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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 SEPTEMBER 30, 2003
[ ] 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 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1611068
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
100 OAKVIEW DRIVE
TRUMBULL, CONNECTICUT 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(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
filing 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 __
---
Number of shares of Imagistics Common Stock, par value $ .01 per share,
outstanding as of October 31, 2003: 16,774,117
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IMAGISTICS INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.................................................3
ITEM 1. FINANCIAL STATEMENTS..................................................3
Consolidated Statements of Income for the three and nine months
ended September 30, 2003 and 2002 (Unaudited)........................3
Consolidated Balance Sheets as of September 30, 2003 (Unaudited)
and December 31, 2002................................................4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (Unaudited) .......................5
Notes to Consolidated Financial Statements............................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........25
ITEM 4. CONTROLS AND PROCEDURES..............................................26
PART II - OTHER INFORMATION...................................................27
ITEM 1. LEGAL PROCEEDINGS....................................................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................27
SIGNATURES....................................................................29
Page 2 of 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenue:
Sales $ 84,298 $ 77,081 $ 236,227 $ 231,216
Rentals 54,239 58,088 167,414 175,506
Support services 21,012 20,900 62,746 62,799
-------------- -------------- -------------- --------------
Total revenue 159,549 156,069 466,387 469,521
Cost of sales 52,328 47,236 145,738 145,044
Cost of rentals 17,952 20,991 55,800 64,446
Selling, service and administrative expenses 76,017 78,707 231,540 233,042
-------------- -------------- -------------- --------------
Operating income 13,252 9,135 33,309 26,989
Interest expense 4,289 2,240 7,510 6,429
-------------- -------------- -------------- --------------
Income before income taxes 8,963 6,895 25,799 20,560
Provision for income taxes 3,833 2,740 10,877 8,168
-------------- -------------- -------------- --------------
Net income $ 5,130 $ 4,155 $ 14,922 $ 12,392
============== ============== ============== ==============
Earnings per share:
Basic $ 0.31 $ 0.23 $ 0.89 $ 0.66
============== ============== ============== ==============
Diluted $ 0.30 $ 0.22 $ 0.86 $ 0.64
============== ============== ============== ==============
Shares used in computing earnings per share:
Basic 16,471,877 17,989,310 16,854,555 18,902,517
============== ============== ============== ==============
Diluted 17,067,336 18,537,611 17,330,051 19,363,662
============== ============== ============== ==============
See Notes to Consolidated Financial Statements
Page 3 of 29
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 25,071 $ 31,325
Accounts receivable, net of allowances of $9,650 and $5,792
at September 30, 2003 and December 31, 2002, respectively 72,172 84,142
Accrued billings 27,508 26,125
Inventories 98,148 106,002
Current deferred taxes on income 19,492 20,518
Other current assets and prepaid expenses 3,110 5,173
------------- ------------
Total current assets 245,501 273,285
Property, plant and equipment, net 53,214 43,812
Rental equipment, net 66,470 88,433
Goodwill, net 55,447 52,600
Other assets 4,652 6,776
------------- ------------
Total assets $ 425,284 $ 464,906
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 545 $ 749
Accounts payable and accrued liabilities 63,855 77,590
Advance billings 26,111 27,243
------------- ------------
Total current liabilities 90,511 105,582
Long-term debt 53,041 73,399
Deferred taxes on income 18,338 15,320
Other liabilities 1,995 6,358
------------- ------------
Total liabilities 163,885 200,659
Commitments and contingencies (see Note 8)
Stockholders' equity:
Preferred stock ($1.00 par value; 10,000,000 shares authorized,
none issued at September 30, 2003 and December 31, 2002) - -
Common stock ($0.01 par value; 150,000,000 shares authorized,
19,857,935 and 19,813,517 issued at September 30, 2003 and
December 31, 2002, respectively) 199 198
Additional paid-in-capital 294,904 294,370
Retained earnings 29,444 14,522
Treasury stock, at cost (3,063,186 and 1,936,760 at
September 30, 2003 and December 31, 2002, respectively) (61,215) (36,549)
Unearned compensation (2,302) (3,217)
Accumulated other comprehensive income (loss) 369 (5,077)
------------- ------------
Total stockholders' equity 261,399 264,247
------------- ------------
Total liabilities and stockholders' equity $ 425,284 $ 464,906
============= ============
See Notes to Consolidated Financial Statements
Page 4 of 29
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2003 2002
------------- ------------
Cash flows from operating activities:
Net income $ 14,922 $ 12,392
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,547 60,093
Provision for bad debt 5,686 3,765
Provision for inventory obsolescence 5,147 11,417
Deferred taxes on income 4,195 3,719
Change in assets and liabilities, net of acquisitions:
Accounts receivable 7,015 12,813
Accrued billings (1,383) (428)
Inventories 3,664 6,591
Other current assets and prepaid expenses 2,088 1,286
Accounts payable and accrued liabilities (14,720) 19,897
Advance billings (1,343) (904)
Other, net 2,552 1,632
------------- ------------
Net cash provided by operating activities 84,370 132,273
Cash flows from investing activities:
Expenditures for rental equipment assets (28,022) (38,723)
Expenditures for property, plant and equipment (13,679) (14,860)
Other investing activities (4,139) -
------------- ------------
Net cash used in investing activities (45,840) (53,583)
Cash flows from financing activities:
Exercises of stock options, including sales
under employee stock purchase plan 1,964 35
Purchases of treasury stock (26,186) (29,998)
Repayments under term loan (20,562) (25,665)
Repayments under revolving credit facility - (17,000)
------------- ------------
Net cash used in financing activities (44,784) (72,628)
------------- ------------
(Decrease) increase in cash (6,254) 6,062
Cash at beginning of period 31,325 18,844
------------- ------------
Cash at end of period $ 25,071 $ 24,906
============= ============
See Notes to Consolidated Financial Statements
Page 5 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
Imagistics International Inc. (the "Company" or "Imagistics") is a large
independent direct sales, service and marketing organization offering document
imaging solutions, including copiers, facsimile machines and multifunctional
products, primarily to large corporate and government customers, as well as to
mid-size and regional businesses. In addition, the Company offers specialized
document imaging options including digital, analog, color and/or networked
products and systems.
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") initiated a plan to spin-off substantially all of its office systems
businesses to its stockholders as an independent publicly traded company. On
February 28, 2001, the Company was incorporated in Delaware as Pitney Bowes
Office Systems, Inc., a wholly owned subsidiary of Pitney Bowes, at which time
100 shares of the Company's common stock, par value $.01 per share, were
authorized, issued and outstanding. On October 12, 2001, the Company changed its
name to Imagistics International Inc. On December 3, 2001, Imagistics was spun
off from Pitney Bowes pursuant to a contribution by Pitney Bowes of
substantially all of its office systems businesses to the Company and a
distribution (the "Distribution") of the stock of the Company to stockholders of
Pitney Bowes based on a distribution ratio of 1 share of Imagistics stock for
every 12.5 shares of Pitney Bowes stock held at the close of business on
November 19, 2001. At the Distribution, the Company's authorized capital stock
consisted of 10,000,000 shares of preferred stock, par value $1.00 per share and
150,000,000 shares of common stock, par value $.01 per share. The Company issued
19,463,007 shares of common stock in connection with the Distribution.
Pitney Bowes has received a tax ruling from the Internal Revenue Service
stating that, subject to certain representations, the Distribution qualifies as
tax-free to Pitney Bowes and its stockholders for United States federal income
tax purposes.
Basis of presentation
The unaudited interim consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission (the "SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of results of operations, financial position and cash flows as of
and for the periods presented. Certain previously reported amounts have been
reclassified to conform to the current year presentation.
The Company believes that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results for the full
year. These unaudited interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K for the year
ended December 31, 2002 filed with the SEC on March 28, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the copier equipment at the customer location. For facsimile equipment and
facsimile supplies, the satisfaction of contractual obligations and the passing
of title and risk of loss to the customer occur upon the delivery of the
facsimile equipment and the facsimile supplies to the customer location. The
Company records a provision for estimated sales returns and other allowances
based upon historical experience.
Page 6 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of rental contracts, the Company
bills its customers a flat periodic charge and/or a usage-based fee. Revenues
related to these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable.
Support services contracts, which often include supplies, are generally for
an initial term of one year with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of support services contracts, the
Company bills its customers either a flat periodic charge or a usage-based fee.
Revenues related to these contracts are recognized each month as earned, either
using the straight-line method or based upon usage, as applicable.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
The Company enters into arrangements that include multiple deliverables,
which typically consist of the sale of equipment with a support services
contract. The Company accounts for each element within an arrangement with
multiple deliverables as separate units of accounting. Revenue is allocated to
each unit of accounting based on the residual method, which requires the
allocation of the revenue based on the fair value of the undelivered items. Fair
value of support services is primarily determined by reference to renewal
pricing of support services contracts when sold on a stand-alone basis.
Stock-based employee compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company recognizes stock-based compensation expense on its
restricted stock on a straight-line basis over the vesting period. The Company
does not recognize stock-based compensation expense on its stock options in its
reported results as all options granted, other than adjustment options in
connection with the Distribution, had an exercise price equal to the market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2003 2002 2003 2002
----------- ------------ ------------- ------------
Net income, as reported $ 5,130 $ 4,155 $ 14,922 $ 12,392
Compensation expense based on the
fair value method, net of related tax benefits 533 448 1,650 1,342
----------- ------------ ------------- ------------
Pro forma net income $ 4,597 $ 3,707 $ 13,272 $ 11,050
=========== ============ ============= ============
Basic earnings per share:
As reported $ 0.31 $ 0.23 $ 0.89 $ 0.66
Pro forma $ 0.28 $ 0.21 $ 0.79 $ 0.58
Diluted earnings per share:
As reported $ 0.30 $ 0.22 $ 0.86 $ 0.64
Pro forma $ 0.27 $ 0.20 $ 0.77 $ 0.57
Page 7 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Recent accounting pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003 and all provisions should be applied
prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. Certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's financial position, results of operations or cash flows.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
and disposal activities that are initiated after December 31, 2002 and provides
guidance on the recognition and measurement of liabilities associated with
disposal activities. The Company adopted SFAS No. 146 on January 1, 2003. The
adoption of SFAS No. 146 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB Emerging Issues Task Force reached a consensus
on issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 applies to certain contractually
binding arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed or determinable. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the Company's financial
position, results of operations or cash flows.
3. GOODWILL AND GOODWILL AMORTIZATION
The Company accounts for goodwill in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets," which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be tested for impairment annually and on an interim basis if events
or changes in circumstances indicate that goodwill might be impaired. The
Company performed its annual test for impairment using the discounted cash flow
valuation method as of October 1, 2003, and, based on that review, has
determined that its recorded goodwill was not impaired. For the three and nine
months ended September 30, 2003 and 2002, there was no goodwill amortization.
The carrying value of goodwill as of September 30, 2003 increased $2.8 million
as a result of the Company's acquisition (see Note 10). The carrying value of
goodwill of $55.4 million as of September 30, 2003 is attributable to the United
States geographic segment.
4. SUPPLEMENTAL INFORMATION
Inventories
Inventories consisted of the following at September 30, 2003 and December
31, 2002:
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
Finished products $ 61,971 $ 77,447
Supplies and service parts 36,177 28,555
-------------- --------------
Total inventories $ 98,148 $ 106,002
============== ==============
Page 8 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fixed assets
Fixed assets consisted of the following at September 30, 2003 and December
31, 2002:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 10,722 10,088
Machinery and equipment 22,684 21,372
Computers and software 45,980 36,483
------------- -------------
Property, plant and equipment, gross 80,742 69,299
Accumulated depreciation (27,528) (25,487)
------------- -------------
Property, plant and equipment, net $ 53,214 $ 43,812
============= =============
Rental equipment, gross $ 348,169 $ 365,793
Accumulated depreciation (281,699) (277,360)
------------- -------------
Rental equipment, net $ 66,470 $ 88,433
============= =============
Depreciation and amortization expense was $18.5 million and $56.5 million
for the three and nine months ended September 30, 2003, respectively, and $19.8
million and $60.1 million for the three and nine months ended September 30,
2002, respectively. Unamortized software costs totaled $27.3 million as of
September 30, 2003 and $19.6 million as of December 31, 2002. Amortization
expense on account of capitalized software totaled $0.2 million and $0.6 million
for the three and nine months ended September 30, 2003, respectively.
Amortization expense on account of capitalized software totaled $0.2 million and
$0.5 million for the three and nine months ended September 30, 2002,
respectively.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
September 30, 2003 and December 31, 2002:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
Accounts payable $ 22,558 $ 21,553
Accrued compensation and benefits 7,287 8,631
Other non-income taxes payable 6,152 6,973
Other accrued liabilities 27,858 40,433
------------- --------------
Accounts payable and accrued liabilities $ 63,855 $ 77,590
============= ==============
Comprehensive income
Comprehensive income consisted of the following for the three and nine
months ended September 30, 2003 and 2002:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ----------- ----------
Net income $ 5,130 $ 4,155 $ 14,922 $ 12,392
Translation adjustment 864 998 1,736 1,289
Unrealized gain (loss) on
cash flow hedges 791 (1,995) 868 (3,762)
Reclassification adjustment for
realized loss on cash flow
hedges included in net income 2,841 - 2,841 -
---------- ---------- ----------- ----------
Comprehensive income $ 9,626 $ 3,158 $ 20,367 $ 9,919
========== ========== =========== ==========
Page 9 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Treasury stock
The following table summarizes the Company's treasury stock transactions:
TREASURY STOCK
SHARES COST
------------- -------------
Balance at December 31, 2002 1,936,760 $ 36,549
Purchases under stock
buy back program 1,205,900 26,186
Sales to employees under
employee stock purchase plan (79,474) (1,520)
------------- -------------
Balance at September 30, 2003 3,063,186 $ 61,215
============= =============
Cash flow information
Cash paid for income taxes was $12,513 and $2,846 for the nine months ended
September 30, 2003 and 2002, respectively. Cash paid for interest was $7,303 and
$6,605 for the nine months ended September 30, 2003 and 2002, respectively.
5. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable segments based on geographic area:
the United States and the United Kingdom. Revenues are attributed to geographic
regions based on where the revenues are derived.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ---------------------
2003 2002 2003 2002
---------- ---------- --------- ----------
Revenues:
United States $ 154,778 $ 150,368 $ 451,180 $ 453,388
United Kingdom 4,771 5,701 15,207 16,133
---------- ---------- --------- ----------
Total revenues $ 159,549 $ 156,069 $ 466,387 $ 469,521
========== ========== ========= ==========
Income before income taxes:
United States $ 8,172 $ 6,129 $ 23,021 $ 18,226
United Kingdom 791 766 2,778 2,334
---------- ---------- --------- ----------
Total income before
income taxes $ 8,963 $ 6,895 $ 25,799 $ 20,560
========== ========== ========= ==========
Page 10 of 29
IMAGISTICS INTERNATIONAL INC,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues from Pitney Bowes, substantially all of which are generated in the
United States segment, consisted of the following for the three and nine months
ended September 30, 2003 and 2002:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
2003 2002 2003 2002
---------- ---------- ----------- ---------
Revenues from Pitney Bowes:
Pitney Bowes Canada $ 8,714 $ 4,725 $ 21,396 $ 18,163
Other subsidiaries of
Pitney Bowes 5,849 9,642 19,210 22,776
----------- ---------- ----------- ----------
Sub-total 14,563 14,367 40,606 40,939
Pitney Bowes Credit
Corporation 23,470 22,717 68,830 65,387
----------- ---------- ----------- ----------
Total $ 38,033 $ 37,084 $ 109,436 $ 106,326
=========== ========== =========== ==========
For the periods presented, Pitney Bowes Credit Corporation ("PBCC") was the
Company's primary lease vendor and the Company expects PBCC to continue as the
Company's primary lease vendor in the future. However, if PBCC were to cease
being the Company's primary lease vendor, the Company is confident that it could
obtain a replacement primary lease vendor with substantially the same lease
terms as PBCC. No other single customer or controlled group represented 10% or
more of the Company's revenues.
The following tables show identifiable long-lived assets and total assets
for each reportable segment at September 30, 2003 and December 31, 2002.
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
Identifiable long-lived assets:
United States $ 175,741 $ 187,310
United Kingdom 4,043 4,311
------------ ------------
Total identifiable long-lived assets $ 179,784 $ 191,621
============ ============
Total assets:
United States $ 398,448 $ 440,508
United Kingdom 26,836 24,398
------------ ------------
Total assets $ 425,284 $ 464,906
============ ============
Identifiable long-lived assets in the United States at September 30, 2003
included goodwill of $55.4 million and at December 31, 2002 included goodwill of
$52.6 million.
Concentrations
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and relatively small account
balances within the majority of the Company's customer base and their dispersion
across different businesses. The Company periodically evaluates the financial
strength of its customers and believes that its credit risk exposure is limited.
Most of the Company's product purchases are from overseas vendors, the
majority of which are from a limited number of Japanese suppliers who operate
manufacturing facilities in Japan and China. Although the Company currently
sources products from a number of manufacturers throughout the world, a
significant portion of new copier equipment is currently obtained from three
suppliers. If these suppliers were unable to deliver products for a significant
period of time, the Company would be required to find replacement products from
an alternative supplier or suppliers, which may not be available on a timely or
cost effective basis. The Company's operating results could be adversely
affected if a significant supplier is unable to deliver sufficient product.
Page 11 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. EARNINGS PER SHARE CALCULATION
Basic earnings per share was calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share was calculated by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding plus all dilutive common stock equivalents outstanding during
the period. The calculation of diluted earnings per share did not include 2,700
options for the three months ended September 30, 2003, since they were
antidilutive for the periods presented. There were no antidilutive options for
the three months ended September 30, 2002. The calculation of earnings per share
did not include 344,500 and 54,445 options for the nine months ended September
30, 2003 and 2002, respectively, since they were antidilutive for the periods
presented.
A reconciliation of the basic and diluted earnings per share computation is
as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income available to common stockholders $ 5,130 $ 4,155 $ 14,922 $ 12,392
============= ============= ============= =============
Weighted average common shares outstanding 16,822,907 18,336,310 17,200,224 19,230,878
Less: non-vested restricted stock 351,030 347,000 345,669 328,361
------------- ------------- ------------- -------------
Weighted average common shares for basic earnings per share 16,471,877 17,989,310 16,854,555 18,902,517
Add: dilutive effect of restricted stock 186,106 347,000 180,745 328,361
Add: dilutive effect of stock options 409,353 201,301 294,751 132,784
------------- ------------- ------------- -------------
Weighted average common shares and equivalents
for diluted earnings per share 17,067,336 18,537,611 17,330,051 19,363,662
============= ============= ============= =============
Basic earnings per share $ 0.31 $ 0.23 $ 0.89 $ 0.66
============= ============= ============= =============
Diluted earnings per share $ 0.30 $ 0.22 $ 0.86 $ 0.64
============= ============= ============= =============
7. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 2003 and
December 31, 2002:
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- -------------
Term loan $ 53,586 $ 74,148
Less: current maturities 545 749
-------------- -------------
Total long-term debt $ 53,041 $ 73,399
============== =============
On November 9, 2001 the Company entered into a Credit Agreement with a
group of lenders (the "Credit Agreement") that provided for secured borrowings
and the issuance of letters of credit in an aggregate amount not to exceed $225
million, comprised of a $125 million Revolving Credit Facility (the "Revolving
Credit Facility") and a $100 million Term Loan (the "Term Loan"). The Credit
Agreement required the Company to manage its interest rate risk with respect to
at least 50% of the aggregate principal amount of the Term Loan for a period of
at least 36 months. Accordingly, the Company entered into two interest rate swap
agreements in notional amounts of $50 million and $30 million to convert the
variable interest rate payable on the Term Loan to a fixed interest rate in
order to hedge the exposure to variability in expected future cash flows. These
interest rate swap agreements were designated as cash flow hedges.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of the Company's stock permitted to be repurchased from $20 million to
$30 million. On July 19, 2002, the Credit Agreement was amended to increase the
total amount of the Company's stock permitted to be repurchased from $30 million
to $58 million and to reduce the Term Loan interest rates to LIBOR plus a margin
of from 2.75% to 3.75%, from LIBOR plus a margin of from 3.50% to 3.75%,
depending on the Company's leverage ratio, or the Fleet Bank base lending rate
plus a margin of from 1.75% to 2.75%, from the Fleet Bank base
Page 12 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
lending rate plus a margin of from 2.50% to 2.75%, depending on the Company's
leverage ratio. On March 5, 2003, the Credit Agreement was amended to increase
the total amount of the Company's stock permitted to be repurchased from $58
million to $78 million, to reduce the minimum earnings before interest, taxes,
depreciation and amortization covenant to $100 million for the remainder of the
term of the Credit Agreement and to revise the limitation on capital
expenditures.
On May 16, 2003, the Credit Agreement was further amended (the "Fourth
Amendment") to reduce the aggregate amount of the Revolving Credit Facility from
$125 million to $95 million, to delete the requirement that the Company maintain
interest rate protection with respect to at least 50% of the aggregate principal
amount of the Term Loan, to reduce and fix the Term Loan interest rate to LIBOR
plus a margin of 2.25%, from LIBOR plus a margin of from 2.75% to 3.75%,
depending on the Company's leverage ratio, or to the Fleet Bank base lending
rate plus a margin of 1.25%, from the Fleet Bank base lending rate plus a margin
of from 1.75% to 2.75%, depending on the Company's leverage ratio, to reduce and
fix the Revolving Credit Facility interest rate to LIBOR plus a margin of 1.25%,
from LIBOR plus a margin of from 2.25% to 3.00%, depending on the Company's
leverage ratio, or to the Fleet Bank base lending rate plus a margin of 0.25%,
from the Fleet Bank base lending rate plus a margin of from 1.25% to 2.00%,
depending on the Company's leverage ratio and to fix the commitment fee at
0.375% on the average daily unused portion of the Revolving Credit Facility from
0.375% to 0.500% on the average daily unused portion of the Revolving Credit
Facility, depending on the Company's leverage ratio.
During the third quarter of 2002, the Company revised its cash flow
estimates and prepaid $8 million of the amount outstanding under the Term Loan.
This prepayment was covered by a portion of the $30 million interest rate swap
agreement that had been designated as a cash flow hedge. Since it was no longer
probable that the hedged forecasted transactions related to the $8 million Term
Loan prepayment would occur, the Company recognized a loss related to that
portion of the swap agreement underlying the amount of the prepayment by
reclassifying $0.4 million from accumulated other comprehensive loss into
interest expense. The Company also unwound $8 million of the $30 million
interest rate swap agreement.
During the third quarter of 2003, the Company again revised its cash flow
estimates and prepaid $20 million of the amount outstanding under the Term Loan.
In light of this revision, the deletion of the interest rate protection
requirement resulting from the Fourth Amendment and the Company's consistent
historical positive cash flow and near term estimated operating and capital
expenditure requirements, the Company disposed of its two interest rate swap
agreements in the notional amounts of $50 million and $22 million. Accordingly,
the Company reclassified $2.8 million from accumulated other comprehensive loss
into interest expense because it was no longer probable that the hedged
forecasted transactions would occur.
8. COMMITMENTS AND CONTINGENCIES
Guarantees and indemnifications
The Company has applied the disclosure provisions of FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others," to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The Company is a guarantor in the arrangements described below.
In connection with the Distribution, the Company entered into certain
agreements pursuant to which it may be obligated to indemnify Pitney Bowes with
respect to certain matters. The Company agreed to assume all liabilities
associated with the Company's business, and to indemnify Pitney Bowes for all
claims relating to the Company's business. These may be claims by or against
Pitney Bowes or the Company relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property rights, equipment, service or payment disputes with
customers and disputes with employees.
The Company and Pitney Bowes entered into a tax separation agreement, which
governs the Company's and Pitney Bowes' respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. In addition, the tax separation agreement
generally obligates the Company not to enter into any transaction that would
adversely affect the tax-free nature of the Distribution for the two-year period
following the Distribution, and obligates the Company to indemnify Pitney Bowes
and affiliates to the extent that any action the Company takes or fails to take
gives rise to a tax liability with respect to the Distribution.
Page 13 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In each of these circumstances, payment by the Company is contingent on
Pitney Bowes making a claim. As such, it is not possible to predict the maximum
potential future payments under these agreements. As of September 30, 2003, the
Company has not paid any amounts pursuant to the above indemnifications other
than expenses incurred in connection with the defense and settlement of assumed
claims asserted in connection with the operation of the Company in the ordinary
course of business. The Company believes that if it were to incur a loss in any
of these matters, such loss would not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the normal course of business, the Company
has been party to occasional lawsuits relating to the Company's business. These
may involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies since the ultimate resolutions
of the legal matters cannot be determined and a minimum cost or amount of loss
cannot be reasonably estimated. In the opinion of the Company's management, none
of these proceedings, individually or in the aggregate, should have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
Risks and uncertainties
Prior to the Distribution, the Company's business was operated by Pitney
Bowes as a division of its broader corporate organization rather than as a
separate stand-alone entity. Pitney Bowes assisted the Company by providing
corporate functions such as legal, tax and information technology functions.
Following the Distribution, Pitney Bowes has no obligation to provide assistance
to the Company other than certain interim and transitional services to be
provided by Pitney Bowes. Because the Company has a limited history operating as
a stand-alone entity, there can be no assurance that the Company will be able to
successfully implement the changes necessary to operate independently in the
future. The Company's inability to successfully implement the changes necessary
to operate independently would have a material adverse effect on the Company's
financial position, results of operations and cash flows.
In October 2003, the Company began the implementation of Phase II of its
enterprise resource planning ("ERP") system, consisting of order management,
order fulfillment, billing, cash collection and service management, which
replaced the information technology services provided by Pitney Bowes under the
transition services agreement. As a result of this implementation, the Company
has experienced, as expected, certain temporary processing inefficiencies. These
inefficiencies are expected to result in a temporary increase in working capital
requirements. The Company is effectively addressing these typical issues
encountered with an ERP implementation and believes that it has an appropriate
action plan to address each issue. However, if the Company is unable to timely
resolve these issues or if additional unforeseen issues were to arise,
operational inefficiencies could affect customer satisfaction levels and could
result in a loss of business. Other than the temporary increase in working
capital requirements, the Company does not anticipate that these issues or
potential issues will have a material adverse effect on the Company's financial
position, results of operations and cash flows.
9. SEPARATION AGREEMENTS
The Company and Pitney Bowes entered into a transition services agreement
that provided for Pitney Bowes to supply certain services to the Company at cost
for a limited time following the Distribution. These services included
information technology, computing, telecommunications, certain accounting, field
service of equipment and dispatch call center services. The Company and Pitney
Bowes have agreed to an extension until December 31, 2003, of the transition
services agreement as it relates to information technology and related services,
if required. Services provided under this extension are at negotiated market
rates. Effective July 1, 2003, the Company and Pitney Bowes entered into a
separate one-year service agreement relating to field service of equipment and
dispatch call center services.
Page 14 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company paid Pitney Bowes $3.3 million and $13.7 million for the three
and nine months ended September 30, 2003, respectively, in connection with the
transition services agreement and other administrative services. The Company
paid Pitney Bowes $4.9 million and $17.1 million for the three and nine months
ended September 30, 2002, respectively, in connection with the transition
services agreement and certain shared corporate and administrative services.
The Company also entered into certain other agreements covering
intellectual property, commercial relationships and leases and licensing
arrangements. The pricing terms of the products and services covered by the
other commercial agreements reflect negotiated prices.
The Company and Pitney Bowes entered into a tax separation agreement, which
governs the Company's and Pitney Bowes' respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. In addition, the tax separation agreement
generally obligates the Company not to enter into any transaction that would
adversely affect the tax-free nature of the Distribution for the two-year period
following the Distribution, and obligates the Company to indemnify Pitney Bowes
and affiliates to the extent that any action the Company takes or fails to take
gives rise to a tax liability with respect to the Distribution.
10. ACQUISITIONS
Effective August 30, 2003, the Company completed its acquisition of
substantially all of the assets and business of one independent dealer of copier
and multifunctional equipment and related support services, to expand the
Company's geographic sales and service capabilities. The aggregate purchase
price was $4.1 million, of which $0.8 million was allocated to the assets
acquired and liabilities assumed at the date of acquisition and $3.3 million was
allocated to intangible and other assets, of which $2.8 million was goodwill.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of the acquired business have been included in the
Company's consolidated financial statements from the date of the acquisition.
Page 15 of 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto, included in our latest
Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission on March 28, 2003, as well as the unaudited
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. This Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Please see "Risk Factors That
Could Cause Results To Vary" and "Special Note About Forward-Looking Statements"
for a discussion of the uncertainties, risks and assumptions associated with
these forward-looking statements. Our actual results could differ materially
from those forward-looking statements discussed in this section. For the
purposes of the following discussion, unless the context otherwise requires,
"Imagistics International Inc." and "Imagistics," refers to Imagistics
International Inc. and subsidiary.
The unaudited interim consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in our opinion, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
results of operations, financial position and cash flows as of and for the
periods presented. We believe that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and nine months ended
September 30, 2003 are not necessarily indicative of the results for the full
year.
OVERVIEW
Imagistics is a large direct sales, service and marketing organization
offering document imaging solutions, including copiers, facsimile machines and
multifunctional products, sometimes referred to as MFPs, primarily to large
corporate customers known as national accounts, government entities and mid-size
and regional businesses known as commercial accounts. In addition, we offer a
range of document imaging options, including digital, analog, color and/or
networked products and systems.
Our strategic vision is to become the leading independent direct provider
of enterprise office imaging and document solutions by providing world-class
products and services with unparalleled customer support and satisfaction with a
focus on multiple location customers, thus building value for our shareholders.
Our strategic initiatives include:
o Executing our unique business model,
o Leveraging product and marketplace strengths to drive market share,
o Leveraging strengths in customer support to drive customer loyalty,
o Achieving operational excellence and benchmark productivity and
o Pursuing opportunistic expansion and investments.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Revenue Recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the copier equipment at the customer location. For facsimile equipment and
facsimile supplies, the satisfaction of contractual obligations and the passing
of title and risk of loss to the customer occur upon the delivery of the
facsimile equipment and the facsimile supplies to the customer location. We
record a provision for estimated sales returns and other allowances based upon
historical experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless we receive prior
notice of cancellation. Under the terms of rental contracts, we bill our
customers a flat periodic charge and/or a usage-based fee. Revenues related to
these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable.
Support services contracts, which often include supplies, are generally for
an initial term of one year with automatic renewals unless we receive prior
notice of cancellation. Under the terms of support services contracts, we bill
our customers either a flat
Page 16 of 29
periodic charge or a usage-based fee. Revenues related to these contracts are
recognized each month as earned, either using the straight-line method or based
upon usage, as applicable.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
We enter into arrangements that include multiple deliverables, which
typically consist of the sale of equipment with a support services contract. We
account for each element within an arrangement with multiple deliverables as
separate units of accounting. Revenue is allocated to each unit of accounting
based on the residual method, which requires the allocation of the revenue based
on the fair value of the undelivered items. Fair value of support services is
primarily determined by reference to renewal pricing of support services
contracts when sold on a stand-alone basis.
Accounts Receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that we believe are
uncollectible. Our estimate of losses is based on prior collection experience
including evaluating the credit worthiness of each of our customers, analyzing
historical bad debt write-offs and reviewing the aging of the receivables. Our
allowance for doubtful accounts includes amounts for specific accounts that we
believe are uncollectible, as well as amounts that have been computed by
applying certain percentages based on historic loss trends, to certain accounts
receivable aging categories.
Inventories
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demands.
Rental Equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier equipment is depreciated over three years and facsimile
equipment is depreciated over five years. Facsimile equipment placed in service
on or after October 1, 2003 will be depreciated over three years.
REVENUES
(Dollars in thousands)
The following table shows our revenue sources by product line for the
periods indicated.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Copier product line $ 105,651 $ 94,169 $ 297,187 $ 276,946
Facsimile product line 53,898 61,900 169,200 192,575
----------- ----------- ----------- -----------
Total revenue $ 159,549 $ 156,069 $ 466,387 $ 469,521
=========== =========== =========== ===========
The following table shows our revenue sources by segment for the periods
indicated.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
United States $ 154,778 $ 150,368 $ 451,180 $ 453,388
United Kingdom 4,771 5,701 15,207 16,133
----------- ----------- ----------- -----------
Total revenue $ 159,549 $ 156,069 $ 466,387 $ 469,521
=========== =========== =========== ===========
Page 17 of 29
The following table shows our revenue with sales to Pitney Bowes Canada
under a reseller agreement, presented separately, for the three and nine months
ended September 30, 2003 compared with the same periods in the prior year.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue
Sales excluding
Pitney Bowes Canada $ 75,584 $ 72,356 $ 214,831 $ 213,053
Sales to Pitney Bowes
Canada 8,714 4,725 21,396 18,163
----------- ----------- ----------- -----------
Total sales 84,298 77,081 236,227 231,216
Rentals 54,239 58,088 167,414 175,506
Support services 21,012 20,900 62,746 62,799
----------- ----------- ----------- -----------
Total revenue $ 159,549 $ 156,069 $ 466,387 $ 469,521
=========== =========== =========== ===========
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenue
Revenue excluding
Pitney Bowes Canada $ 150,835 $ 151,344 $ 444,991 $ 451,358
Sales to Pitney Bowes
Canada 8,714 4,725 21,396 18,163
----------- ----------- ----------- -----------
Total revenue $ 159,549 $ 156,069 $ 466,387 $ 469,521
=========== =========== =========== ===========
Sales to Pitney Bowes Canada under the reseller agreement, the initial term
of which expires in December 2003, are at margins significantly below the
margins on sales to our direct customers. We expect to maintain a reseller
arrangement with Pitney Bowes Canada, however, we are unable to predict the
future level of sales to Pitney Bowes Canada. We also believe it is useful to
analyze sales excluding sales to Pitney Bowes Canada in order to better evaluate
the effectiveness of our direct sales and marketing initiatives and our pricing
policies.
The following table shows our growth rates by revenue type and product line
for the three and nine months ended September 30, 2003 compared with the same
periods in the prior year.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Sales
Copier products 18.5% (2.2%) 9.4% 2.3%
Facsimile products (9.0%) (4.2%) (11.5%) (1.8%)
Total sales 9.4% (2.9%) 2.2% 0.8%
Rentals
Copier products 5.8% 7.6% 7.2% 8.1%
Facsimile products (15.4%) (8.8%) (12.4%) (6.3%)
Total rentals (6.6%) (2.6%) (4.6%) (1.1%)
Support services
Copier products 3.0% 6.6% 1.9% 2.8%
Facsimile products (19.5%) 24.9% (15.0%) 8.9%
Total support services 0.5% 8.3% (0.1%) 3.5%
Total revenue 2.2% (1.4%) (0.7%) (0.5%)
Page 18 of 29
RESULTS OF OPERATIONS
The following table shows our statement of income data, expressed as a
percentage of total revenue, for the periods indicated. The table also shows
cost of sales as a percentage of sales revenue, cost of rentals as a percentage
of rental revenue and our effective tax rate.
AS A % OF TOTAL REVENUE, EXCEPT AS NOTED
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Equipment sales 29% 25% 27% 25%
Supplies sales 24% 24% 24% 24%
---------- ---------- ---------- ----------
Total sales 53% 49% 51% 49%
Equipment rentals 34% 37% 36% 38%
Support services 13% 14% 13% 13%
---------- ---------- ---------- ----------
Total revenue 100% 100% 100% 100%
Cost of sales 33% 30% 31% 31%
Cost of rentals 11% 14% 12% 13%
Selling, service and
administrative expenses 48% 50% 50% 50%
---------- ---------- ---------- ----------
Operating income 8% 6% 7% 6%
Interest expense 3% 1% 2% 1%
---------- ---------- ---------- ----------
Income before income
taxes 5% 5% 5% 5%
Provision for income taxes 2% 2% 2% 2%
---------- ---------- ---------- ----------
Net income 3% 3% 3% 3%
========== ========== ========== ==========
Cost of sales as a percentage
of sales revenue 62.1% 61.3% 61.7% 62.7%
========== ========== ========== ==========
Cost of rentals as a
percentage of rental
revenue 33.1% 36.1% 33.3% 36.7%
========== ========== ========== ==========
Effective tax rate 42.8% 39.7% 42.2% 39.7%
========== ========== ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Revenue. For the three months ended September 30, 2003, total revenue of
$159,549 increased 2% versus revenue of $156,069 for the three months ended
September 30, 2002 primarily reflecting higher copier/MFP sales, rentals and
support services revenue, partially offset by lower facsimile revenue. Excluding
the impact of revenue attributable to sales to Pitney Bowes Canada, total
revenue for the third quarter declined less than one half percent versus the
prior year.
Equipment and supply sales revenue of $84,298 increased 9% for the three
months ended September 30, 2003 from $77,081 for the three months ended
September 30, 2002 reflecting higher copier/MFP sales, partially offset by lower
facsimile sales. Excluding the impact of sales to Pitney Bowes Canada, total
sales revenue increased 4% compared with the prior year. Copier/MFP sales
increased 12% with particular improvement in our color product category and our
mid-market digital black-and-white multifunctional products as well as increased
copier supply sales. Facsimile sales declined 11% due to lower equipment and
supply sales resulting from the decline in industry-wide facsimile usage.
Equipment rental revenue of $54,239 for the three months ended September
30, 2003 declined 7% versus equipment rental revenue of $58,088 for the three
months ended September 30, 2002, reflecting the continuing expected decline in
facsimile rental revenues, partially offset by an increase in copier rental
revenues resulting from a continuing copier marketing focus on national
accounts, which prefer a rental placement strategy similar to that of our
historic facsimile product placement strategy. Rental revenue derived from our
copier product line increased 6% reflecting the impact of an increase in page
volumes and increased placements of our mid-range digital black and white and
color copiers/MFPs. Rental revenue from our facsimile product line declined 15%
versus the prior year reflecting a lower installed base and lower pricing.
Page 19 of 29
Support services revenue for the three months ended September 30, 2003 of
$21,012, primarily derived from stand-alone service contracts, increased 1%
versus support services revenue of $20,900 for the three months ended September
30, 2002, reflecting higher copier/MFP service revenue resulting from higher
page volumes, partially offset by lower per unit revenue resulting from the
product mix shift to high-end digital copier/MFP products and lower facsimile
service revenue due to lower pricing.
Cost of sales. Cost of sales was $52,328 for the three months ended
September 30, 2003 compared with $47,236 for the same period in 2002 and cost of
sales as a percentage of sales revenue increased to 62.1% for the three months
ended September 30, 2003 from 61.3% for the three months ended September 30,
2002. This increase was primarily due to an increase in lower margin sales to
Pitney Bowes Canada and the continuing shift in product mix toward lower margin
copier/MFP products, partially offset by lower inventory obsolescence
provisions.
Cost of rentals. Cost of rentals was $17,952 for the three months ended
September 30, 2003 compared with $20,991 for the three months ended September
30, 2002 and cost of rentals as a percentage of rental revenue declined 3.0
percentage points to 33.1% for the three months ended September 30, 2003 from
36.1% for the three months ended September 30, 2002. This decline was due to
product cost improvements coupled with the impact of our disciplined focus on
improving profit margins, partially offset by an increase in the continuing mix
of copier/MFP product rentals which have a higher cost as a percentage of rental
revenue than facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $76,017 were 47.6% of total revenue for the three
months ended September 30, 2003 compared with $78,707, or 50.4% of total revenue
for the three months ended September 30, 2002. Selling, service and
administrative expenses decreased 3% versus the prior year primarily resulting
from lower advertising, lower employee benefit and service expenses and an
insurance recovery in partial settlement of property damage claims related to
the World Trade Center, partially offset by the anticipated higher information
technology and related administrative expenses related to maintaining legacy
systems while incurring costs relating to our enterprise resource planning
("ERP") project.
Interest expense. Interest expense increased to $4,289 for the three months
ended September 30, 2003 from $2,240 for the three months ended September 30,
2002 due to the reclassification of $2.8 million from accumulated other
comprehensive loss related to our interest rate swap agreements, partially
offset by lower interest rates. The weighted average interest rate for the three
months ended September 30, 2003 was 6.0% versus 7.1% for the three months ended
September 30, 2002.
Effective tax rate. Our effective tax rate was 42.8% for the three months
ended September 30, 2003 compared with 39.7% for the three months ended
September 30, 2002 due to a change in the estimate of the deductibility for tax
purposes of certain expenses and an increase in state and local income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Revenue. For the nine months ended September 30, 2003, total revenue of
$466,387 declined 1% versus revenue of $469,521 for the nine months ended
September 30, 2002 primarily reflecting lower rental revenue, partially offset
by higher sales.
Equipment and supply sales revenue of $236,227 increased 2% for the nine
months ended September 30, 2003 from $231,216 for the nine months ended
September 30, 2002. Copier/MFP sales increased 9% resulting from increased
placements of our mid-market digital black and white and color copiers/MFPs and
higher supply sales. Facsimile sales declined 12% due to lower equipment and
supply sales resulting from lower industry-wide facsimile usage.
Equipment rental revenue of $167,414 for the nine months ended September
30, 2003 declined 5% versus equipment rental revenue of $175,506 for the nine
months ended September 30, 2002, reflecting the continuing expected decline in
facsimile rental revenues, partially offset by an increase in copier rental
revenues. Rental revenue derived from our copier/MFP product line increased 7%
reflecting increases in page volumes and new placements in the mid-level digital
black and white and color product categories as well as growth in the overall
installed rental population resulting from a continuing copier marketing focus
on national accounts, which prefer a rental placement strategy similar to that
of our historic facsimile product placement strategy. Rental revenue from our
facsimile product line declined 12% versus the prior year reflecting a lower
installed base and lower pricing on new placements and renewals compared to
expiring contracts.
Support services revenue for the nine months ended September 30, 2003 of
$62,746, primarily derived from stand-alone service contracts, declined slightly
versus support services revenue of $62,799 for the nine months ended September
30, 2002, reflecting a product mix shift toward higher-end copiers/MFPs, offset
by lower facsimile service revenue due to lower pricing.
Page 20 of 29
Cost of sales. Cost of sales was $145,738 for the nine months ended
September 30, 2003 compared with $145,044 for the same period in 2002 and cost
of sales as a percentage of sales revenue declined to 61.7% for the nine months
ended September 30, 2003 from 62.7% for the nine months ended September 30,
2002. This decline was due to lower obsolete inventory provisions, the impact of
our disciplined focus on improving profit margins and lower product cost,
partially offset by an increase in the mix of copier/MFP product sales, which
have a higher cost of sales percentage than facsimile sales.
Cost of rentals. Cost of rentals was $55,800 for the nine months ended
September 30, 2003 compared with $64,446 for the nine months ended September 30,
2002 and cost of rentals as a percentage of rental revenue declined 3.4
percentage points to 33.3% for the nine months ended September 30, 2003 from
36.7% for the nine months ended September 30, 2002. This decline was due to
product cost improvements coupled with the impact of our disciplined focus on
improving profit margins, partially offset by an increase in the mix of
copier/MFP product rentals, which have a higher cost as a percentage of rental
revenue than facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $231,540 were 49.6% of total revenue for the nine
months ended September 30, 2003 compared with $233,042, or 49.6% of total
revenue for the nine months ended September 30, 2002. Selling, service and
administrative expenses decreased 1% over the prior year primarily resulting
from lower employee compensation and benefit expenses, lower advertising and
lower service expenses, partially offset by higher information technology and
associated administrative expenses related to maintaining legacy systems while
incurring costs relating to our ERP project.
Interest expense. Interest expense increased to $7,510 for the nine months
ended September 30, 2003 from $6,429 for the nine months ended September 30,
2002 due to the reclassification of $2.8 million from accumulated other
comprehensive loss related to our interest rate swap agreements, partially
offset by lower debt levels and lower interest rates. The weighted average
interest rate for the nine months ended September 30, 2003 was 6.5% versus 7.1%
for the nine months ended September 30, 2002.
Effective tax rate. Our effective tax rate was 42.2% for the nine months
ended September 30, 2003 compared with 39.7% for the nine months ended September
30, 2002 due to a change in the estimate of the deductibility for tax purposes
of certain expenses and an increase in state and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
On November 9, 2001 we entered into a Credit Agreement with a group of
lenders (the "Credit Agreement") that provided for secured borrowings or the
issuance of letters of credit in an aggregate amount not to exceed $225 million,
comprised of a $125 million Revolving Credit Facility (the "Revolving Credit
Facility") and a $100 million Term Loan (the "Term Loan"). The term of the
Revolving Credit Facility is five years and the term of the Term Loan is six
years.
We have pledged substantially all of our assets plus 65% of the stock of
our subsidiary as security for our obligations under the Credit Agreement.
Available borrowings and letter of credit issuance under the Revolving Credit
Facility are determined by a borrowing base consisting of a percentage of our
eligible accounts receivable, inventory, rental assets and accrued and advance
billings, less outstanding borrowings under the Term Loan.
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio (total debt to EBITDA), as
well as other covenants, which, among other things, place limits on dividend
payments and capital expenditures.
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at our option, on either the LIBOR rate plus a
margin of from 2.25% to 3.00%, depending on our leverage ratio, or the Fleet
Bank base lending rate plus a margin of from 1.25% to 2.00%, depending on our
leverage ratio. Amounts borrowed under the Term Loan bore interest at variable
rates based, at our option, on either the LIBOR rate plus a margin of 3.50% or
3.75%, depending on our leverage ratio, or the Fleet Bank base lending rate plus
a margin of 2.50% to 2.75%, depending on our leverage ratio. A commitment fee of
from 0.375% to 0.500% on the average daily unused portion of the Revolving
Credit Facility was payable quarterly, in arrears, depending on our leverage
ratio.
The Credit Agreement required us to manage our interest rate risk with
respect to at least 50% of the aggregate principal amount of the Term Loan for a
period of at least 36 months. Accordingly, we entered into two interest rate
swap agreements in the notional amounts of $50 million and $30 million expiring
in February 2005 to convert the variable interest rate payable on the Term Loan
to a fixed interest rate in order to hedge the exposure to variability in
expected future cash flows. These interest rate swap agreements had been
designated as cash flow hedges. The counterparties to the interest rate swap
agreements were major international financial institutions. Under the terms of
the swap agreements, we received payments based upon the 90-day LIBOR
Page 21 of 29
rate and remitted payments based upon a fixed rate. The fixed interest rates
were 4.17% and 4.32% for the $50 million and the $30 million swap agreements,
respectively.
Our initial borrowings of $150 million under the Credit Agreement,
consisting of $100 million under the Term Loan and $50 million under the
Revolving Credit Facility, were used to repay amounts due to Pitney Bowes and to
pay a dividend to Pitney Bowes. At December 31, 2001, Pitney Bowes Credit
Corporation ("PBCC") provided substantially all of our Term Loan. During 2002,
PBCC disposed of its commitments under the Credit Agreement and is no longer a
participant in the Credit Agreement.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of our stock permitted to be repurchased from $20 million to $30 million.
On July 19, 2002, the Credit Agreement was further amended to increase the total
amount of our stock permitted to be repurchased from $30 million to $58 million
and to reduce the Term Loan interest rates to LIBOR plus a margin of from 2.75%
to 3.75%, depending on our leverage ratio, or to the Fleet Bank base lending
rate plus a margin of from 1.75% to 2.75%, depending on our leverage ratio. On
March 5, 2003, the Credit Agreement was amended to increase the total amount of
stock permitted to be repurchased from $58 million to $78 million, to reduce the
minimum EBITDA covenant to $100 million for the remainder of the term of the
Credit Agreement and to revise the limitation on capital expenditures. On May
16, 2003, the Credit Agreement was further amended (the "Fourth Amendment") to
reduce the aggregate amount of the Revolving Credit Facility from $125 million
to $95 million, to delete the requirement that we maintain interest rate
protection with respect to at least 50% of the aggregate principal amount of the
Term Loan, to reduce and fix the Term Loan interest rate to LIBOR plus a margin
of 2.25%, from LIBOR plus a margin of from 2.75% to 3.75%, depending on our
leverage ratio, or to the Fleet Bank base lending rate plus a margin of 1.25%,
from the Fleet Bank base lending rate plus a margin of from 1.75% to 2.75%,
depending on our leverage ratio, to reduce and fix the Revolving Credit Facility
interest rate to LIBOR plus a margin of 1.25%, from LIBOR plus a margin of from
2.25% to 3.00%, depending on our leverage ratio, or to the Fleet Bank base
lending rate plus a margin of 0.25%, from the Fleet Bank base lending rate plus
a margin of from 1.25% to 2.00%, depending on our leverage ratio and to fix our
commitment fee at 0.375% on the average daily unused portion of the Revolving
Credit Facility from 0.375% to 0.500% on the average daily unused portion of the
Revolving Credit Facility, depending on our leverage ratio. At September 30,
2003, we were in compliance with all of the financial covenants.
During the third quarter of 2002, we revised our cash flow estimates and
prepaid $8 million of the amount outstanding under the Term Loan. This
prepayment was covered by a portion of the $30 million interest rate swap
agreement that had been designated as a cash flow hedge. Since it was no longer
probable that the hedged forecasted transactions related to the $8 million Term
Loan prepayment would occur, we recognized a loss related to that portion of the
swap agreement underlying the amount of the prepayment by reclassifying $0.4
million from accumulated other comprehensive loss into interest expense. We also
unwound $8 million of the $30 million interest rate swap agreement.
During the third quarter of 2003, we revised our cash flow estimates and
prepaid $20 million of the amount outstanding under the Term Loan. In light of
this revision, the deletion of the interest rate protection requirement
resulting from the Fourth Amendment and our consistent historical positive cash
flow and near term estimated operating and capital expenditure requirements, we
disposed of our two interest rate swap agreements in the notional amounts of $50
million and $22 million. Accordingly, we reclassified $2.8 million from
accumulated other comprehensive loss into interest expense because it was no
longer probable that the hedged forecasted transactions would occur.
At September 30, 2003, $54 million of borrowings were outstanding under the
Credit Agreement, consisting solely of $54 million of borrowings under the Term
Loan and the borrowing base amounted to approximately $124 million.
Approximately $94 million of the Revolving Credit Facility was available for
borrowing at September 30, 2003. The Term Loan is payable in 13 consecutive
equal quarterly installments of $0.1 million due December 31, 2003 through
December 31, 2006, three consecutive equal quarterly installments of $12.9
million due March 31, 2007 through September 30, 2007 and a final payment of
$12.9 million due at maturity.
At September 30, 2003, one irrevocable standby letter of credit in the
amount of $0.6 million was outstanding as security for our casualty insurance
program. There were no letters of credit outstanding at December 31, 2002.
The ratio of current assets to current liabilities increased to 2.7 to 1 at
September 30, 2003 compared to 2.6 to 1 at December 31, 2002 due to reductions
in accounts payable and accrued liabilities, partially offset by reductions in
accounts receivable and inventories. At September 30, 2003, our total debt as a
percentage of total capitalization decreased to 17.0% from 21.9% at December 31,
2002 due to our debt repayment, offset in part by stock repurchases under our
stock buy back program.
Net cash provided by operating activities was $84,370 and $132,273 for the
nine months ended September 30, 2003 and 2002, respectively. Net income was
$14,922 and $12,392, respectively. Non-cash charges for depreciation and
amortization and provisions for bad debt and inventory obsolescence in the
aggregate provided cash of $67,380 and $75,275 for the nine months ended
September 30, 2003 and 2002, respectively. The provision for bad debt of $5,686
for the nine months ended September 30,
Page 22 of 29
2003 was higher than historical levels reflecting an increase in the rate of
delinquencies. For the nine months ended September 30, 2003, the provision to
write down excess and obsolete inventory amounted to $5,147 and was lower than
the prior year as substantially all of the value of analog equipment has been
written down to its nominal net realizable value. For the nine months ended
September 30, 2002, the provision to write down excess and obsolete inventory
amounted to $11,417. Changes in the principal components of working capital
required $4,679 of cash in the nine months ended September 30, 2003 and provided
cash of $39,255 in the nine months ended September 30, 2002. Cash used by
working capital changes in the nine months ended September 30, 2003 of $4,679
included a reduction in accounts payable and other liabilities of $15 million
primarily consisting of $7 million of net reductions in income taxes payable
resulting from timing of income tax payments, $4 million for 2002 compensation
programs, partially offset by $7 million of net reductions in accounts
receivable resulting primarily from collections.
We used $45,840 and $53,583 in investing activities for the nine months
ended September 30, 2003 and 2002, respectively. Investment in rental equipment
assets totaled $28,022 and $38,723 for the nine months ended September 30, 2003
and 2002, respectively. The decline in rental asset expenditures reflects
product cost improvements and a reduction in new facsimile rental equipment
placements resulting from continuing lower demand. Capital expenditures for
property, plant and equipment were $13,679 and $14,860 for the nine months ended
September 30, 2003 and 2002, respectively, of which the investment in ERP
accounted for $8,330 and $9,110, respectively.
Cash used in financing activities was $44,784 and $72,628 for the nine
months ended September 30, 2003 and 2002, respectively. Cash used in financing
activities in 2003 reflects repayments under the Term Loan of $20,562. As a
result of the repayment, the remaining outstanding borrowings under the Term
Loan at September 30, 2003 are payable in 13 equal quarterly installments of
$0.1 million due December 31, 2003 through December 31, 2006, three equal
quarterly installments of $12.9 million due March 31, 2007 through September 30,
2007 and a final payment of $12.9 million due at maturity. Cash used in
financing activities for the nine months ended September 30, 2003 and 2002
reflects the repurchase of 1,205,900 shares of our stock at a cost of $26,186
and 1,607,460 shares at a cost of $29,998, respectively. In March 2002, the
Board of Directors approved a $30 million stock buy back program. In October
2002, the Board of Directors authorized the repurchase of an additional $28
million of our stock, raising the total authorization to $58 million. In July
2003, the Board of Directors authorized the repurchase of an additional $20
million of our stock, raising the total authorization to $78 million and, as of
September 30, 2003, we have accumulated approximately 3.1 million shares of
treasury stock at a cost of approximately $63 million.
During the nine month period ended September 30, 2003, we had no material
changes in our contractual obligations and commitments. We had no material
commitments other than supply agreements with vendors that extend only to
equipment supplies and parts ordered under purchase orders; there are no
long-term purchase requirements. We will continue to make additional investments
in facilities, rental equipment, computer equipment and systems and our
distribution network as required to support our operations. We anticipate
investments in rental equipment assets for new and replacement programs in
amounts consistent with the recent past. We estimate that we will spend
approximately $5 million to $10 million over the next three to six months to
continue to enhance our information systems infrastructure and implement our ERP
system.
Historically, our cash flow has been positive. We expect our cash flow to
remain positive although we do expect our cash generation to moderate compared
with the same period in the prior year as our ability to continue to provide
cash through changes in working capital is reduced. Our cash flow from
operations, together with borrowings under the Credit Agreement, are expected to
adequately finance our ordinary operating cash requirements and capital
expenditures for the foreseeable future. We expect to fund further expansion and
long-term growth primarily with cash flows from operations, borrowings under the
Credit Agreement and possible future sales of additional equity or debt
securities.
We began the implementation of Phase II of our enterprise resource planning
("ERP") system in October 2003, consisting of order management, order
fulfillment, billing, cash collection and service management. As a result of
this implementation, we have experienced, as expected, certain temporary
processing inefficiencies. These inefficiencies are expected to result in a
temporary increase in working capital requirements. Other than the temporary
increase in working capital requirements, we do not anticipate that these issues
or potential issues will have a material adverse effect on our financial
position, results of operations and cash flows.
RISK FACTORS THAT COULD CAUSE RESULTS TO VARY
Risk Factors Relating to Our Business
The document imaging and management industry is undergoing an evolution in
product offerings, moving toward the use of digital and color technology in a
multifunctional office environment. Our continued success will depend to a great
extent on our ability to respond to this rapidly changing environment by
developing new options and document imaging solutions for our customers.
Page 23 of 29
The proliferation of e-mail, multifunctional products and other
technologies in the workplace may lead to a reduction in the use of traditional
copiers and fax machines. We cannot anticipate whether other technological
advancements will substantially minimize the need for our products in the
future.
Many of our rental customers have contract provisions allowing for
technology and product upgrades during the term of their contract. If we have
priced these upgrades improperly, this may have an adverse effect on our
profitability and future business. If many of our customers exercise their
contractual rights to upgrade to digital equipment, we may experience returns of
a large number of analog machines and a subsequent loss of book value on these
machines.
The document imaging solutions industry is very competitive; we may be
unable to compete favorably, causing us to lose sales to our competitors. Our
future success depends, in part, on our ability to deliver enhanced products,
service packages and business processes such as e-commerce capabilities, while
also offering competitive price levels.
We rely on outside suppliers to manufacture the products that we
distribute, many of whom are located in the Far East. In addition, two
manufacturers supply a significant portion of our new copier and multifunctional
equipment. If these manufacturers discontinue their products or are unable to
deliver us products in the future or if political changes, economic disruptions
or natural disasters occur where their production facilities are located, we
will be forced to identify an alternative supplier or suppliers for the affected
product. In addition, although we have worked with our suppliers and freight
forwarders to mitigate the potential impacts of an outbreak of infectious
disease affecting our supply chain, should our manufacturers become affected by
epidemics of infectious diseases, including the recent outbreak of severe acute
respiratory syndrome, we could be forced to identify an alternative supplier or
suppliers for the affected product. Although we are confident that we can
identify alternate sources of supply, we may not be successful in doing so. Even
if we are successful, the replacement product may be more expensive or may lack
certain features of the discontinued product and we may experience some delay in
obtaining the product. Other events that disrupt the shipment to or receipt of
ocean freight at U.S. ports, such as labor unrest, war or terrorist activity
could delay, prevent or add substantial cost to our receipt of such products.
Any of these events would cause disruption to our customers and could have an
adverse effect on our business.
Much of our international business is transacted in local currency.
Currently, approximately 20% of our total product purchases, based on costs, are
denominated in yen. The majority of our remaining product purchases are
denominated in U.S. dollars and are produced by Japanese suppliers in
manufacturing facilities located in China. Currently, the exchange rate of the
Chinese renminbi and the U.S. dollar is fixed. If the Chinese government were to
revalue the Chinese renminbi and the nominal value of the renminbi rises, the
resultant impact on the exchange rate of the Chinese renminbi and the U.S.
dollar could have a negative impact on our product cost. We do not currently
utilize any form of derivative financial instruments to manage our exchange rate
risk. We manage our foreign exchange risk by attempting to pass through to our
customers any cost increases related to foreign currency exchange. However, no
assurance can be given that we will be successful in passing cost increases
through to our customers in the future.
Risk Factors Relating to Separating Our Company From Pitney Bowes
We have a limited history operating as an independent entity and may be
unable to make the changes necessary to operate successfully as a stand-alone
entity, or may incur greater costs as a stand-alone entity that may cause our
profitability to decline.
Prior to the Distribution, our business was operated by Pitney Bowes as a
division of its broader corporate organization, rather than as a separate
stand-alone entity. Pitney Bowes assisted us by providing corporate functions
such as legal, tax and information technology functions. Following the
Distribution, Pitney Bowes has no obligation to provide assistance to us other
than certain interim and transitional services. Because our business had not
previously been operated as a stand-alone entity, there can be no assurance that
we will be able to successfully implement the changes necessary to operate
independently or will not incur additional costs as a result of operating
independently.
In October 2003, we began the implementation of Phase II of our ERP system,
consisting of order management, order fulfillment, billing, cash collection and
service management, which replaced the information technology services provided
by Pitney Bowes under the transition services agreement. As a result of this
implementation, we have experienced, as expected, certain temporary processing
inefficiencies. These inefficiencies are expected to result in a temporary
increase in working capital requirements. We are effectively addressing these
typical issues encountered with an ERP implementation and we believe that we
have an appropriate action plan to address each issue. However, if we are unable
to timely resolve these issues or if additional unforeseen issues were to arise,
operational inefficiencies could affect customer satisfaction levels and could
result in a loss of business. Other than the temporary increase in working
capital requirements, we do not anticipate that these issues or potential issues
will have a material adverse effect on our financial position, results of
operations and cash flows.
Page 24 of 29
Pitney Bowes has been and is expected to continue to be a significant
customer. For three months ended September 30, 2003 and 2002, revenues from
Pitney Bowes, exclusive of equipment sales to PBCC for lease to the end user,
accounted for approximately 9% and 8%, respectively, of our total revenue and
for the nine months ended September 30, 2003 and 2002, accounted for
approximately 9% and 9% of our total revenue, respectively. However, no
assurance can be given that Pitney Bowes will continue to purchase our products
and services.
In connection with the Distribution, Imagistics and Pitney Bowes entered
into a non-exclusive intellectual property agreement that allows us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. However, this agreement may be terminated if we or Pitney Bowes
elect to terminate the non-competition obligations contained in the distribution
agreement. In 2002, we began introducing new products under the "Imagistics"
brand name and we initiated a major brand awareness advertising campaign to
establish our new brand name. Brand name recognition is an important part of our
overall business strategy and we cannot assure you that customers will maintain
the same level of interest in our products when we can no longer use the Pitney
Bowes brand name.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Statements contained in this discussion and elsewhere in this report that
are not purely historical are forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, and are based on
management's beliefs, certain assumptions and current expectations. These
statements may be identified by their use of forward-looking terminology such as
the words "expects", "projects", "anticipates", "intends" and other similar
words. Such forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. The
forward-looking statements contained herein are made as of the date hereof and,
except as required by law, we do not undertake any obligation to update any
forward-looking statements, whether as a result of future events, new
information or otherwise.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and hedging relationships designated after June 30, 2003 and
all provisions should be applied prospectively. The provisions of SFAS No. 149
that relate to SFAS No. 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. Certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not
have a material impact on our financial position, results of operations or cash
flows.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
and disposal activities initiated after December 31, 2002 and provides guidance
on the recognition and measurement of liabilities associated with disposal
activities. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No.
146 did not have a material impact on our financial position, results of
operations or cash flows.
In November 2002, the FASB Emerging Issues Task Force reached a consensus
on issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 applies to certain contractually
binding arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed or determinable. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on our financial position,
results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain exposures to market risk related to changes in interest
rates, foreign currency exchange rates and commodities. Historically, we used
interest rate swap agreements to manage our risk related to interest payments on
our debt instruments and to hedge the exposure to variability in future cash
flows. During the third quarter of 2003, we disposed of our interest rate swap
agreements.
Page 25 of 29
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as described in Exchange Act Rule 13a-15. In conducting the
evaluation, such officers noted that we continued to be reliant on certain
Pitney Bowes information systems for the generation of financial information.
Based upon our existing internal controls, such officers' knowledge of Pitney
Bowes' systems and internal controls and a review of Pitney Bowes' Exchange Act
filings and related certifications, the Chief Executive Officer and the Chief
Financial Officer have concluded that the information generated by the Pitney
Bowes information systems is subject to adequate controls. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC filings
relating to our Company (including our consolidated subsidiary).
There were no changes in our internal control over financial reporting
during the quarter ended September 30, 2003 that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Page 26 of 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we have been party
to occasional lawsuits relating to our business. These may involve litigation or
other claims by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
trademark, patent and other intellectual property matters, equipment, service or
payment disputes with customers, bankruptcy preference claims and disputes with
employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation (3)
3.2 Amended and Restated Bylaws (1)
3.3 Certificate of Designation of Series A Junior Participating Preferred Stock, dated August 1, 2002 (6)
4.1 Form of Imagistics International Inc. Common Stock Certificate (1)
10.1 Tax Separation Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.2 Transition Services Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.3 Distribution Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.4 Intellectual Property Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.5 Reseller Agreement between Pitney Bowes Management Services and Imagistics International Inc. (3)
10.6 Reseller Agreement between Pitney Bowes of Canada and Imagistics International Inc. (3)
10.7 Vendor Financing Agreement between Pitney Bowes Credit Corporation and Imagistics International Inc. (3)
10.8 Form of Sublease Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.9 Form of Sublease and License Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.10 Form of Assignment and Novation Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky (1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak (1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as Administrative Agent (3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe Trust Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc C. Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and Joseph D. Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and Christine B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John C. Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris C. Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark S. Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and Nathaniel M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and Joseph W. Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
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10.28 Amendment No. 2 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as Administrative Agent, and the
Lenders identified therein (5)
10.29 First Amendment to Imagistics International Inc. 2001 Stock Plan (6)
10.30 First Amendment to Rights Agreement between Imagistics International Inc. and EquiServe Trust Company, N.A. (6)
10.31 Amendment No. 3 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (7)
10.32 Amendment No. 1 to Transition Services Agreement between Pitney Bowes Inc. and Imagistics International Inc. (8)
10.33 Amendment No. 4 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (9)
31.1 Certification of the Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1) Incorporated by reference to Amendment No. 1 to the Registrant's Form 10 filed July 13, 2001.
(2) Incorporated by reference to Amendment No. 2 to the Registrant's Form 10 filed August 13, 2001.
(3) Incorporated by reference to the Registrant's Form 10-K filed March 28, 2002.
(4) Incorporated by reference to the Registrant's Form 10-Q filed May 14, 2002.
(5) Incorporated by reference to the Registrant's Form 8-K dated July 23, 2002.
(6) Incorporated by reference to the Registrant's Form 10-Q filed August 14, 2002.
(7) Incorporated by reference to the Registrant's Form 8-K dated March 7, 2003.
(8) Incorporated by reference to the Registrant's Form 10-K dated March 28, 2003.
(9) Incorporated by reference to the Registrant's Form 8-K dated May 16, 2003.
(b) Reports on Form 8-K.
On July 31, 2003, we filed a Current Report on Form 8-K, under Item 9
furnished pursuant to Item 12, which included a copy of our press release dated
July 31, 2003 in which we announced our earnings for the fiscal quarter ended
June 30, 2003 and certain additional matters.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 2003 Imagistics International Inc.
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(Registrant)
By: /s/ Joseph D. Skrzypczak
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Name: Joseph D. Skrzypczak
Title: Chief Financial Officer
and Authorized Signatory
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