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, 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 other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
1020 Petersburg Road, Hebron, KY 41048
--------------------------------------
(Address of principal executive offices)
(859) 586-0600
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
As of November 5, 2003, the number of shares of Common Stock issued was
12,933,245 and the number of Common Stock outstanding was 12,194,867.
1
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of
October 5, 2003 and January 5, 2003 3
Consolidated Statements of Income for
the Three Months Ended October 5, 2003
and 2002 5
Consolidated Statements of Income for
the Nine Months Ended October 5, 2003 and 2002 6
Consolidated Statements of Cash Flows
for the Nine Months Ended October 5,
2003 and 2002 7
Notes to Consolidated Financial
Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Item 2. Operations 16
Quantitative and Qualitative Disclosure
Item 3. about Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information 23
SIGNATURES 24
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) October 5, January 5,
2003 2003
----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,264 $ 32,505
Accounts receivable:
Trade, less allowance of $1,969 and $1,553 at October 5,
2003 and January 5, 2003, respectively. . . . . . . . . 107,422 95,859
Vendor receivables, less allowance of $3,334 at
October 5, 2003 and January 5, 2003 . . . . . . . . . 3,820 10,297
Net investment in leases . . . . . . . . . . . . . . . . . 3,258 1,966
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 2,775
----------- -----------
Total receivables. . . . . . . . . . . . . . . . . . 116,504 110,897
----------- -----------
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 13,201 11,238
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,282 10,198
----------- -----------
Total current assets . . . . . . . . . . . . . . . . 177,251 164,838
----------- -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment. . . . . . . . . . . . . 29,542 28,741
Leasehold Improvements . . . . . . . . . . . . . . . . . . 6,426 5,951
----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . . 35,968 34,692
Less accumulated depreciation. . . . . . . . . . . . . . . 18,672 15,393
----------- -----------
Net equipment and leasehold improvements . . . . . . 17,296 19,299
----------- -----------
Net investment in leases. . . . . . . . . . . . . . . . . . . 2,329 1,889
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . 66,493 60,635
Intangible assets . . . . . . . . . . . . . . . . . . . . . . 481 540
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,027 1,295
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . $ 264,877 $ 248,496
=========== ===========
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) October 5, January 5,
2003 2003
----------- -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $ 48,394 $ 31,165
Current portion of notes payable . . . . . . . . . . . . . . . 663 541
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . 3,330 1,490
Other current liabilities. . . . . . . . . . . . . . . . . . . 10,692 8,308
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . 63,079 41,504
----------- -----------
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 663 -
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 4,728 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,
(12,927 and 12,869 shares issued at October 5, 2003 and
January 5, 2003, respectively) . . . . . . . . . . . . . 129 129
Paid in capital . . . . . . . . . . . . . . . . . . . . . . 82,295 81,740
Retained earnings . . . . . . . . . . . . . . . . . . . . . 122,262 125,988
----------- -----------
204,686 207,857
Less treasury stock, at cost (738 and 355 shares
at October 5, 2003 and January 5, 2003, respectively). . 8,279 4,183
----------- -----------
Total equity. . . . . . . . . . . . . . . . . . . . . 196,407 203,674
----------- -----------
Total liabilities and equity. . . . . . . . . . . . . $ 264,877 $ 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
--------------------------
October 5, October 5,
2003 2002
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing. . . . . . . . $ 125,698 $ 136,976
Service. . . . . . . . . . . . . . . . . . . . . . . 32,374 33,945
------------ ------------
Total net sales and revenues. . . . . . . . . . . 158,072 170,921
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing. . . . . . . . 116,825 125,777
Service. . . . . . . . . . . . . . . . . . . . . . . 23,612 23,692
------------ ------------
Total cost of sales and service . . . . . . . . . 140,437 149,469
------------ ------------
Gross profit . . . . . . . . . . . . . . . . 17,635 21,452
------------ ------------
Operating expenses:
Selling, general and administrative. . . . . . . . 11,331 12,551
Rent expense . . . . . . . . . . . . . . . . . . . 802 786
Depreciation . . . . . . . . . . . . . . . . . . . 1,228 1,158
Amortization . . . . . . . . . . . . . . . . . . . 63 328
Provision for doubtful accounts. . . . . . . . . . - 400
Restructuring charge . . . . . . . . . . . . . . . - 227
Litigation settlement. . . . . . . . . . . . . . . - 300
------------ ------------
Total operating expenses . . . . . . . . . . 13,424 15,750
------------ ------------
Income before other expense (income) and income tax . 4,211 5,702
------------ ------------
Other expense (income):
Interest . . . . . . . . . . . . . . . . . . . . . (7) 112
Miscellaneous. . . . . . . . . . . . . . . . . . . 16 (45)
------------ ------------
Net other expense (income) . . . . . . . . . 9 67
------------ ------------
Income before income tax. . . . . . . . . . . . . 4,202 5,635
Income tax expense . . . . . . . . . . . . . . . . 1,639 541
------------ ------------
Net income . . . . . . . . . . . . . . . . . . . . $ 2,563 $ 5,094
============ ============
Weighted average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . 12,226 12,745
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . . 12,369 12,772
============ ============
Earnings per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.40
============ ============
Diluted. . . . . . . . . . . . . . . . . . . . . . $ 0.21 $ 0.40
============ ============
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data) Nine Months Ended
--------------------------
October 5, October 5,
2003 2002
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing . . . . . . . $ 341,879 $ 453,352
Service . . . . . . . . . . . . . . . . . . . . . . 93,523 100,497
------------ ------------
Total net sales and revenues . . . . . . . . . . 435,402 553,849
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing . . . . . . . 316,186 414,955
Service . . . . . . . . . . . . . . . . . . . . . . 67,887 69,520
------------ ------------
Total cost of sales and service. . . . . . . . . 384,073 484,475
------------ ------------
Gross profit. . . . . . . . . . . . . . . . 51,329 69,374
------------ ------------
Operating expenses:
Selling, general and administrative . . . . . . . 34,627 39,475
Rent expense. . . . . . . . . . . . . . . . . . . 2,397 2,550
Depreciation. . . . . . . . . . . . . . . . . . . 3,643 3,485
Amortization. . . . . . . . . . . . . . . . . . . 360 824
Provision for doubtful accounts . . . . . . . . . 200 900
Restructuring charge. . . . . . . . . . . . . . . - 714
Litigation settlement . . . . . . . . . . . . . . 150 300
------------ ------------
Total operating expenses. . . . . . . . . . 41,377 48,248
------------ ------------
Income before other expense (income) and income tax. 9,952 21,126
------------ ------------
Other expense (income):
Interest. . . . . . . . . . . . . . . . . . . . . (21) 437
Miscellaneous . . . . . . . . . . . . . . . . . . 1 (53)
------------ ------------
Net other expense (income). . . . . . . . . (20) 384
------------ ------------
Income before income tax . . . . . . . . . . . . 9,972 20,742
Income tax expense. . . . . . . . . . . . . . . . 3,889 6,358
------------ ------------
Net income. . . . . . . . . . . . . . . . . . . . $ 6,083 $ 14,384
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . 12,340 12,729
============ ============
Diluted . . . . . . . . . . . . . . . . . . . . . 12,390 12,799
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . $ 0.49 $ 1.13
============ ============
Diluted . . . . . . . . . . . . . . . . . . . . . $ 0.49 $ 1.12
============ ============
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,
2003 2002
------------ ------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 6,083 $ 14,384
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 3,643 4,121
Amortization . . . . . . . . . . . . . . . . . . 360 824
Deferred income taxes. . . . . . . . . . . . . . 2,365 (1,251)
Loss on sale of fixed assets . . . . . . . . . . 73 652
Changes in working capital accounts, net of
effects of acquisitions:
Receivables . . . . . . . . . . . . . . . . . (1,624) 36,224
Inventories . . . . . . . . . . . . . . . . . (1,851) 3,306
Prepaids. . . . . . . . . . . . . . . . . . . 3,057 (599)
Net investment in leases. . . . . . . . . . . (561) 2,823
Accounts payable. . . . . . . . . . . . . . . 13,216 (42,902)
Deferred revenue. . . . . . . . . . . . . . . 1,840 (472)
Income tax payable. . . . . . . . . . . . . . - (2,866)
Other, net. . . . . . . . . . . . . . . . . . 1,629 1,557
------------ ------------
Net operating activities . . . . . . . . . . . . 28,230 15,801
------------ ------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . (1,485) (7,113)
Proceeds from sale of fixed assets . . . . . . . 1 469
Proceeds from sale of leasing segment. . . . . . - 24,374
Acquisition of subsidiary companies, net of
cash acquired . . . . . . . . . . . . . . . . (5,097) (1,625)
------------ ------------
Net investing activities . . . . . . . . . . . . (6,581) 16,105
------------ ------------
Cash flows from financing activities:
Payments of notes payable. . . . . . . . . . . . (541) (10,053)
Proceeds from notes payable. . . . . . . . . . . - 4,900
Net payments under bank notes payable. . . . . . - (12,118)
Proceeds from exercise of stock options. . . . . 391 810
Payment for treasury stock purchase. . . . . . . (4,096) (889)
Proceeds from employee stock purchase plan . . . 165 238
Cash dividend. . . . . . . . . . . . . . . . . . (9,809) -
------------ ------------
Net financing activities . . . . . . . . . . . . (13,890) (17,112)
------------ ------------
Increase in cash. . . . . . . . . . . . . . . . . . 7,759 14,794
Cash:
Beginning of period. . . . . . . . . . . . . . . 32,505 2,875
------------ ------------
End of period. . . . . . . . . . . . . . . . . . $ 40,264 $ 17,669
============ ============
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 periods have been made.
The results of operations for the nine month period ended October 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 November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus opinion on EITF 02-16, "Accounting by a Customer (including a
reseller) for Certain Consideration Received from a Vendor." EITF 02-16
requires that cash payments, credits, or equity instruments received as
consideration by a customer from a vendor should be presumed to be a
reduction of cost of sales when recognized by the customer in the income
statement. In certain situations, the presumption could be overcome and the
consideration recognized either as revenue or a reduction of a specific
cost incurred. The consensus should be applied prospectively to new or
modified arrangements entered into after December 31, 2002.
The Company has been participating in a vendor program that expires in
November of 2003. Since this program was initiated prior to December 31,
2002, the Company has classified these vendor program payments as a
reduction in selling, general and administrative expenses. Under a new
agreement which the Company expects to be in place by the end of 2003, the
Company will classify these vendor program payments under cost of sales in
accordance with EITF 02-16.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin
51, Consolidated Financial Statements, for certain entities that do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties or in
which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected returns or
both. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after December 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. The Company is in the process of
determining what impact, if any, the adoption of the provisions of FIN 46
will have upon its financial condition or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
amends and clarifies the accounting for
8
derivative instruments, including certain derivatives instruments embedded
in other contracts, and for hedging activities under SFAS 133.
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 has adopted
the provisions of SFAS 150 and they had no material impact on its 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 October 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 nine months of fiscal 2003, the Company's 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
nine months of fiscal 2003, the Company repurchased 383,367 shares of its
common stock at a cost of $4.1 million.
5. Dividends
On August 7, 2003, the Company paid a one-time cash dividend of $9.8
million or $0.80 per share to shareholders of record as of July 28, 2003.
6. 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.
9
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date consistent with the provisions of SFAS No.
123, the Company's pro forma net income and earnings per share would have been
as indicated below:
(in thousands, except per share amounts) Three Months Ended October 5,
2003 2002
------------- -------------
Net income - as reported $ 2,563 $ 5,094
Less, stock-based compensation expense-net of tax 206 242
------------- -------------
Net income - pro forma $ 2,357 $ 4,852
============= =============
Net income per common share - as reported
Basic $ 0.21 $ 0.40
============= =============
Diluted $ 0.21 $ 0.40
============= =============
Net income per common share - pro forma
Basic $ 0.19 $ 0.38
============= =============
Diluted $ 0.19 $ 0.38
============= =============
(in thousands, except per share amounts) Nine Months Ended October 5,
2003 2002
-------------- --------------
Net income - as reported $ 6,083 $ 14,384
Less, stock-based compensation expense-
net of tax 1,011 835
-------------- --------------
Net income - pro forma $ 5,072 $ 13,549
============== ==============
Net income per common share - as reported
Basic $ 0.49 $ 1.13
============== ==============
Diluted $ 0.49 $ 1.12
============== ==============
Net income per common share - pro forma
Basic $ 0.41 $ 1.06
============== ==============
Diluted $ 0.41 $ 1.06
============== ==============
10
7. 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,
--------------------------------------
2003 2002
--------------------- ---------------
Per Share Per Share
Shares Amount Shares Amount
--------- ---------- ------ -------
Basic EPS 12,226 $ 0.21 12,745 $ 0.40
Effect of dilutive
Stock options 143 - 27 -
--------- ---------- ------ -------
Diluted EPS 12,369 $ 0.21 12,772 $ 0.40
========= ========== ====== =======
Nine Months Ended October 5,
---------------------------------------
2003 2002
--------------------- ----------------
Per Share Per Share
Shares Amount Shares Amount
--------- ---------- ------ --------
Basic EPS 12,340 $ 0.49 12,729 $ 1.13
Effect of dilutive
Stock options 50 - 70 (0.01)
--------- ---------- ------ --------
Diluted EPS 12,390 $ 0.49 12,799 $ 1.12
========= ========== ====== ========
8. 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, 2003 and January 5, 2003:
11
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
10/5/2003 10/5/2003 10/5/2003 1/5/2003 1/5/2003 1/5/2003
---------- ------------- ---------- --------- ------------- ---------
Amortized intangible assets:
Covenants not to compete $ 1,845 $ 1,626 $ 219 $ 1,694 $ 1,324 $ 370
Customer lists 627 365 262 477 307 170
---------- ------------- ---------- --------- ------------- ---------
Total amortized intangibles $ 2,472 $ 1,991 $ 481 $ 2,171 $ 1,631 $ 540
========== ============= ========== ========= ============= =========
Projected future amortization expense related to intangible assets with definite
lives are as follows:
(in thousands)
Fiscal Years:
2003 $ 45 October 6, 2003 - January 5, 2004
2004 138
2005 53
2006 20
2007 20
2008 and thereafter 205
------
Total $ 481
======
12
For the nine months ended October 5, 2003, there was no amortization expense
related to goodwill. Amortization expense related to intangible assets was $63
thousand for the quarter ended October 5, 2003 and $360 thousand for the nine
months ended October 5, 2003.
For the nine months ended October 5, 2002, there was no amortization expense
related to goodwill. For the quarter ended October 5, 2002, amortization
expense related to intangible assets was $328 thousand. For the nine months
ended October 5, 2002, amortization expense related to intangible assets was
$741 thousand of which $71 thousand was reported under the captions "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 in Note 11.
The reallocation of the net carrying amount of goodwill for the nine months
ended October 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 nine months 3,168 2,690 5,858
---------- --------- -------------
Net carrying amount as of 10/5/03 $ 35,241 $ 31,252 $ 66,493
========== ========= =============
9. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows: (in thousands)
Nine Months Ended October 5,
------------------------------
2003 2002
-------------- --------------
Interest paid $ 310 $ 424
============== ==============
Income taxes paid $ 744 $ 10,474
============== ==============
Post acquisition adjustments to purchase price
of acquired assets and intangibles $ 299 $ 1,936
============== ==============
Business combinations accounted for
as purchases:
Assets acquired $ 10,497 $ 2,069
Liabilities assumed 4,074 260
Notes payable 1,326 184
-------------- --------------
Net cash paid $ 5,097 $ 1,625
============== ==============
13
10. Litigation
During the first nine months of fiscal 2003, 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.
11. 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 $1.4 million in the
third quarter and $4.5 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 October 5, 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 125,685 $ 32,374 $ 13 $ 158,072
Income from operations 2,468 1,733 10 4,211
Total assets 169,879 86,849 8,149 264,877
Capital expenditures 160 159 - 319
Depreciation and amortization 644 647 - 1,291
Three Months Ended October 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 136,722 $ 33,945 $ 254 $ 170,921
Income from operations 1,921 3,570 211 5,702
Total assets 193,990 61,490 6,649 262,129
Capital expenditures 961 22 - 983
Depreciation and amortization 1,367 227 14 1,608
14
Nine Months Ended October 5, 2003
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 341,715 $ 93,523 $ 164 $ 435,402
Income from operations 5,746 4,056 150 9,952
Total assets 169,879 86,849 8,149 264,877
Capital expenditures 737 748 - 1,485
Depreciation and amortization 2,073 1,930 - 4,003
Nine Months Ended October 5, 2002
---------------------------------------------
Products Services Leasing Consolidated
--------- --------- -------- -------------
Revenues $ 449,864 $ 100,497 $ 3,488 $ 553,849
Income from operations 7,655 11,945 1,526 21,126
Total assets 193,990 61,490 6,649 262,129
Capital expenditures 4,908 2,121 84 7,113
Depreciation and amortization 4,061 664 220 4,945
12. 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
October 5, 2003, the Company had paid all of the remaining accrued and
unpaid costs.
13. Acquisitions
During fiscal 2003, the Company completed one acquisition through a stock
purchase. The acquisition of Micrologic Business Systems of K.C., Inc.
("Micrologic"), a Kansas City based IT solutions and professional services
provider was completed on February 21, 2003. For the twelve months ended
December 31, 2002, Micrologic recorded revenues of $32.0 million. Their
primary services include systems network integration, project management,
and telephony integration. The Company recorded $3.2 million of goodwill
related to the acquisition. The total consideration given consisted of $3.8
million in cash and subordinated notes of $1.3 million. Additionally, the
purchase price will be adjusted for any potential earn outs. The Company
shall pay fifty percent of the net profit before taxes ("NPBT") to the
purchaser in excess of the NPBT threshold for the applicable year, subject
to a cumulative limitation of $3.5 million during such aggregate period as
earn outs. Interest on the subordinated notes is payable quarterly.
Principal in the amount of $1.3 million is payable in two annual
installments commencing on the first anniversary of closing. The
acquisition was accounted for as a purchase, accordingly the purchase price
was allocated to assets and liabilities based on their estimated value as
of the date of acquisition. The results of operations of the acquisition
are included in the consolidated statement of income from the date of
acquisition. If the 2003 acquisition had occurred on January 6, 2003, the
pro forma operations of the Company would not have been materially
different than that reported in the accompanying consolidated statements of
income.
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 $12.8
million, or 7.5%, to $158.1 million in the third quarter of fiscal 2003 from
$170.9 million in the third 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 third quarter of fiscal 2003, the Company elected
to take such commissions on transactions whose sales would otherwise have been
$2.6 million. Excluding acquisitions completed in fiscal year 2003, total net
sales and revenues decreased 13.3%. Products and leasing sales decreased $11.3
million, or 8.2% to $125.7 million in the third quarter of fiscal 2003 from
$137.0 million in the third quarter of fiscal 2002. Excluding acquisitions
completed in fiscal year 2003, products and leasing sales decreased 15.0%.
Service revenues decreased $1.5 million, or 4.4%, to $32.4 million in the third
quarter of fiscal 2003 from $33.9 million in the third quarter of fiscal year
2002. Excluding acquisitions completed in fiscal year 2003, service revenues
decreased 6.7%.
Total net sales and revenues decreased $118.4 million, or 21.4%, to $435.4
million in the first nine months of fiscal 2003 from $553.8 million in the first
nine 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. 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 nine months of fiscal 2003, the Company elected to take such
commissions on transactions whose sales would otherwise have been $7.9 million.
Excluding acquisitions completed in fiscal year 2003, total net sales and
revenues decreased 25.3%. Products and leasing sales decreased $111.5 million,
or 24.6% to $341.9 million in the first nine months of fiscal 2003 from $453.4
million in the first nine months of fiscal 2002. Excluding acquisitions
completed in fiscal year 2003, products and leasing sales decreased 29.0%.
Service revenues decreased $7.0 million, or 7.0%, to $93.5 million in the first
nine months of fiscal 2003 from $100.5 million in the first nine months of
fiscal year 2002. Excluding acquisitions completed in fiscal year 2003, service
revenues decreased 8.6%.
16
GROSS PROFIT. Gross profit decreased to 11.2% in the third quarter of fiscal
2003 as compared to 12.6% in the third quarter of fiscal 2002. This decrease in
gross profit resulted primarily from the decrease in hardware and service
margins, but was offset somewhat 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 20.5% of total net sales
and revenues in the third quarter of fiscal 2003 compared to 19.9% of total net
sales and revenues in the third quarter of fiscal 2002. Service gross margin
increased to 49.7% of total gross margin in the third quarter of fiscal 2003
from 47.8% in the third 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 11.8% in the first nine months of fiscal 2003 as
compared to 12.5% in the first nine months of fiscal 2002. This decrease in
gross profit resulted primarily from the decrease in hardware and service
margins, but was offset somewhat 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 21.5% of total net sales and revenues in
the first nine months of fiscal 2003 compared to 18.1% of total net sales and
revenues in the first nine months of fiscal 2002. Service gross margin
increased to 49.9% of total gross margin in the first nine months of fiscal 2003
from 44.7% in the first nine 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 decreased to 7.7% in the third quarter of fiscal 2003
from 8.0% in the third quarter of fiscal 2002. Total operating expenses
expressed as a percentage of total net sales and revenues decreased to 8.5% in
the third quarter of fiscal 2003 from 9.2% in the third quarter of fiscal 2002.
This decrease is primarily due to the provision for doubtful accounts,
litigation settlement and the restructuring charge recorded in the third quarter
of fiscal 2002.
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 8.5% in the first nine months of fiscal 2003 from 7.8%
in the first nine months of fiscal 2002. Total operating expenses expressed as a
percentage of total net sales and revenues increased to 9.5% in the first nine
months of fiscal 2003 from 8.7% in the first nine months of fiscal 2002. This
increase is primarily the result of lower total net sales and revenues during
the first nine months of fiscal 2003 as compared to the first nine months of
fiscal 2002.
17
RESTRUCTURING CHARGE. In the second quarter of 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 plan resulted in a pre-tax restructuring charge of $714 thousand ($438
thousand after tax) for the nine months ended October 5, 2002. The
restructuring costs consist of $484 thousand in equipment and leasehold
improvement dispositions, $126 thousand in involuntary employee severance costs,
and $104 thousand in lease terminations. Under the plan, the Company eliminated
approximately 40 employees.
The execution of the plan began in the second quarter of fiscal 2002 and was
completed in the third quarter of fiscal 2002. As of October 5, 2003, the
Company had paid all of the remaining accrued and unpaid restructuring costs.
LITIGATION SETTLEMENT. During the third quarter 2002, the Company recorded a
litigation settlement of $0.3 million. The litigation settlement is related to
a single bankruptcy preference claim.
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 $1.5 million, or
26.3%, to $4.2 million in the third quarter of fiscal 2003 from $5.7 million in
the third quarter of fiscal 2002. The Company's operating margin decreased to
2.7% in the third quarter of fiscal 2003 as compared to 3.3% in the third
quarter of fiscal 2002. This decrease is primarily due to the decrease in the
Company's gross margin.
Income from operations decreased $11.1 million, or 52.6%, to $10.0 million in
the first nine months of fiscal 2003 from $21.1 million in the first nine months
of fiscal 2002. The Company's operating margin decreased to 2.3% in the first
nine months of fiscal 2003 as compared to 3.8% in the first nine 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 INCOME/EXPENSE. Interest Income was $0.007 million in the third quarter
of fiscal 2003 compared to interest expense of $0.1 million in the third quarter
of fiscal 2002. This decrease was due to reduced borrowings as a result of
improved cash flow and interest income earned on cash balances.
Interest income was $0.02 million in the first nine months of fiscal 2003
compared to interest expense of $0.4 million in the first nine 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 interest income on cash balances.
INCOME TAXES. The Company's effective tax rate was 39.0% in the third quarter
of fiscal 2003 compared to 9.6% in the third quarter of fiscal 2002. This
increase was related to a tax benefit of $1.6 million associated with an
increase in the tax basis of leased assets as a result of an accounting method
change for tax purposes in the third quarter of fiscal 2002.
The Company's effective tax rate was 39.0% in the first nine months of fiscal
2003 compared to 30.7% in the first nine months of fiscal 2002. This increase
was related to a tax benefit of $1.6 million associated with an increase in the
tax basis of leased assets as a result of an accounting method change for tax
purposes in the third quarter of fiscal 2002.
18
NET INCOME. Net income decreased $2.5 million, or 49.7%, to $2.6 million in the
third quarter of fiscal 2003 from $5.1 million in the third quarter of fiscal
2002 due to the factors described above.
Net income decreased $8.3 million, or 57.6%, to $6.1 million in the first nine
months of fiscal 2003 from $14.4 million in the first nine months of fiscal 2002
due to the factors described above.
19
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $28.2 million in the first nine months
of fiscal 2003. Cash used in investing activities was $6.6 million, which
included $5.1 million for an acquisition made in 2003 and prior year
acquisitions and $1.5 million for capital expenditures. Cash used in financing
activities was $13.9 million, which included $4.1 million for the purchase of
treasury stock, $0.5 million in payments under notes payable, $9.8 million for a
dividend payment and offset by $0.5 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 October 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 October 5, 2003, the Company did not have a balance outstanding under the
working capital and cash flow components 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 the Company's contractual obligations and other
commitments as of October 5, 2003 is presented in the following table:
MORE THAN
(in thousands) TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
------- ------- ------- ------- ------- ------- ----------
Acquisition note $ 1,326 $ 663 $ 663 $ - $ - $ - $ -
Operating leases 15,696 4,055 3,487 2,468 1,787 1,489 2,410
------- ------- ------- ------- ------- ------- ----------
Total contractual cash obligations $17,022 $ 4,718 $ 4,150 $ 2,468 $ 1,787 $ 1,489 $ 2,410
======= ======= ======= ======= ======= ======= ==========
20
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., Iin. ("Micrologic"), a Kansas City based IT
solutions and professional services provider. For the twelve months ended
December 31, 2002, Micrologic 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 would pay a one-time dividend of
approximately $10 million or $.80 per share to shareholders of record as of July
28, 2003. The cash dividend of $9.8 million was paid on August 7, 2003.
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 cash position, the Company
did not experience a material impact from interest rate risk for the first nine
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
As of October 5, 2003, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are, to the best
of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Subsequent to
October 5, 2003, our Chief Executive Officer and Chief Financial Officer have
concluded that there were no significant changes in the Company's internal
controls or in other factors that could significantly affect our internal
controls.
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-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 . . . . None
Item 5-Other Information . . . . . . . . . . . . . . . . . . . . . None
23
Item 6-Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . .
On October 7, 2003, the Company reported the dismissal of Grant Thornton
LLP as the Company's independent accountants effective October 3, 2003.
Additionally, the Company reported the engagement of Crowe Chizek and
Company LLC as its new independent accountants effective October 3, 2003.
On November 11, 2003, the Company announced the results for the third
quarter and the nine months ended October 5, 2003.
(b) Exhibits
10 Material Agreements
10 (iii) Material Employee Benefit and Other Agreements
(j)(7) Amended and restated employment agreement by and between
Pomeroy IT Solutions, Inc. fka Pomeroy Computer Resources, Inc.
and Stephen E. Pomeroy, dated November 3, 2003
11 Computation of earnings per share
31(a) Section 302 CEO Certification
31(b) Section 302 CFO Certification
32(a) Section 906 CEO Certification
32(b) Section 906 CFO Certification
SIGNATURES
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: November 19, 2003 By: /s/ Michael E. Rohrkemper
-----------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
24