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, 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 February 28, 2006 was
12,620,469.
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of October
5, 2005 (Unaudited) and January 5, 2005 1
Consolidated Statements of Operations for
the Three Months Ended October 5, 2005
and 2004 (Unaudited) 3
Consolidated Statements of Comprehensive
Income for the Three Months Ended
October 5, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Income for
the Nine Months Ended October 5, 2005
and 2004 (Unaudited) 5
Consolidated Statements of Comprehensive
Income for the Nine Months Ended October
5, 2005 and 2004 (Unaudited) 6
Consolidated Statements of Cash Flows for
the Nine Months Ended October 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 24
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security
Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 25
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) October 5, January 5,
2005 2005
------------ -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 129 $ 13,108
Certificates of deposit 4,638 4,561
Accounts receivable:
Trade, less allowance of $4,289 at October 5, 2005
and $1,462 at January 5, 2005 130,007 143,113
Vendor receivables, less allowance of $100 at
October 5, 2005 and January 5, 2005 5,769 5,790
Net investment in leases 3,146 3,814
Other 2,590 2,902
------------ -----------
Total receivables 141,512 155,619
------------ -----------
Inventories 13,832 17,188
Other 9,375 10,302
------------ -----------
Total current assets 169,486 200,778
------------ -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment 30,735 30,113
Leasehold improvements 6,591 6,187
------------ -----------
Total 37,326 36,300
Less accumulated depreciation 23,915 21,061
------------ -----------
Net equipment and leasehold improvements 13,411 15,239
------------ -----------
Net investment in leases, net of current portion 977 1,650
Goodwill 115,626 109,913
Intangible assets, net 3,078 3,702
Other assets 2,373 1,606
------------ -----------
Total assets $ 304,951 $ 332,888
============ ===========
<FN>
See notes to consolidated financial statements.
1
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) October 5, January 5,
2005 2005
------------ ------------
(Unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable $ - $ 912
Short-term borrowings 3,686 20,153
Accounts payable 56,815 72,656
Deferred revenue 3,368 3,490
Employee compensation and benefits 7,760 8,245
Accrued restructuring and severance charges 6,007 7,585
Other current liabilities 8,651 6,778
------------ ------------
Total current liabilities 86,287 119,819
------------ ------------
Notes payable, less current portion - 250
Deferred income taxes 2,134 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
(13,400 and 13,188 shares issued at October 5, 2005
and January 5, 2005, respectively) 134 132
Paid-in capital 87,861 85,231
Accumulated other comprehensive income (loss) 24 (78)
Retained earnings 137,633 136,183
------------ ------------
225,652 221,468
Less treasury stock, at cost ( 810 and 778 shares at
October 5, 2005 and January 5, 2005, respectively) 9,122 8,746
------------ ------------
Total equity 216,530 212,722
------------ ------------
Total liabilities and equity $ 304,951 $ 332,888
============ ============
<FN>
See notes to consolidated financial statements.
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share data) Three Months Ended
--------------------------
October 5, October 5,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Net sales and service revenues:
Sales - equipment, supplies and leasing $ 129,281 $ 139,403
Service 55,720 61,101
------------ ------------
Total net sales and service revenues 185,001 200,504
------------ ------------
Cost of sales and service:
Sales - equipment, supplies and leasing 120,058 129,621
Service 42,427 44,433
------------ ------------
Total cost of sales and service 162,485 174,054
------------ ------------
Gross profit 22,516 26,450
------------ ------------
Operating expenses:
Selling, general and administrative 19,005 18,818
Rent expense 830 906
Depreciation 1,187 1,052
Amortization 164 122
Provision for doubtful accounts 2,000 -
Restructuring and severance charges 1,662 2,423
------------ ------------
Total operating expenses 24,848 23,321
------------ ------------
Income (loss) from operations (2,332) 3,129
------------ ------------
Other expense:
Interest , net 152 32
Other 4 4
------------ ------------
Total other expense 156 36
------------ ------------
Income (loss) before income tax (2,488) 3,093
Income tax expense (benefit) (1,008) 1,221
------------ ------------
Net income (loss) $ (1,480) $ 1,872
============ ============
Weighted average shares outstanding:
Basic 12,583 12,240
============ ============
Diluted 12,583 12,366
============ ============
Earnings (loss) per common share:
Basic $ (0.12) $ 0.15
============ ============
Diluted $ (0.12) $ 0.15
============ ============
<FN>
* Dilutive loss per common share for the three months ended October 5, 2005
would have been anti-dilutive if the number of weighted average shares
outstanding were adjusted to reflect the dilutive effect of outstanding stock
options.
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Three Months Ended
--------------------------
October 5, October 5,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Net income (loss)
Other comprehensive income: $ (1,480) $ 1,872
Foreign currency translation adjustment, net of tax - -
------------ ------------
Comprehensive income (loss) $ (1,480) $ 1,872
============ ============
<FN>
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data) Nine Months Ended
--------------------------
October 5, October 5,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Net sales and service revenues:
Sales - equipment, supplies and leasing $ 375,617 $ 407,724
Service 167,241 126,149
------------ ------------
Total net sales and service revenues 542,858 533,873
------------ ------------
Cost of sales and service:
Sales - equipment, supplies and leasing 347,438 377,638
Service 124,941 91,685
------------ ------------
Total cost of sales and service 472,379 469,323
------------ ------------
Gross profit 70,479 64,550
------------ ------------
Operating expenses:
Selling, general and administrative 56,861 44,570
Rent expense 2,556 2,451
Depreciation 3,624 2,968
Amortization 624 201
Provision for doubtful accounts 2,000 -
Restructuring and severance charges 1,794 2,423
------------ ------------
Total operating expenses 67,459 52,613
------------ ------------
Income from operations 3,020 11,937
------------ ------------
Other expense:
Interest , net 579 1
Other 5 27
------------ ------------
Total other expense 584 28
------------ ------------
Income before income tax 2,436 11,909
Income tax expense 986 4,675
------------ ------------
Net income $ 1,450 $ 7,234
============ ============
Weighted average shares outstanding:
Basic 12,542 12,243
============ ============
Diluted 12,652 12,419
============ ============
Earnings per common share:
Basic $ 0.12 $ 0.59
============ ============
Diluted $ 0.11 $ 0.58
============ ============
<FN>
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
Net income $ 1,450 $ 7,234
Other comprehensive income:
Foreign currency translation adjustment, net of tax 102 (36)
------------ ------------
Comprehensive income $ 1,552 $ 7,198
============ ============
<FN>
See notes to consolidated financial statements.
6
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Nine Months Ended
--------------------------
October 5, October 5,
2005 2004
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,450 $ 7,234
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation 3,624 2,968
Amortization 624 201
Restructuring and severance charges 1,794 -
Provision for doubtful accounts 2,000 -
Deferred income taxes 3,177 12
Loss on sale of fixed assets 4 30
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable 9,560 13,232
Inventories 2,267 (5,959)
Other current assets (1,769) (2,210)
Net investment in leases 1,492 377
Accounts payable (15,245) 1,023
Deferred revenue (122) (501)
Income tax payable (174) 204
Employee compensation and benefits (485) -
Other, net (3,835) (669)
------------ ------------
Net operating activities 4,362 15,942
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,314) (1,495)
Proceeds from sale of fixed assets 6 20
Purchases of certificates of deposit (77) -
Acquisition of businesses, net of
cash acquired (1,185) (16,634)
------------ ------------
Net investing activities (2,570) (18,109)
------------ ------------
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings (16,467) 2,853
Payments of acquisition notes payable (663) (31,385)
Proceeds from exercise of stock options
and related tax benefit 2,463 441
Purchase of treasury stock (376) (467)
Proceeds from employee stock purchase plan 170 160
------------ ------------
Net financing activities (14,873) (28,398)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents 102 (36)
------------ ------------
Change in cash and cash equivalents (12,979) (30,601)
Cash and cash equivalents:
Beginning of period 13,108 40,200
------------ ------------
End of period $ 129 $ 9,599
============ ============
<FN>
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 nine-month period ended October 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 do not believe the adoption
will result in amounts that are materially different than 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.
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
8
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 October 5, 2005, the
Company had an outstanding balance under the Company's credit facility of
$3.7 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 a maximum net loss after tax. As of
October 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 October 5,
share amounts) 2005 2004
----------------- ---------------
Net income (loss) - as reported $ (1,480) $ 1,872
Stock-based compensation expense-net of tax 897 299
----------------- ---------------
Net income (loss) - pro forma $ (2,377) $ 1,573
================= ===============
Net income (loss) per common share - as reported
Basic $ (0.12) $ 0.15
================= ===============
Diluted $ (0.12) $ 0.15
================= ===============
Net income (loss) per common share - pro forma
Basic $ (0.19) $ 0.13
================= ===============
Diluted $ (0.19) $ 0.13
================= ===============
(in thousands, except per Nine Months Ended October 5,
share amounts) 2005 2004
----------------- ---------------
Net income - as reported $ 1,450 $ 7,234
Stock-based compensation expense-net of tax 2,255 1,099
----------------- ---------------
Net income (loss) - pro forma $ (805) $ 6,135
================= ===============
Net income per common share - as reported
Basic $ 0.12 $ 0.59
================= ===============
Diluted $ 0.11 $ 0.58
================= ===============
Net income (loss) per common share - pro forma
Basic $ (0.06) $ 0.50
================= ===============
Diluted $ (0.06) $ 0.49
================= ===============
10
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)
Three Months Ended October 5,
-------------------------------------------
2005 2004
--------------------- --------------------
Per Share Per Share
Shares Amount Shares Amount
-------- ----------- ------- -----------
Basic EPS 12,583 $ (0.12) 12,240 $ 0.15
-------- ----------- ------- -----------
Effect of dilutive
stock options - - 126 -
-------- ----------- ------- -----------
Diluted EPS 12,583 $ (0.12) 12,366 $ 0.15
======== =========== ======= ===========
<FN>
* Not presented herein since effect on loss per common share is anti-dilutive
for the three months ended October 5, 2005.
Nine Months Ended October 5,
-------------------------------------------
2005 2004
--------------------- --------------------
Per Share Per Share
Shares Amount Shares Amount
-------- ----------- ------- -----------
Basic EPS 12,542 $ 0.12 12,243 $ 0.59
-------- ----------- ------- -----------
Effect of dilutive
stock options 110 (0.01) 176 (0.01)
-------- ----------- ------- -----------
Diluted EPS 12,652 $ 0.11 12,419 $ 0.58
======== =========== ======= ===========
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, 2005 and January 5,
2005:
(in thousands)
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
10/5/2005 10/5/2005 10/5/2005 1/5/2005 1/5/2005 1/5/2005
------------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 2,024 $ 1,855 $ 169 $ 2,024 $ 1,769 $ 255
Customer lists 2,877 968 1,909 2,877 559 2,318
Other intangibles 1,200 200 1,000 1,200 71 1,129
---------- ------------- ---------- --------- ------------- ---------
Total amortized intangibles $ 6,101 $ 3,023 $ 3,078 $ 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 October 5, 2005,
amortization expense related to intangible assets was $164 thousand. For
the quarter ended October 5, 2004, amortization expense related to
intangible assets was $122 thousand. For the nine months ended October 5,
2005, amortization expense related to intangible assets with definite lives
was $624 thousand. For the nine months ended October 5, 2004, amortization
expense related to intangible assets with definite lives was $201 thousand.
11
Projected future amortization expense related to intangible assets with
definite lives is as follows:
(in thousands)
Fiscal Years:
2005 $ 140 October 6, 2005 - January 5, 2006
2006 543
2007 504
2008 461
2009 421
2010 + 1,009
------
Total $3,078
======
The change of the net carrying amount of goodwill for the nine months ended
October 5, 2005 is as follows:
(in thousands)
Net carrying amount as of 1/5/05 $109,913
Goodwill recorded during first quarter (11)
---------
Net carrying amount as of 4/5/05 109,902
---------
Goodwill recorded during second quarter 612
---------
Net carrying amount as of 7/5/05 110,514
---------
Goodwill recorded during third quarter 5,112
---------
Net carrying amount as of 10/5/05 $115,626
=========
Goodwill recorded during the three and nine months ended October 5, 2005
was principally associated with the adjustment of accruals for
restructuring charges and income taxes established in connection with the
acquisition of Alternative Resources Corporation during the third quarter
of fiscal year 2004.
Pursuant to the provisions of SFAS 142, the Company performs its goodwill
impairment testing on an annual basis. Historically, the Company has
performed its annual goodwill impairment testing during the fourth quarter
of its fiscal year and reflects the results of that testing in its
consolidated financial statements included in its Annual Report on Form
10-K. During fiscal 2005, the Company realigned its reporting structure and
for the fourth quarter of fiscal 2005, is testing its goodwill based on one
reporting segment. In prior years, the Company's goodwill impairment
testing was based on two reportable segments.
As part of its goodwill impairment testing, the Company reviews various
factors, such as the market price of the Company's common stock, discounted
cash flows from projected earnings and values for comparable companies to
determine whether impairment exists. The Company is working with evaluation
firm to assess goodwill impairment. The Company has not received a
determination from the valuation firm assisting the Company in its goodwill
impairment testing as to goodwill impairment. However, due to the Company's
declining stock price in the fourth quarter of 2005, and the Company's
declining profitability in fiscal 2005, the Company recognizes that
impairment could have occurred. If any impairment has occurred, the Company
must determine the magnitude of such impairment. The Company believes that
if impairment does occur, the magnitude of that impairment could be
significant. The Company anticipates that the testing for its goodwill to
determine whether there is impairment and, if so, the determination
thereof, will be finalized shortly and any adjustments related thereto will
be reflected in its consolidated financial statements included in Form 10-K
for its fiscal year ended January 5, 2006.
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)
12
Nine Months Ended
October 5,
(in thousands)
------ -------
2005 2004
------ -------
Interest paid $ 721 $ 270
====== =======
Income taxes paid $1,422 $ 3,787
====== =======
Adjustment to purchase price
of acquired assets and goodwill $4,528 $ 70
====== =======
Business combinations accounted for
as purchases:
Assets acquired $1,184 $78,256
Liabilities assumed - 61,622
------ -------
Net cash paid $1,184 $16,634
====== =======
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.
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.
13
11. Restructuring and Severance Charges
During the first quarter of 2005, the Company also recorded severance
charges of $0.1 million resulting from a realignment of the structure of
the Company's internal organization.
During the third quarter of 2005, the Company recorded severance charges of
$0.2 million resulting from a realignment of the structure of the Company's
organization.
During the third quarter of 2005, the Company recorded restructuring
charges aggregating $1.425 million due to unrecoverable assets related to
the Company's former wholly-owned subsidiary, Technology Integration
Financial Services ("TIFS"). Substantially all of the assets of TIFS were
sold in April 2002.
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 continues to serve as Chairman of the Board and as
a consultant.
As of October 5, 2005, the restructuring and severance charge accrual,
consisted of the following:
Total Initial Cash Accrued balance at
(in thousands) Accrual payments October 5, 2005
-------------- ---------- ------------------
Severance $ 2,216 $ (1,701) $ 515
Facility consolidations 576 (403) 173
-------------- ---------- ------------------
$ 2,792 $ (2,104) $ 688
============== ========== ==================
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 October 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 have been recorded as an
increase in goodwill. During the current period, the Company adjusted the
estimates for facility consolidation related to certain operating leases as
a result of changes in assumptions. Any future increases in estimates
thereafter will be charged to operations.
Total Intitial Cash 2005 Adjustment Liability balance at
(in thousands) Liability Payments of Initial Liability October 5, 2005
--------------- ---------- --------------------- ---------------------
Severance $ 2,682 $ (2,462) $ - $ 220
Facility consolidations 3,715 (881) 2,165 4,999
--------------- ---------- --------------------- ---------------------
$ 6,397 $ (3,343) $ 2,165 $ 5,219
=============== ========== ===================== =====================
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.
14
As of October 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 Cash Balance at
as of 7/23/04 payments October 5, 2005
-------------- ---------- ----------------
Severance $ 647 $ (647) $ -
-------------- ---------- ----------------
$ 647 $ (647) $ -
============== ========== ================
Fiscal 2002 Restructuring Charge
2005 Balance at
Total Accrual Cash Adjustment of October 5,
as of 7/23/04 payments Initial Accrual 2005
-------------- ---------- ---------------- -----------
Facility consolidations $ 756 $ (783) $ 100 $ 73
Other charges 696 (669) - 27
-------------- ---------- ---------------- -----------
$ 1,452 $ (1,452) $ 100 $ 100
============== ========== ================ ===========
12. 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.
15
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.
16
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of operations expressed as a percentage of net
sales and service revenues:
Three Three Nine Nine
Months Months Months Months
ended ended ended ended
----------- ----------- ----------- -----------
October 5, October 5, October 5, October 5,
2005 2004 2005 2004
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales and service revenues:
Sales-equipment, supplies and leasing 69.9% 69.5% 69.2% 76.4%
Service 30.1% 30.5% 30.8% 23.6%
----------- ----------- ----------- -----------
Total net sales and service revenues 100.0% 100.0% 100.0% 100.0%
----------- ----------- ----------- -----------
Cost of sales and service:
Sales-equipment, supplies and leasing 64.9% 64.6% 64.0% 70.7%
Service 22.9% 22.2% 23.0% 17.2%
----------- ----------- ----------- -----------
Total cost of sales and service 87.8% 86.8% 87.0% 87.9%
----------- ----------- ----------- -----------
Gross profit 12.2% 13.2% 13.0% 12.1%
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 10.3% 9.4% 10.4% 8.3%
Rent expense 0.4% 0.5% 0.5% 0.5%
Depreciation 0.6% 0.5% 0.7% 0.6%
Amortization 0.1% 0.1% 0.1% 0.0%
Provision for doubtful accounts 1.1% 0.0% 0.4% 0.0%
Restructuring and severance charges 0.9% 1.2% 0.3% 0.5%
----------- ----------- ----------- -----------
Total operating expenses 13.4% 11.6% 12.3% 9.9%
----------- ----------- ----------- -----------
Income (loss) from operations -1.2% 1.6% 0.7% 2.2%
Net other expense 0.1% 0.0% 0.1% 0.0%
Income (loss) before income tax -1.3% 1.5% 0.6% 2.2%
----------- ----------- ----------- -----------
Income tax expense (benefit) -0.5% 0.6% 0.2% 0.8%
----------- ----------- ----------- -----------
Net income (loss) -0.8% 0.9% 0.4% 1.4%
=========== =========== =========== ===========
17
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
decreased $15.5 million, or 7.7%, to $185.0 million in the third quarter of
fiscal 2005 from $200.5 million in the third quarter of fiscal 2004. Product
sales decreased $10.1 million, or 7.2%, to $129.3 million in the third quarter
of fiscal 2005 from $139.4 million in the third quarter of fiscal 2004. The
decrease in product sales is primarily attributable to customers reducing IT
expenditures during 2005. Service revenues decreased $5.4 million, or 8.8%, to
$55.7 million in the third quarter of fiscal 2005 from $61.1 million in the
third quarter of fiscal year 2004. This decline in service revenues relates
primarily to reductions in Alternative Resources Corporation ("ARC") revenue as
a result of service engagements that were not renewed.
Total net sales and service revenues increased $9.0 million, or 1.7%, to $542.9
million in the first nine months of fiscal 2005 from $533.9 million in the first
nine months of fiscal 2004. Product sales decreased $32.1 million, or 7.9%, to
$375.6 million in the first nine months of fiscal 2005 from $407.7 million in
the first nine months of fiscal 2004. This decrease is primarily attributable
to customers reducing expenditures during 2005. Service revenues increased
$41.1 million, or 32.6%, to $167.2 million in the first nine months of fiscal
2005 from $126.1 million in the first nine months of fiscal year 2004. This
increase is due to the acquisition of ARC in July 2004.
GROSS PROFIT. Gross profit decreased $4.0 million, or 15.1%, to $22.5 million in
the third quarter of fiscal 2005 from $26.5 million in the third quarter of
fiscal 2004. The decrease resulted primarily from the decrease in product sales
and a decline in service gross margin. Gross profit, as a percentage of
revenue, decreased to 12.2% in the third quarter of fiscal 2005 as compared to
13.2% in the third quarter of fiscal 2004. This decrease in gross margin
resulted primarily from a decline in service revenue profitability as a result
of reduced profit in the startup phase of new contracts and lower margin
services in the service mix. Going forward, the Company expects to be
aggressive in its pricing in order to increase market share, which could have an
unfavorable impact on overall gross margin. The Company expects to continue
increasing the breadth and depth of its offerings, which will have a continued
impact on gross margin.
Gross profit increased $5.9 million, or 9.1%, to $70.5 million in the first nine
months of fiscal 2005 from $64.6 million in the first nine months of fiscal
2004. The increase resulted primarily from the increase in revenues due to the
acquisition of ARC. Gross profit, as a percentage of revenue, increased to 13.0%
in the first nine months of fiscal 2005 as compared to 12.1% in the first nine
months of fiscal 2004. This increase in gross margin is primarily due to an
increase in service revenue which have higher margins than product sales. On a
forward looking basis, the Company expects to be aggressive in its pricing in
order to increase existing market share, which could have an unfavorable impact
on overall gross margin.
OPERATING EXPENSES. Operating expenses increased $1.5 million, or 6.4%, to
$24.8 million in the third quarter of fiscal 2005 from $23.3 million in the
third quarter of fiscal 2004. The increase is primarily attributable to an
increase in the allowance for doubtful accounts of $2.0 million and an increase
in the reserves related to non-trade accounts receivable of $0.5 million in the
third quarter of fiscal 2005, partially offset by a $0.8 million decrease in
restructuring charges from the third quarter of fiscal 2004 to the third quarter
of fiscal 2005. Expressed as a percentage of total net sales and service
revenues, these expenses increased to 13.4% in the third quarter of fiscal 2005
from 11.6% in the third quarter of fiscal 2004. Operating expenses increased
$14.9 million, or 28.3%, to $67.5 million in the first nine months of fiscal
2005 from $52.6 million in the first nine months of fiscal 2004. The increase
is primarily attributable to an increase in the allowance for doubtful accounts
of $2.0 million, an increase in the reserves related to non-trade accounts
receivable of $0.5 million and to the acquisition of ARC in 2004, partially
offset by a $0.6 million decrease in restructuring charges from the first nine
months of fiscal 2004 to the first nine months of fiscal 2005. Expressed as a
percentage of total net sales and service revenues, these expenses increased to
12.4% in the first nine months of fiscal 2005 from 9.9% in the first nine months
of fiscal 2004. The increases are primarily attributable to increased payroll
costs and related benefits, resulting from the acquisition of ARC in 2004 as
well as the adjustments in the accounts receivable allowances and reserves.
INCOME (LOSS) FROM OPERATIONS. Income (loss) from operations decreased $5.4
million, or 174.2%, to a loss of $2.3 million in the third quarter of fiscal
2005 from operating income of $3.1 million in the third quarter
18
of fiscal 2004. The Company's operating margin decreased to (1.2)% in the third
quarter of fiscal 2005 as compared to 1.6% in the third quarter of fiscal 2004.
This decrease is a result of the decrease in sales and in gross profit and the
increase in operating expenses as described above.
Income from operations decreased $8.9 million, or 74.8%, to $3.0 million in the
first nine months of fiscal 2005 from $11.9 million in the first nine months of
fiscal 2004. The Company's operating margin decreased to 0.6% in the first nine
months of fiscal 2005 as compared to 2.2% in the first nine months of fiscal
2004. This decrease is the result of increased operating expenses, partially
offset by an increase in gross profit.
INTEREST EXPENSE. Net interest expense was $152 thousand during the third
quarter of fiscal 2005 as compared to net interest expense of $32 thousand
during third quarter of fiscal 2004. This increase in net interest expense was
a result of increased borrowings under our credit facility and higher interest
rates.
Net interest expense was $579 thousand in the first nine months of fiscal 2005
compared to net interest expense of $1 thousand in the first nine months of
fiscal 2004. This increase in net interest expense was a result of increased
borrowings under our credit facility and higher interest rates.
INCOME TAXES. The Company's effective income tax rate was 40.5% in the third
quarter of fiscal 2005 compared to 39.5% in the third quarter of fiscal 2004.
This increase was principally related to the increased rate in calculating state
and local income taxes.
The Company's effective tax rate was 40.5% in the first nine months of fiscal
2005 compared to 39.3% in the first nine months of fiscal 2004. This increase
was principally related to the increased rate in calculating state and local
income taxes.
NET INCOME (LOSS). Net income (loss) decreased $3.4 million, or 179.0%, to a net
loss of $1.5 million in the third quarter of fiscal 2005 from net income of $1.9
million in the third quarter of fiscal 2004 due to the factors described above.
Net income decreased $5.7 million, or 79.2%, to $1.5 million in the first nine
months of fiscal 2005 from $7.2 million in the first six months of fiscal 2004
due to the factors described above.
GOODWILL ANALYSIS - Pursuant to the provisions of SFAS 142, the Company performs
its goodwill impairment testing on an annual basis. Historically, the Company
has performed its annual goodwill impairment testing during the fourth quarter
of its fiscal year and reflects the results of that testing in its consolidated
financial statements included in its Annual Report on Form 10-K. During fiscal
2005, the Company realigned its reporting structure and for the fourth quarter
of fiscal 2005, is testing its goodwill based on one reporting segment. In prior
years, the Company's goodwill impairment testing was based on two reportable
segments.
As part of its goodwill impairment testing, the Company reviews various factors,
such as the market price of the Company's common stock, discounted cash flows
from projected earnings and values for comparable companies to determine whether
impairment exists. The Company is working with evaluation firm to assess
goodwill impairment. The Company has not received a determination from the
valuation firm assisting the Company in its goodwill impairment testing as to
goodwill impairment. However, due to the Company's declining stock price in the
fourth quarter of 2005, and the Company's declining profitability in fiscal
2005, the Company recognizes that impairment could have occurred. If any
impairment has occurred, the Company must determine the magnitude of such
impairment. The Company believes that if impairment does occur, the magnitude of
that impairment could be significant. The Company anticipates that the testing
for its goodwill to determine whether there is impairment and, if so, the
determination thereof, will be finalized shortly and any adjustments related
thereto will be reflected in its consolidated financial statements included in
Form 10-K for its fiscal year ended January 5, 2006.
19
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $4.4 million in the first nine months
of fiscal 2005. Cash used in investing activities was $2.6 million, which
included $1.2 million for prior year acquisitions and $1.3 million for capital
expenditures. Cash used in financing activities was $14.9 million, which
included $17.1 million for repayment of short-term borrowings and acquisition
notes payable, $0.4 million for purchase of treasury stock offset by $2.5
million of proceeds from exercise of stock options and employee stock purchase
plan.
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 growth 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 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.
Cash flows provided by operating activities in the nine months ended October 5,
2005 were $4.4 million as compared to cash flows provided by operating
activities of $15.9 million for the corresponding period of fiscal 2004. The
decrease in cash flows from operating activities in the first nine months of
2005 compared to the first nine months of 2004 resulted primarily from lower net
income and the timing of payments on accounts payable, offset by a reduction in
inventories and deferred taxes.
A significant part of Pomeroy's inventories are financed by floor plan
arrangements with third parties. At October 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"). The
ICC line of credit was subsequently reduced to $1.0 million. 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 interest 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 October 5,
2005, the adjusted LIBOR rate was 5.88%. This credit facility expires June 28,
2007.
As of October 5, 2005, the Company had an outstanding balance under the
Company's credit facility of $3.7 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 subject to
various financial covenants. As of October 5, 2005, Pomeroy was not in violation
of any financial covenants.
20
Pomeroy believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy Pomeroy's capital
requirements for the next twelve months. Historically, Pomeroy has financed
acquisitions using a combination of cash, deferred earn-out payments, shares of
its Common Stock and seller financing. Pomeroy anticipates that future
acquisitions will be financed in a similar manner.
21
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 third
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 of October 5, 2005, these material weaknesses and errors have 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 October 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, the financial statements reported on Form 10-Q for the fiscal
quarter ended October 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
Currently, the Company is in the process of assessing and testing internal
controls over financial reporting for 2005. The Company has identified control
weaknesses. The Company has not completed its testing but believes that the
material weaknesses identified in 2004 still exist at the end of fiscal year
2005. In addition, the Company believes that there will be additional material
weaknesses in the areas such as IT system access, payroll and service parts
inventory.
22
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.
There were no shares repurchased under this program during the quarter ended
October 5, 2005.
During 2004 and through October 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
None
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
23
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
24