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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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DELAWARE 06-1611068
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
100 OAKVIEW DRIVE
TRUMBULL, CONNECTICUT 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON STOCK, PAR VALUE $0.01 PER SHARE THE NEW YORK STOCK EXCHANGE
(TOGETHER WITH ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
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__
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL
NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE
IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_X_]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12B-2). YES X NO__
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THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES WAS $503,035,526 AS OF JUNE 30, 2003. THE AMOUNT SHOWN IS
BASED ON THE CLOSING PRICE OF IMAGISTICS INTERNATIONAL INC. COMMON STOCK AS REPORTED ON THE NEW YORK STOCK EXCHANGE COMPOSITE TAPE
ON THAT DATE.
NUMBER OF SHARES OF IMAGISTICS INTERNATIONAL INC. COMMON STOCK, PAR VALUE $0.01, OUTSTANDING AS OF FEBRUARY 27, 2004: 16,702,451
DOCUMENTS INCORPORATED BY REFERENCE:
PORTIONS OF THE IMAGISTICS INTERNATIONAL INC. PROXY STATEMENT FOR THE 2004 ANNUAL MEETING OF STOCKHOLDERS - PART III
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IMAGISTICS INTERNATIONAL INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1 Business.......................................................... 3
2 Properties........................................................ 11
3 Legal Proceedings................................................. 11
4 Submission of Matters to a Vote of Security Holders............... 11
Executive Officers................................................ 12
PART II
5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities......................... 14
6 Selected Financial Data........................................... 15
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 16
7A Quantitative and Qualitative Disclosures About Market Risk........ 30
8 Financial Statements and Supplementary Data....................... 31
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 59
9A Controls and Procedures........................................... 59
PART III
10 Directors and Executive Officers of the Registrant................ 60
11 Executive Compensation............................................ 60
12 Security Ownership of Certain Beneficial Owners and Management.... 60
13 Certain Relationships and Related Transactions.................... 61
14 Principal Accountant Fees and Services............................ 61
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 62
Signatures........................................................ 65
2
Certain statements contained in this filing with the United States Securities
and Exchange Commission on Form 10-K that are not purely historical are
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that 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. These risks and
uncertainties include, but are not limited to, general economic, business and
market conditions, competitive pricing pressures, timely development and
acceptance of new products, our reliance on third party suppliers, potential
disruptions affecting the international shipment of goods, potential disruptions
in implementing information technology systems, our ability to create brand
recognition under our new name and currency and interest rate fluctuations.
Certain of these risks and uncertainties are discussed more fully in Part II,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Risk Factors That Could Cause Results to Vary and elsewhere in this
filing on Form 10-K. The forward-looking statements contained herein are made as
of the date hereof and we, except as may be required by law, do not undertake
any obligation to update any forward-looking statements, whether as a result of
future events, new information or otherwise.
PART I
ITEM 1. BUSINESS
GENERAL
Imagistics International Inc. ("Imagistics" or the "Company") is a large
direct sales, service and marketing organization offering business document
imaging and management solutions, including copiers, multifunctional products,
often referred to as MFPs, and facsimile machines, in the United States and the
United Kingdom that sources its products from various suppliers throughout the
world. MFPs provide businesses with the ability to copy, fax, print and scan
documents on a single device and eliminate costs associated with multiple
devices. MFPs also allow businesses to easily move documents from paper images
to digital files and back. We provide our customers with flexible, comprehensive
document imaging products and services at competitive market prices.
HISTORY
Imagistics traces its origins to Pitney Bowes Inc. ("Pitney Bowes"). In
1967, Pitney Bowes began marketing and distributing copiers and started selling
facsimile products in 1982. Pitney Bowes' office systems division, which
combined the copier and facsimile product lines, was created in 1998. In 2000,
Pitney Bowes decided to spin-off the United States and the United Kingdom
operations of the office systems division to, among other things, enable the
newly formed company, Imagistics, to more fully realize its potential within the
dynamic office document markets. In connection with the planned spin-off, Pitney
Bowes incorporated the Company as Pitney Bowes Office Systems, Inc. in February
2001 and, in August 2001, contributed substantially all of the business and
assets of its office systems division to the Company. The name of the Company
was changed to Imagistics International Inc. on October 12, 2001, and on
December 3, 2001, 100% of the common stock of the Company was distributed by
Pitney Bowes to the common shareholders of Pitney Bowes based on a distribution
ratio of 1 share of Imagistics common stock for every 12.5 shares of Pitney
Bowes common stock held at the close of business on November 19, 2001 (the
"Distribution").
In connection with the spin-off, we entered into several agreements with
Pitney Bowes and Pitney Bowes subsidiaries including a transition services
agreement with Pitney Bowes providing for certain essential services for a
limited period following the spin-off, agreements with Pitney Bowes Management
Services and Pitney Bowes of Canada Ltd. ("Pitney Bowes of Canada"), under which
they could continue to purchase and use our products and a vendor financing
agreement providing for Pitney Bowes Credit Corporation ("PBCC") to continue as
our primary lease vendor on a multi-year basis after the spin-off, an
intellectual property agreement with Pitney Bowes allowing us to continue using
the "Pitney Bowes" brand name in the United States and the United Kingdom for a
period of up to two years following the spin-off, a tax separation agreement and
certain other agreements. Substantially all of the services provided by Pitney
Bowes under these agreements, other than the vendor financing agreement, which
had an initial term of five years, have ceased in accordance with the terms of
the agreements. In addition, we have negotiated an agreement with Pitney Bowes
for the continued provision of equipment maintenance services in remote areas
that we do not directly service. There are alternative providers for both the
vendor financing and equipment maintenance services on substantially similar
terms and conditions and these ongoing arms length relationships with Pitney
Bowes are not considered to be material. The implementation of Phase II or our
enterprise resource planning ("ERP") system permitted us to replace the
remaining information technology related services that had been provided by
Pitney Bowes. These agreements are ending as planned and Imagistics is both
branding all products with the Imagistics name and assuming responsibility for
the transitioned services. A new agreement was reached with Pitney Bowes of
Canada in the fourth quarter of 2003 through which Pitney Bowes of Canada will
continue to purchase and resell Imagistics' products in Canada for an additional
period of two years on a non-exclusive basis.
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AVAILABLE INFORMATION
Additional information about us is available on the Internet at our
corporate website, www.imagistics.com, or our investor website,
www.IGIinvestor.com. In addition to other information, we make available free of
charge on our investor website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after electronically filing with or
furnishing such material to the Securities and Exchange Commission. The
Securities and Exchange Commission maintains an Internet site at
http://www.sec.gov, which contains reports, proxy and information statements,
and other information regarding us. You may also read and copy any document we
file with the SEC at its Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC can be contacted at 1-800-SEC-0330 for further
information on the operation of the Public Reference Room. Our investor website
also provides shareholders and other interested parties with access to important
corporate governance information including our Corporate Governance Guidelines,
Code of Ethics, and the Charters of our Audit, Executive Compensation and
Development, and Governance Committees. These documents are also available in
print to any shareholder requesting a copy from our Investor Relations
department. Amendments to our Code of Ethics and any waiver related to our Chief
Executive Officer, Chief Financial Officer or Controller will also be made
available on our investor website.
INDUSTRY OVERVIEW
The document imaging and management industry consists of the production and
supply of various imaging products, as well as the provision of pre-sale and
after-market product services and related software and professional services. We
have been a leader in the facsimile machine segment of this industry for 20
years and have participated in the copier business for over 35 years. Our
competitors include the distribution units of large office equipment
manufacturers such as Ricoh, Canon and Xerox, and other independent distributors
such as Ikon, Danka and Global Imaging as well as numerous local independent
office equipment dealers and, as technologies continue to merge, traditional
printer companies such as Hewlett Packard and Lexmark.
Companies in the document imaging industry sell products primarily through
three channels of distribution: direct sales, independent dealer sales and
retail sales. Recently, the Internet has begun to emerge as an additional
channel, primarily for lower end equipment and supplies. Direct sales involve
the marketing of products by sales representatives working directly for the
company whose products they offer. Independent dealer sales result from customer
calls performed by independent dealer outlets that generally sell
manufacturer-branded products. Retail sales include sales of low-end products,
typically through national retail outlets or local smaller retailers.
The document imaging industry is rapidly changing. The copier industry has
moved from standalone analog devices to products that utilize digital
technologies. Digital technology provides more reliability, more functionality
and higher quality. Currently, essentially all new copier placements are digital
machines. Digital products can connect with computer networks and communicate
with other office imaging equipment, enabling customers to more efficiently
connect and utilize their document management solutions over a wide array of
more useful features, such as higher quality copies, color capability, finishing
capability and the multifunctional capability of copying, faxing, scanning and
printing. The scanning capability allows organizations to easily move between
hard copy paper documents and electronic documents. MFPs can efficiently copy,
fax and print documents. In addition, technological advances, added features and
functionality and reduced pricing have led to a trend of increased placements of
color copiers and MFPs. The migration from single function digital copiers to
multifunctional devices is now seeing the emergence of universal
copiers/printers that provide cost efficient output in both black and white and
color.
Today's busy corporate environment demands office equipment, software and
solutions that work faster and more efficiently than ever before, while
providing reliable high-quality output. The expanding use of MFPs designed to
address copying, faxing, scanning and printing needs in the workplace is a
direct result of these demands. MFPs efficiently send, receive and print
documents, thus eliminating office bottlenecks, improving employee productivity
and saving valuable workspace in offices of all sizes. As workplaces
increasingly rely on computer networks, document imaging providers are also
developing more products that allow for shared communication and that work
seamlessly with other office systems. These networked solutions offer greater
speed and, by diverting print streams to more efficient output devices, can
lower a company's imaging costs significantly. The cost of managing documents is
high for most companies and increased use of the Internet for desktop research
and printing has further increased the volume and cost of imaging activity for
most businesses. In addition to searching for ways to minimize business document
costs, customers continue to demand high-performance machines that produce
well-finished documents. In addition, corporations struggle with the issue of
how to deploy new technology and get users to embrace it. Currently, the
industry is producing a greater number of color machines to offer customers a
range of options for their copying and printing needs. Color machines allow
companies to increase their level of in-house document production and produce
"finished" copies for meetings, presentations and mailings often times at much
lower costs than if they purchased these jobs externally.
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Corporate customers are also searching for new ways to manage their
document imaging needs. Corporations are continuing to outsource non-core
competencies, including document imaging. This is especially true as the
complexity of these solutions increases and corporations seek to avoid hiring,
training and retraining personnel to use new machines. In recent years, many
large document-imaging providers have developed management services capabilities
to address this need. Through management services relationships, document
imaging providers offer a full range of services, from installation and training
of employees to complete on-site document imaging management, including
selection of equipment and provision of personnel, allowing corporate customers
to choose the solution that is best for them.
STRATEGY
Our strategy 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,
customers and employees. To that end, we plan to build on our strengths and
pursue the following initiatives:
MAINTAIN AND FURTHER STRENGTHEN MAJOR ACCOUNT RELATIONSHIPS. We have
maintained successful relationships in the facsimile area with many large
Fortune 1000 companies for 20 years. We believe that our strong relationships
with many of these customers, as well as our integrated sales and service
organization and the broad national reach of our organization, have been the
keys to our success in acquiring new business and retaining our current
customers. In 2001 we reorganized our sales effort to create customer-centric
national account and commercial user sales organizations, each offering our full
range of products to their respective customer bases. This customer-centric
organization allows us to leverage our success in the facsimile market to sell
copier products and MFPs to these major accounts while also expanding our
product offerings to our commercial user customers.
In light of current economic pressures, technological advances and changes
in the corporate workplace, we must strive to meet our customers' needs in new
ways. As many corporate customers seek to reduce administrative expenses through
centralized purchasing and consolidation of their vendors, we believe that we
are well positioned to offer a range of products and services, including
technological innovations and consulting services that will provide new options,
from a single source. Because we have continuity with so many of our
long-standing major account customers, we believe they will be receptive to
expanding their relationships with us by purchasing additional products and
services.
EXPAND OUR PRODUCT OFFERINGS THROUGH SOURCING AND DISTRIBUTION
RELATIONSHIPS. We believe that one of our greatest strengths is our strategy of
sourcing cost-effective "families" of products from different manufacturers to
best suit our customers' requirements. We seek to form relationships with
various manufacturers, each with different specialties and different strengths.
Although we source from multiple vendors, all of our products meet our demanding
specifications. In addition, we supplement our product offerings with
value-added software and service offerings to optimize ease of use and operation
and support them with trained staff.
In 2003, J.D. Power and Associates Copier Customer Satisfaction Study
ranked Imagistics #1 in Copier/Multifunction Product Satisfaction in a tie.
Imagistics received top scores in the study for both products and service. We
believe the study validates Imagistics' product sourcing strategy and direct
sales and service infrastructure. In addition, in 2003, Imagistics received the
2003 Buyers Laboratories Most Outstanding Multifunctional Product Line of the
Year award as well as six Pick of the Year awards in four different product
categories.
We continuously evaluate various imaging products from multiple
manufacturers and software developers. We believe that our supply contracts
provide us access to the best products and solutions.
We believe that the transition to digital copier/MFPs provides an important
opportunity for us to reach new customers as manufacturers develop machines with
increased capabilities. We continue to launch new digital products that offer
faster, more efficient multifunctional features for our high-volume corporate
customers. These new digital products offer increased document imaging options
and capabilities as well as overall savings. We will continue to expand our
digital document imaging product offerings in order to meet the needs of our
current customers and to allow us to reach a new customer base. In order to
remain competitive in light of the many technological options that are available
to our customers, we will continue to collaborate with companies that develop
integrated document solutions that incorporate the functions of multifunctional
devices. Our success will also depend on our ability to accurately gauge shifts
in market demand and to anticipate potentially unforeseen changes in market
dynamics that may result from new technologies.
INCREASE OUTREACH OF OUR DIRECT SALES AND SERVICE FORCE TO THE COPIER/MFP
MARKET. Our direct sales and service strategy aims to provide major account
customers with one point of contact for their product needs. Regardless of their
location in the United States and United Kingdom, our customers can contact one
of our representatives in their geographic area and receive consistent sales and
service assistance. This allows us to control the quality of our sales and
service effort and ensure a consistent
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experience for our customers. It also provides us with an opportunity to keep in
regular contact with our customers, which we believe often leads to future
sales. In some remote areas, however, we rely on Imagistics-trained third-party
service providers for service of our products. Our marketing strategy is to not
only offer an extensive portfolio of product offerings and diverse technology to
our Fortune 1000 customers, but to establish the same kind of long-term,
copier-based relationships with our customers as we have established with our
facsimile customers by utilizing our national direct sales and service
organization to meet their needs as well.
In September 2003, Imagistics acquired substantially all of the assets and
business of TCM Digital Solutions, an independent dealership based in Salt Lake
City, Utah. The acquisition reflects Imagistics' strategy to expand, on a highly
selective basis, service and distribution capabilities in areas of the country
where such presence will enhance our ability to serve national accounts, while
increasing our sales effort with local companies and public agencies.
FOCUS ON CUSTOMER NEEDS. Since we have direct access to our end user
customers through our direct sales force, we are able to monitor their changing
needs and requirements and respond in an appropriate manner. Although many of
our customers use MFPs and have reacted favorably to the digital products we
offer and we expect that they will continue to grow in the future, not all of
our customers have migrated to digital systems or to multi-functionality at the
fast pace that many in our industry predicted. Our goal is to meet all of our
customers' needs and where price is particularly critical, we have offered them
refurbished and remanufactured analog and refurbished digital systems as well as
standalone devices. Because of our purchasing structure, we believe that we will
be able to provide digital equipment and solutions as our customers require
them. Because we source digital products and train our workforce on the sales,
use and service of these products, and because we continue to research and
source new products, we believe that we will be able to respond effectively as
the industry changes in the future. However, if we fail to accurately predict
changes in market demand we may lose sales or incur losses due to excess
inventories.
PURSUE AN EXPANSION STRATEGY. In order to remain competitive, we will
continue to expand our copier, MFP, software and solutions businesses in
geographic markets in the United States and abroad. Our direct sales and service
strategy has been an effective method for attracting and retaining customers and
we believe we can use it to further expand our copier and MFP business. Although
the facsimile market as a whole is in decline, we will seek to capture
competitive copier accounts while maintaining and leveraging our existing
facsimile customer base. We currently supply document imaging products and
services to a variety of large corporations, many of which have an international
presence and seek global sourcing of their document imaging needs. In order to
serve these clients more effectively, we intend to commence direct operations in
Canada and to use our United Kingdom operation as a platform for expansion of
our business into the larger European market over time. Our United Kingdom
product offerings, which were limited to facsimile products, were expanded to
include a full range of MFPs in January 2003.
BUSINESS SEGMENTS
We operate in two reportable segments based on geographic area: the United
States and the United Kingdom. Revenues from external customers and from Pitney
Bowes are attributed to geographic regions based on where the revenues are
derived. Financial information by segment is set forth in Note 5, "Business
Segment Information," of the "Notes to Consolidated Financial Statements"
included in Item 8 herein.
PRODUCTS
We offer a broad range of office copiers, MFPs, facsimile machines and
related products and services. These products and services serve a wide range of
customer needs from departmental to workgroup solutions. The utilization of
digital technology has led to development of equipment that contains multiple
capabilities and greater options for document imaging and management
applications. Historically, we have used standard industry classifications to
classify our equipment product offerings as part of either the copier product
line or the facsimile product line based upon the primary function of the
equipment.
The evolution of technology has blurred distinctions between traditional
copiers and facsimiles since most new products are multifunctional. Imagistics
has not introduced a single function machine in over three years. Facsimile has
evolved into a feature found on machines ranging in speed from 10 pages per
minute to 65 pages per minute rather than a dedicated single function machine.
Some time in the future, differentiating between facsimile and copier equipment
will not be meaningful.
We offer a broad range of products for departmental applications including
black and white, color, analog, digital, networked and stand-alone copiers and
MFPs. Our definition of departmental machines incorporates the standard industry
product segments 2 through 5, which range in speed from 20 to 90 pages per
minute for black and white prints and typically produce a maximum size output
consisting of ledger size copies/prints.
Our digital black and white copier/MFP line includes fourteen products with
speeds from 20 to 85 pages per minute. Our line of products can address
application needs of workgroups with as few as several hundred to as many as
750,000 impressions per
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month. Most of these solutions are available as multifunctional devices and
offer a range of finishing solutions from simple collating to booklet making,
Z-folding, hole punching and multi-position stapling.
We are currently in the process of discontinuing our black and white analog
refurbished and remanufactured product line offerings and will concentrate on
refurbished and remanufactured digital copier/MFP offerings.
Our current 20 and 31 page per minute digital color copier products are
positioned to provide "universal" solutions to clients. These multifunctional
digital copiers offer copying and networking functionality and are designed to
support both color and monochrome applications and offer enhanced image quality
color printing and copying, a wide range of digital art functions and enhanced
finishing options that include booklet making capabilities.
We also offer a broad range of lower-end workgroup products and solutions.
Our definition of workgroup machines is the standard industry product Segment 1
which range in speed from 11 to 19 pages per minute for black and white prints
and typically produce a maximum size output consisting of legal size
copies/prints. Our workgroup products include traditional copiers, MFPs and
facsimile solutions.
We have historically been a leader in workgroup facsimile systems and
related product offerings and we are currently one of the largest suppliers of
facsimile equipment to the Fortune 1000. We were among the first document
imaging providers to offer plain paper facsimile products as an option to the
slower and less efficient thermal facsimile machines. We were the first company
to offer the 14,400 bits per second and 33,600 bits per second plain paper
facsimile machines to customers. The 33,600 bits per second machines continue to
be among our most popular products.
We currently offer a full range of workgroup solutions that range from
traditional new and remanufactured facsimile equipment to MFPs. We currently
offer ten new MFP solutions, five remanufactured facsimile machines and one new
facsimile machine.
We also maintain alliances with leading document software solutions
providers to satisfy our customers' document management requirements. Through
our alliances, we provide our customers with access to software solutions
providers that enable printing from host applications directly to lower cost
Imagistics' networked MFPs without re-coding, that deliver documents directly to
point of need whenever required and that allow our customers to build customized
document management applications, from simple scan-store-retrieve, to complex
enterprise systems involving automated workflows, web-access, and multi-level
security. Other partners provide facsimile server solutions that increase
productivity and decrease costs of traditional facsimile applications and
software tools for the design, generation and delivery of all types of forms,
reports and other documents.
SUPPLIES
We offer a full complement of consumable supplies for our products, such as
copier and facsimile toner and cartridges and paper. Many of our copier/MFP
customers enter into cost-per-copy rental and/or maintenance agreement plans
that include supplies. This accounts for a constant source of copier supply
revenue and helps to ensure a high level of customer retention. Demand for
facsimile supplies has decreased with the use of e-mail and the availability of
third-party refilled toner cartridges. In response to this decrease in demand,
we introduced our own line of refilled cartridges under the "ECO" brand.
Refilled ECO cartridges work with many of our own facsimile machines and also
with many competitor facsimile machines and laser printers. With increased
printing on multifunctional devices and the deployment of color solutions, we
expect related supplies revenue to increase, which will offset a portion of the
loss in facsimile revenue.
SERVICE
Our continued commitment to our products and customers is evident in the
many aftermarket service options that we provide. Our products are serviced by
our nationwide service organization of approximately 1,400 Imagistics and
contracted service representatives. We believe that this dedicated service force
provides us with a distinct advantage over many of our competitors. These
representatives are trained to service our product line and are managed through
a central dispatch system to meet strict customer response time requirements.
These representatives provide a full range of preventative maintenance and
repair services to major account customers and commercial users.
We support all of our customers through our 24 hour-a-day, 7 day-a-week
diagnostic center. Located in Melbourne, Florida, the diagnostic center is
staffed with Imagistics employees who are experts in the use and servicing of
our products and who help minimize any downtime or disruption to our customers.
The diagnostic center usually handles over 4,000 calls from customers each day.
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FINANCING OPTIONS
We provide our customers with flexible financing options that allow for the
sale, lease or rental of our products. In the past, we have sold products to
commercial users either directly to the end user or to a leasing company that,
in turn, leases the product to the end user. Where leasing is involved, we sell
equipment to either Pitney Bowes' wholly owned subsidiary, PBCC, or to other
finance companies. Currently, PBCC is the primary source of lease financing for
our products. We have entered into an agreement with PBCC that provides for an
ongoing lease-purchase equipment-financing program for our products. In 2003 and
2002, approximately 14% and 13% respectively, of our revenues were derived from
sales to PBCC for lease to the end user.
Historically, in offering products to our major account customers, we have
used a rental strategy. These major account customers have been primarily
customers of our facsimile products. Most often, we rent our facsimile machines
at a flat rate. We are increasingly renting copier and MFP based solutions to
our large major account customers as well. We typically rent our copiers on
either a cost-per-copy basis, with minimum monthly page volumes, or at a flat
rate with allowance and overage plans for certain services and other options. In
the case of rentals, we seek to negotiate a master rental contract with our
customers that can be revised to reflect rental of additional products and
upgrades to current products or additional services. Generally, our rental
contracts are for 36-month terms with renewal options that are automatic unless
the customer gives prior notice of cancellation. These rental contracts also
cover service and, in most cases, include supplies for use with our equipment.
We believe that this approach provides the flexibility this customer base
requires and many prefer compared to owning these assets.
CUSTOMERS
Our primary customers are large corporate customers and government
entities. Our client base includes approximately 70% of the Fortune 500
companies and 60% of the Fortune 1000 companies. We serve major companies in the
manufacturing, distribution, financial services, government and education
markets as well as others. While continuing to strengthen and expand our
relationships with our current customers, we have also established new
initiatives geared specifically toward more efficiently serving mid-sized and
regional companies or commercial users, while shifting our focus to
multi-location customers. We plan to maintain our relationships with commercial
users through the use of our trained team of commercial sales representatives.
In an effort to expand our distribution organization and increase service
coverage for multi-location customers, Imagistics has from time to time acquired
independent regional office equipment dealerships. Imagistics' products are
incorporated into their product mix and their sales and service teams are fully
trained by Imagistics.
We market and distribute our products to the following types of customers:
o major national accounts, including large corporate customers,
o government and education entities and
o commercial accounts, including mid-size and regional businesses.
National account customers include major national and international
corporations that require full office related document imaging and management
throughout the customer's entire organization, whether that organization is
regional or national. Because we began our business by serving major account
customers in the facsimile market 20 years ago and have maintained steady
relationships with many of these same customers, our major accounts provide us
with recurring rental revenues over longer-term contracts. In addition, because
of their individual and complex needs, we are able to provide our major account
customers with cutting-edge products as well as customized approaches to their
specific needs. Customers in these markets have a preference for doing business
with companies they have a long-term relationship with and our existing business
relationships allow us to monitor customer needs and provide appropriate
upgrades.
We target a range of governmental entities from large federal and state
bureaus to small local government offices. These customers provide a long-term
source of business and, because of our experience, we can anticipate their
document imaging needs. Federal government entities may source products through
the competitive bidding process or through flat rate contracts. The federal
government may also issue a separate bid for large placements pertaining to a
specific department or location. Our government contracts are generally for a
period of four to five years. State and local government entities typically
acquire products through their own varied bidding processes. Although many of
these contracts are terminable for non-appropriations of funds by our customers,
we have not had a significant number of early terminations of these contracts
for non-appropriation.
We also target commercial accounts, which generally have more discrete
document imaging needs for one specific area or portion of their business or
workplace. We customarily sell or lease equipment to these customers and, in
most instances, our contracts provide ongoing supplies and service to them.
8
Because of our approach of providing a system of national direct sales and
service, our ability to provide a range of products, system options and
after-market arrangements to our major account customers and our attention to
maintaining our relationships with customers through consistent product service,
we believe that we can expand these markets in the future.
Due to our diversified customer base, no single customer is large enough to
have a material impact on our overall business. Also, due to our diverse
customer base and the recurring nature of our rental, service and supply
revenues, seasonal variations do not significantly impact our business.
SALES AND MARKETING
We believe that our sales and marketing approach is uncommon in our
industry. While many of our competitors offer either their own or other
manufacturers branded products either by dealer sales or retail sales, we rely
solely on distributing Imagistics' branded products through direct sales with
support by direct service. Research conducted by CAP Ventures indicates a
preference for direct sales and service. Our direct sales and service personnel
are located throughout the United States and the United Kingdom. These employees
market and service our products to our customers and potential customers all
over the United States and United Kingdom. Our representatives use national
sales and service standards so that our customers receive consistent and
reliable assistance regardless of where they are located or which one of our
locations they call.
In 2002 we began to introduce new products under the "Imagistics" brand
name and we launched a major brand awareness advertising campaign that included
placements in broadcast and cable television, radio and print media. In 2003, we
continued this effort and now market exclusively under the Imagisics brand.
In addition to our United States business, we currently operate in the
United Kingdom. Our U.K. business now offers our complete product line. We plan
to increase the international marketing of our products. Our goal is to increase
our service to our current customers as well as broaden our existing customer
base by providing our products throughout Europe over time. Our U.K. business is
headquartered in Harlow, England. Our products are also offered in Canada
through Pitney Bowes of Canada, a subsidiary of Pitney Bowes. Our new agreement
with Pitney Bowes of Canada is non-exclusive, which enables us to enter the
Canadian market directly should we choose to do so.
SUPPLIERS AND DISTRIBUTION
For maximum flexibility in product development and to assure our clients of
the best possible business document solutions, we purchase equipment from a
number of different firms throughout the world, rather than manufacture our
products ourselves. We impose high quality standards on all of our equipment
suppliers. We do internal testing of all products before adding them to the
Imagistics family. The testing focuses on our customers' applications to ensure
that we have the best offering to meet these needs.
We source our equipment from suppliers throughout the world including
Konica Minolta, Muratec, Brother, Kyocera Mita, Sharp and Toshiba. We have
contractual relationships with these suppliers, although we continue to search
for the best products and do not enter into exclusive relationships with any of
our suppliers. We also do not have minimum order quantities with any of our
suppliers. Although we do not have minimum order quantities with any of our
suppliers, Konica Minolta, Sharp and Toshiba currently supply a significant
portion of our new copier/MFP equipment. If Konica Minolta, Sharp or Toshiba
were unable to deliver products for a significant period of time, we would be
required to find replacement products, which may not be available on a timely or
cost-effective basis. This could have a material adverse effect on our business,
financial condition and results of operations. We do not believe that we are
materially dependent upon any other supplier of products, whether new products,
parts or consumable supplies. To mitigate against disruptions to our business,
we keep an adequate level of inventory on hand to meet the needs of our
customers for several months.
Using third-party suppliers allows us to offer our customers products with
the most current features and technologies. We believe that this sourcing
strategy also offers us maximum flexibility. As we expand or upgrade our product
line, we are able to choose from the best available products for each product
range. We select products by balancing costs and availability of features with
ease of customer use, service personnel training, parts availability,
reliability and serviceability. Because of these benefits, in most cases, we
purchase similar products from one manufacturer to cover several product levels.
We generally require manufacturers to build our products to order with 60
day or less lead times. We usually take title to the goods at the factory, or in
the case of Asian factories, at the closest seaport. Finished goods are shipped
by ocean freight to a United States port, primarily in California, and then
trans-shipped to one of approximately 9 warehouses in the United States. In the
normal course of business, when a customer order is received, equipment is
unpacked, set up and tested in the warehouse prior to shipping to the customer
location. Supplies are stored primarily at one warehouse location and are
shipped via UPS or overnight delivery directly to our customers. We opened our
own parts warehouse in 2003 and parts are delivered directly to our customers or
service engineers. The United Kingdom business uses similar manufacturing and
shipping procedures and finished
9
goods are shipped directly to one of two contract warehouses in the United
Kingdom. Our reliance on Asian manufacturing could make our business susceptible
to disruptions in international transportation due to port strikes, acts of war
or other factors beyond our control.
PATENTS, TRADEMARKS AND COPYRIGHTS
In connection with the spin-off, we entered into a trademark license,
patent license and copyright license agreement that provided us with a
non-exclusive license to the Pitney Bowes trademark for a period of up to two
years following the spin-off. In addition, the agreement provides for us to
license the patents and patent applications on a non-exclusive basis in
connection with our business in the United States and the United Kingdom, for
the term of the relevant patents, none of which are material to our business.
Finally, the agreement provides for us to license all copyrighted material used
in connection with our business in the United States and the United Kingdom for
the term of the relevant copyrights.
We have historically distributed our products principally under the Pitney
Bowes trademark. We have registered "Imagistics" as a trademark in the United
States, Canada, the European Community and other jurisdictions and we have
transitioned to the use of the "Imagistics" brand name. In addition, as a
reseller of equipment supplied to us by major manufacturers of imaging
equipment, we benefit from the use of patents and patent licenses secured by our
suppliers.
EMPLOYEES
We employ approximately 3,400 individuals throughout the world including
approximately 1,100 sales personnel. We employ approximately 100 people in the
United Kingdom, almost all of whom are subject to the European Works Council
regulations. None of our other employees are covered by a collective bargaining
agreement. We believe that we have good relations with our employees.
COMPETITION
We are primarily involved in the supply of document imaging equipment to
corporate, governmental and commercial customers. The document imaging equipment
supply industry is highly competitive.
Although certain of our competitors have experienced financial difficulties
and the overall number of our competitors has decreased due to ongoing industry
consolidation, the industry remains highly competitive. Customers rigorously
evaluate suppliers on the basis of product reliability and quality, service
expertise, geographic reach and price competitiveness. Many of our competitors
manufacture their own products. Although we believe that our reliance on third
parties for manufacturing provides us with certain benefits, it is possible that
our competitors' guaranteed access to product supply through captive
manufacturing operations may provide them with a competitive advantage. In
addition, our primary suppliers sell products in competition with us, either
directly or through dealer channels. Also, some of our competitors have
substantially greater financial resources than we do.
Our primary competitors are Xerox, Ikon, Danka, Canon, Ricoh, Global
Imaging, Hewlett Packard and Lexmark.
ENVIRONMENTAL MATTERS
We are subject to Federal, state and local laws intended to protect the
environment. We believe that, as a general matter, our policies, practices and
procedures are properly designed to reasonably prevent the risk of environmental
damage and financial liability to the Company.
BACKLOG
Generally, equipment sales and rental orders are shipped within 30 days and
supplies orders are shipped immediately. Accordingly, our backlog is not
significant.
10
ITEM 2. PROPERTIES
The following table provides information regarding our primary owned and leased
properties:
OWN/ SQUARE EXPIRATION
LOCATION LEASE FOOTAGE DATE FACILITY TYPE
- ----------------------------- ----------- -------------- --------------- -----------------------------------------------
United States:
Columbus, Ohio Lease 217,864 2009 Warehouse and distribution center
Trumbull, Connecticut Own 74,000 N/A Corporate headquarters
Beacon Falls, CT Lease 66,050 2007 Warehouse and equipment refurbishing center
Milford, Connecticut Own 41,000 N/A Warehouse and equipment refurbishing center
Denver, Colorado Lease 29,178 2007 Administration and customer support call center
Melbourne, Florida Lease 17,103 2008 Diagnostic call and equipment refurbishing center
Shelton, Connecticut Lease 14,509 2009 Diagnostic and technical services center
Shelton, Connecticut Lease 11,439 2004 Administrative office
United Kingdom:
Harlow Lease 11,866 2007 Headquarters and sales office
We also lease space in approximately 170 sales and service locations
throughout the United States totaling approximately 665,000 square feet. Leases
relating to approximately 27 of our sales and service locations totaling
approximately 93,000 square feet expire in 2004. We plan to renew or replace
these leases to the extent they are for stand-alone facilities, and for certain
other facilities, we plan to relocate and enter into new leases with less square
footage. In the United Kingdom, we lease a warehouse from a third party on a
six-month rolling term, which will terminate in July 2004, at which time we plan
to replace this lease. In addition, in the United Kingdom, we lease two sales
offices near Birmingham and Glasgow on two-year leases and one sales office in
London on a one-year lease. These three leases aggregate approximately 2,355
square feet.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter ended December 31, 2003.
11
SUPPLEMENTAL ITEM: EXECUTIVE OFFICERS
Information concerning the executive officers of Imagistics is set forth
below:
NAME AGE POSITION
- ---- --- --------
Marc C. Breslawsky...................................... 61 Chairman and Chief Executive Officer; Director
Christine B. Allen...................................... 54 Chief Human Resources Officer
John C. Chillock........................................ 47 Vice President, Customer Service Operations
George E. Clark......................................... 57 Vice President and General Manager, Business Product Centers
Chris C. Dewart......................................... 49 Vice President, Commercial Sales
Mark S. Flynn........................................... 49 Vice President, General Counsel and Secretary
Nathaniel M. Gifford.................................... 51 Vice President, Product Development and Marketing
Joseph W. Higgins....................................... 52 Vice President, National Sales
Doris J. Owens.......................................... 51 Vice President, Worldwide Administration
Joseph D. Skrzypczak.................................... 48 Chief Financial Officer
Marc C. Breslawsky. Mr. Breslawsky has served as Chairman and Chief
Executive Officer of Imagistics since February 2001. In connection with the
spin-off, Mr. Breslawsky was elected to our board of directors as Chairman. From
1996 to 2001, Mr. Breslawsky was President and Chief Operating Officer of Pitney
Bowes. From 1994 to 1996, Mr. Breslawsky was Vice Chairman of Pitney Bowes. Mr.
Breslawsky is a director of C. R. Bard, Inc., The Brink's Company and UIL
Holdings Corporation.
Christine B. Allen. Ms. Allen became our Chief Human Resources Officer in
January 2002. From 1995 to 2001, she was with The Hartford Financial Services
Group, Inc.; she joined The Hartford as Director, Human Resources, Commercial
Market and subsequently assumed responsibilities as Vice President, Human
Resources, Commercial Lines. Ms. Allen served as Vice President of Human
Resources for The Walden Book Company from 1988 until 1994. She began her career
with Macy's New York in 1973 and served in a variety of human resources related
capacities for large retailing companies, such as Caldor and Abraham & Straus
prior to joining Waldenbooks.
John C. Chillock. In October 2000, Mr. Chillock assumed the role of our
Vice President, Customer Service Operations. Mr. Chillock joined Pitney Bowes'
office systems division in 1998 as Vice President, Field Operations. Prior to
joining office systems, Mr. Chillock served in various management positions at
Dictaphone Corporation from 1977 to 1998. Prior to joining Dictaphone
Corporation, Mr. Chillock was a Director of Operations for Intellisys Electronic
Commerce, a division of the Chase Manhattan Bank.
George E. Clark. In October 2000, Mr. Clark assumed the role of Vice
President and General Manager, Business Product Centers. Prior to the spin-off,
Mr. Clark was employed by Pitney Bowes for over 25 years in varying capacities
pertaining to the sales and marketing of imaging equipment at Pitney Bowes. Mr.
Clark served as Vice President of Copier Systems for the Northeast Region from
1988 to 1990, Vice President of Marketing for Copier Systems from 1990 to 1997
and Vice President of Business Products Centers East Region from 1997 to 2000.
Prior to joining Pitney Bowes, Mr. Clark was employed by Regenesys, Inc., a
financial reorganization firm in Boston, Massachusetts.
Chris C. Dewart. Mr. Dewart is currently our Vice President, Commercial
Sales. Prior to the spin-off he was employed by Pitney Bowes in the office
systems division since 1983, and served as Vice President since 1990. Mr. Dewart
served as Vice President of European Operations--facsimile systems division from
1990 to 1991, Vice President and General Manager of Canadian Operations from
1991 to 1998 and Vice President of U.S. Sales for Facsimile Systems from 1998 to
August 2000. In August 2000, he assumed the position of Vice President of Sales
for Commercial Markets. Prior to joining office systems, Mr. Dewart held various
positions at General Electric Corporation and Monroe/Litton.
Mark S. Flynn. Mr. Flynn became our Vice President, General Counsel and
Secretary in April 2001. Most recently, he was a partner in the corporate
department of the law firm Wiggin & Dana LLP from 1999 to 2001. From 1997 to
1999, Mr. Flynn served as Senior Deputy General Counsel to Olin Corporation. Mr.
Flynn held the position of Executive Vice President, General Counsel and
Secretary at ServiceMaster Diversified Health Services, a subsidiary of the
ServiceMaster Company, from 1993 to 1997 and Vice President, General Counsel and
Secretary at Arcadian Corporation/Arcadian Partners, L.P. from 1989 to 1993.
Prior to those positions, Mr. Flynn served in various counsel positions at Olin
Corporation from 1986 to 1989, as an attorney at Intercontinental Hotels
Corporation from 1983 to 1986 and as an associate at the law firm of Hughes
Hubbard & Reed from 1980 to 1983. Mr. Flynn serves on the advisory board of
Integra Ventures, a Seattle-based venture fund specializing in life sciences and
health care services.
12
Nathaniel M. Gifford. Mr. Gifford is currently our Vice President, Product
Development and Marketing. Prior to the spin-off he was employed in the Pitney
Bowes office products business for over 20 years in varying capacities
pertaining to product management, planning and marketing. Prior to joining
Pitney Bowes, Mr. Gifford worked at Travelers Insurance Company and Cititrust
Bank in the area of securities analysis and investments.
Joseph W. Higgins. Mr. Higgins is currently our Vice President, National
Sales. Prior to the spin-off he was employed by Pitney Bowes in the office
systems division for nearly 20 years, and has served as Vice President in sales
for more than 13 years. He served as Vice President of National Accounts since
August 2000. Previously, he served as Vice President of U.S. Facsimile Sales
from 1988 through July 1998 and as Vice President of U.S. Copier Sales from July
1998 to August 2000. Prior to joining Pitney Bowes, Mr. Higgins held various
management positions with Burroughs Office Products.
Doris J. Owens. In January 2003, Ms. Owens was appointed to the role of
Vice President, Worldwide Administration. Prior to this appointment, Ms. Owens
held the title of Vice President of Administration. Prior to the spin-off, Ms.
Owens was employed by Pitney Bowes for over 25 years in varying capacities
pertaining to administrative operations.
Joseph D. Skrzypczak. Mr. Skrzypczak has served as our Chief Financial
Officer since February 2001. Prior to assuming this position, Mr. Skrzypczak was
the Chief Operating Officer and acting Chief Financial Officer at Dictaphone
Corporation from October 1998 until December 2000. Prior to being elected Chief
Operating Officer, Mr. Skrzypczak served as Senior Vice President and Chief
Financial Officer from October 1997 to October 1998 and served as Vice President
and Chief Financial Officer from May 1994 to October 1997 at Dictaphone. After
being acquired by Lernout & Hauspie in May 2000, Dictaphone declared bankruptcy
in November 2000, as part of Lernout & Hauspie's overall bankruptcy filing. Mr.
Skrzypczak initially joined Pitney Bowes in 1981 and held various management
positions until May 1994. Prior to working for Dictaphone Corporation, Mr.
Skrzypczak served as Vice President of Finance for Pitney Bowes' office systems
division, and was directly responsible for all financial and administrative
activities. Prior to initially joining Pitney Bowes in 1981, Mr. Skrzypczak
worked for Price Waterhouse. He is a certified public accountant.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Imagistics common stock (trading symbol "IGI") is listed for trading on the
New York Stock Exchange. Information on the high and low sales prices for the
Imagistics common stock during the two most recent fiscal years is included in
Note 16, "Quarterly Financial Data," of the "Notes to Consolidated Financial
Statements" included in Item 8 herein. At February 27, 2004 there were
approximately 16,702,451 shares outstanding and approximately 17,202
stockholders of record. Except for the special cash dividend paid to Pitney
Bowes in connection with the spin-off, Imagistics has not declared or paid any
cash dividends on its common stock.
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to pay
cash dividends on our common stock in the foreseeable future. We have entered
into a senior secured credit facility providing for both term and revolving
credit borrowings, which allows us to borrow funds for general corporate
purposes, including the repayment of other debt, working capital and
acquisitions. The credit facility contains affirmative and negative covenants
that, among other things, require us to satisfy certain financial tests and
maintain certain financial ratios. The credit facility also limits our ability
to declare and pay dividends on our shares. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." If our lenders permit us to declare dividends, the dividend
amounts, if any, will be determined by our board after considering a number of
factors, including our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable contractual
restrictions and any other factors our board may deem relevant.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included in Items 7 and 8 herein.
YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Sales $316,002 $314,899 $307,929 $323,620 $320,925
Rentals 222,183 232,228 237,449 232,156 215,315
Support services 84,011 82,803 80,698 86,982 90,237
-------- -------- -------- -------- --------
Total revenue 622,196 629,930 626,076 642,758 626,477
-------- -------- -------- -------- --------
Cost of sales (1) 192,772 198,437 197,300 184,265 154,529
Cost of rentals 72,254 84,114 92,191 88,506 74,245
Selling, service and administrative expenses 312,759 311,924 305,799 252,799 232,627
-------- -------- -------- -------- --------
Operating income 44,411 35,455 30,786 117,188 165,076
Interest expense 8,437 8,106 9,825 11,281 8,646
-------- -------- -------- -------- --------
Income before income taxes 35,974 27,349 20,961 105,907 156,430
Provision for income taxes 15,515 10,906 8,402 41,903 62,728
-------- -------- -------- -------- --------
Net income $ 20,459 $ 16,443 $ 12,559 $ 64,004 $ 93,702
======== ======== ======== ======== ========
Basic earnings per share (2) $ 1.22 $ 0.88 $ 0.65 $ 3.29 $ 4.81
Diluted earnings per share (2) $ 1.19 $ 0.86 $ 0.65 $ 3.29 $ 4.81
CONSOLIDATED BALANCE SHEET DATA
Total current assets $266,621 $264,153 $283,575 $297,038 $277,681
Total assets $446,732 $461,238 $494,009 $499,434 $463,758
Current portion of long-term debt $ 545 $ 749 $ 1,000 $ - $ -
Due to Pitney Bowes $ - $ - $ - $122,182 $115,877
Total current liabilities, including amounts due to
Pitney Bowes $ 96,159 $101,914 $ 81,479 $178,121 $153,733
Long-term debt $ 62,903 $ 73,399 $116,000 $ - $ -
Total long-term liabilities $ 83,172 $ 95,077 $127,091 $ 11,285 $ 11,053
Stockholders' equity $267,401 $264,247 $285,439 $310,028 $298,974
OTHER DATA
Net cash provided by operating activities $ 83,042 $158,451 $147,813 $137,789 $112,461
Depreciation and amortization $ 74,513 $ 81,593 $ 82,725 $ 73,755 $ 67,219
Capital expenditures $ 50,954 $ 66,599 $ 84,347 $ 83,615 $ 91,705
Certain previously reported amounts have been reclassified to conform to the
current year presentation.
(1) On December 31, 2001 the Company changed its method of accounting for
the cost of inventory from the Last-in, First-out (LIFO) method to the First-in,
First-out (FIFO) method. In accordance with Accounting Principles Board Opinion
No. 20, "Accounting Changes," this change in accounting method has been applied
retroactively by restating the prior year's financial statements for all periods
presented.
(2) The basic and diluted earnings per share amounts for the years ended
December 31, 2000 and 1999 are for comparative purposes only as common shares
were not issued until December 2001. Outstanding shares for 2000 and 1999 are
based on actual shares issued plus assumed conversions, at spin-off.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Imagistics International Inc. ("Imagistics" or the "Company") is a large
direct sales, service and marketing organization offering document imaging and
management solutions, including copiers, multifunctional products and facsimile
machines in the United States and the United Kingdom. Our primary customers
include large corporate customers known as national accounts, government
entities and mid-size and regional businesses known as commercial accounts.
Multifunctional products, often referred to as MFPs, offer the multiple
functionality of printing, copying, scanning and faxing in a single unit. 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,
customers and employees. Our strategic initiatives include:
o Maintaining and further strengthening major account relationships,
o Expanding our product offerings through our sourcing and distribution
relationships,
o Increasing outreach of our direct sales and service force to the
copier/MFP market,
o Focusing on customer needs and
o Pursuing opportunistic expansion and investments.
The principal evolution in our industry and business has been the
transition to networked digital copiers/MFPs, away from single-function
standalone facsimile machines and analog copiers. This transition has resulted
in decreased demand for and usage of single function facsimile equipment in the
marketplace. We have responded to this market development by focusing our
efforts on the growth opportunities existing in our digital copier and MFP
product lines. Although our total revenue has declined only slightly, the
decrease in facsimile usage and our focus on the digital copier and MFP growth
potential has resulted in a decrease in facsimile product line revenues, which
has been offset by an increase in our copier/MFP product line revenues.
IMAGISTICS SPIN-OFF FROM PITNEY BOWES
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") approved the spin-off of the U.S. and U.K. operations of its office
systems business to its common stockholders as an independent, publicly traded
company. On December 3, 2001, Imagistics was spun-off from Pitney Bowes pursuant
to a contribution by Pitney Bowes of substantially all of Pitney Bowes' U.S. and
U.K. office systems businesses to us and a distribution of our common stock to
common stockholders of Pitney Bowes based on a distribution ratio of 1 share of
our common stock for every 12.5 shares of Pitney Bowes common stock held at the
close of business on November 19, 2001 (the "Distribution" or "Spin-off").
Pitney Bowes no longer has a financial investment in our business. We
entered into a transition services agreement with Pitney Bowes providing for
certain essential services to us for a limited period following the
Distribution. These services were provided at cost and included information
technology, computing, telecommunications, accounting, field service of
equipment and dispatch call center services. We and Pitney Bowes had agreed to
an extension until December 31, 2003, of the transition services agreement as it
related to information technology and related services. Services provided under
this extension were at negotiated market rates. Except for field service of
equipment, all of the services provided by Pitney Bowes under these agreements
have ceased effective December 31, 2003, in accordance with the terms of the
agreements. Effective July 1, 2003, we and Pitney Bowes entered into a separate
one-year service agreement on an arms-length basis relating to field service of
equipment in certain remote geographic locations not covered by our direct
service organization. Services provided under this agreement are at negotiated
market rates.
For 2003, we paid Pitney Bowes $16.1 million in connection with the
transition services agreement, field service of equipment and other
administrative expenses. For 2002 and for the period from December 3, 2001
through December 31, 2001, we paid Pitney Bowes $20.4 million and $3.5 million,
respectively, in connection with these agreements and certain shared corporate
and administrative services.
We also entered into certain other agreements covering intellectual
property, commercial relationships, leases and licensing arrangements and tax
separation matters. The pricing terms of the products and services covered by
the other commercial agreements reflect negotiated prices.
The consolidated financial statements for the periods prior to the
Distribution include allocations of certain Pitney Bowes corporate expenses.
Corporate expense allocations were charged based generally on the ratio of our
costs and expenses to Pitney
16
Bowes' costs and expenses. Pitney Bowes' allocated expenses primarily included
administrative expenses such as accounting services, real estate costs, customer
service support in remote geographic areas and information technology and
amounted to $25 million for the period from January 1, 2001 through the
Distribution. We believe the costs of these services charged to us were a
reasonable representation of the services provided or benefits received by us.
In addition, interest expense was charged to us from Pitney Bowes based upon the
proportion of our net assets to Pitney Bowes' net assets. We believe that this
was a reasonable method of allocation.
As part of Pitney Bowes, we also benefited from various economies of scale,
including shared global administrative functions and shared facilities. Our
costs and expenses have and may continue to increase as a result of the loss of
these economies of scale and we have incurred greater expenses associated with
our status as a stand-alone public company.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include certain historical assets,
liabilities and related operations of the United States and United Kingdom
office systems businesses, which were contributed to us from Pitney Bowes prior
to the Distribution. The consolidated financial statements as of and for the
years ended December 31, 2003 and 2002 depict our results as a stand-alone
company. The consolidated financial statements for periods prior to the
Distribution were derived from the financial statements and accounting records
of Pitney Bowes using the historical results of operations and historical basis
of assets and liabilities of the United States and United Kingdom office systems
businesses. Prior to the formation of Imagistics, the office systems business
was operated as a division of Pitney Bowes, and, as such, Pitney Bowes'
investment in Imagistics is shown in lieu of stockholders' equity in the
consolidated financial statements for periods prior to the Distribution. We
began accumulating retained earnings on the date of the Distribution. We believe
the assumptions underlying the consolidated financial statements for the year
ended December 31, 2001 are reasonable. However, the consolidated financial
statements included herein may not necessarily reflect our financial position,
results of operations and cash flows in the future or what our financial
position, results of operations and cash flows as of and for the year ended
December 31, 2001 would have been for periods prior to the Distribution had we
operated as a stand-alone entity during those periods.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The preparation of our consolidated 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 reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates include
assessing the allocation of costs from Pitney Bowes, usage of equipment for
rental assets billed in arrears, sales returns, usage adjustments and other
allowances for equipment sales, equipment rentals and service contract billings,
the collectibility of accounts receivable, the use and recoverability of
inventory, the useful lives of tangible assets, the realization of deferred
taxes and an evaluation of the potential impairment, if any, of goodwill and
other long-lived assets, among others. The markets for our products are
characterized by intense competition, rapid technological development and
pricing pressures, all of which could affect the future realizability of our
assets. Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the consolidated financial statements in the period
they are determined to be necessary. Actual results could differ from these
estimates. We have identified certain accounting policies that are critical to
the understanding of our results of operations due to the judgment management
must make in their application. These significant accounting policies are
outlined below.
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/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the 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. We record a provision
for estimated usage adjustments on rental contracts based upon historical
experience.
17
Support services contracts, which typically 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 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. We record a provision
for estimated usage adjustments on service contracts based upon historical
experience.
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 based upon a flat
periodic charge and/or estimated usage 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.
Inventory valuation
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.
Depreciation of rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated using the straight-line method over the estimated useful life of the
equipment. Copier equipment is depreciated over three years and facsimile
equipment placed in service before October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
Capitalized computer software costs
We capitalize certain costs of internally developed software. Capitalized
internal costs include purchased materials and services and payroll and payroll
related costs. Costs for general administration, overhead, maintenance and
training, as well as the cost of software that does not add functionality to the
existing system, are expensed as incurred. The cost of internally developed
software is amortized on a straight-line basis over appropriate periods,
principally three to seven years. The unamortized balance of internally
developed software is included in fixed assets in the consolidated balance
sheets.
Goodwill
We evaluate goodwill in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142. SFAS No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and certain intangibles are not amortized
into results of operations, but instead are reviewed periodically for impairment
with any resulting impairment charged to results of operations only in the
periods in which the recorded value of goodwill and intangibles is more than
their fair value. SFAS No.142 prescribes a two-step method for determining
goodwill impairment. In the first step, the implied fair value of the reporting
unit's goodwill is compared to the carrying amount of goodwill. If the carrying
amount of goodwill is greater than the implied fair value of goodwill, the
second step of the impairment test is required and the fair value of the
reporting unit's goodwill is determined by allocating the reporting unit's fair
value to all of the assets and liabilities in the same manner performed in a
purchase price allocation. The fair value of the goodwill is then compared to
its carrying amount to determine if there is goodwill impairment. We completed
our review of
18
goodwill in accordance with SFAS No. 142 effective October 1, 2003 and have
determined that our recorded goodwill is not impaired.
Deferred taxes on income
Income taxes are accounted for under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities based on the
estimated future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the periods the temporary differences are expected to be settled.
A valuation allowance is established, as needed, to reduce net deferred tax
assets to realizable value. A valuation allowance has not been established for
our deferred tax assets as we believe it is more likely than not, they will be
realized.
Financial instruments
We recognize all derivative financial instruments as assets and liabilities
and measure them at fair value. All derivative financial instruments were
designated and qualified as cash flow hedges and, accordingly, the effective
portions of changes in fair value of the derivative were recorded in other
comprehensive income and were recognized in the income statement when the hedged
item affected earnings.
Historically, we used interest rate swap agreements to manage and reduce
risk related to interest payments on our debt instruments. During the third
quarter of 2003, we revised our cash flow estimates and disposed of our two
interest rate swap agreements and as a result, reclassified the cumulative
change in the fair market value of the interest rate swap agreements from other
comprehensive income into interest expense.
OVERVIEW OF 2003 FINANCIAL RESULTS
Total revenue for 2003 decreased 1% to $622 million from 2002 revenue of
$630 million. Net income in 2003 was $20 million, or $1.19 per diluted common
share, compared with net income of $16 million, or $0.86 per diluted common
share in 2002.
REVENUES
The following table shows our revenue sources by product line for the
periods indicated.
Dollars in millions YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Copier/MFP product line $ 402 $ 375 $ 357
Facsimile product line 220 255 269
-------- -------- --------
Total revenue $ 622 $ 630 $ 626
======== ======== ========
The following table shows our revenue excluding Pitney Bowes of Canada Ltd.
("Pitney Bowes of Canada") and revenue from Pitney Bowes of Canada for the
periods indicated.
Dollars in millions YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- --------
Revenue excluding Pitney Bowes of Canada $ 593 $ 602 $ 620
Revenue from Pitney Bowes of Canada 29 28 6
-------- -------- --------
Total revenue $ 622 $ 630 $ 626
======== ======== ========
Sales to Pitney Bowes of Canada under a reseller arrangement are at margins
significantly below the margins on sales to our direct customers. Prior to the
Distribution, sales to Pitney Bowes of Canada were primarily accounted for as
intercompany transfers. We expect to maintain a reseller arrangement with Pitney
Bowes of Canada, however, we are unable to predict the future level of sales to
Pitney Bowes of Canada. We believe it is useful to analyze sales excluding sales
to Pitney Bowes of Canada in order to better evaluate the effectiveness of our
direct sales and marketing initiatives and our pricing policies.
19
The following table shows our revenue by geographic segment for the periods
indicated.
Dollars in millions YEAR ENDED DECEMBER 31,
2003 2002 2001
------------ ----------- ------------
United States $ 602 $ 608 $ 606
United Kingdom 20 22 20
------------ ----------- ------------
Total revenue $ 622 $ 630 $ 626
============ =========== ============
The following table shows our revenue and growth rates by revenue type and
product line for the periods indicated.
Dollars in millions YEAR ENDED DECEMBER 31,
2003 2002 2001
---------------------- --------------------- ------------------------
GROWTH GROWTH GROWTH
REVENUE RATE REVENUE RATE REVENUE RATE
------------- -------- ------------ ------- ------------ --------
Sales
Copier/MFP products $ 224 8% $ 207 4% $ 199 (2%)
Facsimile products 92 (15%) 108 (1%) 109 (10%)
------------- ------------ ------------
Total sales 316 - 315 2% 308 (5%)
Rentals
Copier/MFP products 101 7% 94 7% 88 9%
Facsimile products 121 (12%) 138 (8%) 149 (1%)
------------- ------------ ------------
Total rentals 222 (4%) 232 (2%) 237 2%
Support services
Copier/MFP products 76 4% 74 3% 72 (8%)
Facsimile products 8 (16%) 9 2% 9 (2%)
------------- ------------ ------------
Total support services 84 1% 83 3% 81 (7%)
------------- ------------ ------------
Total revenue $ 622 (1%) $ 630 1% $ 626 (3%)
============= ============ ============
20
RESULTS OF OPERATIONS
The following table shows our statement of operations 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 income tax rate.
AS A % OF TOTAL REVENUE, EXCEPT AS NOTED
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- -----------
Equipment sales 27% 25% 25%
Supplies sales 24% 25% 24%
---------- ---------- -----------
Total sales 51% 50% 49%
Equipment rentals 36% 37% 38%
Support services 13% 13% 13%
---------- ---------- -----------
Total revenue 100% 100% 100%
Cost of sales 31% 32% 31%
Cost of rentals 12% 13% 15%
Selling, service and administrative expenses 50% 50% 49%
---------- ---------- -----------
Operating income 7% 5% 5%
Interest expense 1% 1% 2%
---------- ---------- -----------
Income before income taxes 6% 4% 3%
Provision for income taxes 3% 2% 1%
---------- ---------- -----------
Net income 3% 2% 2%
========== ========== ===========
Cost of sales as a percentage of sales revenue 61.0% 63.0% 63.7%
========== ========== ===========
Cost of rentals as a percentage of rental revenue 32.5% 36.2% 38.8%
========== ========== ===========
Effective tax rate 43.1% 39.9% 40.1%
========== ========== ===========
We consider revenue from equipment rentals, supplies sales and support
services to be recurring because they typically are derived from equipment
rentals subject to multi-year contracts and from supplies sales and support
services, which are a natural consequence of the use of our installed base of
equipment. Although the initial term of our rental contracts are generally three
years, they typically provide a continuing stream of revenue resulting from
automatic renewal options or new rental contracts for replacement equipment.
Historically, our recurring revenue has consistently been in the range of
approximately 73% - 75% of total revenue. However, we cannot provide any
assurance that our recurring revenue will continue at these rates. We believe
this information is useful because it indicates our ability to generate a
consistent revenue base.
YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
Revenue. In 2003, total revenue of $622 million declined 1% from the prior
year total revenue of $630 million, primarily reflecting lower rental revenue,
partially offset by higher support services revenue.
Equipment and supplies sales revenue of $316 million increased slightly in
2003 from $315 million in 2002. Copier/MFP sales revenue increased 8% resulting
from increased placements in our mid-market digital black and white and color
copiers/MFPs as well as higher supplies sales. Facsimile sales revenue declined
15% due to lower equipment and supplies sales resulting from the anticipated
lower industry-wide facsimile usage.
Equipment rental revenue of $222 million declined 4% in 2003 from $232
million in 2002, reflecting the continued expected decline in facsimile rental
revenues, partially offset by an increase in copier/MFP rental revenues. Rental
revenue derived from our copier/MFP product line increased 7% reflecting
increases in page volumes and new placements in our 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/MFP 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.
21
Support services revenue, primarily derived from stand-alone service
contracts, increased 1% to $84 million in 2003 from $83 million in 2002,
reflecting a product mix shift toward higher-end copiers/MFPs, offset by lower
facsimile service revenue due to lower pricing.
Cost of sales. Cost of sales was $193 million in 2003 compared with $198
million in 2002 and as a percentage of sales revenue declined to 61.0% in 2003
from 63.0% in 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. The
provision to write our inventory down to net realizable value declined $8
million to $7 million in 2003 from $15 million in 2002.
Cost of rentals. Cost of rentals was $72 million in 2003 compared with $84
million in 2002 and as a percentage of rental revenue declined to 32.5% in 2003
from 36.2% in 2002. This decline resulted from 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 $313 million were 50.3% of total revenue in 2003
compared with $312 million or 49.5% of total revenue in 2002. Selling, service
and administrative expenses increased slightly over the prior year primarily
resulting from higher information technology and associated administrative
expenses related to maintaining legacy systems while incurring costs relating to
our enterprise resource planning ("ERP") project, partially offset by lower
employee compensation and benefit expenses and lower advertising.
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $17 million and $16
million for the years ended December 31, 2003 and 2002, respectively.
Field sales and service operating expenses are included in selling, service
and administrative expenses because no meaningful allocation of these expenses
to cost of sales, cost of rentals or cost of support services is practicable.
Interest expense. Interest expense was $8 million in 2003 and 2002.
Interest expense in 2003 included a loss of $2.8 million resulting from the
reclassification from accumulated other comprehensive loss related to the
disposition of our two interest rate swap agreements. Interest expense for 2002
included a loss of $0.4 million resulting from the prepayment of $8 million of
the Term Loan and associated unwinding of a portion of one of the interest rate
swap agreements. Excluding the impact of these losses, interest expense
decreased as a result of lower debt levels coupled with lower interest rates.
The weighted average interest rate was 5.8% for 2003 versus 7.1% for 2002. As of
December 31, 2003 we had no interest rate swap agreements outstanding.
Effective tax rate. Our effective tax rate was 43.1 % in 2003 compared with
39.9% in 2002 due to an increase in state and local income taxes, a change in
the estimate of the deductibility for tax purposes of certain expenses, and a
foreign deemed dividend net of foreign tax credits. Our future effective tax
rate will depend on our structure and tax strategies as well as any future
jurisdictional rate changes and could vary from our historical effective tax
rates.
YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Revenue. In 2002, total revenue of $630 million increased 1% over the prior
year total revenue of $626 million, reflecting higher sales and support services
revenue, partially offset by lower rental revenue. Revenue attributable to sales
to Pitney Bowes of Canada pursuant to the reseller agreement that became
effective upon the Distribution amounted to $28 million. Prior to the
Distribution, sales to Pitney Bowes of Canada were primarily accounted for as
intercompany transfers. Excluding the impact of sales to Pitney Bowes of Canada,
revenue declined 3% versus 2001. We believe the revenue comparison excluding
sales to Pitney Bowes of Canada eliminates any changes in revenue resulting from
the different accounting treatment of sales to Pitney Bowes of Canada in 2002
and reflects a more meaningful comparison of our revenue performance.
Equipment and supplies sales revenue of $315 million increased 2% in 2002
from $308 million in 2001. Excluding the impact of sales to Pitney Bowes of
Canada, sales revenue declined 5% compared with the prior year. Copier/MFP sales
revenue excluding Pitney Bowes of Canada declined 2% resulting from the
continued implementation of our strategy to shift the marketing focus of our
copier product line from sales to rentals. Facsimile sales revenue excluding
Pitney Bowes of Canada declined 10% due to lower equipment and supplies sales
resulting from lower facsimile equipment usage in the U.S. marketplace.
Equipment rental revenue of $232 million decreased 2% in 2002 from $237
million in 2001, reflecting a decline in facsimile rental revenue partially
offset by an increase in copier rental revenue resulting from a continuing
copier marketing focus on national accounts, which prefer a rental placement
strategy. Rental revenue derived from our copier product line increased 7%
reflecting growth in the overall installed rental population as well as the
impact of increased placements of our high-end copiers
22
and MFPs. Rental revenue from our facsimile product line decreased 8% versus the
prior year resulting from lower pricing and a lower installed base.
Support services revenue, primarily derived from stand-alone service
contracts, increased 3% to $83 million in 2002 from $81 million in 2001,
reflecting the combination of higher contract pricing associated with the
increased placement of high-end digital copier/MFP products in the United States
and increased facsimile placements in the United Kingdom.
Cost of sales. Cost of sales was $198 million in 2002 compared with $197
million in 2001 and as a percentage of sales revenue declined to 63.0% in 2002
from 64.4% in 2001. This decline resulted from lower product costs and lower
provision for obsolete inventory, partially offset by the impact of equipment
sales to Pitney Bowes of Canada under the reseller agreement and an increase in
the mix of copier equipment and MFPs, which have a higher cost of sales
percentage than facsimile sales. The provision to write our inventory down to
net realizable value declined $6 million to $15 million in 2002 from $21 million
in 2001.
Cost of rentals. Cost of rentals was $84 million in 2002 compared with $92
million in 2001 and as a percentage of rental revenue declined to 36.2% in 2002
from 38.8% in 2001. This decline resulted from the impact of our disciplined
focus on improving profit margins coupled with product cost improvements,
partially offset by an increase in the mix of copier and multifunctional 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 $312 million were 50% of total revenue in 2002
compared with $306 million or 49% of total revenue in 2001. Selling, service and
administrative expenses increased 2% over the prior year resulting from
increased finance and administration costs associated with becoming an
independent public company and advertising expenditures associated with our
brand awareness campaign, partially offset by the impact of fewer employees and
lower bad debt write-offs.
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $16 million for each of
the years ended December 31, 2002 and 2001.
Included in selling, service and administrative expenses in 2001 are
allocated amounts from Pitney Bowes, reflecting our share of overhead costs
related to shared selling, service and administrative expenses. Field sales and
service operating expenses are included in selling, service and administrative
expenses because no meaningful allocation of these expenses to cost of sales,
cost of rentals or cost of support services is practicable.
Interest expense. Interest expense decreased to $8 million in 2002 from $10
million in 2001, primarily as a result of lower debt levels. Interest expense
for 2002 included a loss of $0.4 million resulting from the prepayment of $8
million of the Term Loan and associated unwinding of a portion of one of the
interest rate swap agreements. Prior to the Distribution, we participated in
Pitney Bowes' centralized cash management program, which was used to finance our
operations. Interest expense for the first nine months of 2001 represented an
allocation from Pitney Bowes based upon the proportion of our net assets to
Pitney Bowes' net assets. The Pitney Bowes' weighted average borrowing rate was
approximately 6.7% in the first nine months of 2001. Interest expense for the
last three months of 2001, when we no longer participated in the Pitney Bowes
centralized cash management program, was $1.3 million. The weighted average
interest rate was 7.1% for 2002 and 6.3% for the last three months of 2001.
Effective tax rate. Our effective tax rate was 39.9% in 2002 compared with
40.1% in 2001. Prior to the Distribution, our income was included in the Pitney
Bowes consolidated income tax returns and our tax expense was calculated as if
Imagistics and Pitney Bowes filed separate income tax returns.
EXPANSION OF SALES AND SERVICE CAPABILITIES
During 2003, we acquired substantially all of the assets and business of
one independent dealer of copier and multifunctional equipment and related
support services and during 2001, we acquired substantially all of the assets
and business of one independent dealer of copier and multifunctional equipment
and related support services, to expand our geographic sales and service
capabilities. These acquisitions, individually or in the aggregate, were not
significant to our financial position or results of operations. These
acquisitions were accounted for using the purchase method of accounting. The
purchase price, including direct costs of the acquisitions, was allocated to
acquired assets and assumed liabilities. The excess of the purchase price over
the net tangible assets acquired was recorded as goodwill. The operating results
of these acquisitions are included in our financial statements from the dates of
the respective acquisitions.
23
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. The Credit Agreement allowed us to originally
repurchase up to $20 million of our stock and to make acquisitions up to an
aggregate consideration of $30 million. At December 31, 2003 and 2002, we were
in compliance with all of the financial covenants.
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% or 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 were 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 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 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.
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
24
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 December 31, 2003, $63 million of borrowings were outstanding under the
Credit Agreement, consisting of $10 million of borrowings under the Revolving
Credit Facility and $53 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $123 million. As of February 27, 2004,
$78 million of borrowings were outstanding under the Credit Agreement,
consisting of $25 million of borrowings under the Revolving Credit Facility and
$53 million of borrowings under the Term Loan and the borrowing base amounted to
approximately $123 million. Approximately $84 million of the Revolving Credit
Facility was available for borrowing at December 31, 2003 and approximately $69
million of the Revolving Credit Facility was available for borrowing at February
27, 2004. The Term Loan is payable in 12 consecutive equal quarterly
installments of $0.1 million due March 31, 2004 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 December 31, 2003, one irrevocable standby letter of credit in the
amount of $0.9 million was outstanding as security for our casualty insurance
program. There were no letters of credit outstanding at December 31, 2002 and
2001.
The ratio of current assets to current liabilities increased to 2.7 to 1 at
December 31, 2003 compared to 2.6 to 1 at December 31, 2002 due to an increase
in accounts receivable and a reduction in advance billings, partially offset by
decreases in cash and inventories and an increase in accounts payable. At
December 31, 2003, our total debt as a percentage of total capitalization
declined to 19.2% from 21.9% at December 31, 2002 due to debt repayments.
In October 2003, we began the implementation of Phase II of our ERP system,
consisting of order management, order fulfillment, billing, cash collection,
service management and sales compensation. As a result of this implementation,
we have experienced, as expected, certain temporary processing inefficiencies,
which have resulted in a short-term increase in our working capital
requirements, particularly accounts receivable, due to the standardization of
our billing practices and schedules across all product lines and the initial
temporary suspension in invoicing our customers during the conversion to our new
ERP system. We believe that the increase in accounts receivable is temporary and
that we will collect substantially all of the amounts billed to customers that
were temporarily suspended. However, if collection losses related to these
amounts are significantly higher than our historical experience, we would
recognize an increase in our provision for bad debt in the near future. In
addition, certain of the temporary processing inefficiencies have resulted in
delays in certain product shipments, service responsiveness and potential
inaccuracies in calculated sales compensation. These issues, coupled with
certain revisions to our billing practices, could have a negative impact on
customer service and satisfaction, which could result in a potential loss of
business. We are now engaged in a period of stabilization and clean up, as is
typical of a large ERP implementation and we anticipate this transition will be
completed during 2004. Although no assurance can be given that these efforts
will be successful in the time periods expected, other than the temporary
increase in working capital requirements, we do not anticipate that these issues
will have a material adverse effect on our financial position, results of
operations or future cash flows.
Our cash flows 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, together with borrowings under the Credit Agreement and possible
future sales of additional equity or debt securities.
Net cash provided by operating activities was $83 million, $158 million and
$148 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Net income was $20 million, $16 million and $13 million in 2003, 2002 and 2001,
respectively. Non-cash charges for depreciation and amortization and provisions
for bad debt and inventory obsolescence in the aggregate provided cash of $89
million, $102 million and $116 million for 2003, 2002 and 2001, respectively.
The provision for bad debt of $12 million in 2001 reflected an increase in the
rate of delinquencies. In 2003, the provision to write down excess and obsolete
inventory amounted to $7 million. In 2002 and 2001 the provision to write down
excess and obsolete inventory amounted to $15 million and $21 million,
respectively, to recognize the impact of the continuing market shift from analog
to digital equipment on the market value of our inventory. Changes in the
principal components of working capital required cash of $30 million in 2003 and
provided cash of $38 million and $21 million in 2002 and 2001, respectively.
Cash used to satisfy the
25
$30 million increase in our working capital requirements in 2003 included an
increase in accounts receivable of $29 million resulting from the planned
temporary suspension of invoicing our customers during the conversion to a new
invoicing system associated with the implementation of our ERP system, a
decrease in inventories of $12 million resulting from reduced inventory levels
and a reduction in advance billings of $11 million related to the rescheduling
of our facsimile product line billings to coincide with our copier/MFP billings
associated with our ERP implementation. Of the $38 million of cash provided by
working capital changes in 2002, approximately $17 million was due to improved
collection results. In addition, approximately $18 million resulted from the
accrual in our accounts of costs that had been included in amounts due to Pitney
Bowes prior to the Distribution and included $7 million in income taxes, $5
million in employee medical and benefit costs and $6 million of higher accrual
levels for administrative costs associated with becoming an independent public
company. In addition, approximately $3 million of the increase in accounts
payable and accrued liabilities in 2002 resulted from costs associated with the
ERP project.
We used $55 million, $67 million and $85 million in investing activities
for the years ended December 31, 2003, 2002 and 2001, respectively. Investment
in rental equipment assets totaled $35 million, $48 million and $66 million in
2003, 2002 and 2001, respectively. The lower level of rental equipment
expenditures in 2003 and 2002 results from product cost improvements and a
reduction in new facsimile rental equipment placements resulting from expected
continuing lower demand. Capital expenditures for property, plant and equipment
were $16 million, $19 million and $18 million in 2003, 2002 and 2001,
respectively, of which the investment in our ERP system accounted for $9
million, $10 million and $7 million, respectively. In 2003 and 2001, we acquired
independent dealers to expand our sales and service capabilities as described
above under "Expansion of Sales and Service Capabilities."
Cash used in financing activities was $36 million, $79 million and $47
million for the years ended December 31, 2003, 2002 and 2001, respectively. Cash
used in financing activities in 2003 reflects repayments under the Term Loan of
$21 million partially offset by net borrowings under the Revolving Credit
Facility of $10 million. Cash used in financing activities in 2002 reflects
repayments of $17 million under the Revolving Credit Facility and $26 million
under the Term Loan. In 2001, cash used in financing activities reflects
advances to Pitney Bowes offset by increases in amounts due to Pitney Bowes for
corporate allocations and other intercompany charges, as well as borrowings of
$100 million under the Term Loan and net borrowings of $17 million under the
Revolving Credit Facility. In 2001, we used borrowings under the Term Loan and
Revolving Credit Facility to repay amounts due to Pitney Bowes and to pay a
dividend to Pitney Bowes. Cash used in financing activities in 2003 and 2002
reflects the repurchase of 1.3 million shares of our stock at a cost of $28
million and 1.9 million shares at a cost of $37 million, 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
December 31, 2003, we have accumulated approximately 3.2 million shares of
treasury stock at a cost of approximately $65 million. Currently, we intend to
continue repurchasing our stock.
The following table depicts our future payments under material contractual
obligations as of December 31, 2003:
DOLLARS IN MILLIONS PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS
----------- --------- ---------- ---------- ----------
Long-term debt $ 63 $ 1 $ 62 $ - $ -
Operating leases 37 11 22 4 -
Long-term debt payments are related to the Credit Agreement. Payments under
operating leases relate to the lease and sub-lease of properties including sales
and service offices under long-term lease agreements with initial terms
extending from two to fifteen years as described in "Properties" located in Part
I, Item 2 of this 2003 Annual Report on Form 10-K.
We have 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 do not have any capital leases
or off-balance sheet arrangements to finance our business.
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 $12 million during the first
half of 2004 to continue to enhance our information systems infrastructure and
implement our ERP system.
26
In connection with the Distribution, we entered into certain agreements
pursuant to which we may be obligated to indemnify Pitney Bowes with respect to
certain matters.
We agreed to assume all liabilities associated with our business, and to
indemnify Pitney Bowes for all claims relating to our business. These may be
claims by or against Pitney Bowes or us 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.
We and Pitney Bowes entered into a tax separation agreement, which governs
our 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 obligated us
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 us to indemnify Pitney Bowes and affiliates to the extent that any
action we take or fail to take gives rise to a tax liability with respect to the
Distribution.
In each of these circumstances, payment by us 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 December 31, 2003, we had not paid
any material amounts to Pitney Bowes pursuant to the above indemnifications.
However, we have paid amounts to defend and resolve claims and litigation
related to our business that we assumed as part of the Spin-off. We believe that
if we were to incur a loss in any of these matters, such loss would not have a
material effect on our financial position, results of operations or 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 networked, 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.
The proliferation of e-mail, multifunctional products and other
technologies in the workplace has led to a reduction in the use of traditional
copiers and facsimile machines. We must be able to continue to obtain products
with the appropriate technological advancements in order to remain successful.
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, many
of whom are substantially larger and possess greater financial resources. 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, our primary
suppliers sell products in competition with us, either directly or through
dealer channels. Three 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
outbreaks such as 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.
27
We have a geographic dispersion of business and assets located across the
United States comprised of our sales, service and distribution facilities.
Changes in international, national or political conditions, including terrorist
attacks could impact the sales, service and distribution of our products to our
customers and could have an adverse effect on our business.
Inflation
Inflation, although moderate in recent years, continues to affect worldwide
economies and the ways companies operate. Although the cost of copier, facsimile
and multifunctional equipment has been declining for the last two years,
inflation increases labor costs and operating expenses and may, in the future,
raise costs associated with replacement of fixed assets such as rental
equipment. Industry-wide pricing pressures have negatively impacted our profit
margins, but we have generally been able to partially offset declining profit
margins through productivity and efficiency improvements and control of
operating expense levels.
Foreign currency
A portion of our international business is transacted in local currency. In
2003 and 2002, approximately 20% of our total product purchases, based on costs,
were denominated in yen and in 2001, approximately 68% of our total product
purchases, based on costs, were denominated in yen. Our margins were negatively
impacted in 2003 and 2002 because the strong Japanese yen resulted in higher
product costs on yen denominated purchases from our Japanese vendors. Our
margins were positively impacted in 2001 as the weak Japanese yen resulted in
lower product costs on yen denominated purchases from our Japanese vendors. In
2003 and 2002, the value of the yen increased approximately 9% and 8% against
the U.S. dollar, respectively, while in 2001, the value of the yen declined
approximately 12% against the U.S. dollar. 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
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. Pitney Bowes has no
further obligation to provide assistance to us.
In October 2003, we began the implementation of Phase II of our ERP system,
consisting of order management, order fulfillment, billing, cash collection,
service management and sales compensation, 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, which have resulted in a short-term
increase in our working capital requirements, particularly accounts receivable,
due to the standardization of our billing practices and schedules across all
product lines and the initial temporary suspension in invoicing our customers
during the conversion to our new ERP system. We believe that the increase in
accounts receivable is temporary and that we will collect substantially all of
the amounts billed to customers that were temporarily suspended. However, if
collection losses related to these amounts are significantly higher than our
historical experience, we would recognize an increase in our provision for bad
debt in the near future. In addition, certain of the temporary processing
inefficiencies have resulted in delays in certain product shipments, service
responsiveness and potential inaccuracies in calculated sales compensation.
These issues, coupled with certain revisions to our billing practices, could
have a negative impact on customer service and satisfaction, which could result
in a potential loss of business. We are now engaged in a period of stabilization
and clean up, as is typical of a large ERP implementation and we anticipate this
transition will be completed during 2004. Although no assurance can be given
that these efforts will be successful in the time periods expected, other than
the temporary increase in working capital requirements, we do not anticipate
that these issues will have a material adverse effect on our financial position,
results of operations or future cash flows.
Pitney Bowes has been and is expected to continue to be a significant
customer. Revenues from Pitney Bowes, exclusive of equipment sales to PBCC for
lease to the end user, accounted for approximately 9% of our total revenue in
both 2003 and 2002 and 4% of our total revenue in 2001. 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 allowed us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. In
28
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. Effective December 2003, we are no longer using the Pitney Bowes
brand name and all new products are introduced under the Imagistics 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 now that we can no longer use the Pitney Bowes brand name.
LEGAL MATTERS
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 course of normal business, Pitney Bowes has
been party to occasional lawsuits relating to our business. These may involve
litigation by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
intellectual property or patent rights, equipment, service or payment disputes
with customers and disputes with employees.
In connection with the Distribution, liabilities were transferred to us for
matters where Pitney Bowes was a plaintiff or a defendant in lawsuits, relating
to our business or products. 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,
would have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
ENVIRONMENTAL MATTERS
We are subject to Federal, state and local laws intended to protect the
environment. We believe that, as a general matter, our policies, practices and
procedures are properly designed to reasonably prevent the risk of environmental
damage and financial liability to our Company.
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 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 to the customer on a stand-alone basis, (b) there
is objective and reliable evidence of fair value of the undelivered element 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.
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.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is set forth under the headings
"Liquidity and Capital Resources" and "Risk Factors That Could Cause Results to
Vary" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 herein.
INTEREST RATE RISK
We have certain exposures to market risk related to changes in interest
rates. 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 and currently do not utilize any
form of derivative financial instruments to manage our interest rate risk.
FOREIGN CURRENCY EXCHANGE RISK
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. In addition, we are exposed to foreign exchange rate fluctuations with
respect to the British Pound as the financial results of our U.K. subsidiary are
translated into U.S. dollars for consolidation. The effect of foreign exchange
rate fluctuation for the year ended December 31, 2003 was not material.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.............................................. 32
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001........................................................ 33
Consolidated Balance Sheets as of December 31, 2003 and 2002................ 34
Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
Income (Loss) for the years ended December 31, 2003, 2002, and 2001........ 35
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001........................................................ 36
Notes to Consolidated Financial Statements.................................. 37
31
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF IMAGISTICS INTERNATIONAL INC.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and comprehensive income (loss) and of cash flows present fairly, in all
material respects, the financial position of Imagistics International Inc. and
its subsidiary (the "Company") at December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the Consolidated Financial Statements, the
Company adopted Financial Accounting Standards Board Statement No 142, "Goodwill
and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
February 19, 2004
32
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
------------- ------------- -------------
Revenue:
Sales $ 316,002 $ 314,899 $ 307,929
Rentals 222,183 232,228 237,449
Support services 84,011 82,803 80,698
------------- ------------- -------------
Total revenue 622,196 629,930 626,076
Cost of sales 192,772 198,437 197,300
Cost of rentals 72,254 84,114 92,191
Selling, service and
administrative expenses 312,759 311,924 305,799
------------- ------------- -------------
Operating income 44,411 35,455 30,786
Interest expense 8,437 8,106 9,825
------------- ------------- -------------
Income before income taxes 35,974 27,349 20,961
Provision for income taxes 15,515 10,906 8,402
------------- ------------- -------------
Net income $ 20,459 $ 16,443 $ 12,559
============= ============= =============
Earnings per share:
Basic $ 1.22 $ 0.88 $ 0.65
============= ============= =============
Diluted $ 1.19 $ 0.86 $ 0.65
============= ============= =============
Shares used in computing
earnings per share:
Basic 16,710,686 18,631,895 19,463,007
============= ============= =============
Diluted 17,230,261 19,134,158 19,479,899
============= ============= =============
See Notes to Consolidated Financial Statements
33
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash $ 22,938 $ 31,325
Accounts receivable, less allowances of $10,575 and $5,792 at
December 31, 2003 and 2002, respectively 107,690 84,142
Accrued billings 20,862 22,457
Inventories 86,134 100,538
Current deferred taxes on income 24,191 20,518
Other current assets and prepaid expenses 4,806 5,173
------------ ------------
Total current assets 266,621 264,153
Property, plant and equipment, net 53,204 43,812
Rental equipment, net 67,179 93,897
Goodwill, net 55,447 52,600
Other assets 4,281 6,776
------------ ------------
Total assets $ 446,732 $ 461,238
============ ============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 545 $ 749
Accounts payable and accrued liabilities 79,291 73,922
Advance billings 16,323 27,243
------------ ------------
Total current liabilities 96,159 101,914
Long-term debt 62,903 73,399
Deferred taxes on income 17,919 15,320
Other liabilities 2,350 6,358
------------ ------------
Total liabilities 179,331 196,991
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock ($1.00 par value; 10,000,000 shares authorized, none issued) - -
Common stock ($0.01 par value; 150,000,000 shares authorized, 19,871,061
and 19,813,517 issued at December 31, 2003 and 2002, respectively) 199 198
Additional paid in capital 295,176 294,370
Retained earnings 34,981 14,522
Treasury stock, at cost (3,096,878 and 1,936,760 shares at December 31, 2003
and 2002, respectively)
(62,783) (36,549)
Unearned compensation (1,934) (3,217)
Accumulated other comprehensive income (loss) 1,762 (5,077)
------------ ------------
Total stockholders' equity 267,401 264,247
------------ ------------
Total liabilities and stockholders' equity $ 446,732 $ 461,238
============ ============
See Notes to Consolidated Financial Statements
34
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN THOUSANDS)
ADDITIONAL ACCUMULATED
COMMON STOCK PAID RETAINED TREASURY STOCK OWNER'S OTHER
-------------------- IN EARNINGS --------------- UNEARNED NET COMPREHENSIVE COMPREHENSIVE
SHARES PAR VALUE CAPITAL (DEFICIT) SHARES COST COMPENSATION INVESTMENT INCOME INCOME (LOSS)
------ --------- ------- --------- ------ ---- ------------ ---------- ------ -------------
BALANCE AT
JANUARY 1, 2001 - $ - $ - $ - - $ - $ - $ 312,751 $ (2,723)
Net income (1,921) 14,480 $ 12,559
Net advances
to Pitney Bowes (37,519)
Translation
adjustment 70 70
Unrealized gain on
cash flow hedges 301 301
Recapitalization
upon Distribution 19,463,007 195 289,517 (289,712)
---------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2001 19,463,007 195 289,517 (1,921) - $ 12,930 (2,352)
=========
Net income 16,443 $ 16,443
Translation
adjustment 1,285 1,285
Unrealized loss
on cash flow hedges (4,010) (4,010)
Issuance of
restricted stock
under stock plans 347,000 3 4,823 (4,826)
Exercise of stock
options 3,510 30
Purchase of
treasury stock 1,936,760 (36,549)
Amortization of
unearned
compensation 1,609
---------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2002 19,813,517 198 294,370 14,522 1,936,760 (36,549) (3,217) - $ 13,718 (5,077)
=========
Net income 20,459 $ 20,459
Translation
adjustment 3,130 3,130
Reclassification
of realized loss
on cash flow hedges
included in
net income 3,709 3,709
Issuance of
restricted stock
under stock plans 12,700 313 (375)
Exercise of stock
options 44,844 1 595
Issuance of stock
under employee stock
purchase plan (102) (109,782) 2,135
Purchase of
treasury stock 1,269,900 (28,369)
Amortization of
unearned
compensation 1,658
---------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2003 19,871,061 $ 199 $295,176 $34,981 3,096,878 $(62,783) $(1,934) $ - $ 27,298 $ 1,762
===============================================================================================================
See Notes to Consolidated Financial Statements
35
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 20,459 $ 16,443 $ 12,559
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74,513 81,593 82,725
Provision for bad debt 6,656 4,886 12,089
Provision for inventory obsolescence 7,491 15,153 20,956
Deferred taxes on income (923) 467 3,216
Change in assets and liabilities, net of acquisitions:
Accounts receivable (29,474) 16,886 (2,818)
Accrued billings 1,596 (981) (3,335)
Inventories 12,479 2,850 5,074
Other current assets and prepaid expenses 392 (1,198) (2,186)
Accounts payable and accrued liabilities (3,494) 22,819 24,946
Advance billings (11,132) (2,133) (404)
Other, net 4,479 1,666 (5,009)
------------- ------------- -------------
Net cash provided by operating activities 83,042 158,451 147,813
Cash flows from investing activities:
Expenditures for rental equipment assets (34,854) (48,062) (65,936)
Expenditures for property, plant and equipment (16,100) (18,537) (18,411)
Acquisitions, net of cash acquired (4,139) - (676)
------------- ------------- -------------
Net cash used in investing activities (55,093) (66,599) (85,023)
Cash flows from financing activities:
Due to Pitney Bowes - - (122,182)
Advances to Pitney Bowes - - (37,519)
Exercises of stock options, including purchases
under employee stock purchase plan 2,732 30 -
Purchases of treasury stock (28,369) (36,549) -
(Repayments) borrowings under term loan (20,699) (25,852) 100,000
Net borrowings (repayments) under revolving credit facility 10,000 (17,000) 17,000
Payments of financing fees
- - (4,345)
------------- ------------- -------------
Net cash used in financing activities (36,336) (79,371) (47,046)
------------- ------------- -------------
(Decrease) increase in cash (8,387) 12,481 15,744
Cash at beginning of period 31,325 18,844 3,100
------------- ------------- -------------
Cash at end of period $ 22,938 $ 31,325 $ 18,844
============= ============= =============
See Notes to Consolidated Financial Statements
36
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT AS OTHERWISE INDICATED)
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 United States and
United Kingdom office systems businesses to its stockholders as an independent
publicly traded company. On December 3, 2001, Imagistics was spun off from
Pitney Bowes pursuant to a contribution by Pitney Bowes of substantially all of
its United States and United Kingdom office systems businesses to the Company
and a distribution of the stock of the Company to stockholders of Pitney Bowes
based on a distribution ratio of 1 share of Imagistics common stock for every
12.5 shares of Pitney Bowes common stock held at the close of business on
November 19, 2001 (the "Distribution").
The Company was incorporated in Delaware on February 28, 2001 as Pitney
Bowes Office Systems, Inc., a wholly owned subsidiary of Pitney Bowes. On that
date, 100 shares of the Company's common stock, par value $0.01 per share, were
authorized, issued and outstanding. On October 12, 2001, the Company changed its
name to Imagistics International Inc. 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 $0.01
per share. The Company issued 19,463,007 shares of common stock in connection
with the Distribution described above.
Pitney Bowes has received tax rulings 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 consolidated financial statements as of and for the years ended
December 31, 2003 and 2002 depict Imagistics' results as a stand-alone company.
The consolidated financial statements as of and for the year ended December 31,
2001 include certain historical assets, liabilities and related operations of
the United States and United Kingdom office systems businesses, which were
contributed to the Company from Pitney Bowes prior to the Distribution.
Accordingly, the consolidated financial statements prior to December 3, 2001
were derived from the financial statements and accounting records of Pitney
Bowes using the historical results of operations and historical basis of assets
and liabilities of the United States and United Kingdom office systems
businesses. Prior to the formation of the Company, the office systems business
was operated as a division of Pitney Bowes, and, as such, Pitney Bowes'
investment in the Company is shown in lieu of stockholders' equity in the
consolidated financial statements for periods prior to the Distribution. The
Company began accumulating retained earnings on December 3, 2001, the date of
the Distribution. Management believes the assumptions underlying the
consolidated financial statements for the year ended December 31, 2001 are
reasonable. However, the consolidated financial statements included herein may
not necessarily reflect the Company's financial position, results of operations
and cash flows in the future or what its financial position, results of
operations and cash flows would have been prior to the Distribution had the
Company operated as a stand-alone entity during those periods.
The consolidated financial statements of the Company for the period through
the Distribution include allocations of certain Pitney Bowes' corporate
expenses. Corporate expense allocations have been primarily charged based on the
ratio of the Company's costs and expenses to Pitney Bowes' costs and expenses.
The Company's allocated expenses primarily include administrative expenses such
as accounting services, real estate costs, customer service support in remote
geographic areas and information technology and amounted to $24.8 million for
the period from January 1, 2001 through the Distribution. The Company's
management believes the amount of these services were a reasonable
representation of the services provided or benefits received by the Company.
Prior to the Distribution, the Company participated in Pitney Bowes'
centralized cash management program, which was used to finance the Company's
operations. Cash deposits from the Company were transferred to Pitney Bowes on a
regular basis and
37
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
were netted against the due to Pitney Bowes account. As a result, none of Pitney
Bowes' cash, cash equivalents or debt at the corporate level had been allocated
to the Company in the consolidated financial statements for periods prior to the
Distribution. Cash in the consolidated financial statements during these periods
represents amounts held locally by the Company's operations in remote geographic
areas and funds unavailable for transfer to Pitney Bowes.
The Company's consolidated financial statements for the period through the
Distribution included interest expense allocated to the Company based on a
relationship between the Company's net assets and Pitney Bowes' net assets.
Interest expense allocated from Pitney Bowes totaled $8.5 million for the period
from January 1, 2001 through the Distribution. The weighted average interest
rate was 6.70% for the period from January 1, 2001 through the Distribution. The
Company believes these were reasonable estimates of the cost of financing the
Company's assets and operations in the past. However, the net asset balances
used to calculate interest expense and the interest rates associated with
obligations to Pitney Bowes are not necessarily representative of the levels the
Company experiences as a stand-alone entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the United
States and United Kingdom operations of the Company. All significant
transactions between the United States and the United Kingdom operations have
been eliminated. Transactions between the Company and Pitney Bowes are included
in these consolidated financial statements and not eliminated.
Use of estimates
The preparation of consolidated 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 reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates include
assessing the allocation of costs from Pitney Bowes, usage of equipment for
rental assets billed in arrears, sales returns, usage adjustments and other
allowances for equipment sales, equipment rentals and service contract billings,
the collectibility of accounts receivable, the use and recoverability of
inventory, the useful lives of tangible assets, the realization of deferred
taxes and an evaluation of the potential impairment, if any, of goodwill and
other long-lived assets, among others. The markets for the Company's products
are characterized by intense competition, rapid technological development and
pricing pressures, all of which could affect the future realizability of the
Company's assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary. Actual results could differ from
those 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/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the 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.
Rental contracts, which typically 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. The Company records a
provision for estimated usage adjustments on rental contracts based upon
historical experience.
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
38
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
earned, either using the straight-line method or based upon usage, as
applicable. The Company records a provision for estimated usage adjustments on
service contracts based upon historical experience.
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 based upon a flat
periodic charge and/or estimated usage 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.
Shipping and handling fees and costs
The Company records shipping and handling costs as part of cost of sales,
as these costs are generally absorbed by the Company. Any amounts billed to a
customer for reimbursement of shipping and handling costs are included in
revenue.
Costs and expenses
Inbound freight charges are included in inventory. When the inventory is
sold, the cost of the inventory, including the inbound freight charges, is
relieved and charged to cost of sales. When the inventory is rented, the cost of
the inventory, including the inbound freight charges, is relieved and
transferred to the rental equipment asset account. The cost of the rental
equipment asset is then depreciated over the estimated useful life of the
equipment. The depreciation of rental equipment assets is included in cost of
rentals.
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $17.1 million, $16.3
million and $15.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Field sales and service operating expenses are included in selling, service
and administrative expenses because no meaningful allocation of these expenses
to cost of sales, cost of rentals or cost of support services is practicable.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that the Company believes are
uncollectible. The Company's estimate of losses is based on prior collection
experience including evaluating the credit worthiness of each of its customers,
analyzing historical bad debt write-offs and reviewing the aging of the
receivables. The allowance for doubtful accounts includes amounts for specific
accounts that the Company believes 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.
Inventory valuation
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out ("FIFO") method for inventory valuation. Provisions,
when required, are made to reduce excess and obsolete inventories to the
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 demand. As further
39
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
described in Note 4, the Company changed its method of accounting for the cost
of inventory from the last-in, first-out ("LIFO") method to the FIFO method in
2001.
Fixed assets and depreciation
Property, plant and equipment are stated at cost and depreciated
principally using the straight-line method over appropriate periods, buildings
at fifty years, machinery and equipment principally three to fifteen years and
computers principally three to seven years. Major improvements that add to
productive capacity or extend the life of an asset are capitalized while repairs
and maintenance are charged to expense as incurred. Rental equipment is
comprised of equipment on rent to customers and is depreciated using the
straight-line method over the estimated useful life of the equipment. Copier
equipment is depreciated over three years and facsimile equipment placed in
service before October 1, 2003 is depreciated over five years. Facsimile
equipment placed in service on or after October 1, 2003 is depreciated over
three years.
Capitalized computer software costs
The Company capitalizes certain costs of internally developed software.
Capitalized internal costs include purchased materials and services and payroll
and payroll related costs. Costs for general administration, overhead,
maintenance and training, as well as the cost of software that does not add
functionality to the existing system, are expensed as incurred. The capitalized
cost of internally developed software is amortized on a straight-line basis over
appropriate periods, principally three to seven years. The unamortized balance
of internally developed software is included in fixed assets in the consolidated
balance sheets.
Goodwill
Effective January 1, 2002, the Company accounts for goodwill in accordance
with Statement of Financial Accounting Standards ("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 as well as on an interim basis if
events or changes in circumstances indicate that goodwill might be impaired. The
Company performed its annual test for impairment as of October 1, 2003 using the
discounted cash flow valuation method. There was no impairment to the value of
the Company's recorded goodwill for the year ended December 31, 2003.
Impairment of long-lived assets
The carrying value of long-lived assets, including property and equipment,
rental equipment, and capitalized computer software costs, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. If such a change in circumstances
occurs, the related estimated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are compared to the
carrying amount. If the sum of the expected cash flows is less than the carrying
amount, the Company would record an impairment loss. The impairment loss would
be measured as the amount by which the carrying amount exceeds the fair value of
the asset. There was no impairment of long-lived assets recorded for the years
ended December 31, 2003, 2002 and 2001.
Income taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized based on the
estimated future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the periods the temporary differences are expected to be settled.
A valuation allowance is established, as needed, to reduce net deferred tax
assets to realizable value. A valuation allowance has not been established for
the Company's deferred tax assets as the Company believes it is more likely than
not, they will be realized. Prior to the Distribution, the Company's operations
were included in Pitney Bowes' consolidated income tax returns and income taxes
were calculated as if the Company filed separate income tax returns.
Research and development
The Company did not incur any significant research and development costs in
2003. Historically, research and development activities, if any, were limited to
identifying new technology to enhance the operating efficiency of the Company's
products. Research and development costs, which are expensed as incurred,
consist mainly of salaries and consulting expenditures relating to customized
solutions for document imaging products. Research and development costs, which
are included in selling, service
40
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and administrative expenses in the consolidated statements of income, were
approximately $0.4 million in each of the years ended December 31, 2002 and
2001.
Foreign exchange
Assets and liabilities of the Company's United Kingdom operations are
translated at rates in effect at the end of the period, and revenues and
expenses are translated at average rates during the period. Cumulative
translation gains and losses are included in accumulated other comprehensive
income (loss) in stockholders' equity. Gains and losses resulting from foreign
currency transactions (transactions denominated in a currency other than the
entity's functional currency) are included in the consolidated statements of
operations.
Reclassifications
Certain previously reported amounts have been reclassified to conform to
the current year presentation.
Financial instruments
The Company recognizes all derivative financial instruments as assets and
liabilities and measures them at fair value. All derivative financial
instruments were designated and qualified as cash flow hedges and, accordingly,
the effective portions of changes in fair value of the derivative financial
instruments were recorded in other comprehensive income (loss) and were
recognized in the statement of operations when the hedged item affected
earnings.
Historically, the Company used interest rate swap agreements to manage and
reduce risk related to interest payments on its debt instruments. During the
third quarter of 2003, the Company revised its cash flow estimates and disposed
of its interest rate swap agreements and as a result, reclassified the
cumulative change in the fair market value of the interest rate swap agreements
from other comprehensive income (loss) into interest expense.
The Company monitors the creditworthiness of its financial institutions,
including depositories, on a periodic basis. The carrying amount of investments
held at financial institutions approximates fair market value because of the
short maturity of these instruments.
Comprehensive income (loss)
Comprehensive income (loss) is recorded directly to a separate section of
stockholders' equity and includes unrealized gains and losses excluded from the
consolidated statement of operations. These unrealized gains and losses consist
of foreign currency translation adjustments and unrealized gains and losses on
cash flow hedges.
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, had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
Prior to the Distribution, the Company's employees participated in Pitney
Bowes' United States and United Kingdom stock option plans. The 2001 stock
compensation expense was an allocation from Pitney Bowes based upon the
participation of the Company's employees in relation to total participation.
41
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to stock-based employee compensation:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- ----------
Net income, as reported $ 20,459 $ 16,443 $ 12,559
Compensation expense based on the
fair value method, net of
related tax effects 2,316 1,789 3,524
---------- ---------- ----------
Pro forma net income $ 18,143 $ 14,654 $ 9,035
========== ========== ==========
Basic earnings per share:
As reported $ 1.22 $ 0.88 $ 0.65
Pro forma $ 1.09 $ 0.79 $ 0.46
Diluted earnings per share:
As reported $ 1.19 $ 0.86 $ 0.65
Pro forma $ 1.05 $ 0.77 $ 0.46
The fair value of stock options granted to employees of the Company in 2003
and 2002 under the 2001 Stock Plan was estimated on the date of grant using the
Black-Scholes option-pricing method. The option-pricing assumptions for 2001 are
the assumptions used by Pitney Bowes in the determination of stock compensation
expense. The assumptions used are as follows:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- ----------
Expected stock price volatility 35% 43% 29%
Risk-free interest rate 4% 4% 4%
Expected life (years) 5 5 5
Expected dividend yield 0% 0% 3%
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 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 to the customer on a stand-alone basis, (b) there
is objective and reliable evidence of fair value of the undelivered element 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.
42
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
3. GOODWILL AND GOODWILL AMORTIZATION
The Company accounts for goodwill in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets." In accordance with SFAS No. 142, the Company
completed its annual reviews of goodwill for impairment as of October 1, 2003
and 2002, and, based on these reviews, has determined that its recorded goodwill
was not impaired. Accordingly, for the years ended December 31, 2003 and 2002,
there was no goodwill amortization or goodwill impairment. For the year ended
December 31, 2001, goodwill amortization amounted to $1.4 million.
The following table depicts the Company's net income and earnings per share
adjusted for the impact of goodwill amortization during the reported periods:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- ---------- ----------
Reported net income $ 20,459 $ 16,443 $ 12,559
Add back: Goodwill amortization - - 1,427
---------- ---------- ----------
Adjusted net income $ 20,459 $ 16,443 $ 13,986
========== ========== ==========
Basic earnings per share:
Reported net income $ 1.22 $ 0.88 $ 0.65
Add back: Goodwill amortization - - 0.07
---------- ---------- ----------
Adjusted net income $ 1.22 $ 0.88 $ 0.72
========== ========== ==========
Diluted earnings per share:
Reported net income $ 1.19 $ 0.86 $ 0.65
Add back: Goodwill amortization - - 0.07
---------- ---------- ----------
Adjusted net income $ 1.19 $ 0.86 $ 0.72
========== ========== ==========
The carrying value of goodwill as of December 31, 2003 increased $2.8
million as a result of the Company's 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 (see Note 15). There was no change in the carrying
value of goodwill as of December 31, 2002. The carrying value of goodwill of
$55.4 million and $52.6 million at December 31, 2003 and 2002, respectively, is
attributable to the United States geographic segment.
4. SUPPLEMENTAL INFORMATION
Inventories
On December 31, 2001 the Company changed its method of accounting for the
cost of inventory from the LIFO method to the FIFO method. The Company believes
the FIFO method is preferable because it results in a more appropriate inventory
valuation in an environment of declining costs, it provides more meaningful
financial information to management and stockholders by better matching current
costs with current revenues and it facilitates comparison with the Company's
competitors who primarily use the FIFO or average cost methods. In accordance
with APB No. 20, "Accounting Changes", this change in accounting method has been
applied retroactively by restating the prior years financial statements. The
effect of the change was to decrease net income by $1.6 million and earnings per
share by $0.07 in 2001.
43
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Inventories consisted of the following at December 31, 2003 and 2002:
DECEMBER 31,
2003 2002
--------- ---------
Finished products $ 50,726 $ 63,368
Supplies and service parts 35,408 37,170
--------- ---------
Total inventories $ 86,134 $100,538
========= =========
Fixed assets
Fixed assets consisted of the following at December 31, 2003 and 2002:
DECEMBER 31,
2003 2002
--------- ---------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 10,976 10,088
Machinery and equipment 23,474 21,372
Computers and software 47,356 36,483
--------- ---------
Property, plant and equipment, gross 83,162 69,299
Accumulated depreciation and amortization (29,958) (25,487)
--------- ---------
Property, plant and equipment, net $ 53,204 $ 43,812
========= =========
Rental equipment, gross $333,563 $365,793
Accumulated depreciation (266,384) (271,896)
--------- ---------
Rental equipment, net $ 67,179 $ 93,897
========= =========
Depreciation and amortization expense was $74.5 million, $81.6 million and
$82.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Unamortized capitalized software costs totaled $27.0 million,
$19.6 million and $6.5 million at December 31, 2003, 2002 and 2001,
respectively. Amortization expense on account of capitalized software totaled
$1.6 million and $0.7 million at December 31, 2003 and 2002, respectively. There
was no amortization expense on account of capitalized software for the year
ended December 31, 2001.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
December 31, 2003 and 2002:
DECEMBER 31,
2003 2002
--------- ---------
Accounts payable $ 33,237 $ 21,553
Accrued salaries, wages and commissions 8,321 8,631
Other non-income taxes payable 6,626 6,973
Other accrued liabilities 31,107 36,765
--------- ---------
Accounts payable and accrued
liabilities $ 79,291 $ 73,922
========= =========
Cash flow information
Cash paid for income taxes was $15.6 million, $5.6 million and $9.0 million
for the years ended December 31, 2003, 2002 and 2001, respectively. Cash paid
for interest was $8.0 million, $7.8 million and $9.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
44
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table provides details of the Company's acquisitions for the
years ended December 31, 2003, 2002 and 2001:
DECEMBER 31,
2003 2002 2001
---------- --------- ---------
Fair value of assets, excluding Goodwill $ 2,591 $ - $ 463
Goodwill 2,847 - 561
Liabilities 1,297 - 348
---------- --------- ---------
Cash paid 4,141 - 676
Less cash acquired 2 - -
---------- --------- ---------
Acquisitions, net of cash acquired $ 4,139 $ - $ 676
========== ========= =========
5. BUSINESS SEGMENT INFORMATION
Geographic 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.
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- --------- ---------
Revenues:
United States $602,167 $608,291 $605,711
United Kingdom 20,029 21,639 20,365
---------- --------- ---------
Total revenues $622,196 $629,930 $626,076
========== ========= =========
Income before income taxes:
United States $ 32,953 $ 24,524 $ 22,740
United Kingdom 3,021 2,825 (1,779)
---------- --------- ---------
Total income before taxes $ 35,974 $ 27,349 $ 20,961
========== ========= =========
Revenues from Pitney Bowes consisted of the following for the years ended
December 31, 2003, 2002 and 2001:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- --------- ---------
Revenues from Pitney Bowes:
Pitney Bowes of Canada $ 28,920 $ 27,843 $ 5,795
Other subsidiaries of Pitney Bowes 27,683 31,055 20,305
---------- --------- ---------
Sub-total 56,603 58,898 26,100
Pitney Bowes Credit Corporation 87,620 84,753 96,800
---------- --------- ---------
Total $ 144,223 $ 143,651 $ 122,900
========== ========= =========
Revenues from external customers were approximately $478.0 million, $486.3
million and $503.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Revenues from Pitney Bowes, substantially all of which were
generated in the United States segment, were approximately $144.2 million,
$143.6 million and $122.9 million during the years ended 2003, 2002 and 2001,
respectively. 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
represents 10% or
45
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
more of the Company's revenues. In connection with these revenues, the Company
recorded $24.3 million and $12.2 million due from Pitney Bowes as accounts
receivable in the consolidated balance sheets at December 31, 2003 and 2002,
respectively.
The following tables show identifiable long-lived assets and total assets
for each reportable segment at December 31, 2003 and 2002:
DECEMBER 31,
2003 2002
--------- ---------
Identifiable long-lived assets
United States $ 176,157 $ 192,774
United Kingdom 3,954 4,311
--------- ---------
Total identifiable long-lived
assets $ 180,111 $ 197,085
========= =========
Total assets
United States $ 417,704 $ 436,840
United Kingdom 29,028 24,398
--------- ---------
Total assets $ 446,732 $ 461,238
========= =========
Identifiable long-lived assets in the United States include goodwill of
$55.4 million and $52.6 million for the years ended December 31, 2003 and 2002,
respectively.
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 and a
portion are transacted in local currency. In both 2003 and 2002, approximately
20% of the Company's total product purchases, based on costs, were from a
limited number of Japanese suppliers and were denominated in yen. 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 whose manufacturing facilities are located in Asia. 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.
46
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. PROVISION FOR INCOME TAXES
The following table presents the U.S. and foreign components of net income
before taxes and the provision (benefit) for income taxes:
YEAR ENDED DECEMBER 31,
2003 2002 2001
---------- --------- ---------
Income (loss) before income taxes:
U.S. $ 32,953 $ 24,524 $ 22,740
Outside the U.S. 3,021 2,825 (1,779)
---------- --------- ---------
Total income before income taxes $ 35,974 $ 27,349 $ 20,961
========== ========= =========
Provision (benefit) for income taxes:
U.S. federal
Current $ 12,086 $ 6,838 $ 3,941
Deferred (737) 1,206 3,542
---------- --------- ---------
Total U.S. federal 11,349 8,044 7,483
U.S. state and local
Current 3,811 2,407 600
Deferred (532) (399) 879
---------- --------- ---------
Total U.S. state and local 3,279 2,008 1,479
Outside the U.S.
Current 511 1,197 645
Deferred 376 (343) (1,205)
---------- --------- ---------
Total outside the U.S. 887 854 (560)
Total current 16,408 10,442 5,186
Total deferred (893) 464 3,216
---------- --------- ---------
Total provision for income taxes $ 15,515 $ 10,906 $ 8,402
========== ========= =========
For the period January 1, 2001 through December 2, 2001, the Company was
included as a member of the consolidated group in the federal income tax return
of its former parent, Pitney Bowes. Payment for taxes due or receivable between
the Company and Pitney Bowes for this time period have been made in accordance
with the tax separation agreement (see Note 14).
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate is as follows:
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------- -------- -------
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 5.9% 4.8% 4.6%
Foreign deemed dividend 7.0% 0.0% 0.0%
Foreign tax credit (6.2%) 0.0% 0.0%
Other, net 1.4% 0.1% 0.5%
-------- -------- -------
Effective income tax rate 43.1% 39.9% 40.1%
======== ======== =======
47
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The components of deferred tax assets and liabilities as of December 31,
2003 and 2002 are as follows:
DECEMBER 31,
2003 2002
--------- ---------
Deferred tax assets:
Inventory $ 18,112 $ 15,080
State and local property taxes 1,599 1,576
Accounts receivable 3,903 2,036
Employee benefits and compensation 2,202 1,958
Other 1,376 2,775
--------- ---------
Deferred tax assets 27,192 23,425
Deferred tax liabilities:
Fixed assets 15,597 13,821
Goodwill 4,120 3,062
Other 1,203 1,344
--------- ---------
Deferred tax liabilities 20,920 18,227
--------- ---------
Net deferred tax asset $ 6,272 $ 5,198
========= =========
Deferred tax assets and liabilities are reflected on the Company's
consolidated balance sheets as follows:
DECEMBER 31,
2003 2002
--------- ---------
Current deferred taxes on income $ 24,191 $ 20,518
Non-current deferred taxes on income 17,919 15,320
--------- ---------
Net deferred taxes on income $ 6,272 $ 5,198
========= =========
For periods prior to the Distribution, deferred taxes associated with the
temporary differences between financial statement amounts and tax amounts were
included in the due to Pitney Bowes intercompany account. Effective with the
Distribution, the Company reclassified these amounts from the due to Pitney
Bowes intercompany account to the appropriate deferred tax accounts.
At December 31, 2003 and 2002, cumulative undistributed earnings of the
Company's foreign subsidiary were $3.9 million and $2.1 million, respectively.
No deferred provision for U.S. income taxes has been provided since the Company
considers the undistributed earnings to be permanently reinvested for continued
use in the Company's foreign subsidiary's operations.
7. 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
approximately 87,775, 26,424 and 70,553 options for the years ended December 31,
2003, 2002 and 2001, respectively, since they were antidilutive for the periods
presented.
48
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A reconciliation of the basic and diluted earnings per share computation is
as follows:
YEAR ENDED DECEMBER 31,
2003 2002 2001
----------- ----------- -----------
Net income available to common stockholders $ 20,459 $ 16,443 $ 12,559
============ ============ ============
Weighted average common shares outstanding 17,061,052 18,978,895 19,463,007
Less: non-vested restricted stock 350,366 347,000 -
------------ ------------ ------------
Weighted average common shares for basic
earnings per share 16,710,686 18,631,895 19,463,007
Add: dilutive effect of restricted
stock 185,548 337,681 778
Add: dilutive effect of stock options 334,027 164,582 16,114
------------ ------------ ------------
Weighted average common shares and
equivalents for diluted earnings
per share 17,230,261 19,134,158 19,479,899
============ ============ ============
Basic earnings per share $ 1.22 $ 0.88 $ 0.65
Diluted earnings per share $ 1.19 $ 0.86 $ 0.65
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, cash equivalents, accounts receivable and accounts payable
The carrying amounts approximate fair value because of the short maturity
of these instruments.
Long-term debt
The carrying amounts approximate fair value because of the floating
interest rate of the instrument.
9. LONG-TERM DEBT
The Company's long-term debt consisted of the following at December 31,
2003 and 2002:
DECEMBER 31,
2003 2002
--------- ---------
Revolving Credit Facility $ 10,000 $ -
Term Loan 53,448 74,148
--------- ---------
Total debt 63,448 74,148
Less: current maturities 545 749
--------- ---------
Total long-term debt $ 62,903 $ 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
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.
The obligations under the Credit Agreement are secured by a blanket first
perfected security interest in substantially all of the Company's assets plus
the pledge of 65% of the stock of the Company's subsidiary. Available borrowings
and letter of credit issuance under the Revolving Credit Facility are determined
by a borrowing base consisting of a percentage of the Company's eligible
accounts receivable, inventory, rental equipment assets and accrued and advance
billings, less outstanding borrowings under the Term Loan.
49
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, as well as other
covenants, which, among other things, place limits on dividend payments and
capital expenditures. The Credit Agreement allowed the Company to originally
repurchase up to $20 million of the Company's stock and to make acquisitions up
to an aggregate consideration of $30 million. At December 31, 2003 and 2002, the
Company was in compliance with all financial covenants.
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at the Company's option, on either the LIBOR
rate plus a margin of from 2.25% to 3.00% depending on the Company's leverage
ratio, or the Fleet Bank base lending rate plus a margin of from 1.25% to 2.00%,
depending on the Company's leverage ratio. Amounts borrowed under the Term Loan
bore interest at variable rates based, at the Company's option, on either the
LIBOR rate plus a margin of 3.50% or 3.75%, depending on the Company's leverage
ratio, or the Fleet Bank base lending rate plus a margin of 2.50% or 2.75%,
depending on the Company's leverage ratio. A commitment fee of 0.375% to 0.500%
on the average daily unused portion of the Revolving Credit Facility was payable
quarterly, in arrears, depending on the Company's leverage ratio.
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 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, the Company received payments based upon the 90-day
LIBOR 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.
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%, depending on the Company's leverage ratio, or to the
Fleet Bank base lending rate plus a margin of from 1.75% 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 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 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 income (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 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
income (loss) into interest expense because it was no longer probable that the
hedged forecasted transactions would occur.
50
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 2003, $63 million of borrowings were outstanding under the
Credit Agreement, consisting of $10 million of borrowings under the Revolving
Credit Facility and $53 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $123 million. As of February 27, 2004,
$78 million of borrowings were outstanding under the Credit Agreement,
consisting of $25 million of borrowings under the Revolving Credit Facility and
$53 million of borrowings under the Term Loan and the borrowing base amounted to
approximately $123 million. Approximately $84 million of the Revolving Credit
Facility was available for borrowing at December 31, 2003 and approximately $69
million of the Revolving Credit Facility was available for borrowing at February
27, 2004. The Term Loan is payable in 12 consecutive equal quarterly
installments of $0.1 million due March 31, 2004 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.
10. COMMITMENTS AND CONTINGENCIES
Guarantees and indemnifications
The Company has applied the disclosure provisions of FIN No. 45 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 following is a description of the arrangements in which the Company
is a guarantor.
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 obligated 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.
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 December 31, 2003, the
Company has not paid any material 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 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 course of normal 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.
51
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Risks and uncertainties
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, service management and sales
compensation, 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, which have resulted in a short-term increase in the
Company's working capital requirements, particularly accounts receivable, due to
the standardization of the Company's billing practices and schedules across all
product lines and the initial temporary suspension in invoicing the Company's
customers during the conversion to our new ERP system. The Company believes that
the increase in accounts receivable is temporary and that the Company will
collect substantially all of the amounts billed to customers that were
temporarily suspended. However, if the Company's collection losses related to
these amounts are significantly higher than historical experience, the Company
would recognize an increase in its provision for bad debt in the near future. In
addition, certain of the temporary processing inefficiencies have resulted in
delays in certain product shipments, service responsiveness and potential
inaccuracies in sales compensation. These issues, coupled with certain revisions
to the Company's billing practices, could have a negative impact on customer
service and satisfaction, which could result in a potential loss in business.
The Company is now engaged in a period of stabilization and clean up, as is
typical with a large ERP implementation and the Company anticipates that this
transition will be completed during 2004. Although no assurance can be given
that these efforts will be successful in the time periods expected, 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 or future
cash flows.
11. LEASES
In addition to owned distribution and office facilities, the Company leases
or subleases similar properties, as well as sales and service offices, equipment
and other properties, generally under long-term lease agreements with initial
terms extending from two to fifteen years.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2003 are as follows:
YEARS ENDING DECEMBER 31,
2004 $ 11,016
2005 8,899
2006 7,558
2007 5,952
2008 3,156
Thereafter 743
------------------
Total minimum lease payments $ 37,324
==================
Rental expense was $11.1 million, $10.1 million and $8.9 million in 2003,
2002 and 2001, respectively.
12. STOCK PLANS
2001 Stock Plan
The Company's employees are eligible to participate in the Imagistics
International Inc. 2001 Stock Plan. Under the provisions of this plan, the Board
of Directors is authorized to grant stock options, restricted stock and other
stock-based awards.
Adjustment Options. Prior to the Distribution, certain employees of the
Company were granted stock options under Pitney Bowes' stock based plans. At the
time of the Distribution, options outstanding under the Pitney Bowes stock plans
that were held by Pitney Bowes employees who were transferred to the Company
remained options to acquire Pitney Bowes common stock. Certain adjustments of
the exercise price, but not the number of options, were made to reflect the
reduced value of Pitney Bowes stock as a result of the Distribution. In
addition, such holders were granted options to acquire Imagistics stock in an
amount calculated to restore the reduction in the aggregate intrinsic value of
the options held by each such holder. The Imagistics stock options have the same
vesting provisions, option periods and other terms and conditions as the related
Pitney Bowes options. The exercise price has been calculated so that each
Imagistics option has the same ratio of exercise price per share to market value
per
52
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
share as the Pitney Bowes stock options immediately prior to the Distribution.
The Company granted options to purchase 162,368 shares of common stock of the
Company in connection with this adjustment. The per share weighted average fair
value of options granted was $10.83.
Stock Options. Under the 2001 Stock Plan, certain officers and employees of
the Company are granted options at prices equal to the fair market value of the
Company's common stock on the date of the grant. Options generally become
exercisable over a three-year period and expire in ten years. The plan
authorizes a maximum of 3,162,368 options to purchase shares of common stock, of
which a maximum of 750,000 shares may be issued as restricted stock. Options to
purchase a total of 1,500,117 shares of common stock were outstanding at
December 31, 2003. Pursuant to SFAS No. 123, companies can, but are not required
to, elect to recognize compensation expense for all stock-based awards using a
fair value methodology. The Company has adopted the disclosure-only provisions,
as permitted by SFAS No. 123. The Company applies APB No. 25 and related
interpretations in accounting for its stock-based plans.
The following table summarizes information about stock option transactions:
YEAR ENDED DECEMBER 31,
2003 2002 2001
-------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------ ---------- ------------
Options outstanding at the
beginning of the year 1,211,368 $ 13.63 161,166 $ 10.83 - $ -
Granted 378,700 $ 20.14 1,086,400 $ 14.03 162,368 $ 10.84
Exercised 44,847 $ 13.31 3,510 $ 8.60 - $ -
Forfeited 41,307 $ 16.70 30,230 $ 13.99 1,202 $ 12.07
Expired 3,797 $ 13.91 2,458 $ 13.94 - $ -
Options outstanding at the ------------ ------------ ----------
end of the year 1,500,117 $ 15.21 1,211,368 $ 13.63 161,166 $ 10.83
============ ============ ==========
Exercisable at the end of the year 429,741 $ 13.35 99,505 $ 11.87 83,465 $ 11.36
============ ============ ==========
Weighted average fair value
of options granted $ 7.52 $ 6.03 $ 5.19
The following table summarizes information regarding the Company's stock
options outstanding and exercisable as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE PRICE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- ----------------- -------- ------------------ ----------- -------- -----------
$4.36 - $12.84 92,324 5.0 years $ 8.55 69,368 $ 8.70
$13.35 - $15.38 994,319 8.0 years $ 13.84 328,847 $ 13.83
$16.65 - $18.91 74,258 7.7 years $ 18.53 29,642 $ 18.46
$19.48 - $22.89 325,516 9.2 years $ 19.79 1,884 $ 19.78
$24.33 - $37.12 13,700 9.7 years $ 31.15 - $ -
53
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
Restricted Stock. During 2003, one newly appointed executive officer of the
Company was granted a total of 4,700 shares of restricted stock at no cost to
the employee. The per share weighted average fair value of the shares granted
was $18.86. During 2002, certain executive officers of the Company were granted
a total of 323,000 shares of restricted stock at no cost to the employees. The
per share weighted average fair value of shares granted was $13.85. The
restricted stock awards vest three years after grant. Under this plan, stock
will vest only if the executive is still employed by the Company at the end of
the restricted period and, if applicable, the executive has attained or
partially attained the performance objectives as determined by the Executive
Compensation and Development Committee of the Board of Directors. None of the
restricted stock grants have performance criteria. The compensation expense for
these awards is recognized over the vesting period. The compensation expense
relating to restricted stock awards totaled $1.5 million for the years ended
December 31, 2003 and 2002. The shares carry full voting and dividend rights but
may not be assigned or transferred. Of the total 3,162,368 shares of common
stock authorized under the 2001 Stock Plan, the Plan has authorized a maximum of
750,000 shares of common stock for issuance to employees as restricted stock.
The following table summarizes information about employee restricted stock
transactions:
YEAR ENDED DECEMBER 31,
2003 2002
-------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES FAIR VALUE SHARES FAIR VALUE
---------- ------------ ---------- ------------
Shares outstanding at the
beginning of the year 323,000 $ 13.85 - $ -
Granted 4,700 $ 18.86 323,000 $ 13.85
Shares outstanding at the ----------- ----------
end of the year 327,700 $ 13.92 323,000 $ 13.85
=========== ==========
Vested at the end of the year - $ - - $ -
=========== ==========
Non Employee Director Stock Plan
Under this plan, on the date of initial election to the Company's Board of
Directors, and on the date of each Annual Meeting of Stockholders thereafter,
each director who is not an employee of the Company is granted 2,000 shares of
restricted stock at no cost to the director. The restricted shares vest in equal
installments over a three-year period beginning on the first anniversary of the
grant date, subject to the director's continued service. The compensation
expense for these awards is recognized over the vesting period. The shares carry
full voting and dividend rights but may not be assigned or transferred until
vested. The Company has authorized a maximum of 100,000 shares of common stock
for issuance under this plan. The Company recorded minimal compensation expense
in 2003, 2002 and 2001, related to these shares.
The following table summarizes information about non-employee director
restricted stock transactions:
YEAR ENDED DECEMBER 31,
2003 2002 2001
------------------------ ------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES FAIR VALUE SHARES FAIR VALUE SHARES FAIR VALUE
------- ------------ -------- ------------ -------- ------------
Shares outstanding at the
beginning of the year 24,000 $ 14.64 10,000 $ 11.75 - $ -
Granted 12,000 $ 23.88 14,000 $ 16.73 10,000 $ 11.75
Cancelled 4,000 $ 14.46 - $ - - $ -
Shares outstanding at the ------- --------- ---------
end of the year 32,000 $ 18.12 24,000 $ 14.64 10,000 $ 11.75
======= ========= =========
Vested at the end of the year 9,334 $ 13.84 3,335 $ 17.18 - $ -
======= ========= =========
54
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
Employee Stock Purchase Plan
In May 2002, the Company's Board of Directors adopted the Employee Stock
Purchase Plan. Under this plan, a total of 1,000,000 shares of the Company's
common stock have been reserved for issuance. The plan, which is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code, provides for consecutive six-month offering periods
and enables substantially all eligible United States employees to purchase
shares of Imagistics common stock at a discounted offering price. Offering
periods begin each July 1 and January 1. The price would be equal to 85% of the
lesser of the average high and low price of Imagistics common stock on the New
York Stock Exchange on the first or last business day of the offering period.
Participation in the plan is voluntary. Employees are eligible to participate in
the plan if they are employed by the Company, or a United States subsidiary of
the Company, for at least 20 hours per week. The plan permits eligible employees
to purchase common stock through payroll deductions, which may not exceed 10% of
an employee's compensation, subject to certain limitations. Employees may modify
or end their participation at any time during the offering period, subject to
certain limitations. Participation ends automatically on termination of
employment with the Company.
Stockholder Rights Plan
Prior to the Distribution, the Board of Directors adopted a stockholder
rights plan (the "Rights Plan") under which one right (the "Right") was issued
for each share of common stock. The description and terms of the Rights Plan and
Rights are set forth in a Rights Agreement between the Company and EquiServe, as
Rights Agent.
The Rights will become exercisable on the Rights Distribution Date, which
is the earlier of ten business days after a person has acquired 15% or more of
the outstanding shares of the Company's common stock (an "Acquiring Person") or
ten business days (or such later date as the Company's Board of Directors may
designate before any person has become an Acquiring Person) after the
commencement by a person of a tender or exchange offer that would result in such
person becoming an Acquiring Person. Rights owned by an Acquiring Person will be
void after the Rights Distribution Date.
The Rights are not exercisable prior to the Rights Distribution Date. Prior
to the Rights Distribution Date, the Rights will be evidenced by and transferred
with the Company's common stock. After the Rights Distribution Date, the Rights
Agent will mail separate certificates evidencing the Rights to each registered
holder of the Company's common stock, and thereafter the Rights will be
transferable separately from the Company's common stock.
After the Rights Distribution Date, but before any person has become an
Acquiring Person, each Right will entitle the registered holder to purchase from
the Company one one-hundredth of a share of Series A junior participating
preferred stock at a price of $100.00 (the "Purchase Price"). If any person has
become an Acquiring Person and the Company is not involved in a merger or other
business combination or sale of 50% or more of the assets or earnings power of
the Company, each Right will entitle the registered holder to purchase for the
Purchase Price a number of shares of the Company's common stock having a market
value of twice the Purchase Price. If the Company is involved in a merger or
other business combination or sale of 50% or more of the assets or earnings
power of the Company, each Right will entitle the registered holder to purchase
for the Purchase Price a number of shares of the common stock of the other party
to the business combination or sale having a market value of twice the Purchase
Price.
At any time after any person has become an Acquiring Person, but before any
person becomes the beneficial owner of 50% or more of the outstanding shares of
the Company's common stock or the Company is involved in a merger or other
business combination or sale of 50% or more of the assets or earnings power of
the Company, the Board of Directors may exchange all or part of the Rights for
shares of the Company's common stock at an exchange ratio of one share of the
Company's common stock per Right. Before any person becomes an Acquiring Person,
the Board of Directors may redeem all or part of the Rights at a price of $0.01
per Right. The Rights will expire ten years from the Distribution and the Board
of Directors may amend the Rights Agreement and Rights as long as the Rights are
redeemable. The Rights Agreement contains antidilution provisions designed to
prevent efforts to diminish the effectiveness of the Rights.
Stock Buy-Back Program
In March 2002, the Board of Directors authorized a $30 million stock
buy-back program. In October 2002, the Board of Directors authorized an
additional $28 million for the stock buy-back program, raising the total
authorization to $58 million and in July 2003, the Board of Directors authorized
the repurchase of an additional $20 million of the Company's stock, raising the
total authorization to $78 million.
55
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
The following table summarizes information regarding the Company's stock
buy-back program:
SHARES AVERAGE TOTAL
PURCHASED COST PER SHARE COST
----------------- ------------------ ---------------
Balance at December 31, 2002 1,936,760 $ 18.87 $ 36,549
Purchases under stock buy-back program:
Three months ended:
March 31, 2003 642,000 $ 19.62 12,597
June 30, 2003 368,000 $ 21.54 7,928
September 30, 2003 195,900 $ 28.90 5,661
December 31, 2003 64,000 $ 34.10 2,183
----------------- ---------------
Balance at December 31, 2003 3,206,660 $ 20.24 $ 64,918
================= ===============
13. EMPLOYEE BENEFIT PLANS
Imagistics 401(k) Plan
Substantially all of the Company's employees are eligible to participate in
the Imagistics 401(k) plan that was established in 2001. Under the plan, the
Company matches 100% of contributions to the plan of between 1% and 4% of a
participant's compensation, and 50% of contributions to the plan from 5% to 6%
of a participant's compensation, up to certain limitations required by
government laws or regulations. Contributions to the plan on behalf of employees
of the Company were $5.7 million and $4.3 million for the years ended December
31, 2003 and 2002, respectively.
Prior to the Distribution, the Company's employees participated in Pitney
Bowes' profit sharing and savings plan. Substantially all of Pitney Bowes'
domestic employees were eligible to participate in the plan under which Pitney
Bowes made matching contributions of 100% of a participant's contributions of at
least 1% of a participant's eligible compensation up to 4% of the participant's
eligible compensation, subject to limitations required by government laws or
regulations. In addition, Pitney Bowes made an employer contribution to all
participants based upon the increase in the stock price of Pitney Bowes shares
from year to year. Contributions to the plan on behalf of employees of the
Company were $3.1 million for the period January 1, 2001 through the
Distribution.
Imagistics Supplemental Savings Plan
In December 2003, the Company's Board of Directors adopted the Supplemental
Savings Plan. Beginning in January 2004, eligible employees may contribute
tax-deferred amounts of their compensation, up to certain limitations required
by government laws or regulations. Eligibility under the plan is determined at
the discretion of the Employee Benefits Committee. The Plan, which is considered
a non-qualified deferred compensation plan, is designed to provide a select
group of management and other highly compensated employees with a tax-advantaged
opportunity to save for retirement and it is not subject to the regulations and
protections of the Employee Retirement Income Security Act of 1974 (ERISA). The
Plan is an unfunded plan and all benefits paid from the plan are paid from the
Company's general assets. The Company reserves the right to amend, suspend, or
terminate the plan at its discretion at any time for any reason.
Pitney Bowes' Plans
The Company does not offer a defined benefit pension plan. Prior to the
Distribution, the Company's employees participated in Pitney Bowes' defined
benefit pension plan, which covers substantially all Pitney Bowes employees. In
general, those Pitney Bowes employees who became employees of the Company
following the Distribution will cease accruing benefits under the Pitney Bowes
pension plan but will maintain their vested rights in the Pitney Bowes pension
plan. Certain of the Company's employees whose combined age and years of service
with Pitney Bowes totaled more than 50 as of the Distribution, will continue to
participate in the Pitney Bowes pension plan for up to three years following the
Distribution. Pitney Bowes' funding policy is to contribute annual amounts as
needed based on actuarial and economic assumptions designed to achieve adequate
funding of projected benefit obligations. The net periodic pension benefit
allocated to the Company associated with the Pitney Bowes defined benefit
pension plan was $1.7 million for the period January 1, 2001 through the
Distribution. Benefits provided under Pitney Bowes' defined benefit pension plan
were primarily based on the employee's age, years of service and compensation.
56
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
The Company does not offer post retirement plans. Prior to the
Distribution, the Company's employees participated in Pitney Bowes' post
retirement plans that provide certain healthcare and life insurance benefits to
eligible retirees and their dependents. Substantially all of Pitney Bowes' U.S.
employees become eligible for these benefits if they have met certain age and
service requirements at retirement. The costs of these benefits were recognized
over the period the employee provided credited service to the Company.
Postretirement benefit costs incurred on behalf of employees of the Company were
$1.6 million for the period January 1, 2001 through the Distribution. The
liability and related future payments associated with Pitney Bowes' post
retirement plans are Pitney Bowes' responsibility. Company employees who
attained age 55 and completed at least 10 years of combined service with Pitney
Bowes and the Company as of or within three years following the Distribution
will be eligible for retiree medical benefits under the Pitney Bowes Retiree
Medical Plan when they retire from the Company. The costs associated with these
are borne by Pitney Bowes.
14. RELATED PARTY TRANSACTIONS
The Company and Pitney Bowes entered into a transition services agreement
that provided for Pitney Bowes to provide certain services to the Company at
cost for a limited time following the Distribution. These services were provided
at cost and included information technology, computing, telecommunications,
certain accounting, field service of equipment and dispatch call center
services. The Company and Pitney Bowes had agreed to an extension until December
31, 2003, of the transition services agreement as it related to information
technology and related services. Services provided under this extension were at
negotiated market rates. Except for field service of equipment, all of the
services provided by Pitney Bowes under these agreements have ceased effective
December 31, 2003, in accordance with the terms of the agreements. Effective
July 1, 2003, the Company and Pitney Bowes entered into a separate one-year
service agreement on an arms-length basis relating to field service of equipment
in certain remote geographic locations not covered by the Company's direct
service organization. Services provided under this agreement are at negotiated
market rates.
The Company paid Pitney Bowes $16.1 million for the year ended December 31,
2003 in connection with the transition services agreement, field service of
equipment and other administrative expenses. The Company paid Pitney Bowes $20.4
million and $3.5 million for the year ended December 31, 2002 and for the period
from December 3, 2001 through December 31, 2001, respectively, in connection
with these agreements 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 obligated 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.
15. ACQUISITIONS
During the year ended December 31, 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.
During the year ended December 31, 2001, the Company acquired substantially
all of the assets and business of one independent dealer of copier and facsimile
equipment and related support services, to expand the Company's geographic sales
and service capabilities. The aggregate purchase price was $0.7 million, of
which substantially all was allocated to goodwill.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of the acquired businesses have been
included in the Company's consolidated financial statements from the respective
date of acquisition.
57
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIALS STATEMENTS - (CONTINUED)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 2003 and 2002 follows:
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
--------------- --------------- --------------- ---------------
2003
- ----
Total revenue $ 150,922 $ 155,916 $ 159,549 $ 155,809
Operating income $ 9,642 $ 10,415 $ 13,252 $ 11,102
Income before income taxes $ 8,013 $ 8,823 $ 8,963 $ 10,175
Net income $ 4,766 $ 5,026 $ 5,130 $ 5,537
Basic earnings per share $ 0.28 $ 0.30 $ 0.31 $ 0.34
Diluted earnings per share $ 0.27 $ 0.29 $ 0.30 $ 0.33
Common stock price high-low $21.68 - $17.55 $26.30 - $18.50 $30.85 - $25.65 $39.20 - $29.00
2002
- ----
Total revenue $ 155,161 $ 158,291 $ 156,069 $ 160,409
Operating income $ 8,594 $ 9,260 $ 9,135 $ 8,466
Income before income taxes $ 6,394 $ 7,271 $ 6,895 $ 6,789
Net income $ 3,856 $ 4,381 $ 4,155 $ 4,051
Basic earnings per share $ 0.20 $ 0.23 $ 0.23 $ 0.23
Diluted earnings per share $ 0.19 $ 0.22 $ 0.22 $ 0.22
Common stock price high-low $17.80 - $12.25 $21.73 - $15.70 $21.85 - $16.30 $21.64 - $14.10
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this 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 as a result of our implementation of an ERP
system during the third quarter of 2003, we no longer continued to be reliant on
certain Pitney Bowes information systems for the generation of financial
information. Based on our 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 the Company, (including its
consolidated subsidiary).
Since the most recent evaluation of internal controls over financial
reporting by our Chief Executive Officer and Chief Financial Officer, as a
result of the implementation of an ERP system, there have been changes to our
procedures surrounding order management and fulfillment, billing, cash
application and service management and the controls surrounding processing in
these areas have been adjusted accordingly. We did not implement any changes to
our monitoring controls and we believe the changes to our processing controls
have not materially affected, nor are reasonably likely to materially affect,
our internal control over financial reporting.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning the directors of Imagistics is set forth
under the headings "Election of Directors", "Nominees for Election
to Terms Expiring at the 2007 Annual Meeting", "Incumbent Directors
Whose Terms Expire at the 2006 Annual Meeting", "Incumbent Directors
Whose Terms Expire at the 2005 Annual Meeting", "Board Information
and Committees" and "Directors Compensation" in the Imagistics Proxy
Statement for the 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
(b) Information concerning executive officers of Imagistics is set forth
under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I,
Item 4 of this report.
(c) Information concerning compliance with beneficial ownership
reporting requirements is set forth under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Imagistics
Proxy Statement for the 2004 Annual Meeting of Stockholders and is
incorporated herein by reference.
(d) The Company's Board of Directors has determined that there is at
least one audit committee financial expert serving on the Company's
Audit Committee. Information concerning the audit committee financial
expert is set forth under the heading "Board Information and
Committees - The Audit Committee" in the Imagistics Proxy Statement
for the 2004 Annual Meeting of Stockholders and is incorporated
herein by reference.
(e) The Company has adopted a code of ethics that applies to all
employees of the Company, including its Chief Executive Officer and
Chief Financial Officer, or other officers performing similar
functions. This code of ethics is publicly available on the Company's
investor website at www.igiinvestor.com. Amendments to our code of
ethics and any grant of a waiver from a provision of the code
requiring disclosure under applicable SEC rules will be disclosed on
the Company's investor website.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under the
headings "Executive Officer Compensation", "Executive Contracts and Severance
and Change of Control Arrangements" and "Report on Executive Compensation" in
the Imagistics Proxy Statement for the 2004 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning shares of Imagistics equity securities beneficially
owned by certain beneficial owners and by management is set forth under the
heading "Security Ownership" in the Imagistics Proxy Statement for the 2004
Annual Meeting of Stockholders and is incorporated herein by reference.
Information regarding securities authorized for issuance under our equity
compensation plans is set forth under the heading "Equity Compensation Plans" in
the Imagistics Proxy Statement for the 2004 Annual Meeting of Stockholders and
is incorporated herein by reference.
During the year ended December 31, 2003, we repurchased 1,269,900 shares of
Imagistics common stock at a weighted average purchase price of $22.34 per
share. Since the inception of our stock buy-back program in March 2002, we have
repurchased 3,206,660 shares of Imagistics common stock at a weighted average
purchase price of $20.24 per share.
60
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding our equity compensation
plans as of December 31, 2003:
Number of securities Number of securities
to be issued upon Weighted-average remaining available for future
exercise of exercise price of issuance under equity
Plan Category outstanding options outstanding options compensation plans
- --------------------------------------------- --------------------- --------------------- -------------------------------
Equity compensation plans
approved by security holders:
2001 Stock Plan (1) 1,827,817 $ 12.48 1,334,551
Non-Employee Director Stock Plan (2) 22,666 $ - 68,000
Equity compensation plans
not approved by security holders - - -
--------------------- --------------------------------
Total (3) 1,850,483 $ 12.33 1,402,551
===================== ================================
(1) The number of securities to be issued upon exercise of outstanding
options for the 2001 Stock Plan includes 327,700 shares of restricted stock. The
calculation of the weighted-average exercise price of outstanding options for
the 2001 Stock Plan includes 327,700 shares of restricted stock for which the
exercise price is zero. The number of securities remaining available for future
issuance under equity compensation plans includes 422,300 shares that may be
issued as restricted stock.
(2) The Non-Employee Director Stock Plan is comprised solely of restricted
stock for which the exercise price is zero.
(3) Included in the total number of securities to be issued upon exercise
of outstanding options are 350,366 shares of restricted stock. The calculation
of the total weighted-average exercise price of outstanding options includes
350,366 shares of restricted stock for which the exercise price is zero. The
number of securities remaining available for future issuance under equity
compensation plans includes 422,300 shares that may be issued as restricted
stock and 68,000 shares available for issuance solely as restricted stock.
For further details relating to our equity compensation plans, see Note 12,
"Stock Plans" of our "Notes to Consolidated Financial Statements" included in
Item 8 herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning Principal Accountant Fees and Services is set forth
under the heading "Proposal 2: Approval of Appointment of Imagistics'
Independent Accountants" in the Imagistics Proxy Statement for the 2004 Annual
Meeting of Stockholders and is incorporated herein by reference.
61
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are filed as part of this Annual
Report on Form 10-K under "Item 8. Financial Statements and
Supplementary Data" in Part II of this report:
1. Financial Statements
Report of Independent Auditors
Consolidated Statement of Operations for each of the
three years in the period ended December 31, 2003
Consolidated Balance Sheets at December 31, 2003 and
2002
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income (Loss) for each of
the three years in the period ended December 31, 2003
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2003
Notes to Consolidated Financial Statements
2. Financial Statement Report and Schedule filed as part of
this report pursuant to Item 8 of this report:
Report of PricewaterhouseCoopers LLP dated February
19, 2004 on the company's financial statement
schedule filed as part hereof for the fiscal years
ended December 31, 2003, 2002 and 2001.
Schedule No. II - Valuation and Qualifying Accounts
Financial statement schedules not included with this
report have been omitted because they are not
applicable or the required information is shown in
the consolidated financial statements or the notes
thereto.
3. Exhibits. Those exhibits required to be filed by Item
601 of Regulation S-K are listed in the Exhibit Index
included in this report below.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2003, the following Current
Report on Form 8-K was filed.
On November 13, 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 November 13, 2003 in which we announced our earnings for the
fiscal quarter ended September 30, 2003 and certain additional matters.
62
(c) 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)
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)
10.34 Reseller Agreement between Pitney Bowes of Canada Ltd. and Imagistics
International Inc.
21.1 Subsidiaries of Imagistics International Inc.
23.1 Consent of PricewaterhouseCoopers LLP
63
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.
- ------------------------
(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.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
IMAGISTICS INTERNATIONAL INC.
Dated: March 12, 2004 By /s/ MARC C. BRESLAWSKY
----------------------
Marc C. Breslawsky
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
TITLE DATE
/s/ MARC C. BRESLAWSKY Chairman, Chief Executive Officer and Director March 12, 2004
------------------
Marc C. Breslawsky
/s/ JOSEPH D. SKRZYPCZAK Chief Financial Officer March 12, 2004
--------------------
Joseph D. Skrzypczak
/s/ TIMOTHY E. COYNE Vice President, Corporate Controller March 12, 2004
---------------- Principal Accounting Officer
Timothy E. Coyne
/s/ THELMA R. ALBRIGHT Director March 12, 2004
------------------
Thelma R. Albright
/s/ T. KEVIN DUNNIGAN Director March 12, 2004
-------------------
T. Kevin Dunnigan
/s/ IRA D. HALL Director March 12, 2004
-------------
Ira D. Hall
/s/ CRAIG R. SMITH Director March 12, 2004
----------------
Craig R. Smith
/s/ JAMES A. THOMAS Director March 12, 2004
-----------------
James A. Thomas
/s/ RONALD L. TURNER Director March 12, 2004
------------------
Ronald L. Turner
65
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF IMAGISTICS INTERNATIONAL INC.
Our audits of the consolidated financial statements referred to in our report
dated February 19, 2004, appearing in the 2003 Annual Report on Form 10-K of
Imagistics International Inc. also included an audit of the financial statement
schedule listed in Item 15 (a) (2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Stamford, Connecticut
February 19, 2004
66
IMAGISTICS INTERNATIONAL INC.
SCHEDULE (II) - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2002 AND 2003
(THOUSANDS)
The information set forth below should be read in conjunction with our
consolidated financial statements and notes thereto included in Item 8 herein.
BALANCE AT
BEGINNING OF CHARGES, COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
------------------ ------------------ ------------------ ------------------
Allowance for doubtful accounts:
2001 $ 2,992 $ 12,089 $ (8,893) $ 6,188
2002 $ 6,188 $ 4,886 $ (5,282) $ 5,792
2003 $ 5,792 $ 6,656 $ (1,873) $ 10,575
BALANCE AT
BEGINNING OF ADDITIONS TO CHARGES/ BALANCE AT
PERIOD ALLOWANCE RETURNS END OF PERIOD
------------------ ------------------ ------------------ ------------------
Sales, rental and service revenue
returns and allowances:
2001 $ 1,500 $ 29,942 $(29,292) $ 2,150
2002 $ 2,150 $ 30,974 $(30,104) $ 3,020
2003 $ 3,020 $ 30,025 $(30,475) $ 2,570
67