005 2005
--------------------- ---------------------
(Restated-Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . $ 4,218 $ 13,108
Certificates of deposit. . . . . . . . . . . . . . . . . . . . 4,595 4,561
Accounts receivable:
Trade, less allowance of $2,031 at July 5, 2005 and $1,462
at January 5, 2005 . . . . . . . . . . . . . . . . . . . . 142,662 143,113
Vendor receivables, less allowance of $100 at
July 5, 2005 and January 5, 2005 . . . . . . . . . . . . . 7,301 5,790
Net investment in leases . . . . . . . . . . . . . . . . . . 2,480 3,814
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,134 2,902
--------------------- ---------------------
Total receivables. . . . . . . . . . . . . . . . . . . . . 154,577 155,619
--------------------- ---------------------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 18,206 17,188
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,672 10,302
--------------------- ---------------------
Total current assets . . . . . . . . . . . . . . . . . . . 190,268 200,778
--------------------- ---------------------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . . . 30,513 30,113
Leasehold improvements . . . . . . . . . . . . . . . . . . . 6,474 6,187
--------------------- ---------------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 36,987 36,300
Less accumulated depreciation. . . . . . . . . . . . . . . . 22,932 21,061
--------------------- ---------------------
Net equipment and leasehold improvements . . . . . . . . . 14,055 15,239
--------------------- ---------------------
Net investment in leases, net of current portion . . . . . . . 1,741 1,650
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,514 109,913
Intangible assets, net . . . . . . . . . . . . . . . . . . . . 3,242 3,702
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 2,593 1,606
--------------------- ---------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 322,413 $ 332,888
===================== =====================
See notes to consolidated financial statements.
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) July 5, January 5,
2005 2005
--------------------- ---------------------
(Restated-Unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable . . . . . . . . . . . . . . $ - $ 912
Short-term borrowings. . . . . . . . . . . . . . . . . . . . 17,652 20,153
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 67,996 72,656
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 3,103 3,490
Employee compensation and benefits . . . . . . . . . . . . . 4,263 8,245
Accrued restructuring and severance charges. . . . . . . . . 4,111 7,585
Other current liabilities. . . . . . . . . . . . . . . . . . 5,985 6,778
--------------------- ---------------------
Total current liabilities. . . . . . . . . . . . . . . . 103,110 119,819
--------------------- ---------------------
Notes payable, less current portion. . . . . . . . . . . . . - 250
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 1,597 97
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
(13,368 and 13,188 shares issued at July 5, 2005 and
January 5, 2005, respectively) . . . . . . . . . . . . . 134 132
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . 87,556 85,231
Accumulated other comprehensive income (loss). . . . . . . 24 (78)
Retained earnings. . . . . . . . . . . . . . . . . . . . . 139,114 136,183
--------------------- ---------------------
226,828 221,468
Less treasury stock, at cost ( 810 and 778 shares at July 5
2005 and January 5, 2005, respectively). . . . . . . . . 9,122 8,746
--------------------- ---------------------
Total equity . . . . . . . . . . . . . . . . . . . . . 217,706 212,722
--------------------- ---------------------
Total liabilities and equity . . . . . . . . . . . . . $ 322,413 $ 332,888
===================== =====================
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(in thousands,except earnings per share data) Three Months Ended
--------------------------------------------
July 5, July 5,
2005 2004
--------------------- ---------------------
(Restated-Unaudited) (Unaudited)
Net sales and service revenues:
Sales-equipment, supplies and leasing $ 135,093 $ 143,722
Service 56,932 34,433
--------------------- ---------------------
Total net sales and service revenues 192,025 178,155
--------------------- ---------------------
Cost of sales and service:
Sales-equipment, supplies and leasing 124,956 133,444
Service 41,922 24,980
--------------------- ---------------------
Total cost of sales and service 166,878 158,424
--------------------- ---------------------
Gross profit 25,147 19,731
--------------------- ---------------------
Operating expenses:
Selling, general and administrative 18,748 12,785
Rent expense 790 777
Depreciation 1,236 1,027
Amortization 192 39
--------------------- ---------------------
Total operating expenses 20,966 14,628
--------------------- ---------------------
Income from operations 4,181 5,103
--------------------- ---------------------
Other expense (income):
Interest , net 206 (19)
Other - 21
--------------------- ---------------------
Total other expense (income) 206 2
--------------------- ---------------------
Income before income tax 3,975 5,101
Income tax expense 1,610 2,015
--------------------- ---------------------
Net income and comprehensive income $ 2,365 $ 3,086
===================== =====================
Weighted average shares outstanding:
Basic 12,573 12,258
===================== =====================
Diluted 12,656 12,401
===================== =====================
Earnings per common share:
Basic $ 0.19 $ 0.25
===================== =====================
Diluted $ 0.19 $ 0.25
===================== =====================
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data) Six Months Ended
--------------------------------------------
July 5, July 5,
2005 2004
--------------------- ---------------------
(Restated-Unaudited) (Unaudited)
Net sales and service revenues:
Sales-equipment, supplies and leasing $ 246,336 $ 268,321
Service 111,521 65,048
--------------------- ---------------------
Total net sales and service revenues 357,857 333,369
--------------------- ---------------------
Cost of sales and service:
Sales-equipment, supplies and leasing 227,380 248,017
Service 82,514 47,252
--------------------- ---------------------
Total cost of sales and service 309,894 295,269
--------------------- ---------------------
Gross profit 47,963 38,100
--------------------- ---------------------
Operating expenses:
Selling, general and administrative 37,856 25,752
Rent expense 1,726 1,545
Depreciation 2,437 1,916
Amortization 460 79
Restructuring and severance charges 132 -
--------------------- ---------------------
Total operating expenses 42,611 29,292
--------------------- ---------------------
Income from operations 5,352 8,808
--------------------- ---------------------
Other expense (income):
Interest, net 427 (31)
Other 1 23
--------------------- ---------------------
Total other expense (income) 428 (8)
--------------------- ---------------------
Income before income tax 4,924 8,816
Income tax expense 1,994 3,454
--------------------- ---------------------
Net income $ 2,930 $ 5,362
===================== =====================
Weighted average shares outstanding:
Basic 12,521 12,245
===================== =====================
Diluted 12,661 12,362
===================== =====================
Earnings per common share:
Basic $ 0.23 $ 0.44
===================== =====================
Diluted $ 0.23 $ 0.43
===================== =====================
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Six Months Ended
--------------------------------------------
July 5, July 5,
2005 2004
--------------------- ---------------------
(Restated-Unaudited) (Unaudited)
Net income. . . . . . . . . . . . . . . . . . . . . . $ 2,930 $ 5,362
Other comprehensive income:
Foreign currency translation adjustment, net of tax 102 -
--------------------- ---------------------
Comprehensive income. . . . . . . . . . . . . . . . . $ 3,032 $ 5,362
===================== =====================
See notes to consolidated financial statements.
6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months Ended
--------------------------
July 5, July 5,
2005 2004
------------ ------------
(Restated- (Unaudited)
Unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,930 $ 5,362
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . 2,437 1,916
Amortization . . . . . . . . . . . . . . . . . . . . . . . 460 79
Restructuring and severance charges. . . . . . . . . . . . 132 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . 2,641 (395)
Loss on sale of fixed assets . . . . . . . . . . . . . . . 8 22
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable. . . . . . . . . . . . . . . . . . . (1,765) 668
Inventories. . . . . . . . . . . . . . . . . . . . . . . (1,841) (5,793)
Other current assets . . . . . . . . . . . . . . . . . . 489 (462)
Net investment in leases . . . . . . . . . . . . . . . . 2,413 254
Accounts payable . . . . . . . . . . . . . . . . . . . . (4,065) 5,332
Deferred revenue . . . . . . . . . . . . . . . . . . . . (387) (908)
Income tax payable . . . . . . . . . . . . . . . . . . . 18 290
Employee compensation and benefits . . . . . . . . . . . (3,982) (286)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (5,068) 1,133
------------ ------------
Net operating activities . . . . . . . . . . . . . . . . . (5,580) 7,212
------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . (1,033) (1,062)
Proceeds from sale of fixed assets . . . . . . . . . . . . 6 20
Purchases of certificates of deposit . . . . . . . . . . . (34) (1,517)
Acquisition of businesses, net of
cash acquired. . . . . . . . . . . . . . . . . . . . . . (1,139) (541)
------------ ------------
Net investing activities . . . . . . . . . . . . . . . . . (2,200) (3,100)
------------ ------------
Cash flows from financing activities:
Payments of notes payable. . . . . . . . . . . . . . . . . (662) (663)
Proceeds from exercise of stock options
and related tax benefit. . . . . . . . . . . . . . . . . 2,327 396
Purchase of treasury stock . . . . . . . . . . . . . . . . (376) (349)
Proceeds from employee stock purchase plan . . . . . . . . - 160
Net payments of short-term borrowings. . . . . . . . . . . (2,501) -
------------ ------------
Net financing activities . . . . . . . . . . . . . . . . . (1,212) (456)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 102 -
------------ ------------
Change in cash and cash equivalents. . . . . . . . . . . . . (8,890) 3,656
Cash and cash equivalents:
Beginning of period. . . . . . . . . . . . . . . . . . . . 13,108 37,183
------------ ------------
End of period. . . . . . . . . . . . . . . . . . . . . . . $ 4,218 $ 40,839
============ ============
See notes to consolidated financial statements.
7
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by US GAAP for
complete financial statements. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended January 5, 2005. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the interim periods have been made.
The results of operations for the six-month period ended July 5, 2005 are
not necessarily indicative of the results that may be expected for future
interim periods or for the year ending January 5, 2006.
2. Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4."
SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4,
"Inventory Pricing," that inventories are presumed to be stated at cost;
however, it amends ARB No. 43 to clarify that abnormal amounts of idle
facilities, freight, handling costs and spoilage should be recognized as
current period expenses. Also, SFAS No. 151 requires fixed overhead costs
be allocated to inventories based on normal production capacity. The
guidance in SAFS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company believes that
implementing SFAS No. 151 should not have any material impact on its
financial condition, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires all
share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair
values, beginning with the first interim or annual period of an entity's
first fiscal year beginning after June 15, 2005, with early adoption
encouraged. The Company expects to adopt SFAS No. 123R effective January 6,
2006. The pro forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement recognition. Under
SFAS 123R, we must determine the appropriate fair value model to be used
for valuing share-based payments, the amortization method for compensation
cost and the transition method to be used at date of adoption.
SFAS No. 123R will apply to awards granted or modified by the Company after
January 5, 2006. Compensation cost will also be recorded for prior option
grants that vest after that date. The effect of adopting SFAS 123 on the
Company's consolidated results of operations will depend on the level of
future option grants and the fair value of the options granted at such
future dates, as well as the vesting periods provided by such awards and,
therefore, cannot currently be estimated. We are evaluating the
requirements of SFAS 123R and have not yet determined the method of
adoption or the effect of adopting SFAS 123R, and we have not determined
whether the adoption will result in amounts that are similar to the current
pro forma disclosures under SFAS 123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB No.
107"). SAB No. 107 covers key topics related to the implementation of SFAS
No. 123R which include the valuation models, expected volatility, expected
option term, income tax effects of SFAS No. 123R, classification of
stock-based compensation cost, capitalization of compensation costs, and
disclosure requirements.
8
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" (FIN No. 47). FIN No. 47
clarifies that a company should record a liability for a conditional asset
retirement obligation when incurred if the fair value of the obligation can
be reasonably estimated. This interpretation further clarified conditional
asset retirement obligation, as used in SFAS No. 143, "Accounting for Asset
Retirement Obligations," as a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the entity. FIN No. 47 is effective for companies no later than the end of
their fiscal years ending after December 15, 2005. The Company does not
expect the adoption of FIN No. 47 to have a material impact on the
Company's financial position, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB No. 20, "Accounting Changes," and SFAS No.
3, "Reporting Accounting Changes in Interim Financial Statements." This
statement requires that an entity apply the retrospective method in
reporting a change in an accounting principle of the reporting entity. The
standard only allows for a change in accounting principle if it is required
by a newly issued accounting pronouncement or the entity can justify the
use of an allowable alternative accounting principle on the basis that it
is preferable. This statement also requires that corrections for errors
discovered in prior period financial statements be reported as a prior
period adjustment by restating the prior period financial statements.
Additional disclosures are required when a change in accounting principle
or reporting entity occurs, as well as when a correction for an error is
reported. The statement is effective for the Company for fiscal 2006. No
material impact is anticipated as a result of the adoption of this
statement.
3. Cash and Short-Term Borrowings
The Company has a $165.0 million Syndicated Credit Facility Agreement with
GE Commercial Distribution Finance. The credit facility has a three-year
term and its components include a maximum of $75.0 million for inventory
financing and a revolver, collateralized primarily by accounts receivable,
of up to $110.0 million. The credit facility also provides a letter of
credit facility of $5.0 million. Interest on outstanding borrowings under
the credit facility is payable monthly based on the LIBOR rate and a
pricing grid. This credit facility expires June 28, 2007.
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 July 5, 2005, the
Company had an outstanding balance under the Company's credit facility of
$17.7 million. As of January 5, 2005, the Company had an outstanding
balance under the Company's credit facility of $20.2 million.
Under the terms of the credit facility, the Company is subject to various
financial covenants including maintenance of a minimum level of tangible
net worth, a minimum fixed charge coverage ratio, a maximum ratio of total
funded indebtedness to EBITDA and maximum net loss after tax. As of July 5,
2005, the Company was in compliance with those financial covenants.
4. Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, compensation cost
for stock options is measured as the excess, if any, of the quoted market
price of the Company's common stock at the date of grant over the amount an
employee must pay to acquire the stock. The Company adopted SFAS No. 123
for disclosure purposes and for non-employee stock options.
9
Had compensation cost for the Company's stock option plans been determined
based on the fair value of the awards at the grant date consistent with the
provisions of SFAS No. 123, as amended by SFAS No.148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
(in thousands, except per Three Months Ended July 5,
share amounts) 2005 2004
-------------- -------------
(Restated)
Net income - as reported $ 2,365 $ 3,086
Stock-based compensation expense-net of tax 266 261
-------------- -------------
Net income - pro forma $ 2,099 $ 2,825
============== =============
Net income per common share - as reported
Basic $ 0.19 $ 0.25
============== =============
Diluted $ 0.19 $ 0.25
============== =============
Net income per common share - pro forma
Basic $ 0.17 $ 0.23
============== =============
Diluted $ 0.17 $ 0.23
============== =============
(in thousands, except per Six Months Ended July 5,
share amounts) 2005 2004
------------ --------------
(Restated)
Net income - as reported $ 2,930 $ 5,362
Stock-based compensation expense-net of tax 1,358 800
------------ --------------
Net income - pro forma $ 1,572 $ 4,562
============ ==============
Net income per common share - as reported
Basic $ 0.23 $ 0.44
============ ==============
Diluted $ 0.23 $ 0.43
============ ==============
Net income per common share - pro forma
Basic $ 0.13 $ 0.37
============ ==============
Diluted $ 0.12 $ 0.37
============ ==============
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations: (in thousands, except per share data)
10
Three Months Ended July 5,
---------------------------------------
2005 2004
------------------- ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
(Restated)
Basic EPS 12,573 $ 0.19 12,258 $ 0.25
Effect of dilutive
stock options 83 - 143 -
------ ----------- ------ ----------
Diluted EPS 12,656 $ 0.19 12,401 $ 0.25
====== =========== ====== ==========
Six Months Ended July 5,
----------------------------------------
2005 2004
------------------- -------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ -----------
(Restated)
Basic EPS 12,521 $ 0.23 12,245 $ 0.44
Effect of dilutive
stock options 140 - 117 (0.01)
------ ----------- ------ -----------
Diluted EPS 12,661 $ 0.23 12,362 $ 0.43
====== =========== ====== ===========
6. Goodwill and Long-Lived Assets
Intangible assets with definite lives are amortized using straight-line and
accelerated methods over their estimated useful lives. The following table
provides a summary of the Company's intangible assets with definite lives
as of July 5, 2005 and January 5, 2005:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
7/5/2005 7/5/2005 7/5/2005 1/5/2005 1/5/2005 1/5/2005
----------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 2,024 $ 1,841 $ 183 $ 2,024 $ 1,769 $ 255
Customer lists 2,877 861 2,016 2,877 559 2,318
Other intangibles 1,200 157 1,043 1,200 71 1,129
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 6,101 $ 2,859 $ 3,242 $ 6,101 $ 2,399 $ 3,702
========= ============= ========= ========= ============= =========
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 quarter ended July 5, 2005,
amortization expense related to intangible assets was $192 thousand. For
the quarter ended July 5, 2004, amortization expense related to intangible
assets was $39 thousand. For the six months ended July 5, 2005,
amortization expense related to intangible assets with definite lives was
$460 thousand. For the six months ended July 5, 2004, amortization expense
related to intangible assets with definite lives was $79 thousand.
11
Projected future amortization expense related to intangible assets with
definite lives is as follows:
(in thousands)
Fiscal Years:
2005 $ 304 July 6, 2005 - January 5, 2006
2006 543
2007 504
2008 461
2009 421
2010 + 1,009
------
Total $3,242
======
The change in the net carrying amount of goodwill for the six months ended
July 5, 2005 is as follows:
(in thousands)
Net carrying amount as of 1/5/05 $109,913
Net goodwill recorded during first quarter (11)
---------
Net carrying amount as of 4/5/05 109,902
Net goodwill recorded during second quarter 612
---------
Net carrying amount as of 7/5/05 $110,514
=========
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows:
(in thousands) Six Months Ended July 5,
-------------------------
2005 2004
------------ -----------
Interest paid $ 520 $ 162
============ ===========
Income taxes paid $ 1,088 $ 2,364
============ ===========
Adjustments to purchase price
of acquired assets and goodwill $ (538) $ 70
============ ===========
Business combinations accounted for
as purchases:
Assets acquired $ 1,139 $ 541
Liabilities assumed - -
-------------------------
Net cash paid $ 1,139 $ 541
=========================
8. Litigation
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
12
9. Segment Information
Effective in the fourth quarter of 2005, the Company re-aligned its
business segments and operating segments into one business segment, which
includes both product and service offerings. The Company follows the
provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement establishes standards for the
reporting of information about operating segments in annual and interim
financial statements. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding
how to allocate resources and in assessing performance. The Company's
operating segments have similar economic characteristics and therefore can
be aggregated into one reporting segment. Two or more operating segments
may be aggregated into a single operating segment if the segments are
similar in each of the following areas: (1) the nature of the products and
services (2) the nature of the production processes (3) the type of class
of customer for the products and service and (4) the nature of the
regulatory environment.
Prior to fiscal year 2005, the Company disclosed three reporting segments:
products, services and leasing. Monthly income statements were generated
and reviewed by management for both the products and service businesses for
decision making purposes. The segment reporting (product and services) are
no longer reviewed by management on a regular basis and required
significant manual work to develop the information solely for quarterly
external financial statement reporting purposes.
During the fourth quarter of 2005, the Company realigned its management and
reporting responsibilities into functional lines: Sales, Service
Operations, Finance and Administrative. The Company also aligned sales and
service delivery into five domestic geographic regions and finance and
administration is centralized. Each of the geographic regions sell both
products and services and each geographic region has similar economic
characteristics. As a result the Company now reports one reportable segment
and the information in this report has been revised to reflect the
Company's current segment reporting.
10. Reclassifications
Certain reclassifications of prior period amounts have been made to conform
to the current period presentation.
11. Restructuring and Severance Charges
During the first quarter of 2005, the Company recorded severance charges of
$0.1 million resulting from the realignment of the structure of the
Company's internal organization.
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 charges were
associated with legacy Pomeroy costs of facilities and processes that have
or will become duplicative or redundant as Alternative Resources
Corporation ("ARC") operations are integrated into the Company. These costs
consisted of facility closing and involuntary employee reduction severance
costs of $576 thousand and $400 thousand, respectively. These costs were
accounted for under FAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," and were included as a charge to the results of
operations for the 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 during the third quarter of 2004 a non-recurring,
one-time charge for severance in the amount of $1.447 million related to
the resignation of founder and former CEO David B. Pomeroy II. Mr. Pomeroy
will continue to serve as Chairman of the Board and as a consultant.
13
As of July 5, 2005, the restructuring and severance charge accrual
consisted of the following:
Total Initial Cash Accrued balance
(in thousands) Accrual payments at July 5, 2005
--------------------------------------------
Severance $ 1,979 $ (1,700) $ 279
--------------------------------------------
Facility consolidations 576 (345) 231
--------------------------------------------
$ 2,555 $ (2,045) $ 510
============================================
Also, the Company's management recorded a restructuring charge liability in
connection with the ARC acquisition to eliminate certain duplicative
activities and reduced facility requirements. As a result, approximately
$6.4 million of costs were recorded as part of the liabilities assumed in
the ARC acquisition in July 2004. The restructuring charge consisted of
costs of vacating duplicative leased facilities of ARC 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. Changes to the estimates of executing the currently approved
plans of restructuring through July 23, 2005 will be recorded as an
increase or decrease in goodwill with any increases in estimates thereafter
charged to operations.
Total Initial Cash Liability balance
(in thousands) Liability payments at July 5, 2005
----------------------------------------------
Severance $ 2,682 $ (2,256) $ 426
----------------------------------------------
Facility consolidations 3,715 (605) 3,110
----------------------------------------------
$ 6,397 $ (2,861) $ 3,536
==============================================
Additionally, as part of the acquisition of ARC, the Company acquired the
remaining obligations of ARC's existing restructuring plans, which were
initially recorded by ARC in fiscal 2003 and fiscal 2002. The total
obligations assumed in connection with these restructuring plans were $2.1
million at July 23, 2004.
As of July 5, 2005, the balance of the ARC fiscal 2003 and fiscal 2002
accrued restructuring costs recorded consisted of the following:
(in thousands)
Fiscal 2003 Restructuring Charge
Total Accrual as Cash Balance at July 5,
of 7/23/04 payments 2005
--------------------------------------------------
Severance $ 647 $ (647) $ -
--------------------------------------------------
$ 647 $ (647) $ -
==================================================
Fiscal 2002 Restructuring Charge
Total Accrual as Cash Balance at July 5,
of 7/23/04 payments 2005
--------------------------------------------------
Facility consolidations $ 756 $ (722) $ 34
--------------------------------------------------
Other charges 696 (666) 31
--------------------------------------------------
$ 1,452 $ (1,388) $ 65
==================================================
14
12. Restatement
Subsequent to the filing of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended July 5, 2005, the Company determined that there
were accounting errors related to service revenue and cost calculations, In
addition, the Company has reviewed and adjusted depreciation expense
related to internal use software.
The following table sets forth the consolidated statements of income and
selected balance sheet data previously reported on Form 10-Q for the three
months and six months ended July 5, 2005, and the restated amounts:
Pomeroy IT Solutions, Inc.
Consolidated Statements of Income
(in thousands, except earnings per share data)
Three months ended Six months ended
July 5, 2005 July 5, 2005
---------------------- ----------------------
Previously Previously
Reported Restated Reported Restated
----------- --------- ----------- ---------
Total net sales and service revenues $ 193,671 $ 192,025 $ 359,261 $ 357,857
Total cost of sales and service 167,449 166,878 308,603 309,894
----------- --------- ----------- ---------
Gross profit 26,222 25,147 50,658 47,963
Total operating expenses 20,788 20,966 42,061 42,611
----------- --------- ----------- ---------
Income from operations 5,434 4,181 8,597 5,352
Total other expense 207 206 428 428
----------- --------- ----------- ---------
Income before income tax 5,227 3,975 8,169 4,924
Income tax expense 2,116 1,610 3,308 1,994
----------- --------- ----------- ---------
Net income $ 3,111 $ 2,365 $ 4,861 $ 2,930
=========== ========= =========== =========
Earnings per share:
Basic $ 0.25 $ 0.19 $ 0.39 $ 0.23
=========== ========= =========== =========
Diluted $ 0.25 $ 0.19 $ 0.38 $ 0.23
=========== ========= =========== =========
Pomeroy IT Solutions, Inc.
Selected Consolidated Balance Sheet Data
As of July 5, 2005
(in thousands)
Previously
Reported Restated
----------- ---------
Total current assets $ 190,209 $ 190,268
----------- ---------
Total assets $ 322,741 $ 322,413
=========== =========
Total current liabilities $ 102,601 $ 103,110
Total long-term liabilities 504 1,597
Total equity 219,636 217,706
----------- ---------
Total liabilities and equity $ 322,741 $ 322,413
=========== =========
15
13. Subsequent Events
On November 15, 2005, the Company disclosed that it was unable to complete its
financial statements for the third quarter of fiscal 2005 because it has
identified errors relating to service billing and cost calculations. The errors
relate to problems with new IT systems and processes for services revenues that
were implemented during the latter part of the first quarter of fiscal 2005. The
new IT systems converted and integrated the prior systems and processes used by
the Company and Alternative Resources Corporation, the services business
acquired by the Company during fiscal 2004.
On November 23, 2005, the Company received a Nasdaq Staff Determination notice
from the Nasdaq Listing Qualifications Department that the Company was not in
compliance with the continued listing requirements of NASD Marketplace Rule
4310(c)(14). The Company requested a hearing before the Nasdaq Listing
Qualifications Hearings Panel (the "Panel") to review the Staff Determination,
which was held on December 22, 2005. As a result of that hearing, on January
30, 2006, the Company received a decision letter from Nasdaq informing the
Company that the Panel determined to grant the Company's request for continued
listing on The Nasdaq National Market provided that the Company filed its
quarterly report on Form 10-Q for the period ended October 5, 2005 (the "Third
Quarter Form 10-Q") and all required restatements, by February 28, 2006.
On February 17, 2006, in accordance with the Company's Plan submitted to the
Panel, the Company notified the Panel that Pomeroy's Audit Committee had
concluded that the financial statements for the Company's quarters ended April
5, 2005 and July 5, 2005 should be restated and requested that the Panel grant
an additional extension of time to file the Third Quarter Form 10-Q and
restatements. On February 23, 2006, the Company reported on Form 8-K the
conclusion of the Audit Committee that the financial statements for the
Company's quarters ended April 5, 2005 and July 5, 2005 should be restated. On
February 28, 2006, the Company received a decision letter from Nasdaq informing
the Company that the Panel determined to grant the Company's request for
continued listing on The Nasdaq National Market provided that the Company files
the Third Quarter Form 10-Q and all required restatements by March 31, 2006. In
order to fully comply with the terms of this exception, the Company must provide
prompt notification to the Panel of any significant events that occur during the
exception period and demonstrate compliance with all requirements for continued
listing on The Nasdaq National Market. If the Company fails to satisfy the
terms of the exception, its securities may be delisted.
16
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Restatement
This section has been updated to give effect to the restatement as discussed in
Note 12 to the Notes to Consolidated Financial Statements included in Item 1.
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.
17
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 service revenues:
Percentage of net sales and service revenues
--------------------------------------------------------------------------------------
Financial Results Three months ended Six months ended
July 5, July 5,
2005 2004 2005 2004
-------------------- -------------------- -------------------- --------------------
(Restated- (Unaudited) (Restated- (Unaudited)
Unaudited) Unaudited)
Net sales and service revenues:
Sales-equipment, supplies and leasing 70.4% 80.7% 68.8% 80.5%
Service 29.6% 19.3% 31.2% 19.5%
-------------------- -------------------- -------------------- --------------------
Total net sales and service revenues 100.0% 100.0% 100.0% 100.0%
==================== ==================== ==================== ====================
Cost of sales and service:
Sales-equipment, supplies and leasing 65.1% 74.9% 63.5% 74.4%
Service 21.8% 14.0% 23.1% 14.2%
-------------------- -------------------- -------------------- --------------------
Total cost of sales and service 86.9% 88.9% 86.6% 88.6%
==================== ==================== ==================== ====================
Gross profit 13.1% 11.1% 13.4% 11.4%
-------------------- -------------------- -------------------- --------------------
Operating expenses:
Selling, general and administrative 9.8% 7.2% 10.6% 7.7%
Rent expense 0.4% 0.4% 0.5% 0.5%
Depreciation 0.6% 0.6% 0.7% 0.6%
Amortization 0.1% 0.0% 0.1% 0.0%
-------------------- -------------------- -------------------- --------------------
Total operating expenses 10.9% 8.2% 11.9% 8.8%
-------------------- -------------------- -------------------- --------------------
Income from operations 2.2% 2.9% 1.5% 2.6%
Net other expense 0.1% 0.0% 0.1% 0.0%
-------------------- -------------------- -------------------- --------------------
Income before income tax 2.1% 2.9% 1.4% 2.6%
Income tax expense 0.9% 1.2% 0.6% 1.0%
-------------------- -------------------- -------------------- --------------------
Net income 1.2% 1.7% 0.8% 1.6%
==================== ==================== ==================== ====================
18
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND SERVICE REVENUES. Total net sales and service revenues
increased $13.8 million, or 7.7%, to $192.0 million in the second quarter of
fiscal 2005 from $178.2 million in the second quarter of fiscal 2004. Product
sales decreased $8.6 million, or 6.0%, to $135.1 million in the second quarter
of fiscal 2005 from $143.7 million in the second quarter of fiscal 2004. This
decrease is due to year over year decline as a result of reductions in IT
spending. Service revenues increased $22.5 million, or 65.4%, to $56.9 million
in the second quarter of fiscal 2005 from $34.4 million in the second quarter of
fiscal year 2004. This increase reflects both organic growth and the acquisition
of Alternative Resources Corporation ("ARC") on July 23, 2004.
Total net sales and service revenues increased $24.5 million, or 7.3%, to $357.9
million in the first six months of fiscal 2005 from $333.4 million in the first
six months of fiscal 2004. Product sales decreased $22.0 million, or 8.2%, to
$246.3 million in the first six months of fiscal 2005 from $268.3 million in the
first six months of fiscal 2004. Service revenues increased $46.5 million, or
71.5%, to $111.5 million in the first six months of fiscal 2005 from $65.0
million in the first six months of fiscal year 2004.
GROSS PROFIT. Gross profit increased $5.4 million, or 27.4%, to $25.1 million in
the second quarter of fiscal 2005 from $19.7 million in the second quarter of
fiscal 2004. The increase resulted primarily from increases in service revenues
as a result of the acquisition of ARC. Gross profit, as a percentage of
revenue, increased to 13.1% in the second quarter of fiscal 2005 as compared to
11.1% in the second quarter of fiscal 2004. The increase in gross margin
percentage resulted primarily from a change in product/service mix, that yielded
a higher gross margin. The product/service mix change can be attributed to an
increase in higher margin service revenues primarily as a result of the
acquisition of ARC. Going forward the Company will continue to be aggressive in
its pricing in order to increase market share, which could have an unfavorable
impact on overall gross margin in the future. The Company expects to continue
increasing the breadth and depth of its offerings, which will have a continued
impact on gross margin. Factors that may have an impact on gross margin in the
future include changes in personnel utilization rates, the mix of products sold
and services provided, start-up costs on large service contracts, a change in
unit prices, the percentage of sales with lower-margin customers, and the
Company's decision to aggressively price certain products and services.
Gross profit increased $9.9 million, or 26.0%, to $48.0 million in the first six
months of fiscal 2005 from $38.1 million in the first six months of fiscal 2004.
The increase was primarily due to increased total net sales and service revenues
offset somewhat by lower product gross profit in 2005. Gross profit, as a
percentage of revenue, increased to 13.4% in the first six months of fiscal 2005
as compared to 11.4% in the first six months of fiscal 2004. The increase in
gross margin percentage resulted primarily from a change in product/service mix,
that yielded a higher gross margin. The product/service mix change can be
attributed primarily to the acquisition of ARC. On a forward looking basis, the
Company expects to be aggressive in it's pricing in order to increase market
share, which could have an unfavorable impact on overall gross margin.
Additionally, the Company expects to continue increasing the breadth and depth
of its offerings, which will have a continued favorable impact on gross margin.
Factors that may have an impact on gross margin in the future include changes in
personnel utilization rates, the mix of products sold and services provided, a
change in unit prices, the percentage of sales with lower-margin customers, and
the Company's decision to aggressively price certain products and services.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense) expressed as a percentage of total net sales and service revenues
increased to 10.2% in the second quarter of fiscal 2005 from 7.6% in the second
quarter of fiscal 2004. Total operating expenses expressed as a percentage of
total net sales and service revenues increased to 10.9% in the second quarter of
fiscal 2005 from 8.2% in the second quarter of fiscal 2004. The increases are
primarily attributable to increased payroll costs and related benefits,
resulting from the acquisition of ARC in 2004.
19
Selling, general and administrative expenses (including rent expense) expressed
as a percentage of total net sales and service revenues increased to 11.1% in
the first six months of fiscal 2005 from 8.2% in the first six months of fiscal
2004. Total operating expenses expressed as a percentage of total net sales and
revenues increased to 11.9% in the first six months of fiscal 2005 from 8.8% in
the first six months of fiscal 2004. The increases are primarily attributable
to increased payroll costs and related benefits, resulting from the acquisition
of ARC in 2004.
INCOME FROM OPERATIONS. Income from operations decreased $0.9 million, or
17.6%, to $4.2 million in the second quarter of fiscal 2005 from $5.1 million in
the second quarter of fiscal 2004. The Company's operating margin decreased to
2.2% in the second quarter of fiscal 2005 as compared to 2.9% in the second
quarter of fiscal 2004. This decrease is a result of the increase in operating
expenses.
Income from operations decreased $3.4 million, or 38.6%, to $5.4 million in the
first six months of fiscal 2005 from $8.8 million in the first six months of
fiscal 2004. The Company's operating margin decreased to 1.5% in the first six
months of fiscal 2005 as compared to 2.6% in the first six months of fiscal
2004. This decrease is primarily due to the increase in operating expenses.
INTEREST INCOME/EXPENSE. Net interest expense was $206 thousand during the
second quarter of fiscal 2005 as compared to net interest income of $19 thousand
during second quarter of fiscal 2004. This increase in net interest expense was
a result of increased borrowings under our credit facility and lower interest
rates on invested funds.
Net interest expense was $427 thousand in the first six months of fiscal 2005
compared to net interest income of $31 thousand in the first six months of
fiscal 2004. This increase in net interest expense was a result of increased
borrowings under our credit facility.
INCOME TAXES. The Company's effective income tax rate was 40.5% in the second
quarter of fiscal 2005 compared to 39.5% in the second quarter of fiscal 2004.
This increase was principally related to the increased rate in calculating state
and local income taxes.
The Company's effective income tax rate was 40.5% in the first six months of
fiscal 2005 compared to 39.2% in the first six months of fiscal 2004. This
increase was principally related to the increased rate in calculating state and
local income taxes.
NET INCOME. Net income decreased $0.7 million, or 22.6%, to $2.4 million in the
second quarter of fiscal 2005 from $3.1 million in the second quarter of fiscal
2004 due to the factors described above.
Net income decreased $2.4 million, or 45.3%, to $2.9 million in the first six
months of fiscal 2005 from $5.4 million in the first six months of fiscal 2004
due to the factors described above.
20
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $5.6 million in the first six months of
fiscal 2005. Cash used in investing activities was $2.2 million, which included
$1.1 million for prior year acquisitions and $1.0 million for capital
expenditures. Cash used in financing activities was $1.2 million which included
$2.5 million for repayment of short-term borrowings, $0.4 million for the
purchase of treasury stock and $0.7 million for payments of notes payable offset
by $2.3 million of proceeds from the exercise of stock options.
The amount of cash derived from operating activities will vary based on a number
of business factors which may change from time to time, including terms of
available financing from vendors, downturns in the Company's business and/or
downturns in the businesses of the Company's customers. However, a growth or
decline in services revenue in conjunction with a change in the proportion of
services revenue to total revenue is an underlying driver of operating cash flow
during the period of change because a majority of the Company's service revenue
is generated based upon the billings of the Company's technicians. The cash
outlay for these labor/payroll costs is incurred bi-weekly with each pay period.
The invoicing for the service is generated on various billing cycles as dictated
by the customers, and the respective cash inflow typically follows within 30 to
60 days of invoice date, which may be as long as 60 to 120 days from the time
the services are performed. This differs from product revenue in that the time
period between the time that the Company incurs the cost to purchase the
products and collects the revenue from its customer is typically shorter,
usually from 0 to 60 days, and the Company primarily orders inventory for a
particular customer rather than stocking large amounts of inventory. The
Company anticipates an increase in service revenue and in the proportion of
service revenue to total revenue which, if it occurs, may result in a
significant decrease in cash flows from operating activities during periods of
significant growth or periods of excess technical capacity. In addition,
certain services, primarily outsourcing contracts for the Company's Life Cycle
Services, require that the Company maintain a stock of specific parts inventory
for servicing the customer; thus, an increase or decrease in the type of
services provided can impact inventory levels and operating cash flows.
Operating cash flows used in the six months ended July 5, 2005 were $5.6 million
as compared to cash flows provided by operating activities of $7.2 million for
the corresponding period of fiscal 2004. The decrease in cash flows from
operating activities in the first six months of 2005 resulted primarily from
increases in inventory, slower collection of trade accounts receivables and
timing of payments on accounts payable. In addition acquisition-related
expenditures were made for restructuring charges (primarily facility
consolidation) and payment of year-end employee compensation, bonuses and
severance.
A significant part of the Company's inventories are financed by floor plan
arrangements with third parties. At July 5, 2005, these lines of credit totaled
$85.0 million, including $75.0 million with GE Commercial Distribution Finance
("GECDF") and $10.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on fifteen-day notes.
All such borrowings are secured by the related inventory. Financing on
substantially all of the arrangements is interest free due to subsidies by
manufacturers. Overall, the average rate on these arrangements is less than
1.0%. The Company classifies amounts outstanding under the floor plan
arrangements as accounts payable.
The Company has a $165.0 million Syndicated Credit Facility Agreement with
GECDF. The credit facility has a three-year term and its components include a
maximum of $75.0 million for inventory financing as described above and a
revolving line of credit, collateralized primarily by accounts receivable, of up
to $110.0 million; provided that the total amount outstanding at any time under
the inventory financing facility and the revolving line of credit may not exceed
$165.0 million. The credit facility also provides a letter of credit facility
of $5.0 million. The interest rate under the credit facility is based on the
London InterBank Offering Rate ("LIBOR") and a pricing grid. As of July 5,
2005, the adjusted LIBOR rate was 5.34%. This credit facility expires June 28,
2007.
As of July 5, 2005, the Company had an outstanding balance under the Company's
credit facility of $17.7 million. As of January 5, 2005, the Company had an
outstanding balance under the Company's credit facility of $20.2 million. The
credit facility is collateralized by substantially all of the assets of Pomeroy,
except those assets that collateralize certain other financing arrangements.
Under the terms of the credit facility, Pomeroy is
21
subject to various financial covenants. As of July 5, 2005 the Company was not
in violation of any 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, deferred earn-out payments, shares of
its Common Stock and seller financing. The Company anticipates that future
acquisitions will be financed in a similar manner.
On October 11, 2004, the Board of Directors approved the repurchase of up to
100,000 shares of the Company's common stock. This stock redemption program was
approved to remain in place and in full force/effect for a period of one year.
22
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 debt position, the Company
did not experience a material impact from interest rate risk for the second
quarter of fiscal 2005.
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
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) designed to provide reasonable assurance that the
information required to be reported in its Exchange Act filings is recorded,
processed, summarized and reported within the time periods specified and
pursuant to the regulations of the Securities and Exchange Commission, including
controls and procedures designed to ensure that this information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. It should be noted that, because of inherent
limitations, the Company's disclosure controls and procedures, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the objectives of the disclosure controls and procedures are met.
As more fully described in Item 9A of the Company's Annual Report on Form 10-K/A
for the year ended January 5, 2005, the Company reported that it identified
material weaknesses in its internal control over financial reporting related to
(1) the accuracy of service billing calculations and revenue recognition related
to service activity, and (2) appropriately applying generally accepted
accounting principles ensuring the adequacy and completeness of disclosures in
the consolidated financial statements as of January 5, 2005. As a result, the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, concluded that as of January 5, 2005, the Company's disclosure controls
and procedures were not effective at a reasonable level of assurance, based on
the evaluation of these controls and procedures required by Exchange Act Rules
13(a)-15(e) or 15(d)-15(e).
As a result of the identified material weaknesses and subsequently identified
errors related service revenue and cost calculations, the Company is taking
steps to enhance its internal control over financial reporting in an effort to
prevent a recurrence of the errors which led to the restatements of the
Company's consolidated financial statements for the quarters ended April 5, 2005
and July 5,2005. The Audit Committee and management have discussed the matters
in detail with Pomeroy's auditor as part of their efforts to enhance Pomeroy's
internal controls over financial reporting. Management has developed a plan for
addressing each of the material weaknesses; however, as of July 5, 2005, the
material weaknesses and subsequently identified errors had not been remediated
and management does not believe all material weaknesses will be remediated by
year end. Accordingly, our Chief Executive Officer and Chief Financial
Officer concluded that, as of July 5, 2005, our disclosure controls and
procedures were not effective in providing reasonable assurance that information
required to be disclosed by us in reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's forms and rules. Despite the material weaknesses and
subsequently identified errors, the financial statements reported on Form 10-Q
for the fiscal quarter ended July 5, 2005, fairly present, in all material
respects, the consolidated financial condition and results of operations of the
Company for the fiscal quarters presented.
Changes in Internal Control Over Financial Reporting
Pomeroy IT Solutions, Inc. acquired Alternative Resources Corporation ("ARC") in
July of 2004. As previously disclosed in the Company's Form 10-K/A for the year
ended January 5, 2005, ARC, whose core competency was the staffing of technical
resources for customers, was excluded from management's assessment of internal
control over financial reporting. During the three-month period ended April 5,
2005, the integration of the two companies was substantially completed. This
integration involved implementing a packaged resource
23
management job order application, and interfacing it with Pomeroy's financial
and payroll legacy systems. As of July 5, 2005, this system had not been fully
tested from an internal control perspective. However, management believes that
testing of these controls may reveal material weaknesses.
24
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
On October 11, 2004, the Board of Directors approved the repurchase of up to
100,000 shares of the Company's common stock. This stock redemption program was
approved to remain in place and in full force/effect for a period of one year.
Issuer Purchases of Equity Securities
(c) Total number (d) Maximum
of shares number of shares
(a) Total number (b) Average purchased as that may yet be
of shares price paid part of publicly purchased under
Period purchased per share announced plan the plan
4/6/05 - 5/5/05 - $ - - 100,000
5/6/05 - 6/5/05 27,400 $ 12.18 27,400 72,600
6/6/05 - 7/5/05 3,900 $ 10.79 3,900 68,700
---------------- ----------------------------------
Total 31,300 31,300 68,700
================ ==================================
During 2004 and through July 5, 2005, the Company did not pay any cash
dividends. Pomeroy has no plans to pay cash dividends in the foreseeable
future, and the payment of such dividends is restricted under Pomeroy's current
credit facility. Under such credit facility, cash dividends and stock
redemptions are limited to $5 million annually.
ITEM 3-DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 16, 2005, the Company held its annual meeting of stockholders for the
following purposes:
1. To elect ten directors; and
2. To approve certain amendments to the 2002 Amended and Restated
Outside Directors' Stock Option Plan.
25
The voting on the above matters by the stockholders was as follows:
Matter
------
Election of Directors: For Withheld
---------------------- ---------- ---------
David B. Pomeroy, II 7,619,804 2,878,925
James H. Smith III 7,613,725 2,885,004
Michael E. Rohrkemper 7,622,409 2,876,320
Stephen E. Pomeroy 7,670,639 2,828,090
William H. Lomicka 10,160,356 338,373
Vincent D. Rinaldi 7,620,637 2,878,092
Debra E. Tibey 10,181,168 317,561
Edward E. Faber 10,326,264 172,465
Kenneth R. Waters 10,390,406 108,323
David G. Boucher 10,421,176 77,553
APPROVE THE AMENDMENT TO THE COMPANY'S 2002 AMENDED AND RESTATED OUTSIDE
DIRECTORS' STOCK OPTION PLAN
5,255,420 shares were voted in favor of the forgoing proposal and 3,895,122
shares were voted against the forgoing proposal. Stockholders holding
19,230, shares abstained from voting in this proposal. The number of shares
voted in favor of the proposal was sufficient for its passage.
ITEM 5-OTHER INFORMATION
None
ITEM 6-EXHIBITS
(a) Exhibits
31.1 Section 302 CEO Certification
31.2 Section 302 CFO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO Certification
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
--------------------------
(Registrant)
Date: March 31, 2006 By: /s/ Stephen E. Pomeroy
-------------- -------------------------------------
Stephen E. Pomeroy
Chief Executive Officer and
Chief Accounting Officer
27