10-Q 1 doc1.txt 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, 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 November 5, 2004 was 12,247,390. 1

POMEROY IT SOLUTIONS, INC. TABLE OF CONTENTS Part I. Financial Information Item 1. Financial Statements: Page ---- Consolidated Balance Sheets as of 3 October 5, 2004 (Unaudited) and January 5, 2004 Consolidated Statements of Income for 5 the Three Months Ended October 5, 2004 and 2003 (Unaudited) Consolidated Statements of 6 Comprehensive Income for the Three Months Ended October 5, 2004 and 2003 (Unaudited) Consolidated Statements of Income for 7 the Nine Months Ended October 5, 2004 and 2003 (Unaudited) Consolidated Statements of 8 Comprehensive Income for the Nine Months Ended October 5, 2004 and 2003 (Unaudited) Consolidated Statements of Cash Flows 9 for the Nine Months Ended October 5, 2004 and 2003 (Unaudited) Notes to Consolidated Financial 10 Statements (Unaudited) Item 2. Management's Discussion and Analysis of 18 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 23 about Market Risk Item 4. Controls and Procedures 23 Part II. Other Information 24 SIGNATURE 25

2

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) October 5, January 5, 2004 2004 ------------ ----------- (unaudited) ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 9,599 $ 40,200 Accounts receivable: Trade, less allowance of $1,564 and $2,556 at October 5, 2004 and January 5, 2004, respectively . . . . . . . . . . . . . . 117,477 111,324 Vendor receivables, less allowance of $100 at October 5, 2004 and January 5, 2004 . . . . . . . . . . . . . 5,052 7,226 Net investment in leases. . . . . . . . . . . . . . . . . . . . 4,377 2,056 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,148 2,043 ------------ ----------- Total receivables . . . . . . . . . . . . . . . . . . . . . . 129,054 122,649 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,680 12,453 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,444 5,193 ------------ ----------- Total current assets. . . . . . . . . . . . . . . . . . . . . 162,777 180,495 Equipment and leasehold improvements: Furniture, fixtures and equipment . . . . . . . . . . . . . . . 30,746 29,517 Leasehold improvements. . . . . . . . . . . . . . . . . . . . . 6,304 6,438 ------------ ----------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,050 35,955 Less accumulated depreciation . . . . . . . . . . . . . . . . . 21,158 19,696 ------------ ----------- Net equipment and leasehold improvements. . . . . . . . . . . 15,892 16,259 Net investment in leases, net of current portion. . . . . . . . . 2,219 2,935 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . 120,403 67,664 Intangible assets, net. . . . . . . . . . . . . . . . . . . . . . 3,864 436 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,509 1,410 ------------ ----------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 308,664 $ 269,199 ============ =========== See notes to consolidated financial statements.

3

POMEROY IT SOLUTIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) October 5, January 5, 2004 2004 ------------ ----------- (unaudited) LIABILITIES AND EQUITY Current Liabilities: Current portion of notes payable . . . . . . . . . . . . . . $ 912 $ 912 Short-term borrowings. . . . . . . . . . . . . . . . . . . . 2,853 - Accounts payable . . . . . . . . . . . . . . . . . . . . . . 63,325 50,051 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . 3,487 3,988 Accrued restructuring and severance charges. . . . . . . . . 8,875 - Other current liabilities. . . . . . . . . . . . . . . . . . 16,387 8,758 ------------ ----------- Total current liabilities. . . . . . . . . . . . . . . . 95,839 63,709 Notes payable, less current portion. . . . . . . . . . . . . 250 913 Deferred income taxes. . . . . . . . . . . . . . . . . . . . 5,446 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 (13,021 and 12,943 shares issued at October 5, 2004 and January 5, 2004, respectively. . . . . . . . . . . . 130 130 Paid-in-capital. . . . . . . . . . . . . . . . . . . . . . 83,297 82,696 Accumulated other comprehensive loss . . . . . . . . . . . (36) - Retained earnings. . . . . . . . . . . . . . . . . . . . . 132,484 125,250 ------------ ----------- 215,875 208,076 Less treasury stock, at cost ( 778 and 738 shares at October 5, 2004 and January 5, 2004, respectively. . . . . 8,746 8,279 ------------ ----------- Total equity . . . . . . . . . . . . . . . . . . . . . . 207,129 199,797 ------------ ----------- Total liabilities and equity . . . . . . . . . . . . . . $ 308,664 $ 269,199 ============ =========== 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, 2004 2003 (unaudited) (unaudited) ------------ ------------ Net sales and revenues: Sales-equipment, supplies and leasing. . . . . . . $ 139,403 $ 125,698 Service. . . . . . . . . . . . . . . . . . . . . . 61,101 32,374 ------------ ------------ Total net sales and revenues . . . . . . . . . . 200,504 158,072 Cost of sales and service: Sales-equipment, supplies and leasing. . . . . . . 129,621 116,825 Service. . . . . . . . . . . . . . . . . . . . . . 44,433 23,612 ------------ ------------ Total cost of sales and service. . . . . . . . . 174,054 140,437 ------------ ------------ Gross profit . . . . . . . . . . . . . . . . . 26,450 17,635 Operating expenses: Selling, general and administrative. . . . . . . 18,818 11,331 Rent expense . . . . . . . . . . . . . . . . . . 906 802 Depreciation . . . . . . . . . . . . . . . . . . 1,052 1,228 Amortization . . . . . . . . . . . . . . . . . . 122 63 Restructuring and severance charges. . . . . . . 2,423 - ------------ ------------ Total operating expenses . . . . . . . . . . . 23,321 13,424 ------------ ------------ Income before other expense (income) and income tax. 3,129 4,211 Other expense (income): Interest, net. . . . . . . . . . . . . . . . . . 32 (7) Other. . . . . . . . . . . . . . . . . . . . . . 4 16 ------------ ------------ Total other expense, net . . . . . . . . . . . 36 9 ------------ ------------ Income before income tax. . . . . . . . . . . . . . 3,093 4,202 Income tax expense . . . . . . . . . . . . . . . . . 1,221 1,639 ------------ ------------ Net income . . . . . . . . . . . . . . . . . . . $ 1,872 $ 2,563 ============ ============ Weighted average shares outstanding: Basic. . . . . . . . . . . . . . . . . . . . . . 12,240 12,226 ============ ============ Diluted. . . . . . . . . . . . . . . . . . . . . 12,366 12,369 ============ ============ Earnings per common share: Basic. . . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.21 ============ ============ Diluted. . . . . . . . . . . . . . . . . . . . . $ 0.15 $ 0.21 ============ ============ Dividends per common share, . . . . . . . . . . . . $ -- $ 0.80 ============ ============ See notes to consolidated financial statements.

5

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended -------------------------- October 5, October 5, 2004 2003 ------------ ------------ (unaudited) (unaudited) Net income . . . . . . . . . . . . . . . . . . . . . . $ 1,872 $ 2,563 Other comprehensive loss: Foreign currency translation adjustment, net of tax. (36) - ------------ ------------ Comprehensive income . . . . . . . . . . . . . . . . . $ 1,836 $ 2,563 ============ ============ See notes to consolidated financial statements.

6

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) Nine Months Ended -------------------------- October 5, October 5, 2004 2003 ------------ ------------ (unaudited) (unaudited) Net sales and revenues: Sales-equipment, supplies and leasing. . . . . . . $ 407,724 $ 341,879 Service. . . . . . . . . . . . . . . . . . . . . . 126,149 93,523 ------------ ------------ Total net sales and revenues . . . . . . . . . . 533,873 435,402 Cost of sales and service: Sales-equipment, supplies and leasing. . . . . . . 377,638 316,186 Service. . . . . . . . . . . . . . . . . . . . . . 91,685 67,887 ------------ ------------ Total cost of sales and service. . . . . . . . . 469,323 384,073 ------------ ------------ Gross profit . . . . . . . . . . . . . . . . . 64,550 51,329 Operating expenses: Selling, general and administrative. . . . . . . 44,570 34,777 Rent expense . . . . . . . . . . . . . . . . . . 2,451 2,397 Depreciation . . . . . . . . . . . . . . . . . . 2,968 3,643 Amortization . . . . . . . . . . . . . . . . . . 201 360 Provision for doubtful accounts. . . . . . . . . - 200 Restructuring and severance charges. . . . . . . 2,423 - ------------ ------------ Total operating expenses . . . . . . . . . . . 52,613 41,377 ------------ ------------ Income before other expense (income) and income tax. 11,937 9,952 Other expense (income): Interest, net. . . . . . . . . . . . . . . . . . 1 (21) Other. . . . . . . . . . . . . . . . . . . . . . 27 1 ------------ ------------ Total other expense (income), net. . . . . . . 28 (20) ------------ ------------ Income before income tax. . . . . . . . . . . . . . 11,909 9,972 Income tax expense . . . . . . . . . . . . . . . . . 4,675 3,889 ------------ ------------ Net income . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083 ============ ============ Weighted average shares outstanding: Basic. . . . . . . . . . . . . . . . . . . . . . 12,243 12,340 ============ ============ Diluted. . . . . . . . . . . . . . . . . . . . . 12,419 12,390 ============ ============ Earnings per common share: Basic. . . . . . . . . . . . . . . . . . . . . . $ 0.59 $ 0.49 ============ ============ Diluted. . . . . . . . . . . . . . . . . . . . . $ 0.58 $ 0.49 ============ ============ Dividends per common share, . . . . . . . . . . . . $ -- $ 0.80 ============ ============ See notes to consolidated financial statements.

7

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Nine Months Ended -------------------------- October 5, October 5, 2004 2003 ------------ ------------ (unaudited) (unaudited) Net income . . . . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083 Other comprehensive loss: Foreign currency translation adjustment, net of tax. (36) - ------------ ------------ Comprehensive income . . . . . . . . . . . . . . . . . $ 7,198 $ 6,083 ============ ============ See notes to consolidated financial statements.

8

POMEROY IT SOLUTIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended -------------------------- October 5, October 5, 2004 2003 ------------ ------------ (unaudited) (unaudited) Cash flows from operating activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,234 $ 6,083 Adjustments to reconcile net income to net cash from operating activities: Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . 2,968 3,643 Amortization. . . . . . . . . . . . . . . . . . . . . . . . . 201 360 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 12 2,365 Effect of exchange rate changes on cash and cash equivalents. (36) - Loss on sale of fixed assets. . . . . . . . . . . . . . . . . 30 73 Changes in working capital accounts, net of effects of acquisitions: Accounts receivable . . . . . . . . . . . . . . . . . . . . 13,232 (1,624) Inventories . . . . . . . . . . . . . . . . . . . . . . . . (5,959) (1,851) Prepaids. . . . . . . . . . . . . . . . . . . . . . . . . . (2,210) 3,057 Net investment in leases. . . . . . . . . . . . . . . . . . 377 (561) Accounts payable. . . . . . . . . . . . . . . . . . . . . . 1,023 13,216 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . (501) 1,840 Income tax payable. . . . . . . . . . . . . . . . . . . . . 204 - Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (669) 1,629 ------------ ------------ Net operating activities. . . . . . . . . . . . . . . . . . . 15,906 28,230 ------------ ------------ Cash flows from investing activities: Capital expenditures. . . . . . . . . . . . . . . . . . . . . (1,495) (1,485) Proceeds from sale of fixed assets. . . . . . . . . . . . . . 20 1 Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . (16,634) (5,097) ------------ ------------ Net investing activities. . . . . . . . . . . . . . . . . . . (18,109) (6,581) ------------ ------------ Cash flows from financing activities: Proceeds from short-term borrowings . . . . . . . . . . . . . 2,853 - Payments of acquisition notes payable. . . . . . . . . . . . (31,385) (541) Proceeds from exercise of stock options and related tax benefit . . . . . . . . . . . . . . . . . . 441 391 Purchase of treasury stock. . . . . . . . . . . . . . . . . . (467) (4,096) Proceeds from employee stock purchase plan. . . . . . . . . . 160 165 Cash dividend paid. . . . . . . . . . . . . . . . . . . . . . - (9,809) ------------ ------------ Net financing activities. . . . . . . . . . . . . . . . . . . (28,398) (13,890) ------------ ------------ Change in cash and cash equivalents . . . . . . . . . . . . . . (30,601) 7,759 Cash and cash equivalents Beginning of period . . . . . . . . . . . . . . . . . . . . . 40,200 32,505 ------------ ------------ End of period . . . . . . . . . . . . . . . . . . . . . . . . $ 9,599 $ 40,264 ============ ============ See notes to consolidated financial statements.

9 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 nine-month period ended October 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 10 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 Short-Term Borrowings On June 28, 2004, the Company finalized a new $165 million Syndicated Credit Facility Agreement with GE Commercial Distribution Finance. The new credit facility has a three-year term and its components include a maximum of $75 million for inventory financing and a revolver, collateralized primarily by accounts receivable, of up to $110 million. Under the new agreement, the credit facility provides a letter of credit facility of $5 million. 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 October 5, 2004, the Company had an outstanding balance under the Company's credit facility of $2.9 million. As of January 5, 2004, the Company did not have a balance outstanding under the Company's previous credit facility. 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: 11

(in thousands, except per Three Months Ended October 5, share amounts) 2004 2003 --------------- ---------------- Net income - as reported $ 1,872 $ 2,563 Stock-based compensation expense-net of tax 299 206 --------------- ---------------- Net income - pro forma $ 1,573 $ 2,357 =============== ================ Net income per common share - as reported Basic $ 0.15 $ 0.21 =============== ================ Diluted $ 0.15 $ 0.21 =============== ================ Net income per common share - pro forma Basic $ 0.13 $ 0.19 =============== ================ Diluted $ 0.13 $ 0.19 =============== ================

(in thousands, except per Nine Months Ended October 5, share amounts) 2004 2003 ------------- ----------------- Net income - as reported $ 7,234 $ 6,083 Stock-based compensation expense-net of tax 1,099 1,011 ------------- ----------------- Net income - pro forma $ 6,135 $ 5,072 ============ ================= Net income per common share - as reported Basic $ 0.59 $ 0.49 ============ ================= Diluted $ 0.58 $ 0.49 ============ ================= Net income per common share - pro forma Basic $ 0.50 $ 0.41 ============ ================= Diluted $ 0.49 $ 0.41 ============ =================

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) 12

Three Months Ended October 5, ---------------------------------------- 2004 2003 ------------------- ------------------- Per Share Per Share Shares Amount Shares Amount ------ ----------- ------ ----------- Basic EPS 12,240 $ 0.15 12,226 $ 0.21 Effect of dilutive stock options 126 - 143 - ------ ----------- ------ ----------- Diluted EPS 12,366 $ 0.15 12,369 $ 0.21 ====== =========== ====== =========== Nine Months Ended October 5, ---------------------------------------- 2004 2003 ------------------- ------------------- Per Share Per Share Shares Amount Shares Amount ------ ----------- ------ ----------- Basic EPS 12,243 $ 0.59 12,340 $ 0.49 Effect of dilutive stock options 176 (0.01) 50 - ------ ----------- ------ ----------- Diluted EPS 12,419 $ 0.58 12,390 $ 0.49 ====== =========== ====== ===========

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 October 5, 2004 and January 5, 2004:

(in thousands) Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount 10/5/2004 10/5/2004 10/5/2004 1/5/2004 1/5/2004 1/5/2004 ------------------------------------- ----------------------------------- Amortized intangible assets: Covenants not-to-compete $ 2,023 $ 1,722 $ 301 $ 1,844 $ 1,650 $ 194 Customer lists 2,877 485 2,392 627 385 242 Other intangibles 1,200 29 1,171 - - - ---------- ------------- ---------- --------- ------------- --------- Total amortized intangibles $ 6,100 $ 2,236 $ 3,864 $ 2,471 $ 2,035 $ 436 ========== ============= ========== ========= ============= =========

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 quarters ended October 5, 2004 and 2003, amortization expense related to intangible assets with definite lives was $122 and $63 thousand, respectively. For the nine months ended October 5, 2004 and 2003, amortization expense related to intangible assets with definite lives was $201 and $360 thousand, respectively. 13 Projected future amortization expense related to intangible assets with definite lives are as follows:

(in thousands) Fiscal Years: 2004 $ 163 October 6, 2004 - January 5, 2005 2005 524 2006 417 2007 417 2008 417 2009 417 2010 and thereafter 1,509 ------- Total $3,864 =======

The change in the net carrying amount of goodwill for the nine months ended October 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 Goodwill recorded during second quarter 66 59 125 --------- --------- ------------- Net carrying amount as of 7/5/04 36,058 31,977 68,035 Goodwill recorded during third quarter 1 52,367 52,368 --------- --------- ------------- Net carrying amount as of 10/5/04 $ 36,059 $ 84,344 $ 120,403 ========= ========= =============

See footnote 10 for explanation of increase in goodwill for the third quarter of fiscal 2004. 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)

Nine Months Ended October 5, -------------------------------- 2004 2003 -------------- ---------------- Interest paid $ 270 $ 310 ============== ================ Income taxes paid $ 3,787 $ 744 ============== ================ Adjustments to purchase price of acquisition assets and intangibles $ 70 $ 299 ============== ================ Business combinations accounted for as purchases: Assets acquired $ 78,256 $ 10,497 Liabilities assumed 61,622 4,074 Notes payable - 1,326 -------------- ---------------- Net cash paid $ 16,634 $ 5,097 ============== ================

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. 14 9. Segment Information Summarized financial information concerning the Company's reportable segments is shown in the following table. (in thousands)

Three Months Ended October 5, 2004 ------------------------------------------------ Products Services Leasing Consolidated --------- --------- -------- ---------------- Revenues $ 139,346 $ 61,101 $ 57 $ 200,504 Income before other expense (income) and income tax 1,097 1,990 42 3,129 Total assets 178,211 123,078 7,375 308,664 Capital expenditures 204 229 - 433 Depreciation and amortization 508 666 - 1,174 Three Months Ended October 5, 2003 ------------------------------------------------ Products Services Leasing Consolidated --------- --------- -------- ---------------- Revenues $ 125,685 $ 32,374 $ 13 $ 158,072 Income before other expense (income) and income tax 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 Nine Months Ended October 5, 2004 ------------------------------------------------ Products Services Leasing Consolidated --------- --------- -------- ---------------- Revenues $ 407,635 $ 126,149 $ 89 $ 533,873 Income before other expense (income) and income tax 5,144 6,749 44 11,937 Total assets 178,211 123,078 7,375 308,664 Capital expenditures 764 731 - 1,495 Depreciation and amortization 1,559 1,608 2 3,169 Nine Months Ended October 5, 2003 ------------------------------------------------ Products Services Leasing Consolidated --------- --------- -------- ---------------- Revenues $ 341,715 $ 93,523 $ 164 $ 435,402 Income before other expense (income) and income tax 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

10. Merger On July 23, 2004, the Company and Pomeroy Acquisition Sub, Inc. ("PAS"), a wholly owned subsidiary the Company, completed a merger with Alternative Resources Corporation ("ARC"). On May 11, 2004, the parties entered into a definitive merger agreement for PAS to acquire all of the issued and outstanding shares of capital stock of ARC. The merger was approved by ARC shareholders at a meeting held on July 22, 2004. As a result of the merger, ARC is now a wholly-owned subsidiary of the Company. 15 The cash consideration paid at closing, including the cost of all stock, stock options and warrants purchased and the amount of ARC net debt retired, was approximately $46.1 million, which was funded from cash on hand and borrowings from Pomeroy's existing line of credit. The Merger will nearly double total service revenues for Pomeroy based on historical performance. In addition, with the anticipated recovery of IT spending, it is believed that the Merger represents an opportunity to increase revenue growth. The Merger will add approximately 2,000 technical resources to Pomeroy as well as some major new customers. The additional technical personnel will also allow Pomeroy to add new services capabilities. The operating results of ARC have been included in the Company's consolidated financial statements since the acquisition date of July 23, 2004. On an unaudited pro forma basis, assuming the acquisition had occurred at the January 6, 2004, the Company's consolidated results would have been:

(in thousands, except per share data) For the three months ended For the nine months ended October 5,2004 October 5, 2004 -------------------------- ------------------------- Actual Pro forma Actual Pro forma ------------- ----------- ------------ ----------- Net sales and revenues $ 200,504 $ 207,715 $ 533,873 $ 598,928 Income before other expense (income) and income tax 3,129 2,671 11,937 9,773 Net income 1,872 1,576 7,234 5,787 Earnings per common share, diluted 0.15 0.13 0.58 0.47

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 is associated with legacy Pomeroy costs of facilities and processes that have or will become duplicative or redundant as ARC operations are integrated into the Company. These costs consist of facility closing and involuntary employee reduction severance costs of $576 thousand and $400 thousand, respectively. These costs are accounted for under FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities," and have been 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 a non-recurring, one-time charge for severance in the amount of $1.447 million related to the retirement of founder and former CEO David B. Pomeroy II. Mr. Pomeroy will continue to serve as board chairman. Also, in fiscal 2005, the Company plans to have an additional restructuring charge related to exiting unutilized leased facility space of approximately $292 thousand. This charge will be recorded when the leased facilities have been vacated. During the third quarter of fiscal 2004, the restructuring and severance charges expensed consisted of the following: 16

(in thousands) Total Initial Cash Accrued balance Accrual payments at October 5, 2004 ----------------------------------------------- Severance $ 1,847 $ (142) $ 1,705 Facility consolidations 576 - 576 ----------------------------------------------- $ 2,423 $ (142) $ 2,281 ===============================================

Also, the Company's management recorded a restructuring charge liability on the ARC opening balance sheet to eliminate certain duplicative activities and reduced facility requirements. As a result, approximately $6.4 million of costs were recorded as part of the ARC merger. The restructuring charge consisted of costs of vacating duplicative leased facilities 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. A portion of the restructuring liabilities are classified as long-term liabilities in the accompanying consolidated balance sheet at October 5, 2004. Changes to the estimates of executing the currently approved plans of restructuring will be recorded as an increase or decrease to goodwill.

(in thousands) Total Initial Cash Liability balance Liability payments at October 5, 2004 ----------------------------------------------- Severance $ 2,682 $ (453) $ 2,229 Facility consolidations 3,715 (106) 3,609 ----------------------------------------------- $ 6,397 $ (559) $ 5,838 ===============================================

Additionally, as part of the acquisition of ARC, the Company acquired the remaining obligations of ARC's existing restructuring plans, which were initially recorded in fiscal 2003 and fiscal 2002. The total obligations acquired in connection with these restructuring plans was $2.1 million at July 23, 2004. As of October 5, 2004, the Company had paid approximately $1.3 million of the acquired accrued costs. As of October 5, 2004, 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 Cash Balance at as of 7/23/04 payments October 5, 2004 -------------------------------------------- Severance $ 647 $ (461) $ 186 -------------------------------------------- $ 647 $ (461) $ 186 ============================================ Fiscal 2002 Restructuring Charge Total Accrual Cash Balance at as of 7/23/04 payments October 5, 2004 -------------------------------------------- Facility consolidations $ 756 $ (226) $ 530 Other charges 696 (656) 40 -------------------------------------------- $ 1,452 $ (882) $ 570 ============================================

17 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. 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: 18

Financial Results Percentage of net sales and revenues Three months ended Nine months ended October 5, October 5, ---------------------- ------------------------ 2004 2003 2004 2003 ---------- ---------- --------- ------------- Net sales and revenues: Equipment, supplies and leasing 69.5% 79.5% 76.4% 78.5% Service 30.5% 20.5% 23.6% 21.5% ---------- ---------- --------- ------------- Total net sales and revenues 100.0% 100.0% 100.0% 100.0% ========== ========== ========= ============= Cost of sales and servce: Equipment, supplies and leasing 64.6% 73.9% 70.7% 72.6% Service 22.2% 14.9% 17.2% 15.6% ---------- ---------- --------- ------------- Total cost of sales and service 86.8% 88.8% 87.9% 88.2% ========== ========== ========= ============= Gross profit: Equipment, supplies and leasing 4.9% 5.6% 5.7% 5.9% Service 8.3% 5.5% 6.4% 5.9% ---------- ---------- --------- ------------- Total gross profit 13.2% 11.2% 12.1% 11.8% ========== ========== ========= ============= Operating expenses: Selling, general and administrative 9.4% 7.2% 8.3% 8.0% Rent 0.4% 0.5% 0.5% 0.6% Depreciation 0.5% 0.8% 0.6% 0.8% Amortization 0.1% 0.0% 0.0% 0.1% Provision for doubtful accounts 0.0% 0.0% 0.0% 0.0% Restructuring and severance charges 1.2% 0.0% 0.5% 0.0% ---------- ---------- --------- ------------- Total operating expenses 11.6% 8.5% 9.9% 9.5% ========== ========== ========= ============= Income before other expense (income) and income tax 1.6% 2.6% 2.2% 2.3% Net other expense 0.1% 0.0% 0.0% 0.0% Income before income tax 1.5% 2.6% 2.2% 2.3% Income tax expense 0.6% 1.0% 0.8% 0.9% ---------- ---------- --------- ------------- Net income 0.9% 1.6% 1.4% 1.4% ========== ========== ========= =============

19 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 $42.4 million, or 26.8%, to $200.5 million in the third quarter of fiscal 2004 from $158.1 million in the third quarter of fiscal 2003. This increase was primarily a result of increased industry-wide technology spending and the acquisition of Alternative Resources Corporation on July 23, 2004. Excluding acquisitions completed in fiscal years 2003 and 2004, total net sales and revenues increased 11.5%. Products and leasing sales increased $13.7 million, or 10.9% to $139.4 million in the third quarter of fiscal 2004 from $125.7 million in the third quarter of fiscal 2003. Excluding acquisitions completed in fiscal years 2003 and 2004, products and leasing sales in the third quarter of fiscal 2004 increased 9.7% over the products and leasing sales in the third quarter of fiscal 2003. Service revenues increased $28.7 million, or 88.7%, to $61.1 million in the third quarter of fiscal 2004 from $32.4 million in the third quarter of fiscal year 2003, primarily as a result of the acquisition of Alternative Resources Corporation. Excluding acquisitions completed in fiscal years 2003 and 2004, service revenues in the third quarter of fiscal 2004 increased 18.6% over service revenues in the third quarter of fiscal 2003. Total net sales and revenues increased $98.5 million, or 22.6%, to $533.9 million in the first nine months of fiscal 2004 from $435.4 million in the first nine months of fiscal 2003. Excluding acquisitions completed in fiscal years 2003 and 2004, total net sales and revenues increased 15.9%. Products and leasing sales increased $65.8 million, or 19.3%, to $407.7 million in the first nine months of fiscal 2004 from $341.9 million in the first nine months of fiscal 2003. Excluding acquisitions completed in fiscal years 2003 and 2004, products and leasing sales in the first nine months of fiscal 2004 increased 17.8% over products and leasing sales in the first nine months of fiscal 2003. Service revenues increased $32.6 million, or 34.9%, to $126.1 million in the first nine months of fiscal 2004 from $93.5 million in the first nine months of fiscal year 2003, primarily as a result of the acquisition of Alternative Resources Corporation in the third quarter of fiscal 2004. Excluding acquisitions completed in fiscal years 2003 and 2004, service revenues in the first nine months of fiscal 2004 increased 8.8% over service revenues in the first nine months of fiscal 2003. GROSS PROFIT. Gross profit increased $8.8 million, or 50.0%, to $26.4 million in the third quarter of fiscal 2004 from $17.6 million in the third quarter of fiscal 2003. The increase was primarily due to increased total net sales and revenues. Gross profit, as a percentage of revenue, increased to 13.2% in the third quarter of fiscal 2004 as compared to 11.2% in the third quarter of fiscal 2003. This increase in gross margin 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 margin due to the acquisition of Alternative Resources Corporation. As a consequence of adopting EITF 02-16, the Company recorded approximately $70 thousand during the third quarter of fiscal 2004 of vendor considerations as a reduction of product cost of sales, which previously would 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 remained at 13.2% during the third quarter of fiscal 2004 compared to 11.2% during the third 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 may have an unfavorable impact on overall gross margin. Additionally, the Company expects to continue increasing the breadth and depth of its service offerings, which should have a continued favorable 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. Gross profit increased $13.2 million, or 25.8%, to $64.5 million in the first nine months of fiscal 2004 from $51.3 million in the first nine months of fiscal 2003. The increase was primarily due to increased total net sales and revenues. Gross profit, as a percentage of revenue, increased to 12.1% in the first nine months of fiscal 2004 as compared to 11.8% in the first nine months of fiscal 2003. This increase in gross margin 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 margin due to the acquisition of Alternative Resources Corporation. As a consequence of adopting EITF 02-16, the Company recorded approximately $543 thousand during the first nine 20 months of fiscal 2004 of vendor considerations as a reduction of product cost of sales, which previously would 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 12.0% during the first nine months of fiscal 2004 compared to 11.8% during the first nine months 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 may have a continued unfavorable impact on overall gross margin. OPERATING EXPENSES. Selling, general and administrative expenses (including rent expense) expressed as a percentage of total net sales and revenues increased to 9.8% in the third quarter of fiscal 2004 from 7.7% in the third quarter of fiscal 2003. Total operating expenses expressed as a percentage of total net sales and revenues increased to 11.6% in the third quarter of fiscal 2004 from 8.5% in the third quarter of fiscal 2003. This increase is primarily the result of the acquisition of Alternative Resources Corporation and recording a $2.4 million restructuring charge offset by higher net sales and revenues in the third quarter of fiscal 2004 as compared to the third quarter of fiscal 2003. As a result of adopting EITF 02-16, the Company reclassified approximately $70 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 11.6% during the third quarter of fiscal 2004 as compared to 8.5% during the third quarter of fiscal 2003. This non-GAAP measurement is included to provide a more meaningful comparison to prior periods. 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 8.8% in the first nine months of fiscal 2004 from 8.6% in the first nine months of fiscal 2003. Total operating expenses expressed as a percentage of total net sales and revenues increased to 9.9% in the first nine months of fiscal 2004 from 9.5% in the first nine months of fiscal 2003. This increase is primarily the result of recording a $2.4 million restructuring charge in the third quarter of fiscal 2004 offset by higher net sales and revenues in the first nine months of fiscal 2004 as compared to the first nine months of fiscal 2003. As a result of adopting EITF 02-16, the Company reclassified approximately $543 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 9.7% during the first nine months of fiscal 2004 as compared to 9.5% during the first nine months of fiscal 2003. This non-GAAP measurement is included to provide a more meaningful comparison to prior periods. RESTRUCTURING AND SEVERANCE CHARGES. During the third quarter of 2004, in connection with certain strategic initiatives, the Company recorded restructuring and severance charges of $1.0 million. The restructuring charge is associated with legacy Pomeroy costs of facilities and processes that have or will become duplicative or redundant as ARC operations are integrated into the Company. The Company also recorded a non-recurring, one-time charge for severance in the amount of $1.4 million related to the retirement of founder and former CEO David B. Pomeroy II. INCOME BEFORE OTHER EXPENSE (INCOME) AND INCOME TAX. Income from operations decreased $1.1 million, or 25.7%, to $3.1 million in the third quarter of fiscal 2004 from $4.2 million in the third quarter of fiscal 2003. The Company's operating margin decreased to 1.6% in the third quarter of fiscal 2004 as compared to 2.6% in the third quarter of fiscal 2003. This decrease is primarily due to recording the non-recurring restructuring and severance charges described above. Income before other expense (income) and income tax increased $2.0 million, or 19.9%, to $11.9 million in the first nine months of fiscal 2004 from $9.9 million in the first nine months of fiscal 2003. The Company's operating margin decreased to 2.2% in the first nine months of fiscal 2004 as compared to 2.3% in the first nine months of fiscal 2003. This decrease is primarily due to recording the restructuring and severance charges described above offset by increase in service revenues as a percentage of total revenues and the increase in service gross margin as a percentage of total gross margin due to the acquisition of Alternative Resources Corporation. NET INTEREST INCOME (EXPENSE). Net interest expense was $0.032 million during the third quarter of fiscal 2004 as compared to net interest income of $0.007 million during the third quarter of fiscal 2003. This was primarily a result of increased borrowings on the credit facility. 21 Net interest expense was $0.001 million in the first nine months of fiscal 2004 compared to net interest income of $0.02 million in the first nine months of fiscal 2003. This increase in net interest expense was a result of increased borrowings under our credit facility and lower interest rates on invested funds. INCOME TAXES. The Company's effective tax rate was 39.5% in the third quarter of fiscal 2004 compared to 39.0% in the third quarter of fiscal 2003. The Company's effective tax rate was 39.3% in the first nine months of fiscal 2004 compared to 39.0% in the first nine months of fiscal 2003. NET INCOME. Net income decreased $0.7 million, or 27.0%, to $1.9 million in the third quarter of fiscal 2004 from $2.6 million in the third quarter of fiscal 2003 due to the factors described above. Net income increased $1.1 million, or 18.9%, to $7.2 million in the first nine months of fiscal 2004 from $6.1 million in the first nine months of fiscal 2003 due to the factors described above. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $15.9 million in the first nine months of fiscal 2004. Cash used in investing activities was $18.1 million, which included payments of $16.6 million for current and prior year acquisitions and $1.5 million for capital expenditures. Cash used in financing activities was $28.4 million, which included $31.4 million for payments of acquisition notes payable and $0.5 million for the purchase of treasury stock offset by $2.9 million of proceeds from short-term borrowings, $0.4 million of proceeds from exercise of stock options and $0.2 million of proceeds from employee stock plan purchases. A significant part of the Company's inventories is financed by floor plan arrangements with third parties. At October 5, 2004, these lines of credit totaled $87.0 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 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. On June 28, 2004, the Company finalized a new $165 million syndicated credit facility with GECDF. This new $165 million syndicated credit facility has a three-year term and supersedes the $240.0 million credit facility that was in effect with GECDF prior to the closing of this transaction. The new credit facility components include a maximum of $75 million for inventory financing and a revolver, collateralized primarily by accounts receivable, of up to $110 million. Under the new agreement, the credit facility provides a letter of credit facility of $5 million. The accounts receivable portion of the credit facility carries a variable interest rate based on the London InterBank Offering Rate ("LIBOR") and a pricing grid. As of October 5, 2004 the Company had an outstanding balance on the working capital component of this facility of $2.9 million. 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. The merger of Alternative Resources Corporation with and into Pomeroy Acquisition Sub, Inc., a wholly owned subsidiary of the Company, completed on July 23, 2004 was financed using cash on hand and borrowings from Pomeroy's existing line of credit. 22 Aggregated information about the Company's contractual obligations and other off balance sheet commitments as of October 5, 2004 are presented in the following table:

MORE THAN 5 TOTAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEARS ------------------------------------------------------------- Acquisition notes $ 1,162 $ 912 $ 250 $ - $ - $ - $ - Operating leases 20,320 5,991 3,979 3,375 3,014 2,719 1,242 ------------------------------------------------------------- Total contractual cash obligations $21,482 $ 6,903 $ 4,229 $ 3,375 $ 3,014 $ 2,719 $ 1,242 =============================================================

The operating leases, shown above, are not recorded on the consolidated balance sheet. Operating leases are utilized in the normal course of business. 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 third 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 October 5, 2004, an evaluation was carried out under the supervision and with the participation of the Company's management, including the 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, 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. 23 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

Issuer Purchases of Equity Securities (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 7/6/04 - 8/5/04 10,000 $ 11.81 423,367 0 8/6/04 - 9/5/04 - - - - 9/6/04 - 10/5/04 - - - - ------------------------------------------------------------------ Total 10,000 423,367 0 ==================================================================

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 Item 2.02. Results of Operations and Financial Condition. On November 11, 2004, Pomeroy IT Solutions, Inc. issued a press release announcing financial results for the third quarter and nine months ended October 5, 2004. A copy of this press release is attached hereto as Exhibit 99.1. Certain information in this press release was discussed by Stephen Pomeroy, Chief Executive Officer and President and Michael Rohrkemper, Chief Financial Officer and Chief Accounting Officer in our third quarter conference call that was conducted following the public issuance of the press release. Item 9.01 Financial Statements and Exhibits. --------------------------------------------- 99.1 Press Release, dated November 11, 2004, announcing financial results for the third quarter and nine months ended October 5, 2004. 24 31.1 Section 302 CEO Certification 31.2 Section 302 CFO Certification 32.1 Section 906 CEO Certification 32.2 Section 906 CFO Certification SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. POMEROY IT SOLUTIONS, INC. ---------------------------- (Registrant) Date: November 15, 2004 By: /s/ Michael E. Rohrkemper -------------------------------------------- Michael E. Rohrkemper Chief Financial Officer and Chief Accounting Officer 25