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 July 5, 2003
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 jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
The number of shares of common stock outstanding as of August 6, 2003 was
12,907,346.
1
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of July 5, 2003
and January 5, 2003 3
Consolidated Statements of Income for the
Three Months Ended July 5, 2003 and 2002 5
Consolidated Statements of Income for the
Six Months Ended July 5, 2003 and 2002 6
Consolidated Statements of Cash Flows for the
Six Months Ended July 5, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information 22
SIGNATURE 23
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) July 5, January 5,
2003 2003
-------- -----------
Unaudited
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,900 $ 32,505
Accounts receivable:
Trade, less allowance of $1,935 and $1,553 at July 5,
2003 and January 5, 2003, respectively . . . . . . . . 86,840 95,859
Vendor receivables, less allowance of $3,334 at
July 5, 2003 and January 5, 2003 . . . . . . . . . . . 5,421 10,297
Net investment in leases . . . . . . . . . . . . . . . . 2,432 1,966
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 2,796 2,775
-------- -----------
Total receivables. . . . . . . . . . . . . . . . . . 97,489 110,897
-------- -----------
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 11,710 11,238
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,507 10,198
-------- -----------
Total current assets . . . . . . . . . . . . . . . . 175,606 164,838
-------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . 29,439 28,741
Leasehold Improvements . . . . . . . . . . . . . . . . . 6,400 5,951
-------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . 35,839 34,692
Less accumulated depreciation. . . . . . . . . . . . . . 17,599 15,393
-------- -----------
Net equipment and leasehold improvements . . . . . . 18,240 19,299
-------- -----------
Net investment in leases . . . . . . . . . . . . . . . . . 2,579 1,889
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 64,895 60,635
Intangible assets. . . . . . . . . . . . . . . . . . . . . 544 540
Other assets . . . . . . . . . . . . . . . . . . . . . . . 1,195 1,295
-------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . $263,059 $ 248,496
======== ===========
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) July 5, January 5,
2003 2003
-------- -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 41,382 $ 31,165
Current portion of notes payable . . . . . . . . . . . . . . . 1,204 541
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 1,866 1,490
Other current liabilities. . . . . . . . . . . . . . . . . . . 9,075 8,308
-------- -----------
Total current liabilities. . . . . . . . . . . . . . . . 53,527 41,504
-------- -----------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 663 -
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,161 3,318
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,
(12,892 and 12,869 shares issued at July 5, 2003 and
January 5, 2003, respectively) . . . . . . . . . . . . . . 129 129
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . 81,940 81,740
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 129,508 125,988
-------- -----------
211,577 207,857
Less treasury stock, at cost (642 and 355 shares
at July 5, 2003 and January 5, 2003, respectively) . . . . 6,869 4,183
-------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 204,708 203,674
-------- -----------
Total liabilities and equity. . . . . . . . . . . . . $263,059 $ 248,496
======== ===========
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Three Months Ended
-----------------------
July 5, July 5,
2003 2002
------------ ---------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing . . $ 116,195 $162,923
Service . . . . . . . . . . . . . . . . . 31,157 33,657
------------ ---------
Total net sales and revenues. . . . . . 147,352 196,580
------------ ---------
Cost of sales and service:
Sales-equipment, supplies and leasing . . 107,291 149,342
Service . . . . . . . . . . . . . . . . . 22,744 23,136
------------ ---------
Total cost of sales and service . . . . 130,035 172,478
------------ ---------
Gross profit. . . . . . . . . . . . . 17,317 24,102
------------ ---------
Operating expenses:
Selling, general and administrative . . . 11,808 13,111
Rent expense. . . . . . . . . . . . . . . 809 849
Depreciation. . . . . . . . . . . . . . . 1,250 1,151
Amortization. . . . . . . . . . . . . . . 73 225
Provision for doubtful accounts . . . . . - 500
Restructuring charge. . . . . . . . . . . - 487
Litigation settlement . . . . . . . . . . 150 -
------------ ---------
Total operating expenses. . . . . . . 14,090 16,323
------------ ---------
Income from operations. . . . . . . . . . . 3,227 7,779
------------ ---------
Other expense (income):
Interest. . . . . . . . . . . . . . . . . (81) 199
Miscellaneous . . . . . . . . . . . . . . 8 (6)
------------ ---------
Net other expense (income). . . . . . (73) 193
------------ ---------
Income before income tax . . . . . . . . 3,300 7,586
Income tax expense. . . . . . . . . . . . 1,287 2,959
------------ ---------
Net income. . . . . . . . . . . . . . . . $ 2,013 $ 4,627
============ =========
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . 12,346 12,743
============ =========
Diluted . . . . . . . . . . . . . . . . . 12,379 12,872
============ =========
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . $ 0.16 $ 0.36
============ =========
Diluted . . . . . . . . . . . . . . . . . $ 0.16 $ 0.36
============ =========
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Six Months Ended
-----------------------
July 5, July 5,
2003 2002
------------ ---------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. . . . $ 216,181 $316,376
Service. . . . . . . . . . . . . . . . . . . 61,149 66,552
------------ ---------
Total net sales and revenues . . . . . . . 277,330 382,928
------------ ---------
Cost of sales and service:
Sales-equipment, supplies and leasing. . . . 199,361 289,178
Service. . . . . . . . . . . . . . . . . . . 44,275 45,828
------------ ---------
Total cost of sales and service. . . . . . 243,636 335,006
------------ ---------
Gross profit . . . . . . . . . . . . . . 33,694 47,922
------------ ---------
Operating expenses:
Selling, general and administrative. . . . . 23,298 26,924
Rent expense . . . . . . . . . . . . . . . . 1,595 1,764
Depreciation . . . . . . . . . . . . . . . . 2,414 2,327
Amortization . . . . . . . . . . . . . . . . 296 496
Provision for doubtful accounts. . . . . . . 200 500
Restructuring charge . . . . . . . . . . . . - 487
Litigation settlement. . . . . . . . . . . . 150 -
------------ ---------
Total operating expenses . . . . . . . . 27,953 32,498
------------ ---------
Income from operations . . . . . . . . . . . . 5,741 15,424
------------ ---------
Other expense (income):
Interest . . . . . . . . . . . . . . . . . . (15) 325
Miscellaneous. . . . . . . . . . . . . . . . (14) (8)
------------ ---------
Net other expense (income) . . . . . . . (29) 317
------------ ---------
Income before income tax. . . . . . . . . . 5,770 15,107
Income tax expense . . . . . . . . . . . . . 2,250 5,817
------------ ---------
Net income . . . . . . . . . . . . . . . . . $ 3,520 $ 9,290
============ =========
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . 12,399 12,720
============ =========
Diluted. . . . . . . . . . . . . . . . . . . 12,422 12,832
============ =========
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.73
============ =========
Diluted. . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.72
============ =========
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,
2003 2002
------------ ---------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . $ 3,520 $ 9,290
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . 2,414 2,841
Amortization. . . . . . . . . . . . . . . . . . . 296 496
Deferred income taxes . . . . . . . . . . . . . . 1,617 (1,251)
Loss on sale of fixed assets. . . . . . . . . . . 19 597
Changes in working capital accounts, net of
effects of acquisitions:
Receivables . . . . . . . . . . . . . . . . . . 17,736 25,307
Inventories . . . . . . . . . . . . . . . . . . (339) (391)
Prepaids. . . . . . . . . . . . . . . . . . . . 1,834 (1,686)
Net investment in leases. . . . . . . . . . . . (1,156) 790
Accounts payable. . . . . . . . . . . . . . . . 6,205 (36,150)
Deferred revenue. . . . . . . . . . . . . . . . 376 (336)
Income tax payable. . . . . . . . . . . . . . . - (3,269)
Other, net. . . . . . . . . . . . . . . . . . . 23 1,425
------------ ---------
Net operating activities. . . . . . . . . . . . . 32,545 (2,337)
------------ ---------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . (1,166) (6,130)
Proceeds from sale of fixed assets. . . . . . . . 1 434
Proceeds from sale of leasing segment . . . . . . - 21,716
Acquisition of subsidiary companies, net of
cash acquired . . . . . . . . . . . . . . . . . (3,499) (848)
------------ ---------
Net investing activities. . . . . . . . . . . . . (4,664) 15,172
------------ ---------
Cash flows from financing activities:
Payments under notes payable. . . . . . . . . . . - (8,385)
Proceeds under notes payable. . . . . . . . . . . - 4,900
Net payments under bank notes payable . . . . . . - (11,883)
Proceeds from exercise of stock options . . . . . 34 810
Payment for treasury stock purchase . . . . . . . (2,686) -
Proceeds from employee stock purchase plan. . . . 166 238
------------ ---------
Net financing activities. . . . . . . . . . . . . (2,486) (14,320)
------------ ---------
Increase (decrease) in cash . . . . . . . . . . . . 25,395 (1,485)
Cash:
Beginning of period . . . . . . . . . . . . . . . 32,505 2,875
------------ ---------
End of period . . . . . . . . . . . . . . . . . . $ 57,900 $ 1,390
============ =========
See notes to consolidated financial statements.
7
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2003. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the interim period have been made. The
results of operations for the six month period ended July 5, 2003 are not
necessarily indicative of the results that may be expected for future
interim periods or for the year ending January 5, 2004.
2. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS 149, "Amendment of Statement Derivative
Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivatives instruments embedded in other contracts, and for hedging
activities under SFAS 133. The Company does not expect the provisions of
SFAS 149 to have a material impact on the financial position or results of
operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity"
("SFAS 150"). SFAS 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. The new Statement requires that those instruments be classified as
liabilities in statements of financial position. The Company does not
expect the provisions of SFAS 150 to have a material impact on the
financial position or results of operations.
3. Cash and Bank Notes Payable
The Company maintains a sweep account with its bank whereby daily cash
receipts are automatically transferred as payment towards the Company's
credit facility. As of July 5, 2003 and January 5, 2003, the Company did
not have a balance outstanding under the Company's credit facility. This
credit facility expires June 28, 2004.
4. Treasury Stock
During the first six months of fiscal 2003, the Board of Directors
authorized a program to repurchase up to 1.1 million shares of the
Company's outstanding common stock at market price. During the first six
months of fiscal 2003, the Company repurchased 286,687 shares of stock at a
cost of $2.7 million.
8
5. Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation", in the fall of 1995. The statement
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value beginning in fiscal
1996. The Company elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's common stock at the date of grant
over the amount an employee must pay to acquire the stock. The Company
adopted SFAS No. 123 for disclosure purposes and for non-employee stock
options.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards in the first six
months of fiscal 2003 and 2002 consistent with the provisions of SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
(in thousands, except per Three Months Ended July 5,
share amounts) 2003 2002
------------ ------------
Net income - as reported $ 2,013 $ 4,627
Stock-based compensation expense-net of tax 253 91
------------ ------------
Net income - pro forma $ 1,760 $ 4,536
============ ============
Net income per common share - as reported
Basic $ 0.16 $ 0.36
============ ============
Diluted $ 0.16 $ 0.36
============ ============
Net income per common share - pro forma
Basic $ 0.14 $ 0.36
============ ============
Diluted $ 0.14 $ 0.35
============ ============
9
(in thousands, except per Six Months Ended July 5,
share amounts) 2003 2002
----------- --------------
Net income - as reported $ 3,520 $ 9,290
Stock-based compensation expense-net of tax 805 593
----------- --------------
Net income - pro forma $ 2,715 $ 8,697
=========== ==============
Net income per common share - as reported
Basic $ 0.28 $ 0.73
=========== ==============
Diluted $ 0.28 $ 0.72
=========== ==============
Net income per common share - pro forma
Basic $ 0.22 $ 0.68
=========== ==============
Diluted $ 0.22 $ 0.68
=========== ==============
6. 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 July 5,
-------------------------------------------
2003 2002
--------------------- --------------------
Per Share Per Share
Shares Amount Shares Amount
--------- -------- -------- --------
Basic EPS 12,346 $ 0.16 12,743 $ 0.36
Effect of dilutive
Stock options 33 - 129 -
--------- -------- -------- --------
Diluted EPS 12,379 $ 0.16 12,872 $ 0.36
========= ======== ======== ========
Six Months Ended July 5,
-------------------------------------------
2003 2002
--------------------- --------------------
Per Share Per Share
Shares Amount Shares Amount
--------- -------- -------- --------
Basic EPS 12,399 $ 0.28 12,720 $ 0.73
Effect of dilutive
Stock options 23 - 112 (0.01)
--------- -------- -------- --------
Diluted EPS 12,422 $ 0.28 12,832 $ 0.72
========= ======== ======== ========
10
7. Goodwill and Long Lived Assets
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and
SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective
for fiscal years beginning after December 15, 2001; however, certain
provisions of this Statement apply to goodwill and other intangible assets
acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company
are as follows:
- - All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001, of
which there were none.
- - Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
- - Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 6, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
- - Effective January 6, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
- - All acquired goodwill must be assigned to reporting units for purposes of
impairment testing.
The Company adopted SFAS 142 in the first quarter of fiscal 2002. The
Company has determined that all its intangible assets other than goodwill
have definite lives and will continue to amortize these assets over their
estimated useful lives. During fiscal 2002, the Company no longer amortized
goodwill in accordance with SFAS 142. The Company has completed a
transitional fair value based impairment test of goodwill as of January 6,
2002 and has determined no impairment loss in the carrying amount of its
goodwill. The Company reviews its intangible assets with finite lives for
impairment in accordance with SFAS 144, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
Long-lived assets, including property and equipment, goodwill and other
intangible assets are reviewed for impairment when events or changes in
facts and circumstances indicate that their carrying amount may not be
recoverable. Events or changes in facts and circumstances that the Company
consider as impairment indicators include the following:
- Significant underperformance of the Company's operating results
relative to expected operating results;
- Net book value compared to its market capitalization;
- Significant adverse economic and industry trends;
- Significant decrease in the market value of the asset;
- Significant changes to the asset since the Company acquired it; and
- The extent that the Company may use an asset or changes in the manner
that the Company may use it.
When the Company determines that one or more impairment indicators are
present for its long-lived assets, excluding goodwill, the Company compares
the carrying amount of the asset to the net future undiscounted cash flows
that the asset is expected to generate. The Company would recognize an
impairment loss to the extent of the excess of the carrying amount of the
asset over its fair value.
11
When the Company determines that one or more impairment indicators are
present for its goodwill, the Company compares its reporting unit's
carrying value to its fair value. The Company has two reporting units for
goodwill testing which are a products reporting unit and a services
reporting unit. The Company has adopted January 6 as the valuation date for
the annual testing. For goodwill, a two-step impairment test is performed.
The first step compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying value of a reporting
unit exceeds its fair value, then the second step of the impairment test is
performed to measure the amount of impairment loss. The second step
compares the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. The implied fair value is determined by
allocating the fair value of a reporting unit to all the assets and
liabilities of that unit as if the reporting unit been acquired in a
business combination. The excess of the fair value of a reporting unit over
the amounts assigned to its assets and liabilities is the implied fair
value of goodwill. If the carrying amount of the reporting unit goodwill is
in excess of the implied fair value of that goodwill, then an impairment
loss is recognized equal to that excess. An impairment loss, if any, would
be reported in the Company's future results of operations.
In April 2003, the Company engaged a third-party valuation specialist to
perform the annual goodwill impairment testing as of January 6, 2003. As a
result of the annual goodwill impairment test, no impairment losses were
indicated.
Intangible assets consist of the following:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
7/5/2003 7/5/2003 7/5/2003 1/5/2003 1/5/2003 1/5/2003
--------- ------------- --------- --------- ------------- ---------
Amortized intangible assets:
Covenants not to compete $ 1,844 $ 1,583 $ 261 $ 1,694 $ 1,324 $ 370
Customer lists 627 344 283 477 307 170
--------- ------------- --------- --------- ------------- ---------
Total amortized intangibles $ 2,471 $ 1,927 $ 544 $ 2,171 $ 1,631 $ 540
========= ============= ========= ========= ============= =========
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal Years:
2003 $ 108 July 6, 2003 - January 5, 2004
2004 138
2005 53
2006 20
2007 20
2008 and thereafter 205
---------
Total $ 544
=========
12
For the six months ended July 5, 2003, there was no amortization expense
related to goodwill. Amortization expense related to intangible assets was
$73 thousand for the quarter ended July 5, 2003 and $296 thousand for the
six months ended July 5, 2003.
For the six months ended July 5, 2002, there was no amortization expense
related to goodwill. For the quarter ended July 5, 2002, amortization
expense related to intangible assets was $225 thousand. For the six months
ended July 5, 2002, amortization expense related to intangible assets was
$413 thousand of which $71 thousand was reported under the caption "cost of
sales" or "selling, general and administrative" expenses. Amortization
expense associated with assets reported under the caption "other current
assets" was $154 thousand.
During the first quarter of fiscal 2003, the Company changed the allocation
of goodwill by reporting unit. As a result of this evaluation process, the
Company reallocated approximately $10.3 million of goodwill to the services
reporting unit from the products reporting unit. This reallocation had no
effect on the result of any previous period's impairment testing. The
reallocation is also reflected in the segment information on Note 10.
The reallocation of the net carrying amount of goodwill for the six months
ended July 5, 2003 by segment are as follows:
(in thousands) Products Services Consolidated
---------- --------- -------------
Net carrying amount as of 1/5/03 $ 42,357 $ 18,278 $ 60,635
Reallocation of goodwill (10,284) 10,284 -
Goodwill recorded during first six months 2,262 1,998 4,260
---------- --------- -------------
Net carrying amount as of 7/5/03 $ 34,335 $ 30,560 $ 64,895
========== ========= =============
8. 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,
----------------------------
2003 2002
------------ --------------
Interest paid $ 211 $ 297
============ ==============
Income taxes paid $ 684 $ 10,336
============ ==============
Post Acquisition adjustments to purchase price
of acquisition assets and intangibles $ 1,624 $ 1,861
============ ==============
Business combinations accounted for
as purchases:
Assets acquired $ 7,573 $ -
Liabilities assumed (4,074)
------------ --------------
Net cash paid $ 3,499 $ -
============ ==============
13
9. Litigation
The Company recorded a litigation settlement of $0.2 million. The
litigation settlement is related to a single bankruptcy preference claim.
There are various other 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.
10. Segment Information
During the first quarter of fiscal 2003, the Company revised its segment
methodologies for allocating operating expenses between segments to reflect
ongoing changes in the operating activities giving rise to such expenses.
This change resulted in a decrease of approximately $1.5 million in the
second quarter and $3.1 million year to date of allocated operating
expenses to the product segment and a corresponding increase by the same
amount to the services segment. In addition, the Company revised its
allocation of assets between segments to reflect the use of assets in those
segments. The assets affected were principally goodwill, tax-related assets
and equipment and leasehold improvements.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended July 5, 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 116,150 $ 31,157 $ 45 $ 147,352
Income from operations 2,008 1,180 39 3,227
Total assets 168,966 87,677 6,416 263,059
Capital expenditures 195 183 - 378
Depreciation and amortization 671 652 1,323
Three Months Ended July 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 162,389 $ 33,657 $ 534 $ 196,580
Income from operations 3,041 4,407 331 7,779
Total assets 199,069 57,278 7,523 263,870
Capital expenditures 3,297 1,998 - 5,295
Depreciation and amortization 1,322 170 28 1,520
14
Six Months Ended July 5, 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 216,030 $ 61,149 $ 151 $ 277,330
Income from operations 3,278 2,323 140 5,741
Total assets 168,966 87,677 6,416 263,059
Capital expenditures 577 589 - 1,166
Depreciation and amortization 1,427 1,283 - 2,710
Six Months Ended July 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 313,142 $ 66,552 $ 3,234 $ 382,928
Income from operations 5,734 8,375 1,315 15,424
Total assets 199,069 57,278 7,523 263,870
Capital expenditures 3,947 2,099 84 6,130
Depreciation and amortization 2,694 437 206 3,337
11. Restructuring Charge
During fiscal 2002, the Company approved a plan to consolidate and relocate
operations in various geographical locations and to abandon certain assets
associated with modification to strategic initiatives.
The execution of the plan began and was completed during fiscal 2002. As of
July 5, 2003, the Company had $8.0 thousand in accrued and unpaid
restructuring costs. The Company expects to pay substantially all of the
remaining accrued and unpaid costs by the end of fiscal 2003.
12. Acquisitions
On February 21, 2003, the Company announced the completion of the
acquisition of Micrologic Business Systems of K.C., INC. ("Micrologic"), a
Kansas City based IT solutions and professional services provider. For the
twelve months ended December 31, 2002, Micrologic has recorded revenues of
$32.0 million. Their primary services include systems network integration,
project management, and telephony integration. The Company recorded $3.3
million of goodwill related to the acquisition.
13. Subsequent Events
On July 18, 2003, the Company announced that it will pay a one time
dividend of approximately $10 million or $.80 per share to shareholders of
record as of July 28, 2003. The dividend was paid on August 7, 2003.
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.
POMEROY IT SOLUTIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TOTAL NET SALES AND REVENUES. Total net sales and revenues decreased $49.2
million, or 25.0%, to $147.4 million in the second quarter of fiscal 2003 from
$196.6 million in the second quarter of fiscal 2002. This decrease was a result
primarily of a continued industry-wide slowdown in technology spending due to
the general weakness in the U.S. economy. Further, the Company sometimes elects
to take a commission from the manufacturers for arranging sales transactions
where it judges the gross profit to be inadequate for its participation in the
sales transaction. During the second quarter of fiscal 2003, the Company
elected to take such commissions on transactions whose sales would otherwise
have been $2.8 million. Excluding acquisitions completed in fiscal year 2003,
total net sales and revenues decreased 28.8%. Products and leasing sales
decreased $46.7 million, or 28.7% to $116.2 million in the second quarter of
fiscal 2003 from $162.9 million in the second quarter of fiscal 2002. Excluding
acquisitions completed in fiscal year 2003, products and leasing sales decreased
32.8%. Service revenues decreased $2.5 million, or 7.4%, to $31.2 million in
the second quarter of fiscal 2003 from $33.7 million in the second quarter of
fiscal year 2002. Excluding acquisitions completed in fiscal year 2003,
service revenues decreased 9.4%.
Total net sales and revenues decreased $105.6 million, or 27.6%, to $277.3
million in the first six months of fiscal 2003 from $382.9 million in the first
six months of fiscal 2002. This decrease was a result primarily of a continued
industry-wide slowdown in technology spending due to the general weakness in the
U.S. economy and the decrease in leasing revenue due to the sale of
substantially all the assets of Technology Integration Financial Services, Inc.
("TIFS"). Further, the Company sometimes elects to take a commission from the
manufacturers for arranging sales transactions where it judges the gross profit
to be inadequate for its participation in the sales transaction. During the
first six months of fiscal 2003, the Company elected to take such commissions on
transactions whose sales would otherwise have been $5.3 million. Excluding
acquisitions completed in fiscal year 2003, total net sales and revenues
decreased 30.7%. Products and leasing sales decreased $100.2 million, or 31.7%
to $216.2 million in the first six months of fiscal 2003 from $316.4 million in
the first six months of fiscal 2002. Excluding acquisitions completed in fiscal
year 2003, products and leasing sales decreased 35.1%. Service revenues
decreased $5.4 million, or 8.1%, to $61.1 million in the first six months of
fiscal 2003 from $66.5 million in the first six months of fiscal year 2002.
Excluding acquisitions completed in fiscal year 2003, service revenues decreased
9.7%.
16
GROSS PROFIT. Gross profit decreased to 11.8% in the second quarter of fiscal
2003 as compared to 12.3% in the second quarter of fiscal 2002. This decrease
in gross margin resulted primarily from the decrease in hardware and service
margins and offset by the higher proportion of service gross margin to total
gross margin. The decrease in hardware gross margin is primarily associated with
the Company's strategic decision to aggressively price its hardware business in
order to maintain and capture market share and to the weakened economic
conditions of the IT industry. On a forward looking basis, the Company expects
to continue its aggressive product pricing in order to gain existing market
share which will have a continued impact on product gross margin. The
competitive environment as well as less than maximum technical employee
utilization rate has also resulted in downward pressure on service margins.
Additionally, the Company expects to continue increasing the breadth and depth
of its service offerings, which will have a continued impact on service gross
margin. Service revenues increased to 21.1% of total net sales and revenues in
the second quarter of fiscal 2003 compared to 17.1% of total net sales and
revenues in the second quarter of fiscal 2002. Service gross margin increased
to 48.6% of total gross margin in the second quarter of fiscal 2003 from 43.7%
in the second quarter of fiscal 2002. Factors that may have an impact on gross
margin in the future include the continued changes in hardware margins, change
in personnel utilization rates, the mix of products sold and services provided,
a change in unit prices, the percentage of equipment or service sales with
lower-margin customers, the ratio of service revenues to total net sales and
revenues, and the Company's decision to aggressively price certain products and
services.
Gross profit decreased to 12.2% in the first six months of fiscal 2003 as
compared to 12.5% in the first six months of fiscal 2002. This decrease in
gross margin resulted primarily from the decrease in hardware and service
margins and offset by the higher proportion of service gross margin to total
gross margin associated with the improved utilization of service personnel. The
decrease in hardware gross margin is primarily associated with the Company's
strategic decision to aggressively price its hardware business in order to
maintain and capture market share and to the weakened economic conditions of the
IT industry. On a forward looking basis, the Company expects to continue its
aggressive product pricing in order to gain existing market share which will
have a continued impact on product gross margin. The competitive environment as
well as less than maximum technical employee utilization rate has also resulted
in downward pressure on service margins. Additionally, the Company expects to
continue increasing the breadth and depth of its service offerings, which will
have a continued impact on service gross margin. Service revenues increased to
22.0% of total net sales and revenues in the first six months of fiscal 2003
compared to 17.4% of total net sales and revenues in the first six months of
fiscal 2002. Service gross margin increased to 50.1% of total gross margin in
the first six months of fiscal 2003 from 43.2% in the first six months of fiscal
2002. Factors that may have an impact on gross margin in the future include the
continued changes in hardware margins, change in personnel utilization rates,
the mix of products sold and services provided, a change in unit prices, the
percentage of equipment or service sales with lower-margin customers, the ratio
of service revenues to total net sales and revenues, and the Company's decision
to aggressively price certain products and services.
OPERATING EXPENSES. Selling, general and administrative expenses (including
rent expense and provision for doubtful accounts) expressed as a percentage of
total net sales and revenues increased to 8.7% in the second quarter of fiscal
2003 from 7.4% in the second quarter of fiscal 2002. This increase is primarily
a result of lower than expected total net sales and revenues. Total operating
expenses expressed as a percentage of total net sales and revenues increased to
9.6% in the second quarter of fiscal 2003 from 8.3% in the second quarter of
fiscal 2002. This increase is primarily the result of lower than expected total
net sales and revenues and litigation settlement.
Selling, general and administrative expenses (including rent expense and
provision for doubtful accounts) expressed as a percentage of total net sales
and revenues increased to 9.1% in the first six months of fiscal 2003 from 7.6%
in the first six months of fiscal 2002. This increase is primarily a result of
lower than expected total net sales and revenues. Total operating expenses
expressed as a percentage of total net sales and revenues increased to 10.1% in
the first six months of fiscal 2003 from 8.5% in the first six months of fiscal
2002. This increase is primarily the result of lower than expected total net
sales and revenues and the litigation settlement.
17
RESTRUCTURING CHARGE. During the second quarter of 2002, the Company recorded a
restructuring charge of $0.5 million. The restructuring charge was related to
the consolidation of business operations.
LITIGATION SETTLEMENT. During the second quarter of 2003, the Company recorded
a litigation settlement of $0.2 million. The litigation settlement is related
to a single bankruptcy preference claim.
INCOME FROM OPERATIONS. Income from operations decreased $4.6 million, or
59.0%, to $3.2 million in the second quarter of fiscal 2003 from $7.8 million in
the second quarter of fiscal 2002. The Company's operating margin decreased to
2.2% in the second quarter of fiscal 2003 as compared to 4.0% in the second
quarter of fiscal 2002. This decrease is primarily due to the increase in
operating expenses as a percentage of total net sales and revenues and the
decrease in the Company's gross margin.
Income from operations decreased $9.7 million, or 63.0%, to $5.7 million in the
first six months of fiscal 2003 from $15.4 million in the first six months of
fiscal 2002. The Company's operating margin decreased to 2.1% in the first six
months of fiscal 2003 as compared to 4.0% in the first six months of fiscal
2002. This decrease is primarily due to the increase in operating expenses as a
percentage of total net sales and revenues and the decrease in the Company's
gross margin.
INTEREST EXPENSE. Interest Income was $.08 million in the second quarter of
fiscal 2003 compared to interest expense of $0.2 million in the second quarter
of fiscal 2002. This decrease was due to reduced borrowings as a result of
improved cash flow and a reduced interest rate charged by the Company's lender.
Interest income was $.02 million in the first six months of fiscal 2003 compared
to interest expense of $0.3 million in the first six months of fiscal 2002.
This decrease was due to reduced borrowings as a result of improved cash flow,
the sale of certain T.I.F.S. assets and a reduced interest rate charged by the
Company's lender.
INCOME TAXES. The Company's effective tax rate was 39.0% in the second quarter
of fiscal 2003 compared to 39.0% in the second quarter of fiscal 2002.
The Company's effective tax rate was 39.0% in the first six months of fiscal
2003 compared to 38.5% in the first six months of fiscal 2002. This increase
relates to an expected increase in state tax liabilities.
NET INCOME. Net income decreased $2.6 million, or 56.5%, to $2.0 million in the
second quarter of fiscal 2003 from $4.6 million in the second quarter of fiscal
2002 due to the factors described above.
Net income decreased $5.8 million, or 62.4%, to $3.5 million in the first six
months of fiscal 2003 from $9.3 million in the first six months of fiscal 2002
due to the factors described above.
18
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $32.5 million in the first six months
of fiscal 2003. Cash used in investing activities was $4.7 million, which
included $3.5 million for an acquisition made in 2003 and prior year
acquisitions and $1.2 million for capital expenditures. Cash used in financing
activities was $2.5 million, which included $2.7 million for the purchase of
treasury stock, and offset by $0.2 million in proceeds from the employee stock
purchase plan and exercise of stock options.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At July 5, 2003, these lines of credit totaled
$84.0 million, including $72.0 million with GE Commercial Distribution Finance
("GECDF") and $12.0 million with IBM Credit Corporation ("ICC"). Borrowings
under the GECDF floor plan arrangements are made on thirty-day notes.
Borrowings under the ICC floor plan arrangements are made on either thirty-day
or sixty-day notes. All such borrowings are secured by the related inventory.
Financing on substantially all of the arrangements is interest free due to
subsidies by manufacturers. Overall, the average rate on these arrangements is
less than 1.0% per annum. The Company classifies amounts outstanding under the
floor plan arrangements as accounts payable.
The Company's financing of receivables is provided through a portion of its
credit facility with GECDF. The Company's $240.0 million credit facility with
GECDF has a three year term and includes $72.0 million for inventory financing
as described above, $144.0 million for working capital which is based upon
accounts receivable financing, and a cash-flow component in the form of a $24.0
million term loan, which is not restricted to a borrowing base. The accounts
receivable and term loan portion of the credit facility carry a variable
interest rate based on the London InterBank Offering Rate ("LIBOR") and a
pricing grid. This credit facility expires June 28, 2004.
At July 5, 2003, the Company did not have a balance outstanding under this
facility. The credit facility is collateralized by substantially all of the
assets of the Company, except those assets that collateralize certain other
financing arrangements. Under the terms of the credit facility, the Company is
subject to various financial covenants. Currently, the Company is in compliance
with all financial covenants.
The Company believes that the anticipated cash flow from operations and current
financing arrangements will be sufficient to satisfy the Company's capital
requirements for the next twelve months. Historically, the Company has financed
acquisitions using a combination of cash, earn outs, shares of its Common Stock
and seller financing. The Company anticipates that future acquisitions will be
financed in a similar manner.
AGGREGATED INFORMATION ABOUT CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
MORE THAN
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
------- ------- ------- ------- ------- ------- ---------
Acquisition note $ 1,204 $ 1,204 $ - $ - $ - $ - $ -
Operating leases 15,365 2,344 3,298 2,853 1,786 1,513 3,571
Long term notes payable 663 - 663 - - - -
------- ------- ------- ------- ------- ------- ---------
Total contractual
cash obligations $17,232 $ 3,548 $ 3,961 $ 2,853 $ 1,786 $ 1,513 $ 3,571
======= ======= ======= ======= ======= ======= =========
19
On January 29, 2003, the Company's Board of Directors authorized a program to
repurchase up to an additional 100,000 shares of the Company's outstanding
common stock, which represents less than 1.0% of its outstanding common stock,
in open market purchases made from time to time at the discretion of the
Company's management. On May 13, 2003, the Company announced that its Board of
Directors authorized the repurchase of an additional 1,000,000 shares through
its stock repurchase program. The additional shares to be repurchased represent
approximately 8.0% of the Company's outstanding common stock and will be
purchased in open market purchases made from time to time at the discretion of
the Company's management. The time and extent of the repurchases will depend on
market conditions. The acquired shares will be held in treasury or cancelled.
The Company anticipates financing the stock redemption program out of working
capital and the redemption program will be effectuated over the next 12 months.
On February 21, 2003, the Company announced the completion of the acquisition of
Micrologic Business Systems of K.C., INC. ("Micrologic"), a Kansas City based IT
solutions and professional services provider. For the twelve months ended
December 31, 2002, Micrologic has recorded revenues of $32.0 million. Their
primary services include systems network integration, project management, and
telephony integration.
On July 18, 2003, the Company announced that it will pay a one time dividend of
approximately $10 million or $.80 per share to shareholders of record as of July
28, 2003. The dividend was paid on August 7, 2003.
20
Item 3-Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to interest rate risk primarily through its credit
facility with GECDF. Due to the Company's current cash position, the Company
did not experience a material impact from interest rate risk for the first six
months of fiscal 2003.
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
The Company's chief executive officer and chief financial officer evaluated the
Company's disclosure controls and procedures within the 90-day period prior to
the date of this report pursuant to Rule 13a-14(c) and 15d-14(c) of the
Securities Exchange Act of 1934. Their evaluation concluded that the disclosure
controls and procedures are effective in connection with the filing of this
quarterly report on Form 10-Q for the three months and six months ended July 5,
2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any significant deficiencies or material
weaknesses of internal controls that would require corrective action.
21
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-Changes in Securities and Use of Proceeds . . . . . . . None
Item 3-Defaults Upon Senior Securities . . . . . . . . . . . . None
Item 4-Submission of Matters to a Vote of Security Holders . .
On June 19, 2003, the Company held its annual meeting of stockholders for the
following purposes:
1. To elect eight directors; and
2. To approve the amendment of the Company's Certificate of
Incorporation and grant the Company full authority to change its
name from Pomeroy Computer Resources, Inc. to Pomeroy IT
Solutions, Inc.
The voting on the above matters by the stockholders was as follows:
Matter
------
Election of Directors: For Withheld
---------------------- --- --------
David B. Pomeroy, II 10,305,898 1,682,682
James H. Smith III 11,791,100 197,480
Michael E. Rohrkemper 10,197,930 1,790,650
Stephen E. Pomeroy 10,317,251 1,671,329
William H. Lomicka 11,782,372 206,208
Vincent D. Rinaldi 10,247,274 1,741,306
Debra E. Tibey 11,668,572 320,008
Edward E. Faber 11,692,365 296,215
Approve the Company's Name Change
-------------------------------------
11,975,827 shareholders voted in favor of the forgoing proposal and 10,525
shareholders voted against the forgoing proposal. 2,228 shareholders abstained
from voting and there were 0 shares of Broker Non-Votes on the forgoing
proposal. The number of shares voted in favor of the proposal was sufficient
for its passage.
Item 5-Other Information . . . . . . . . . . . . . . . . . . . None
22
Item 6-Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K . . . . . . . . . . . . . . .
On May 23, 2003, the Company reported the announcement that the
Company's Board of Directors had authorized the addition of $1 million
shares to its stock repurchase program.
On June 30, 2003, the Company reported the announcement of its name
change to Pomeroy IT Solutions, Inc. effective July 1, 2003.
On July 18, 2003, the Company reported the announcement of a one time
dividend of approximately $10 million or $.80 per share to
shareholders of record as of July 28, 2003. The dividend was paid on
August 7, 2003.
(b) Exhibits
3
3(i)(a)5 Certificate of Amendment to Certificate of Incorporation for
Pomeroy Computer Resources, Inc., dated June 19, 2003.
3(i)(a)6 Certificate of Amendment to Certificate of Incorporation for
Pomeroy Computer Resources Sales Company, Inc., dated June
19, 2003.
(mm)(13) Fourth amendment to credit facilities agreement
(mm)(14) Fifth amendment and consent to credit facilities agreement
11 Computation of earnings per share
31(a) Section 302 CEO Certification
31(b) Section 302 CF0 Certification
32(a) Section 906 CEO Certification
32(b) Section 906 CFO Certification
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POMEROY IT SOLUTIONS, INC.
--------------------------
(Registrant)
Date: August 19, 2003 By: /s/ Michael E. Rohrkemper
--------------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
23