POMEROY IT Solutions
[GRAPHIC OMITTED]
1020 Petersburg Road
Hebron, KY 41048
Phone: 859.586.0600
May 31, 2006
Securities and Exchange Commission
Attention: Brad Skinner, Accounting Branch Chief
100 F. Street, N.E.
Washington, DC 20549
Re: Pomeroy IT Solutions, Inc.
File No. 000-20022
Dear Mr. Skinner:
Pomeroy IT Solutions, Inc., a Delaware corporation (the "Company" or "Pomeroy"),
hereby submits the additional responses set forth below to your follow-up
Comment Letter, dated May 3, 2006 (the "Comment Letter"), pertaining to the
Company's Annual Report on Form 10-K for the year ended January 5, 2006 filed
April 17, 2006, the Form 8-K filed April 18, 2006 and the Form 8-K filed April
26, 2006. The Company appreciates that the Commission's comments are designed
to assist the Company in providing more meaningful disclosure to the investment
community.
Our responses set forth below correspond to the numbered comments in the Comment
Letter. For your convenience, we have included your original comment from the
Comment Letter followed by the Company's response.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 5, 2006
- ---------------------------------------------------
FINANCIAL STATEMENTS
- --------------------
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS, PAGE F-12
- -------------------------------------------------------
1. WE NOTE THAT YOU HAVE RECORDED AN ESTIMATED GOODWILL IMPAIRMENT OF $16
MILLION. PLEASE EXPLAIN TO US WHY YOU BELIEVE THAT RECORDING AN ESTIMATED
IMPAIRMENT COMPLIES WITH THE REQUIREMENTS OF PARAGRAPHS 18 THROUGH 26 OF
SFAS 142. ADDITIONALLY, EXPLAIN TO US WHY IT WAS NECESSARY TO ESTIMATE THE
IMPAIRMENT CHARGE CONSIDERING YOUR DISCLOSURE ON PAGE F-12 THAT INDICATES,
"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." AS PART OF
1
YOUR RESPONSE, CLARIFY FOR US WHETHER YOUR MOST RECENT TEST REPRESENTS A
CHANGE IN THE DATE OF YOUR ANNUAL IMPAIRMENT TEST.
The Company has historically performed its annual goodwill impairment test
based on a year end valuation date. We have not changed the date of the
testing and the statement referenced by the Commission in Note 5 was to
reflect the fact that the Company bases its evaluation on fourth quarter
financial statement results and not to indicate the evaluation was actually
performed in the fourth quarter.
As the Commission is aware, in late 2005, the Company discovered errors in
its processes and systems relating to its services business, which caused
the Company to delay the filing of its Form 10-Q for the third quarter of
fiscal 2005 and undertake a comprehensive review process of the financial
reporting for the services business. The Company filed its quarterly report
on Form 10-Q for the third quarter of fiscal 2005, as well as the amended
Forms 10-Q for the first and second quarters on March 31, 2006 (SEC filing
date of April 3, 2006). The year end financial statements could not be
completed until the quarterly reports were finalized. Upon completion of
the annual financial statements the first step of the impairment test was
completed.
According to SFAS 142, paragraph 22, if the second step of the goodwill
impairment test is not complete before the financial statements are issued
and a goodwill impairment loss is probable and can be reasonably estimated,
the best estimate of that loss shall be recognized in those financial
statements. We believe we have appropriately estimated our loss in
accordance with this guidance.
ITEM 9A. CONTROLS AND PROCEDURES, PAGE 27
2. WE NOTE THAT YOU HAVE IDENTIFIED SEVERAL MATERIAL WEAKNESSES. PLEASE
DESCRIBE TO US THE STEPS YOU HAVE TAKEN (OR PLAN TO TAKE) AND PROCEDURES
YOU HAVE IMPLEMENTED (OR PLAN TO IMPLEMENT) TO CORRECT EACH MATERIAL
WEAKNESS. INDICATE WHEN EACH CORRECTIVE ACTION WAS COMPLETED OR IS EXPECTED
TO BE COMPLETED. AS PART OF YOUR RESPONSE, PLEASE TELL US HOW YOU
CONSIDERED DISCLOSING YOUR REMEDIATION PLAN IN YOUR FORM 10-K.
As described above, the Company conducted a comprehensive review of the
financial reporting for the services business, resulting in the filing by
the Company of its quarterly report on Form 10-Q for the third quarter of
fiscal 2005 on March 31, 2006 (SEC filing date of April 3, 2006). At that
time the Company also finalized its review of the material weaknesses for
fiscal 2005 and filed its Form 10-K for fiscal 2005 on April 14 (SEC filing
date of April 17, 2006). Management was still preparing its plan for
remediation of its identified material weaknesses as of the filing of the
Form 10-K for fiscal 2005.
In our first quarter Form 10-Q filed on May 12, 2006, we described in
detail our material weaknesses remediation plans. For your convenience, we
have attached as Exhibit A hereto our Item 4 from the Form 10-Q for the
first quarter of fiscal 2006, which details the plans to correct each of
the material weaknesses.
FORM 8-K FILED APRIL 18, 2006
- -----------------------------
3. WE NOTE THAT YOU DISCLOSE SEVERAL NON-GAAP MEASURES INCLUDING EBIT AND EBIT
EXCLUDING CERTAIN CHARGES. IT APPEARS THAT YOUR PRESENTATION LACKS
SUBSTANTIVE DISCLOSURES THAT
2
ADDRESSES THE BASIC REQUIREMENTS OF ITEM 10(E)(L)(I) OF REGULATION S-K OR
THE DISCLOSURES ON QUESTION 8 OF THE MOST FREQUENTLY ASKED QUESTIONS
REGARDING THE USE OF NON-GAAP FINANCIAL MEASURES. FOR EXAMPLE, THE
DISCLOSURE DOES NOT APPEAR TO PROVIDE, WITH EQUAL OR GREATER PROMINENCE,
THE MOST DIRECTLY COMPARABLE FINANCIAL MEASURE OR MEASURES CALCULATED AND
PRESENTED IN ACCORDANCE WITH GAAP OR EXPLAIN THE ECONOMIC SUBSTANCE BEHIND
YOUR DECISION TO USE THE MEASURES. THE DISCLOSURE DOES NOT INDICATE WHY YOU
BELIEVE THE MEASURES PROVIDE INVESTORS WITH VALUABLE INSIGHT INTO YOUR
OPERATING RESULTS, OR WHY IT IS USEFUL TO AN INVESTOR TO SEGREGATE EACH OF
THE ITEMS FOR WHICH ADJUSTMENTS ARE MADE. ADDITIONALLY, YOU DO NOT PROVIDE
ANY DISCUSSION REGARDING THE MATERIAL LIMITATIONS ASSOCIATED WITH EACH
MEASURE OR THE MANNER IN WHICH YOU COMPENSATE FOR SUCH LIMITATIONS. NOTE
THAT WE BELIEVE THAT DETAILED DISCLOSURES SHOULD BE PROVIDED FOR EACH
ADJUSTMENT TO YOUR GAAP RESULTS AND EACH NON-GAAP MEASURE. PLEASE EXPLAIN
TO US HOW YOUR CURRENT DISCLOSURE MEETS THESE REQUIREMENTS.
The EBIT numbers reported were, in fact, the Income from Operations, a GAAP
number taken from the Company's financial statements for fiscal 2005, as
reported in its Form 10-K and included in the press release and Form 8-K
filed April 18, 2006. To assure no confusion in the future the Company will
consistently refer to this as Income from Operations.
From March 31, 2006 until April 18, 2006 a significant amount of
information about the financial condition of the Company was disclosed in a
very short period of time, after a period of very limited information. The
purpose of the press release was to aid readers in understanding all of
this information. The Company notes that in its Form 8-K filing, the first
and foremost numbers disclosed in both the narrative and in the attached
schedules were GAAP numbers.
Our secondary disclosure of certain charges was our attempt to provide
additional information which would help the reader understand the charges
that were taken during this period. These charges were disclosed in the
narrative only after disclosure of the GAAP numbers and were reconciled to
GAAP numbers on additional schedules provided in the Form 8-K filing. The
Company believes that the narrative disclosure in addition to the
reconciliations provided as part of the Form 8-K filing, fulfill the filing
requirements of Item 10 of Regulation S-K.
4. WE NOTE THAT YOU HAVE EXCLUDED SEVERAL "UNUSUAL ONE-TIME" CHARGES FROM YOUR
GAAP MEASURES. PLEASE EXPLAIN TO US YOUR BASIS FOR REFERRING TO THESE ITEMS
AS UNUSUAL AND ONE-TIME.
As noted in Item 3, above, the Company prominently disclosed GAAP numbers.
The Company also included certain adjusted GAAP numbers. When adjusting the
GAAP numbers, we followed the guidance in Regulation S-K, Item 10(e)(l)(i)
which permits the disclosure of non-recurring, infrequent, or unusual
charges that are not reasonably likely to recur within two years and as to
which there have not been similar charges within the prior two years.
Guidance in Question 8 of the Frequently Asked Questions also states that
there is no per se prohibition against adjusting a financial measure for
recurring items as long as management reasonably believes it is probable
that the financial impact of the item will disappear or become immaterial
within a near-term finite period.
Based on this guidance the Company adjusted the disclosed GAAP numbers for
the following:
3
- $0.9 million for professional fees related to financial review
and late filing issues. These fees are related to an event, the
delayed and restated 2005 filings. Management does not expect
this to recur and believes that the financial impact of the fees
will disappear within the near-term.
- $2.0 million for provision for doubtful accounts and $0.5
million related to non-trade accounts receivable reserve. The
majority of this reserve relates to events that the Company does
not believe will reoccur such as uncollectible receivables for a
line of business that the Company no longer performs and sales
tax receivables which were barred by statute of limitations.
Management does not anticipate charges of this magnitude will
likely recur in the near-term future and the financial impact of
these charges will be eliminated within the near term.
- $2.3 million related to restructuring and severance charges,
including $0.9 million for severance charges, resulting primarily
from a re-alignment of the structure of the Company's
organization, and $1.4 million due to unrecoverable assets
related to the Company's former wholly-owned subsidiary,
Technology Integration Financial Services ("TIFS"). Management
believes that related charges are not likely to recur or be
material within a near-term finite period.
- $16.0 million related to the estimated non-cash charge for
goodwill write-down. We have disclosed that the actual write-down
of goodwill may differ significantly from this estimate upon
completion of our impairment testing. Once the actual amount of
the write-down is determined, management does not believe there
will be further write-downs to goodwill within a near-term finite
period.
5. WE NOTE YOUR PRESENTATION OF A NON-GAAP STATEMENT OF OPERATIONS MAY CREATE
THE UNWARRANTED IMPRESSION THAT THE PRESENTATION IS BASED ON A
COMPREHENSIVE SET OF ACCOUNTING RULES OR PRINCIPLES AND THAT SUCH
PRESENTATION MAY NOT COMPLY WITH ITEM 100 (B) OF REGULATION G. PLEASE
EXPLAIN TO US YOUR BASIS FOR THIS PRESENTATION AND EXPLAIN HOW YOU BELIEVE
IT COMPLIES WITH ITEM 100(B) OF REGULATION G.
Rule 100(b) of Regulation G states that a registrant shall not make public
a non-GAAP financial measure that, taken together with the information
accompanying the measure and any other accompanying discussion of that
measure, contains an untrue statement of a material fact or omits to state
a material fact necessary in order to make the presentation of the non-GAAP
financial measure, in light of the circumstances under which it is
presented, not misleading.
As noted above, the Company's presentation of its financial information was
primarily the presentation of GAAP numbers. The references to non-GAAP
information was offered only as additional information for the reader. We
believe this meets the spirit of this rule; however, we are open to
guidance in making future disclosures.
6. WE NOTE THAT YOU REFER TO YOUR NON-GAAP PRESENTATION AS "PRO FORMA." THE
INFORMATION YOU HAVE PRESENTED SHOULD BE REFERRED TO AS "NON-GAAP" AND NOT
"PRO FORMA." PRO FORMA HAS A DIFFERENT MEANING AS DEFINED BY GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AND SEC RULES THAN IS SIGNIFICANTLY
DIFFERENT THAN YOUR PRESENTATION.
We agree that this presented information should have been referred to as
"non-GAAP" and not "pro forma". We will correct our disclosures in future
filings to the extent that "non-GAAP" information is presented.
4
FORM 8-K FILED APRIL 26, 2006
- -----------------------------
7. WE NOTE THAT ON APRIL 20, 2006 CROWE CHIZEK INFORMED YOU THAT THEY WOULD BE
RESIGNING EFFECTIVE UPON COMPLETION OF YOUR FIRST QUARTER FORM 10-Q. PLEASE
AMEND YOUR FORM 8-K UPON THE EFFECTIVENESS OF THEIR RESIGNATION TO PROVIDE
UPDATED DISCLOSURES THROUGH THE DATE THE RESIGNATION BECAME EFFECTIVE.
ADDITIONALLY, TO THE EXTENT YOU MAKE CHANGES TO THE FORM 8-K TO COMPLY WITH
THIS ACCOUNTANTS STATING WHETHER THE ACCOUNTANT AGREES WITH THE STATEMENTS
MADE IN YOUR REVISED FORM 8-K.
On May 19, 2006, we filed a Form 8-K/A to provide updated disclosures
through the date the resignation became effective.
Thank you for your comments. If you have any questions, please contact our
counsel, Elizabeth A. Horwitz at (513) 852-8207, or me at (859) 586-0600, ext.
1416.
Sincerely,
/s/ Stephen E. Pomeroy, CEO
--- -----------------------
Stephen E. Pomeroy
Chief Executive Officer
cc: Elizabeth A. Horwitz, Esq., Cors & Bassett, LLC
Frank Criniti, Crowe Chizek and Company LLC
5
EXHIBIT A
---------
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 described in Item 9A of the Company's Annual Report on Form 10-K for the year
ended January 5, 2006, the Company reported that it identified four material
weaknesses in its internal control over financial reporting. As a result, the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, concluded that as of January 5, 2006, 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 April 5, 2006, the four material weaknesses have not been remediated.
Accordingly, the Company's Chief Executive Officer and Chief Financial Officer
concluded that, as of April 5, 2006, the Company's 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 these material weaknesses, the
financial statements reported on Form 10-Q for the fiscal quarter ended April 5,
2006, fairly present, in all material respects, the consolidated financial
condition and results of operations of the Company.
MATERIAL WEAKNESSES REMEDIATION PLANS:
Management is committed to the remediation of the four material weaknesses as
well as the continued improvement of the Company's overall internal controls
over financial reporting. Management has been developing remediation plans for
each of the four identified material weaknesses. The Company currently is
executing a remediation plan for each of the material weaknesses set forth below
that includes the following:
Actions Relating to Maintaining Effective Control Over The Accrual of
---------------------------------------------------------------------------
Service Billing Calculations and ServiceRevenue Recognition.
-----------------------------------------------------------------
- - We are assessing our service revenue and expense recognition processes and
procedures. While we have taken certain actions to address this material
weakness, additional time and planning will be necessary before the Company
can finalize a remediation plan. The Company's goal is to have the
remediation completed during the fourth quarter of 2006 or earlier.
6
Actions Relating to Maintaining Effective Control Over Financial Close
---------------------------------------------------------------------------
And Reporting Process.
-----------------------
- - During the fourth quarter of 2005, we began hiring additional accounting
personnel. We hired an individual with a CPA and SEC reporting experience
to manage our SEC reporting function. The Company also hired additional
Sarbanes-Oxley resources. The Company will continue to expand the finance
organization that will include the creation of a Financial Planning and
Analysis department during 2006. We will continue to develop standard
accounting policies and procedures over non-routine general ledger accounts
during 2006. We have developed and implemented more structured and
meaningful general ledger account reconciliations that now reflect
reconciling items that will lead to more timely resolution and proper
account classifications. A detailed finance organization training plan on
financial controls, policies and procedures, account reconciliations, GAAP
and SEC disclosure checklists will be implemented during the second quarter
of 2006.
Actions Related to Maintaining Effective Control Over Computer Applications
---------------------------------------------------------------------------
Used in Financial Reporting.
-------------------------------
- - The Company has expanded and will continue to improve our information
technology systems. The Company hired a CIO during the first quarter of
2006. The Company has developed and implemented controls over system
changes and upgrades. In addition, the Company is addressing the necessary
changes that will address and resolve the issues associated with computer
applications that have improper system access rights. Our remediation of
these control weaknesses will be addressed throughout the year and should
be finalized during the fourth quarter of 2006 or earlier.
Actions Related to Maintaining Effective Controls Over the Payroll Process.
---------------------------------------------------------------------------
- - We have implemented new payroll policies and procedures for timely
notification of terminated employees. The Company will continue to improve
the internal controls over payroll during 2006 by implementing additional
procedures that will hold one-up managers accountable and responsible for
timely notifications of terminated employees.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's remediation plan for three of the four material weaknesses has not
been in place long enough to show meaningful results. It is expected, however,
that the remediation of these four material weaknesses will significantly
improve the Company's internal controls over financial reporting during the
latter part of 2006 and beyond.