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 April 5, 2004
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
--- ---
The number of shares of common stock outstanding as of April 30, 2004 was
12,257,752
1
POMEROY IT SOLUTIONS, INC.
TABLE OF CONTENTS
Part I. Financial Information
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets as of April 3
5, 2004 (Unaudited) and January 5, 2004
Consolidated Statements of Income for
the Three Months Ended April 5, 2004 5
and 2003 (Unaudited)
Consolidated Statements of Cash Flows 6
for the Three Months Ended April 5, 2004
and 2003 (Unaudited)
Notes to Consolidated Financial 7
Statements (Unaudited)
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure 17
about Market Risk
Item 4. Controls and Procedures 17
Part II. Other Information 18
SIGNATURES 20
2
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2004 2004
------------ -----------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 48,633 $ 40,200
Accounts receivable:
Trade, less allowance of $2,556 at April 5, 2004
and January 5, 2004. . . . . . . . . . . . . . 99,961 111,324
Vendor receivables, less allowance of $100 at
April 5, 2004 and January 5, 2004. . . . . . . 4,032 7,226
Net investment in leases . . . . . . . . . . . . . 2,491 2,056
Other. . . . . . . . . . . . . . . . . . . . . . . 2,117 2,043
------------ -----------
Total receivables . . . . . . . . . . . . . . 108,601 122,649
------------ -----------
Inventories. . . . . . . . . . . . . . . . . . . . . . 22,158 12,453
Other. . . . . . . . . . . . . . . . . . . . . . . . . 4,968 5,193
------------ -----------
Total current assets. . . . . . . . . . . . . 184,360 180,495
------------ -----------
Equipment and leasehold improvements:
Furniture, fixtures and equipment . . . . . . . . . 29,908 29,517
Leasehold Improvements. . . . . . . . . . . . . . . 6,332 6,438
------------ -----------
Total . . . . . . . . . . . . . . . . . . . . 36,240 35,955
Less accumulated depreciation . . . . . . . . . . . 20,392 19,696
------------ -----------
Net equipment and leasehold improvements. . . 15,848 16,259
------------ -----------
Net investment in leases, net of current portion . . . 2,781 2,935
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 67,910 67,664
Intangible assets, net . . . . . . . . . . . . . . . . 496 436
Other assets . . . . . . . . . . . . . . . . . . . . . 1,490 1,410
------------ -----------
Total assets. . . . . . . . . . . . . . . . . $ 272,885 $ 269,199
============ ===========
See notes to consolidated financial statements.
3
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) April 5, January 5,
2004 2004
------------ -----------
(unaudited)
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of notes payable. . . . . . . . . . . . . . . . $ 913 $ 912
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 50,615 50,051
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 3,082 3,988
Other current liabilities . . . . . . . . . . . . . . . . . . . 10,814 8,758
------------ -----------
Total current liabilities. . . . . . . . . . . . . . . . 65,424 63,709
------------ -----------
Notes payable, less current portion . . . . . . . . . . . . . . 250 913
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 4,818 4,780
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,
(12,990 and 12,943 shares issued at April 5, 2004 and
January 5, 2004, respectively). . . . . . . . . . . . . . 130 130
Paid-in-capital. . . . . . . . . . . . . . . . . . . . . . . 83,016 82,696
Retained earnings. . . . . . . . . . . . . . . . . . . . . . 127,526 125,250
------------ -----------
210,672 208,076
Less treasury stock, at cost ( 738 shares at April 5, 2004
and January 5, 2004, respectively) . . . . . . . . . . . . 8,279 8,279
------------ -----------
Total equity . . . . . . . . . . . . . . . . . . . . . 202,393 199,797
------------ -----------
Total liabilities and equity . . . . . . . . . . . . . $ 272,885 $ 269,199
============ ===========
See notes to consolidated financial statements.
4
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except earnings per share data) Three Months Ended
--------------------------
April 5, April 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Net sales and revenues:
Sales-equipment, supplies and leasing . . . . $ 124,599 $ 99,986
Service . . . . . . . . . . . . . . . . . . . 30,615 29,992
------------ ------------
Total net sales and revenues . . . . . . . 155,214 129,978
------------ ------------
Cost of sales and service:
Sales-equipment, supplies and leasing . . . . 114,573 92,070
Service . . . . . . . . . . . . . . . . . . . 22,272 21,531
------------ ------------
Total cost of sales and service. . . . . . 136,845 113,601
------------ ------------
Gross profit. . . . . . . . . . . . . 18,369 16,377
------------ ------------
Operating expenses:
Selling, general and administrative . . . . 12,967 11,687
Rent expense. . . . . . . . . . . . . . . . 768 787
Depreciation. . . . . . . . . . . . . . . . 889 1,165
Amortization. . . . . . . . . . . . . . . . 40 224
------------ ------------
Total operating expenses. . . . . . . 14,664 13,863
------------ ------------
Income from operations . . . . . . . . . . . . 3,705 2,514
------------ ------------
Other expense (income):
Interest, net . . . . . . . . . . . . . . . (12) 67
Other . . . . . . . . . . . . . . . . . . . 2 (22)
------------ ------------
Total other expense (income). . . . . (10) 45
------------ ------------
Income before income tax . . . . . . . . . 3,715 2,469
Income tax expense . . . . . . . . . . . . . . 1,439 963
------------ ------------
Net income. . . . . . . . . . . . . . . . . $ 2,276 $ 1,506
============ ============
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . 12,231 12,451
============ ============
Diluted . . . . . . . . . . . . . . . . . . 12,401 12,465
============ ============
Earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . $ 0.19 $ 0.12
============ ============
Diluted . . . . . . . . . . . . . . . . . . $ 0.18 $ 0.12
============ ============
See notes to consolidated financial statements.
5
POMEROY IT SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Three Months Ended
--------------------------
April 5, April 5,
2004 2003
------------ ------------
(unaudited) (unaudited)
Cash Flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . $ 2,276 $ 1,506
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation. . . . . . . . . . . . . . . . . . 889 1,163
Amortization. . . . . . . . . . . . . . . . . . 40 224
Deferred income taxes . . . . . . . . . . . . . 197 (672)
Loss on sale of fixed assets. . . . . . . . . . 3 -
Changes in working capital accounts, net of
effects of acquisitions:
Accounts receivable. . . . . . . . . . . . . 14,480 20,345
Inventories. . . . . . . . . . . . . . . . . (9,932) 1,419
Prepaids . . . . . . . . . . . . . . . . . . 225 4,887
Net investment in leases . . . . . . . . . . (281) 427
Accounts payable . . . . . . . . . . . . . . 564 612
Deferred revenue . . . . . . . . . . . . . . (906) 66
Income tax payable . . . . . . . . . . . . . 363 -
Other, net . . . . . . . . . . . . . . . . . 1,546 808
------------ ------------
Net operating activities. . . . . . . . . . . . 9,464 30,785
------------ ------------
Cash Flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . (251) (788)
Proceeds from sale of fixed assets. . . . . . . - 1
Acquisition of businesses, net of
cash acquired. . . . . . . . . . . . . . . . (438) (3,184)
------------ ------------
Net investing activities. . . . . . . . . . . . (689) (3,971)
------------ ------------
Cash Flows from financing activities:
Payments of notes payable . . . . . . . . . . . (662) -
Proceeds from exercise of stock options
and related tax benefit . . . . . . . . . . . 320 34
Purchase of treasury stock. . . . . . . . . . . - (770)
------------ ------------
Net financing activities. . . . . . . . . . . . (342) (736)
------------ ------------
Increase in cash . . . . . . . . . . . . . . . . . 8,433 26,078
Cash and cash equivalents
Beginning of period . . . . . . . . . . . . . . 40,200 32,505
------------ ------------
End of period . . . . . . . . . . . . . . . . . $ 48,633 $ 58,583
============ ============
See notes to consolidated financial statements.
6
POMEROY IT SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP") for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by US GAAP for
complete financial statements. Except as disclosed herein, there has been
no material change in the information disclosed in the notes to
consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended January 5, 2004. 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 three month period ended April 5, 2004
are not necessarily indicative of the results that may be expected for
future interim periods or for the year ending January 5, 2005.
2. Recent Accounting Pronouncements
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF No. 00-21 addresses certain aspects of the accounting
by a vendor for arrangements under which the vendor will perform multiple
revenue generating activities. EITF No. 00-21 is effective for fiscal years
beginning after June 15, 2003. Adoption of EITF No. 00-21 did not have any
material impact on the Company's financial position or results of
operations.
In November 2002, the EITF reached a consensus 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 had been participating in a vendor program that expired 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 new
agreements, the Company has classified 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 are 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
7
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. Adoption of FIN 46 did not have any impact on the
Company's financial condition or results of operations.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149
amends and clarifies the financial accounting and reporting for derivative
instruments, including certain derivatives instruments embedded in other
contracts, and for hedging activities under SFAS 133. The Company has
adopted the provisions of SFAS 149 and they had no material impact on our
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 clarifies the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
either debt or equity. The new Statement requires that those financial
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 our 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 April 5, 2004 and January 5, 2004, the Company did
not have a balance outstanding under the Company's credit facility. This
credit facility expires June 28, 2004. The Company is currently negotiating
a new credit facility with terms sufficient for its financing needs and
does not anticipate any problems securing a new credit facility before June
28, 2004.
4. Stock-Based Compensation
The FASB 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. 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 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:
8
(in thousands, except per Three Months Ended April 5,
share amounts) 2004 2003
------------- ---------------
Net income - as reported $ 2,276 $ 1,506
Stock-based compensation expense-net of tax 539 552
------------- ---------------
Net income - pro forma $ 1,737 $ 954
============= ===============
Net income per common share - as reported
Basic $ 0.19 $ 0.12
============= ===============
Diluted $ 0.18 $ 0.12
============= ===============
Net income per common share - pro forma
Basic $ 0.14 $ 0.08
============= ===============
Diluted $ 0.14 $ 0.08
============= ===============
5. Earnings per Common Share
The following is a reconciliation of the number of shares used in the basic
EPS and diluted EPS computations: (in thousands, except per share data)
Three Months Ended April 5,
---------------------------------------------------------
2004 2003
------------------------- ------------------------
Per Share Per Share
Shares Amount Shares Amount
------ ----------- ------ ----------
Basic EPS 12,231 $ 0.19 12,451 $ 0.12
Effect of dilutive
Stock options 170 (0.01) 14 -
------ ----------- ------ ----------
Diluted EPS 12,401 $ 0.18 12,465 $ 0.12
====== =========== ====== ==========
6. Goodwill and Long-Lived Assets
Intangible assets with definite lives are amortized over their estimated
useful lives. The following table provides a summary of the Company's
intangible assets with definite lives as of April 5, 2004 and January 5,
2004:
(in thousands) Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
4/5/2004 4/5/2004 4/5/2004 1/5/2004 1/5/2004 1/5/2004
----------------------------------- -----------------------------------
Amortized intangible assets:
Covenants not-to-compete $ 1,894 $ 1,669 $ 225 $ 1,844 $ 1,650 $ 194
Customer lists 677 406 271 627 385 242
Total amortized intangibles $ 2,571 $ 2,075 $ 496 $ 2,471 $ 2,035 $ 436
========= ============= ========= ========= ============= =========
9
Amortized intangible assets are being amortized over periods ranging from 3
to 15 years for covenants not-to-compete and 10 to 15 years for customer
lists. The weighted average amortization period for all amortized
intangible assets acquired in fiscal 2004 is 15 years. For the quarters
ended April 5, 2004 and 2003, amortization expense related to intangible
assets with definite lives was $40 and $224 thousand, respectively.
Projected future amortization expense related to intangible assets with
definite lives are as follows:
(in thousands)
Fiscal Years:
2004 $106 April 6, 2004 - January 5, 2005
2005 58
2006 27
2007 27
2008 27
2009 and thereafter 251
----
Total $496
====
The change of the net carrying amount of goodwill for the three months
ended April 5, 2004 by segment are as follows:
(in thousands) Products Services Consolidated
--------- --------- -------------
Net carrying amount as of 1/5/04 $ 35,862 $ 31,802 $ 67,664
Goodwill recorded during first quarter 130 116 246
Net carrying amount as of 4/5/04 $ 35,992 $ 31,918 $ 67,910
========= ========= =============
7. Supplemental Cash Flow Disclosures
Supplemental disclosures with respect to cash flow information and non-cash
investing and financing activities are as follows: (in thousands)
Three Months Ended April 5,
-------------------------------
2004 2003
------------- ----------------
Interest paid $ 88 $ 70
============= ================
Income taxes paid $ 978 $ 350
============= ================
Adjustments to purchase price
of acquisition assets and intangibles $ 92 $ 1,624
============= ================
Business combinations accounted for
as purchases:
Assets acquired $ 438 $ 7,258
Liabilities assumed - (4,074)
-------------------------------
Net cash paid $ 438 $ 3,184
===============================
10
8. Litigation
There are various legal actions arising in the normal course of business
that have been brought against the Company. Management believes these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
9. Segment Information
Summarized financial information concerning the Company's reportable
segments is shown in the following table. (in thousands)
Three Months Ended April 5, 2004
----------------------------------------------
Products Services Leasing Consolidated
--------- --------- --------- -------------
Revenues $ 124,586 $ 30,615 $ 13 $ 155,214
Income from operations 1,533 2,171 1 3,705
Total assets 173,475 91,665 7,745 272,885
Capital expenditures 137 114 - 251
Depreciation and amortization 505 423 1 929
Three Months Ended April 5, 2003
----------------------------------------------
Products Services Leasing Consolidated
--------- --------- --------- -------------
Revenues $ 99,880 $ 29,992 $ 106 $ 129,978
Income from operations 1,270 1,143 101 2,514
Total assets 165,584 83,522 6,515 255,621
Capital expenditures 382 406 - 788
Depreciation and amortization 756 631 - 1,387
10. Merger
On May 11, 2004, Pomeroy IT Solutions, Inc. announced that Pomeroy
Acquisition Sub, Inc., a wholly owned subsidiary of Pomeroy ("PAS"), and
Alternative Resources Corporation (OTCBB: ALRC) ("ARC") entered into an
Agreement and Plan of Merger ("Agreement") pursuant to which PAS will be
merged with and into ARC. The signing of the Agreement was announced in a
joint news release by the parties on May 11, 2004.
11
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.
12
RESULTS OF OPERATIONS
The following table sets forth for the periods presented information derived
from our consolidated statements of income expressed as a percentage of net
sales and revenues:
Percentage of Net Sales and Revenues
Financial Results Three months ended April 5,
- ------------------------------------- ------------------------------------
2004 2003
---------------- ------------------
Net sales and revenues:
Equipment, supplies and leasing 80.3% 76.9%
Service 19.7% 23.1%
---------------- ------------------
Total net sales and revenues 100.0% 100.0%
================ ==================
Cost of sales and servce:
Equipment, supplies and leasing 73.8% 70.8%
Service 14.3% 16.6%
---------------- ------------------
Total cost of sales and service 88.1% 87.4%
================ ==================
Gross profit:
Equipment, supplies and leasing 6.5% 6.1%
Service 5.4% 6.5%
---------------- ------------------
Total gross profit 11.9% 12.6%
================ ==================
Operating expenses:
Selling, general and administrative 8.4% 9.0%
Rent 0.5% 0.6%
Depreciation 0.6% 0.9%
Amortization 0.0% 0.2%
---------------- ------------------
Total operating expenses 9.5% 10.7%
================ ==================
Income from operations 2.4% 1.9%
Net other expense 0.0% 0.0%
Income before income tax 2.4% 1.9%
Income tax expense 0.9% 0.7%
---------------- ------------------
Net income 1.5% 1.2%
================ ==================
13
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 increased $25.2
million, or 19.4%, to $155.2 million in the first quarter of fiscal 2004 from
$130.0 million in the first quarter of fiscal 2003. This increase was primarily
a result of increased, industry-wide technology spending. Excluding
acquisitions completed in fiscal year 2003, total net sales and revenues
increased 12.4%. Products and leasing sales increased $24.6 million, or 24.6% to
$124.6 million in the first quarter of fiscal 2004 from $100.0 million in the
first quarter of fiscal 2003. Excluding acquisitions completed in fiscal year
2003, products and leasing sales increased 16.1%. Service revenues increased
$0.6 million, or 2.1%, to $30.6 million in the first quarter of fiscal 2004 from
$30.0 million in the first quarter of fiscal year 2003. Excluding acquisitions
completed in fiscal year 2003, service revenues increased 0.04%.
GROSS PROFIT. Gross profit increased $2.0 million, or 12.2%, to $18.4 million in
the first quarter of fiscal 2004 from $16.4 million in the first quarter of
fiscal 2003. The increase was primarily due to increased product sales offset
somewhat by lower service gross profit margins in 2004. Gross profit, as a
percentage of revenue, decreased to 11.9% in the first quarter of fiscal 2004 as
compared to 12.6% in the first quarter of fiscal 2003. This decrease in gross
margin resulted primarily from the decrease in service margins, decrease in
service revenues as a percentage of total revenues and the decrease in service
gross margin as a percentage of total gross margin. The decrease in service
margins was offset by an increase in product margins enhanced somewhat by the
adoption of EITF 02-16. As a consequence of adopting EITF 02-16, the Company
recorded approximately $265 thousand during the first quarter of fiscal 2004 of
vendor considerations as a reduction of product cost of sales, which would
previously have been recorded as a reduction of selling, general and
administrative expenses. Excluding the impact of EITF 02-16, and therefore on a
non-GAAP basis, the gross profit margin would have been 11.7% during the first
quarter of fiscal 2004 compared to 12.6% during the first quarter of fiscal
2003. The non-GAAP gross profit margin is included in this discussion to
provide meaningful comparison to prior periods. On a forward looking basis, the
Company expects to be aggressive in product and service pricing in order to gain
existing market share which will have a continued unfavorable impact on overall
gross margin. 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. 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 8.9% in the first quarter of fiscal
2004 from 9.6% in the first quarter of fiscal 2003. This decrease is primarily a
result of higher net sales and revenues. Total operating expenses expressed as a
percentage of total net sales and revenues decreased to 9.5% in the first
quarter of fiscal 2004 from 10.7% in the first quarter of fiscal 2003. This
decrease is primarily the result of higher net sales and revenues. As a result
of adopting EITF 02-16, the Company reclassified approximately $265 thousand of
vendor consideration to a reduction of cost of sales, which would previously
have been recorded as a reduction of selling, general and administrative
expenses. Excluding the impact of EITF 02-16, and therefore on a non-GAAP
basis, operating expenses would have been 9.6% during the first quarter of
fiscal 2004 as compared to 10.7% during the first quarter of fiscal 2003. This
non-GAAP measurement is included to provide a more meaningful comparison to
prior periods.
INCOME FROM OPERATIONS. Income from operations increased $1.2 million, or
47.4%, to $3.7 million in the first quarter of fiscal 2004 from $2.5 million in
the first quarter of fiscal 2003. The Company's operating margin increased to
2.4% in the first quarter of fiscal 2004 as compared to 1.9% in the first
quarter of fiscal 2003. This increase is primarily due to higher net sales and
revenues.
14
INTEREST INCOME/EXPENSE. Net interest income was $0.012 million during first
quarter of fiscal 2004 as compared to net interest expense of $0.07 million
during first quarter of fiscal 2003. This decrease in interest expense was a
result of improved net cash flow and interest income earned on cash balances.
INCOME TAXES. The Company's effective tax rate was 38.7% in the first quarter
of fiscal 2004 compared to 39.0% in the first quarter of fiscal 2003.
NET INCOME. Net income increased $0.8 million, or 51.1%, to $2.3 million in the
first three months of fiscal 2004 from $1.5 million in the first three months of
fiscal 2003 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $9.5 million in the first three months
of fiscal 2004. Cash used in investing activities was $0.7 million, which
included $0.4 million for prior year acquisitions and $0.3 million for capital
expenditures. Cash used in financing activities was $0.4 million, which included
$0.7 million for payments of notes payable offset by $0.3 million of proceeds
from exercise of stock options.
A significant part of the Company's inventories is financed by floor plan
arrangements with third parties. At April 5, 2004, 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%. 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. The Company is
currently negotiating a new credit facility with terms sufficient for its
financing needs and does not anticipate any problems securing a new credit
facility before June 28, 2004.
At April 5, 2004, 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. Other than the merger of Alternative Resources Corporation
with an into Pomeroy Acquisition Sub, Inc., a wholly owned subsidiary of the
Company, as announced on May 11, 2004 which the Company anticipates will be
finance using cash only, the Company anticipates that future acquisitions will
be financed in a similar manner.
15
Aggregated information about the Company's contractual obligations and other off
balance sheet commitments as of April 5, 2004 are presented in the following
table:
MORE THAN
TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
------- ------- ------- ------- ------- ------- ---------
Acquisition notes $ 1,163 $ 913 $ 250 $ - $ - $ - $ -
Operating leases 14,348 3,009 3,634 2,302 1,709 1,520 2,174
------- ------- ------- ------- ------- ------- ---------
Total contractual
cash obligations $15,511 $ 3,922 $ 3,884 $ 2,302 $ 1,709 $ 1,520 $ 2,174
======= ======= ======= ======= ======= ======= =========
The operating leases, shown above, are not recorded on the consolidated balance
sheet. Operating leases are utilized in the normal course of business.
16
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
quarter of fiscal 2004.
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 April 5, 2004, 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
April 5, 2004, 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.
17
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
Item 6-Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
On February 23, 2004, Pomeroy IT Solutions, Inc. announced that it was
recognized by Cisco Systems, Inc., during the Cisco annual Partner
Summit, in Honolulu, Hawaii, as the Direct Value Added Reseller (DVAR)
of the Year in the Southeast Region. The Cisco DVAR Awards are
conferred to partners who meet and score the highest on a specific set
of requirements that are designed to identify the best channel
partners. These include customer satisfaction, year over year growth
of Cisco sales and Advanced Technologies sales as a percentage of
overall bookings and compliance with the Cisco Channel Partner
Program.
On May 11, 2004, Pomeroy IT Solutions, Inc. announced that Pomeroy
Acquisition Sub, Inc., a wholly owned subsidiary of Pomeroy ("PAS"),
and Alternative Resources Corporation ("ARC") entered into an
Agreement and Plan of Merger pursuant to which PAS will be merged with
and into ARC.
(b) Exhibits
10(I) Agreement and Plan of Merger by and between Pomeroy
Acquisition Sub, Inc., a wholly owned subsidiary of Pomeroy,
and Alternative Resources Corporation, dated May 11, 2004.
10(ii) Lockup and Purchase Agreement by and between Pomeroy IT
Solutions, Inc., a Delaware corporation ("Parent"), and
Wynnchurch Capital Partners, L.P. ("Wynnchurch US"), a
Delaware limited partnership, Wynnchurch Capital Partners
Canada, L.P. ("Wynnchurch Canada"), an Alberta, Canada
limited partnership and Wynnchurch Capital, Ltd., a Delaware
corporation (Wynnchurch US, Wynnchurch Canada and Wynnchurch
Capital, Ltd. are collectively "Wynnchurch"), dated May 11,
2004.
10 (iii) Material Employee Benefit and Other Agreements
18
(j)(8) Amended and restated employment agreement by and
between Pomeroy IT Solutions, Inc. and David B. Pomeroy, II,
dated January 6, 2004.
(j)(9) Amended and restated employment agreement by and
between Pomeroy IT Solutions, Inc. and Stephen E. Pomeroy,
dated January 6, 2004.
31.1 Section 302 CEO Certification
31.2 Section 302 CFO Certification
32.1 Section 906 CEO Certification
32.2 Section 906 CFO Certification
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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: May 17, 2004 By:/s/ Michael E. Rohrkemper
--------------------------------------
Michael E. Rohrkemper
Chief Financial Officer and
Chief Accounting Officer
20