10-Q/A 1 body.txt POMEROY IT SOLUTIONS 10-Q/A 04-05-2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) (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, 2005 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-20022 POMEROY IT SOLUTIONS, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 31-1227808 -------- ---------- (State or other jurisdiction of incorporation (IRS Employer or organization) Identification No.) 1020 Petersburg Road, Hebron, KY 41048 -------------------------------------- (Address of principal executive offices) (859) 586-0600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES 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, 2005 was 12,583,945

POMEROY IT SOLUTIONS, INC. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements: Page ---- Consolidated Balance Sheets as of April 2 5, 2005 (Unaudited) and January 5, 2005 Consolidated Statements of Income for the Three Months Ended April 5, 2005 4 and 2004 (Unaudited) Consolidated Statements of Comprehensive Income for the Three 5 Months Ended April 5, 2005 and 2004 (Unaudited) Consolidated Statements of Cash Flows for the Three Months Ended April 5, 2005 and 2004 (Unaudited) 6 Notes to Consolidated Financial 7 Statements (Unaudited) Item 2. Management's Discussion and Analysis of 14 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 19 about Market Risk Item 4. Controls and Procedures 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 3. Defaults Upon Senior Securities 20 Submission of Matters to a Vote of Item 4. Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits 20 SIGNATURES 21

EXPLANATORY NOTE This Form 10-Q/A (Amendment No. 1) for the quarter ended April 5, 2005 is being filed to restate the consolidated financial statements of the Company, resulting from accounting errors in which payroll and subcontractor costs were under-accrued as of April 5, 2005. As a result, cost of sales and service and selling, general and administrative expenses were understated by $1.421 million and $503 thousand, respectively, for the three months ended April 5, 2005, resulting in a decrease in service gross margins from 31.3%, as initially reported, to 28.6% and a decrease in earnings per share on a fully diluted basis from $.23 to $.14. The Company records employee and subcontractor expenses related to the provision of services as cost of sales and service and other employee and subcontractor expenses as selling, general and administrative expenses. The errors were identified by management in connection with the review of the Company's financial accounting systems subsequent to the release of the first quarter financial results. The under-accrual error relating to payroll expenses occurred in connection with the final conversion, during the first quarter of 2005, of Alternative Resources Corporation ("ARC") payroll practices to the Company's payroll systems as part of completing the integration of the Company's merger with ARC. The conversion and integration process involved changing certain employees' payroll payments from a bi-weekly to a weekly basis and the under-accrual resulted from an error in the accrual formula. In addition, the processing of certain subcontractor expenses was not completed on a timely basis as a result of the relocation of that processing function, during the first quarter of 2005, from the former ARC headquarters to Pomeroy's headquarters. The restatement affects disclosures and tabular amounts in Part I Item 1, Financial Statements; Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations; and Item 4, Controls and Procedures. 1

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) April 5, January 5, 2005 2005 ------------ ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 30 $ 13,108 Certificates of deposit . . . . . . . . . . . . . . . . . . . . . 4,576 4,561 Accounts receivable: Trade, less allowance of $2,031 at April 5, 2005 and $1,462 at January 5, 2005. . . . . . . . . . . . . . . . . . . . 121,773 143,113 Vendor receivables, less allowance of $100 at April 5, 2005 and January 5, 2005 . . . . . . . . . . . . 5,804 5,790 Net investment in leases. . . . . . . . . . . . . . . . . . . 3,118 3,814 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905 2,902 ------------ ----------- Total receivables. . . . . . . . . . . . . . . . . . . . 132,600 155,619 ------------ ----------- Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,650 17,188 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,858 10,302 ------------ ----------- Total current assets . . . . . . . . . . . . . . . . . . 161,714 200,778 ------------ ----------- Equipment and leasehold improvements: Furniture, fixtures and equipment. . . . . . . . . . . . . . . 30,036 30,113 Leasehold Improvements . . . . . . . . . . . . . . . . . . . . 6,323 6,187 ------------ ----------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . 36,359 36,300 Less accumulated depreciation. . . . . . . . . . . . . . . . . 21,626 21,061 ------------ ----------- Net equipment and leasehold improvements . . . . . . . . 14,733 15,239 ------------ ----------- Net investment in leases, net of current portion. . . . . . . . . 2,425 1,650 Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,902 109,913 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 3,434 3,702 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,753 1,606 ------------ ----------- Total assets . . . . . . . . . . . . . . . . . . . . . . $ 294,961 $ 332,888 ============ ===========

See notes to consolidated financial statements. 2

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) April 5, January 5, 2005 2005 ---------- ------------ (Restated-Unaudited) LIABILITIES AND EQUITY Current Liabilities: Current portion of notes payable. . . . . . . . . . . . . . . . $ - $ 912 Short-term borrowings . . . . . . . . . . . . . . . . . . . . . 1,584 20,153 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 56,938 72,656 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 2,898 3,490 Employee compensation and benefits. . . . . . . . . . . . . . . 6,742 8,245 Accrued restructuring and severance charges . . . . . . . . . . 4,914 7,585 Other current liabilities . . . . . . . . . . . . . . . . . . . 4,937 6,778 ---------- ------------ Total current liabilities. . . . . . . . . . . . . . . . 78,013 119,819 ---------- ------------ Notes payable, less current portion . . . . . . . . . . . . . . - 250 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 375 97 Commitments and contingencies Equity: Preferred stock, $.01 par value; authorized 2,000 shares (no shares issued or outstanding) . . . . . . . . . . . . - - Common stock, $.01 par value; authorized 20,000 shares (13,341 and 13,188 shares issued at April 5, 2005 and January 5, 2005, respectively). . . . . . . . . . . . . . 133 132 Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 87,229 85,231 Accumulated other comprehensive income (loss). . . . . . . . 24 (78) Retained earnings. . . . . . . . . . . . . . . . . . . . . . 137,933 136,183 ---------- ------------ 225,319 221,468 Less treasury stock, at cost ( 778 shares at April 5, 2005 and January 5, 2005) . . . . . . . . . . . . . . . . . . . 8,746 8,746 ---------- ------------ Total equity . . . . . . . . . . . . . . . . . . . . . 216,573 212,722 ---------- ------------ Total liabilities and equity . . . . . . . . . . . . . $ 294,961 $ 332,888 ========== ============

See notes to consolidated financial statements. 3

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except earnings per share data) Three Months Ended ------------------------ April 5, April 5, 2005 2004 ----------- ----------- (Restated) Net sales and revenues: Sales-equipment, supplies and leasing . . . . $ 111,313 $ 124,599 Service . . . . . . . . . . . . . . . . . . . 54,277 30,615 ----------- ----------- Total net sales and revenues . . . . . . . 165,590 155,214 ----------- ----------- Cost of sales and service: Sales-equipment, supplies and leasing . . . . 102,424 114,573 Service . . . . . . . . . . . . . . . . . . . 38,730 22,272 ----------- ----------- Total cost of sales and service. . . . . . 141,154 136,845 ----------- ----------- Gross profit. . . . . . . . . . . . . . 24,436 18,369 ----------- ----------- Operating expenses: Selling, general and administrative . . . . 19,078 12,967 Rent expense. . . . . . . . . . . . . . . . 854 768 Depreciation. . . . . . . . . . . . . . . . 1,073 889 Amortization. . . . . . . . . . . . . . . . 268 40 ----------- ----------- Total operating expenses. . . . . . . . 21,273 14,664 ----------- ----------- Income from operations . . . . . . . . . . . . 3,163 3,705 ----------- ----------- Other expense (income): Interest, net . . . . . . . . . . . . . . . 221 (12) Other . . . . . . . . . . . . . . . . . . . - 2 ----------- ----------- Total other expense (income). . . . . . 221 (10) ----------- ----------- Income before income tax. . . . . . . . . . . 2,942 3,715 Income tax expense . . . . . . . . . . . . . . 1,192 1,439 ----------- ----------- Net income . . . . . . . . . . . . . . . . . . $ 1,750 $ 2,276 =========== =========== Weighted average shares outstanding: Basic . . . . . . . . . . . . . . . . . . . 12,469 12,231 =========== =========== Diluted . . . . . . . . . . . . . . . . . . 12,717 12,401 =========== =========== Earnings per common share: Basic . . . . . . . . . . . . . . . . . . . $ 0.14 $ 0.19 =========== =========== Diluted . . . . . . . . . . . . . . . . . . $ 0.14 $ 0.18 =========== ===========

See notes to consolidated financial statements. 4

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three Months Ended ----------------------- April 5, April 5, 2005 2004 ----------- ---------- (Restated) Net income . . . . . . . . . . . . . . . . . . . . . . . $ 1,750 $ 2,276 Other comprehensive income: Foreign currency translation adjustment, net of tax . 102 - ----------- ---------- Comprehensive income . . . . . . . . . . . . . . . . . . $ 1,852 $ 2,276 =========== ==========

See notes to consolidated financial statements. 5

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three Months Ended ------------------------ April 5, April 5, 2005 2004 ----------- ----------- (Restated) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 1,750 $ 2,276 Adjustments to reconcile net income to net cash from operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . 1,073 889 Amortization . . . . . . . . . . . . . . . . . . . . . . . 268 40 Deferred income taxes. . . . . . . . . . . . . . . . . . . 998 197 Loss on sale of fixed assets . . . . . . . . . . . . . . . 1 3 Changes in working capital accounts, net of effects of acquisitions: Accounts receivable . . . . . . . . . . . . . . . . . . 22,019 14,480 Inventories . . . . . . . . . . . . . . . . . . . . . . 350 (9,932) Prepaids. . . . . . . . . . . . . . . . . . . . . . . . 1,723 225 Net investment in leases. . . . . . . . . . . . . . . . 226 (281) Accounts payable. . . . . . . . . . . . . . . . . . . . (15,718) 564 Deferred revenue. . . . . . . . . . . . . . . . . . . . (592) (906) Income tax payable. . . . . . . . . . . . . . . . . . . (1,101) 363 Employee compensation and benefits. . . . . . . . . . . (1,503) 1,345 Other, net. . . . . . . . . . . . . . . . . . . . . . . (4,500) 201 ----------- ----------- Net operating activities . . . . . . . . . . . . . . . . . 4,994 9,464 ----------- ----------- Cash flows from investing activities: Capital expenditures . . . . . . . . . . . . . . . . . . . (386) (251) Proceeds from sale of fixed assets . . . . . . . . . . . . 6 - Purchases of certificates of deposit . . . . . . . . . . . (15) (1,506) Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . (547) (438) ----------- ----------- Net investing activities . . . . . . . . . . . . . . . . . (942) (2,195) ----------- ----------- Cash flows from financing activities: Payments of notes payable. . . . . . . . . . . . . . . . . (662) (662) Proceeds from exercise of stock options and related tax benefit. . . . . . . . . . . . . . . . . 1,999 320 Payments of short-term borrowings. . . . . . . . . . . . . (18,569) - ----------- ----------- Net financing activities . . . . . . . . . . . . . . . . . (17,232) (342) ----------- ----------- Effect of exchange rate changes on cash and cash equivalents. 102 - ----------- ----------- Change in cash and cash equivalents . . . . . . . . . . . . . (13,078) 6,927 Cash and cash equivalents: Beginning of period. . . . . . . . . . . . . . . . . . . . 13,108 37,183 ----------- ----------- End of period. . . . . . . . . . . . . . . . . . . . . . . $ 30 $ 44,110 =========== ===========

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 and Form 10-K/A for the year ended January 5, 2005. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the interim periods have been made. The results of operations for the three-month period ended April 5, 2005 are not necessarily indicative of the results that may be expected for future interim periods or for the year ending January 5, 2006. 2. Recent Accounting Pronouncements In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4." SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, "Inventory Pricing," that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes that implementing SFAS No. 151 should not have any material impact on its financial condition, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period of an entity's first fiscal year beginning after June 15, 2005, with early adoption encouraged. The Company expects to adopt SFAS No. 123R effective January 6, 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. SFAS No. 123R will apply to awards granted or modified by the Company after January 5, 2006. Compensation cost will also be recorded for prior option grants that vest after that date. The effect of adopting SFAS 123 on the Company's consolidated results of operations will depend on the level of future option grants and the fair value of the options granted at such future dates, as well as the vesting periods provided by such awards and, therefore, cannot currently be estimated. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. 7 3. Cash and Short-Term Borrowings The Company has a $165.0 million Syndicated Credit Facility Agreement with GE Commercial Distribution Finance. The credit facility has a three-year term and its components include a maximum of $75.0 million for inventory financing as described above and a revolver, collateralized primarily by accounts receivable, of up to $110.0 million. The credit facility also provides a letter of credit facility of $5.0 million. Interest on outstanding borrowings under the credit facility is payable monthly based on the LIBOR rate and a pricing grid. This credit facility expires June 28, 2007. The Company maintains a sweep account with its bank whereby daily cash receipts are automatically transferred as payment towards balances outstanding under the Company's credit facility. As of April 5, 2005, the Company had an outstanding balance under the Company's credit facility of $1.6 million. As of January 5, 2005, the Company had an outstanding balance under the Company's credit facility of $20.2 million. Under the terms of the credit facility, Pomeroy is subject to various financial covenants including maintenance of a minimum level of tangible net worth, a minimum fixed charge coverage ratio and a maximum ratio of total funded indebtedness to EBITDA. As of April 5, 2005, Pomeroy was in compliance with those financial covenants. 4. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. The Company adopted SFAS No. 123 for disclosure purposes and for non-employee stock options. Had compensation cost for the Company's stock option plans been determined based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123, as amended by SFAS No.148, "Accounting for Stock-Based Compensation-Transition and Disclosure," the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:

(in thousands, except per Three Months Ended April 5, share amounts) 2005 2004 ---------------- -------------- (Restated) Net income - as reported $ 1,750 $ 2,276 Stock-based compensation expense-net of tax 1,092 539 ---------------- -------------- Net income - pro forma $ 658 $ 1,737 ================ ============== Net income per common share - as reported Basic $ 0.14 $ 0.19 ================ ============== Diluted $ 0.14 $ 0.18 ================ ============== Net income per common share - pro forma Basic $ 0.05 $ 0.14 ================ ============== Diluted $ 0.05 $ 0.14 ================ ==============

8 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, -------------------------------------------------------- 2005 2004 ------------------------- ------------------------- Per Share Per Share Shares Amount Shares Amount ------ ----------- ------ ----------- (Restated) Basic EPS 12,469 $ 0.14 12,231 $ 0.19 Effect of dilutive stock options 248 - 170 (0.01) ------ ----------- ------ ----------- Diluted EPS 12,717 $ 0.14 12,401 $ 0.18 ====== =========== ====== ===========

6. Goodwill and Long-Lived Assets Intangible assets with definite lives are amortized using straight-line and accelerated methods over their estimated useful lives. The following table provides a summary of the Company's intangible assets with definite lives as of April 5, 2005 and January 5, 2005:

(in thousands) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 4/5/2005 4/5/2005 4/5/2005 1/5/2005 1/5/2005 1/5/2005 ----------------------------------- ----------------------------------- Amortized intangible assets: Covenants not-to-compete $ 2,024 $ 1,805 $ 219 $ 2,024 $ 1,769 $ 255 Customer lists 2,877 748 2,129 2,877 559 2,318 Other Intangibles 1,200 114 1,086 1,200 71 1,129 --------- ------------- --------- --------- ------------- --------- Total amortized intangibles $ 6,101 $ 2,667 $ 3,434 $ 6,101 $ 2,399 $ 3,702 ========= ============= ========= ========= ============= =========

9 Amortized intangible assets are being amortized over periods ranging from 1 to 15 years for covenants not-to-compete, 7 to 15 years for customer lists and 7 years for other intangibles. For the quarter ended April 5, 2005, amortization expense related to intangible assets was $268 thousand. For the quarter ended April 5, 2004, amortization expense related to intangible assets was $40 thousand. Projected future amortization expense related to intangible assets with definite lives are as follows:

(in thousands) Fiscal Years: 2005 $ 496 April 6, 2005 - January 5, 2006 2006 543 2007 504 2008 461 2009 421 2010 + 1,009 ------- Total $ 3,434 =======

The change in the net carrying amount of goodwill for the three months ended April 5, 2005 by segment are as follows:

(in thousands) Products Services Consolidated ---------- --------- -------------- Net carrying amount as of 1/5/05 $ 36,060 $ 73,853 $ 109,913 Net goodwill recorded during first quarter (54) 43 (11) ---------- --------- -------------- Net carrying amount as of 4/5/05 $ 36,006 $ 73,896 $ 109,902 ========== ========= ==============

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, ------------------------------- 2005 2004 -------------- --------------- Interest paid $ 286 $ 88 ============== =============== Income taxes paid $ 527 $ 978 ============== =============== Adjustments to purchase price of acquisition assets and goodwill $ (558) $ 92 ============== =============== Business combinations accounted for as purchases: Assets acquired $ 547 $ 438 Liabilities assumed - - -------------- --------------- Net cash paid $ 547 $ 438 ============== ===============

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, 2005 (Restated) --------------------------------------------- Products Services Leasing Consolidated --------- --------- -------- ------------- Revenues $ 111,285 $ 54,277 $ 28 $ 165,590 Income from operations 1,512 1,632 19 3,163 Total assets 172,120 116,525 6,316 294,961 Capital expenditures 140 246 - 386 Depreciation and amortization 383 958 - 1,341 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

10. Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current period presentation. 11. Restructuring and Severance Charges During the third quarter of 2004, in connection with certain strategic initiatives, the Company recorded restructuring and severance charges aggregating $1.0 million. The restructuring and severance charge was associated with legacy Pomeroy costs of facilities and processes that have or will become duplicative or redundant as Alternative Resources Corporation ("ARC") operations are integrated into the Company. These costs consisted of facility closing and involuntary employee reduction severance costs of $576 thousand and $400 thousand, respectively. These costs were accounted for under FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," and were included as a charge to the results of operations for the three and nine-month periods ended October 5, 2004. Going forward, any changes to the estimates of executing the currently approved plans of restructuring will be reflected in current results of operations. The Company also recorded during the third quarter of 2004 a non-recurring, one-time charge for severance in the amount of $1.447 million related to the resignation of founder and former CEO David B. Pomeroy II. Mr. Pomeroy will continue to serve as Chairman of the Board and as a consultant. As of April 5, 2005, the restructuring and severance charge accrual consisted of the following: 11

Total Initial Cash Accrued balance (in thousands) Accrual payments at April 5, 2005 --------------------------------------------- Severance $ 1,847 $ (1,637) $ 210 Facility consolidations 576 (295) 281 --------------------------------------------- $ 2,423 $ (1,932) $ 491 =============================================

Also, the Company's management recorded a restructuring charge liability in connection with the ARC acquisition to eliminate certain duplicative activities and reduced facility requirements. As a result, approximately $6.4 million of costs were recorded as part of the liabilities assumed in the ARC acquisition in July 2004. The restructuring charge consisted of costs of vacating duplicative leased facilities of ARC and severance costs associated with exiting activities. These costs are accounted for under EITF 95-3, "Recognition of Liabilities in Connection with Purchase Business Combinations." These costs were recognized as a liability assumed in the purchase business combination and included in the allocation of the cost to acquire ARC. Changes to the estimates of executing the currently approved plans of restructuring through July 23, 2005 will be recorded as an increase or decrease in goodwill with any increases in estimates thereafter charged to operations.

Total Initial Cash Liability balance at (in thousands) Liability payments April 5, 2005 ------------------------------------------------- Severance $ 2,682 $ (1,786) $ 896 Facility consolidations 3,715 (410) 3,305 ------------------------------------------------- $ 6,397 $ (2,196) $ 4,201 =================================================

Additionally, as part of the acquisition of ARC, the Company acquired the remaining obligations of ARC's existing restructuring plans, which were initially recorded by ARC in fiscal 2003 and fiscal 2002. The total obligations assumed in connection with these restructuring plans was $2.1 million at July 23, 2004. As of April 5, 2005, the balance of the ARC fiscal 2003 and fiscal 2002 accrued restructuring costs recorded consisted of the following:

(in thousands) Fiscal 2003 Restructuring Charge Total Accrual as Cash Balance at April of 7/23/04 payments 5, 2005 -------------------------------------------------- Severance $ 647 $ (642) $ 5 -------------------------------------------------- $ 647 $ (642) $ 5 ================================================== Fiscal 2002 Restructuring Charge Total Accrual as Cash Balance at April of 7/23/04 payments 5, 2005 -------------------------------------------------- Facility consolidations $ 756 $ (573) $ 183 Other charges 696 (662) 34 -------------------------------------------------- $ 1,452 $ (1,235) $ 217 ==================================================

12 12. Restatement Subsequent to the filing of the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 5, 2005, the Company determined that there were accounting errors in which payroll and subcontractor costs were under-accrued as of April 5, 2005. As a result, cost of sales and service and selling, general and administrative expenses were understated by $1.421 million and $503 thousand, respectively, for the three months ended April 5, 2005, resulting in a decrease in service gross margins from 31.3%, as initially reported, to 28.6% and a decrease in earnings per share on a fully diluted basis from $.23 to $.14. The Company records employee and subcontractor expenses related to the provision of services as cost of sales and service and other employee and subcontractor expenses as selling, general and administrative expenses. The following table sets forth the consolidated statement of income and selected balance sheet data previously reported on Form 10-Q for the quarter ended April 5, 2005, and the restated amounts:

Pomeroy IT Solutions, Inc. Consolidated Statements of Income Three months ended April 5, 2005 (in thousands, except earnings per share data) As reported As restated ------------ ------------ Total net sales and revenues $ 165,590 $ 165,590 Total cost of sales and service 139,733 141,154 ------------ ------------ Gross profit 25,857 24,436 Total operating expenses 20,770 21,273 ------------ ------------ Income from operations 5,087 3,163 Total other expense 221 221 ------------ ------------ Income before income tax 4,866 2,942 Income tax expense 1,971 1,192 ------------ ------------ Net income $ 2,895 $ 1,750 ============ ============ Earnings per share: Basic $ 0.23 $ 0.14 ============ ============ Diluted $ 0.23 $ 0.14 ============ ============

Pomeroy IT Solutions, Inc. Consolidated Balance Sheet Selected Data As of April 5, 2005 (in thousands) As reported As restated ------------ ------------ Total current assets $ 161,714 $ 161,714 ------------ ------------ Total assets $ 294,961 $ 294,961 ============ ============ Total current liabilities $ 76,868 $ 78,013 Total long-term liabilities 375 375 Total equity 217,718 216,573 ------------ ------------ Total liabilities and equity $ 294,961 $ 294,961 ============ ============

13 ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement This section has been updated to give effect to the restatement as discussed in Note 12 to the Notes to Consolidated Financial Statements included in Item 1. 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. 14 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, ------------------------------------- ---------------- ------------------ 2005 2004 ---------------- ------------------ (Restated) Net sales and revenues: Equipment, supplies and leasing 67.2% 80.3% Service 32.8% 19.7% ---------------- ------------------ Total net sales and revenues 100.0% 100.0% ================ ================== Cost of sales and servce: Equipment, supplies and leasing 61.8% 73.8% Service 23.4% 14.3% ---------------- ------------------ Total cost of sales and service 85.2% 88.1% ================ ================== Gross profit: Equipment, supplies and leasing 5.4% 6.5% Service 9.4% 5.4% ---------------- ------------------ Total gross profit 14.8% 11.9% ================ ================== Operating expenses: Selling, general and administrative 11.6% 8.4% Rent 0.5% 0.5% Depreciation 0.6% 0.6% Amortization 0.2% 0.0% ---------------- ------------------ Total operating expenses 12.9% 9.5% ================ ================== Income from operations 1.9% 2.4% ---------------- ------------------ Net other expense 0.1% 0.0% ================ ================== Income before income tax 1.8% 2.4% Income tax expense 0.7% 0.9% ---------------- ------------------ Net income 1.1% 1.5% ================ ==================

15 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 $10.4 million, or 6.7%, to $165.6 million in the first quarter of fiscal 2005 from $155.2 million in the first quarter of fiscal 2004. Products and leasing sales decreased $13.3 million, or 10.7%, to $111.3 million in the first quarter of fiscal 2005 from $124.6 million in the first quarter of fiscal 2004. This decrease is due to the pace of IT spending in the latter portion of our fiscal quarter whereby multiple projects were slowed or delayed. Service revenues increased $23.7 million, or 77.3%, to $54.3 million in the first quarter of fiscal 2005 from $30.6 million in the first quarter of fiscal year 2004. This increase is due to the acquisition of Alternative Resources Corporation ("ARC") on July 23, 2004. GROSS PROFIT. Gross profit increased $6.1 million, or 33.0%, to $24.4 million in the first quarter of fiscal 2005 from $18.4 million in the first quarter of fiscal 2004. The increase resulted primarily from the increase in service revenues as a percentage of total revenues and the increase in service gross margin as a percentage of total gross margins due to the acquisition of Alternative Resources Corporation. Gross profit, as a percentage of revenue, increased to 14.8% in the first quarter of fiscal 2005 as compared to 11.9% in the first quarter of fiscal 2004. This increase in gross margin resulted primarily from the increase in service margins, increase in service revenues as a percentage of total revenues and the increase in service gross margin as a percentage of total gross margin. On a forward looking basis, the Company expects to be aggressive in product and service pricing in order to increase market share, which could have an 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, changes 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) expressed as a percentage of total net sales and revenues increased to 12.1% in the first quarter of fiscal 2005 from 8.9% in the first quarter of fiscal 2004. Total operating expenses expressed as a percentage of total net sales and revenues increased to 12.9% in the first quarter of fiscal 2005 from 9.5% in the first quarter of fiscal 2004. The increases are primarily the result of the acquisition of Alternative Resources Corporation. INCOME FROM OPERATIONS. Income from operations decreased $0.5 million, or 14.6%, to $3.2 million in the first quarter of fiscal 2005 from $3.7 million in the first quarter of fiscal 2004. The Company's operating margin decreased to 1.9% in the first quarter of fiscal 2005 as compared to 2.4% in the first quarter of fiscal 2004. This decrease is primarily due to the increase in operating expenses. INTEREST INCOME/EXPENSE. Net interest expense was $0.2 million during first quarter of fiscal 2005 as compared to net interest income of $0.012 million during first quarter of fiscal 2004. This increase in net interest expense was a result of increased borrowings under our credit facility relating to the ARC acquisition and lower interest rates on invested funds. INCOME TAXES. The Company's effective tax rate was 40.5% in the first quarter of fiscal 2005 compared to 38.7% in the first quarter of fiscal 2004. This increase was principally related to the increase in state and local income taxes. NET INCOME. Net income decreased $0.5 million, or 23.1%, to $1.8 million in the first three months of fiscal 2005 from $2.3 million in the first three months of fiscal 2004 due to the factors described above. 16 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $5.0 million in the first three months of fiscal 2005. Cash used in investing activities was $0.9 million, which included $0.5 million for prior year acquisitions and $0.4 million for capital expenditures. Cash used in financing activities was $17.2 million, which included $18.5 million for repayment of short-term borrowings and $0.7 million for payments of notes payable offset by $2.0 million of proceeds from exercise of stock options. A significant part of Pomeroy's inventories are financed by floor plan arrangements with third parties. At April 5, 2005, these lines of credit totaled $85.0 million, including $75.0 million with GE Commercial Distribution Finance ("GECDF") and $10.0 million with IBM Credit Corporation ("ICC"). Borrowings under the GECDF floor plan arrangements are made on thirty-day notes. Borrowings under the ICC floor plan arrangements are made on fifteen-day notes. All such borrowings are secured by the related inventory. Financing on substantially all of the arrangements is interest free due to subsidies by manufacturers. Overall, the average interest rate on these arrangements is less than 1.0%. The Company classifies amounts outstanding under the floor plan arrangements as accounts payable. The Company has a $165.0 million Syndicated Credit Facility Agreement with GECDF. The credit facility has a three-year term and its components include a maximum of $75.0 million for inventory financing as described above and a revolving line of credit, collateralized primarily by accounts receivable, of up to $110.0 million; provided that the total amount outstanding at any time under the inventory financing facility and the revolving line of credit may not exceed $165.0 million. The credit facility also provides a letter of credit facility of $5.0 million. The interest rate under the credit facility is based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of April 5, 2005 the adjusted LIBOR rate was 4.87%. This credit facility expires June 28, 2007. As of April 5, 2005, the Company had an outstanding balance under the Company's credit facility of $1.6 million. As of January 5, 2005, the Company had an outstanding balance under the Company's credit facility of $20.2 million. The credit facility is collateralized by substantially all of the assets of Pomeroy, except those assets that collateralize certain other financing arrangements. Under the terms of the credit facility, Pomeroy is subject to various financial covenants. Currently, Pomeroy is not in violation of any financial covenants. Pomeroy believes that the anticipated cash flow from operations and current financing arrangements will be sufficient to satisfy Pomeroy's capital requirements for the next twelve months. Historically, Pomeroy has financed acquisitions using a combination of cash, earn outs, shares of its Common Stock and seller financing. Pomeroy anticipates that future acquisitions will be financed in a similar manner. On October 11, 2004, the Board of Directors approved the repurchase of up to 100,000 shares of the Company's common stock. This stock redemption program was approved to remain in place and in full force/effect for a period of one year. OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS Aggregated information about the Company's contractual obligations as of April 5, 2005 are presented in the following table:

(in thousands) Payments due by period ------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS --------------------------------------------------------------------------------- Operating leases $16,330 $ 5,121 $ 6,411 $ 4,281 $ 517 Floor plan notes payable 13,889 13,889 - - - Short-term borrowings 1,584 1,584 - - - ------------------------------------------------------- Total contractual cash obligations $31,803 $ 20,594 $ 6,411 $ 4,281 $ 517 =======================================================

17 The operating leases, shown above, are not recorded on the consolidated balance sheet. Operating leases are utilized in the normal course of business. The expected timing or payment of obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on changes to agreed-upon amounts for some obligations. 18 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 2005. Currently, the Company does not have any significant financial investments for trading or other speculative purposes or to manage interest rate exposure. ITEM 4-CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) designed to provide reasonable assurance that the information required to be reported in its Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission, including controls and procedures designed to ensure that this information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, the Company's disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met. As more fully described in Item 9A of the Company's Annual Report on Form 10-K/A for the year ended January 5, 2005, the Company reported that it identified material weaknesses in its internal control over financial reporting related to (1) the accuracy of service billing calculations and revenue recognition related to service activity, and (2) appropriately applying generally accepted accounting principles ensuring the adequacy and completeness of disclosures in the consolidated financial statements as of January 5, 2005. As a result, the Company's management, including its Chief Executive Officer and Chief Financial Officer, concluded that as of January 5, 2005, the Company's disclosure controls and procedures were not effective at a reasonable level of assurance, based on the evaluation of these controls and procedures required by Exchange Act Rules 13(a)-15(e) or 15(d)-15(e). As a result of the subsequently identified error, Pomeroy is taking steps to enhance its internal control over financial reporting designed to prevent a recurrence of the errors causing the need for the restatement of the Company's consolidated financial statements for the first quarter ended April 5, 2005. The Audit Committee and management intend to discuss the matter in detail with Pomeroy's auditor as part of their efforts to enhance Pomeroy's internal controls over financial reporting. Changes in Internal Control Over Financial Reporting Pomeroy IT Solutions, Inc. acquired Alternative Resources Corporation ("ARC") in July of 2004. As previously disclosed in the Company's Form 10-K/A for the year ended January 5, 2005, ARC, whose core competency was the staffing of technical resources for customers, was excluded from management's assessment of internal control over financial reporting. During the three-month period ended April 5, 2005, the integration of the two companies was substantially completed. This integration involved implementing Recruitmax, a packaged resource management job order application, and interfacing it with Pomeroy's financial and payroll legacy systems. The completion of this implementation and its integration with other Pomeroy systems paved the way for the full integration of the combined companies' business processes. All financial transactions and financial reporting for the Company are currently maintained in Pomeroy's legacy systems. 19 PART II - OTHER INFORMATION ITEM 1-LEGAL PROCEEDINGS There are various legal actions arising in the normal course of business that have been brought against the Company. Management believes these matters will not have a material adverse effect on the Company's financial position or results of operations. ITEM 2-UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On October 11, 2004, the Board of Directors approved the repurchase of up to 100,000 shares of the Company's common stock. This stock redemption program was approved to remain in place and in full force/effect for a period of one year.

(c) Total number (d) Maximum of shares number of shares (a) Total number (b) Average purchased as that may yet be of shares price paid part of publicly purchased under Period purchased per share announced plan the plan 1/6/05 - 2/5/05 - $ - - 100,000 2/6/05 - 3/5/05 - - - 100,000 3/6/05 - 4/5/05 - - - 100,000 ------------------------------------------------------------------ Total - $ - - 100,000 ==================================================================

During 2004, the Company did not pay any cash dividends. Pomeroy has no plans to pay cash dividends in the foreseeable future, and the payment of such dividends are restricted under Pomeroy's current credit facility. Under such credit facility, cash dividends and stock redemptions are limited to $5 million annually. ITEM 3-DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . None ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . None ITEM 5-OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . None ITEM 6-EXHIBITS (a) Exhibits 10 (iii) Material Employee Benefit and Other Agreements (j)(10) Amended and restated employment agreement by and between Pomeroy IT Solutions, Inc. and Michael E. Rohrkemper, dated March 7, 2005. 31.1 Section 302 CEO Certification 31.2 Section 302 CFO Certification 32.1 Section 906 CEO Certification 32.2 Section 906 CFO Certification 20 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: June 21, 2005 By: /s/Michael E. Rohrkemper ----------------------------------- Michael E. Rohrkemper Chief Financial Officer and Chief Accounting Officer 21