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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1611068
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of Imagistics Common Stock, par value $0.01 per share,
outstanding as of July 26, 2004: 16,570,285
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IMAGISTICS INTERNATIONAL INC.
Table of Contents
PART I - FINANCIAL INFORMATION ............................................. 3
ITEM 1. FINANCIAL STATEMENTS .............................................. 3
Consolidated Statements of Income for the three and
six months ended June 30, 2004 and 2003 (Unaudited) ............. 3
Consolidated Balance Sheets as of June 30, 2004 (Unaudited)
and December 31, 2003 ........................................... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 (Unaudited) ........................ 5
Notes to Consolidated Financial Statements ........................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................... 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 26
ITEM 4. CONTROLS AND PROCEDURES ........................................... 26
PART II - OTHER INFORMATION ................................................ 27
ITEM 1. LEGAL PROCEEDINGS ................................................. 27
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES ............................................. 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 28
SIGNATURES ................................................................. 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue:
Sales $ 75,190 $ 78,876 $ 157,745 $ 151,929
Rentals 54,179 56,107 108,590 113,175
Support services 22,158 20,933 43,514 41,734
----------- ----------- ----------- -----------
Total revenue 151,527 155,916 309,849 306,838
Cost of sales 42,416 48,166 91,362 93,410
Cost of rentals 15,333 18,677 31,123 37,848
Selling, service and administrative expenses 82,297 78,658 164,864 155,523
----------- ----------- ----------- -----------
Operating income 11,481 10,415 22,500 20,057
Interest expense 876 1,592 1,811 3,221
----------- ----------- ----------- -----------
Income before income taxes 10,605 8,823 20,689 16,836
Provision for income taxes 4,497 3,797 8,834 7,044
----------- ----------- ----------- -----------
Net income $ 6,108 $ 5,026 $ 11,855 $ 9,792
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.38 $ 0.30 $ 0.73 $ 0.58
=========== ----------- =========== -----------
Diluted $ 0.36 $ 0.29 $ 0.70 $ 0.56
=========== =========== =========== ===========
Shares used in computing earnings per share:
Basic 16,248,921 16,548,721 16,331,467 17,000,392
=========== =========== =========== ===========
Diluted 16,951,223 17,158,522 17,034,653 17,580,830
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements
3
IMAGISTICS INTERNATIONAL INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
Assets
Current assets:
Cash $ 10,696 $ 22,938
Accounts receivable, net of allowances of $13,684 and $10,575
at June 30, 2004 and December 31, 2003, respectively 119,835 107,690
Accrued billings 24,659 20,862
Inventories 81,498 86,134
Current deferred taxes on income 27,084 24,191
Other current assets and prepaid expenses 4,916 4,806
------------ ------------
Total current assets 268,688 266,621
Property, plant and equipment, net 55,173 53,204
Rental equipment, net 62,828 67,179
Goodwill 62,728 55,447
Other assets 5,315 4,281
------------ ------------
Total assets $ 454,732 $ 446,732
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 545 $ 545
Accounts payable and accrued liabilities 74,454 79,291
Advance billings 14,597 16,323
------------ ------------
Total current liabilities 89,596 96,159
Long-term debt 72,632 62,903
Deferred taxes on income 18,248 17,919
Other liabilities 4,150 2,350
------------ ------------
Total liabilities 184,626 179,331
Commitments and contingencies (see Note 8)
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, 19,980,680
and 19,871,061 issued at June 30, 2004 and December 31, 2003, respectively) 200 199
Additional paid-in-capital 297,361 295,176
Retained earnings 46,836 34,981
Treasury stock, at cost (3,372,846 and 3,096,878 shares at
June 30, 2004 and December 31, 2003, respectively) (74,553) (62,783)
Unearned compensation (1,580) (1,934)
Accumulated other comprehensive income 1,842 1,762
------------ ------------
Total stockholders' equity 270,106 267,401
------------ ------------
Total liabilities and stockholders' equity $ 454,732 $ 446,732
============ ============
See Notes to Consolidated Financial Statements
4
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
For the six months ended
June 30,
--------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 11,855 $ 9,792
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 33,671 38,033
Provision for bad debt 6,385 4,442
Provision for inventory obsolescence 2,513 3,795
Deferred taxes on income (2,563) 1,970
Change in assets and liabilities, net of acquisitions:
Accounts receivable (17,331) 12,264
Accrued billings (3,798) (1,372)
Inventories 3,504 (906)
Other current assets and prepaid expenses (52) 1,622
Accounts payable and accrued liabilities (6,424) (12,787)
Advance billings (2,217) (1,707)
Other, net 150 1,238
------------ ------------
Net cash provided by operating activities 25,693 56,384
Cash flows from investing activities:
Expenditures for rental equipment assets (21,334) (17,374)
Expenditures for property, plant and equipment (6,673) (9,036)
Acquisitions (9,737) --
------------ ------------
Net cash used in investing activities (37,744) (26,410)
Cash flows from financing activities:
Exercises of stock options, including sales
under employee stock purchase plan 2,359 1,838
Purchases of treasury stock (12,277) (20,525)
Repayments under term loan (273) (374)
Net borrowings under revolving credit facility 10,000 --
------------ ------------
Net cash used in financing activities (191) (19,061)
------------ ------------
(Decrease) increase in cash (12,242) 10,913
Cash at beginning of period 22,938 31,325
------------ ------------
Cash at end of period $ 10,696 $ 42,238
============ ============
See Notes to Consolidated Financial Statements
5
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts and as otherwise indicated)
(Unaudited)
1. Background and Basis of Presentation
Background
Imagistics International Inc. (the "Company" or "Imagistics") is a large
direct sales, service and marketing organization offering business document
imaging and management solutions, including copiers, multifunctional products
and facsimile machines, in the United States, Canada and United Kingdom. The
Company's 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, the Company offers a range of document imaging options
including digital, analog, color and/or networked products and systems.
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") initiated a plan to spin-off substantially all of its office systems
businesses to its stockholders as an independent publicly traded company. On
December 3, 2001, Imagistics was spun off from Pitney Bowes pursuant to a
contribution by Pitney Bowes of substantially all of its United States 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 received tax rulings from the Internal Revenue Service
stating that, subject to certain representations, the Distribution qualified as
tax-free to Pitney Bowes and its stockholders for United States federal income
tax purposes.
Basis of presentation
The unaudited interim consolidated financial statements of the Company
have been prepared in accordance with the rules and regulations of the United
States Securities and Exchange Commission (the "SEC") and do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of the management of the Company, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results of
operations, financial position and cash flows as of and for the periods
presented have been included. Certain previously reported amounts have been
reclassified to conform to the current year presentation.
The Company believes that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and six months ended
June 30, 2004 are not necessarily indicative of the results for the full year.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K for the year ended
December 31, 2003 filed with the SEC on March 12, 2004.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
6
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
2. Summary of Significant Accounting Policies
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/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 often include supplies, are generally for an
initial term of three years with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of rental contracts, the Company
bills its customers a flat periodic charge and/or a usage-based fee. Revenues
related to these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. 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 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 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.
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 the Company's
customers, analyzing historical bad debt write-offs and reviewing the aging of
the receivables. The Company's allowance for doubtful accounts includes amounts
for specific accounts that it 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 and the Company's
estimates relating to delinquencies associated with the changes in the Company's
billing policies and invoice format associated with the implementation of the
Company's enterprise resource planning ("ERP") system.
Stock-based employee compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company recognizes stock-based compensation expense on its
restricted stock on a straight-line basis over the vesting period. The Company
does not recognize stock-based compensation expense on its stock options in its
reported results as all options granted, other than adjustment options in
connection with the Distribution, had an exercise price equal to the market
value of the underlying common stock on the date of grant.
7
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
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation:
For the three months ended For the six months ended
June 30, June 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income, as reported $ 6,108 $ 5,026 $ 11,855 $ 9,792
Add: Stock-based compensation expense
included in net income, net of related tax effects 429 414 878 802
Deduct: Total stock-based compensation expense
based on the fair value method, net of related tax effects (898) (1,082) (1,910) (1,919)
---------- ---------- ---------- ----------
Pro forma net income $ 5,639 $ 4,358 $ 10,823 $ 8,675
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.38 $ 0.30 $ 0.73 $ 0.58
Pro forma $ 0.35 $ 0.26 $ 0.66 $ 0.51
Diluted earnings per share:
As reported $ 0.36 $ 0.29 $ 0.70 $ 0.56
Pro forma $ 0.33 $ 0.25 $ 0.64 $ 0.49
3. Supplemental Information
Inventories
Inventories consisted of the following at June 30, 2004 and December 31,
2003:
June 30, December 31,
2004 2003
------------ ------------
Finished products $ 43,651 $ 50,726
Supplies and service parts 37,847 35,408
------------ ------------
Total inventories $ 81,498 $ 86,134
============ ============
Fixed assets and Rental Assets
Fixed assets and rental equipment assets consisted of the following at
June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
------------ ------------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 11,500 10,976
Machinery and equipment 25,173 23,474
Computers and software 52,435 47,356
------------ ------------
Property, plant and equipment, gross 90,464 83,162
Accumulated depreciation (35,291) (29,958)
------------ ------------
Property, plant and equipment, net $ 55,173 $ 53,204
============ ============
Rental equipment, gross $ 317,579 $ 333,563
Accumulated depreciation (254,751) (266,384)
------------ ------------
Rental equipment, net $ 62,828 $ 67,179
============ ============
8
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Depreciation and amortization expense was $16.6 million and $33.7 million
for the three and six months ended June 30, 2004, respectively, and $19.1
million and $38.0 million for the three and six months ended June 30, 2003,
respectively. Unamortized software costs totaled $29.7 million as of June 30,
2004 and $27.0 million as of December 31, 2003. Amortization expense on account
of capitalized software totaled $1.0 million and $2.0 million for the three and
six months ended June 30, 2004, respectively, and $0.2 million and $0.4 million
for the three and six months ended June 30, 2003, respectively.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
June 30, 2004 and December 31, 2003:
June 30, December 31,
2004 2003
------------ ------------
Accounts payable $ 29,537 $ 33,237
Accrued compensation and benefits 7,361 8,321
Other non-income taxes payable 6,306 6,626
Other accrued liabilities 31,250 31,107
------------ ------------
Accounts payable and accrued liabilities $ 74,454 $ 79,291
============ ============
Comprehensive income
Comprehensive income consisted of the following for the three and six
months ended June 30, 2004 and 2003:
For the three months ended For the six months ended
June 30, June 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 6,108 $ 5,026 $ 11,855 $ 9,792
Translation adjustment (278) 825 80 872
Unrealized gain on cash flow hedges -- 48 -- 77
---------- ---------- ---------- ----------
Comprehensive income $ 5,830 $ 5,899 $ 11,935 $ 10,741
========== ========== ========== ==========
Treasury stock
The following table summarizes the Company's treasury stock transactions:
Treasury stock
---------------------------
Shares Cost
---------- ----------
Balance at December 31, 2003 3,096,878 $ 62,783
Purchases under stock buy back program 298,900 12,277
Sales to employees under employee stock purchase plan (22,932) (507)
---------- ----------
Balance at June 30, 2004 3,372,846 $ 74,553
========== ==========
Cash flow information
Cash paid for income taxes was $9.1 million and $8.1 million for the six
months ended June 30, 2004 and 2003, respectively. Cash paid for interest was
$1.3 million and $2.7 million for the six months ended June 30, 2004 and 2003,
respectively.
9
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
4. Business Segment Information
The Company operates in two reportable segments based on geographic area:
North America and the United Kingdom. Revenues are attributed to geographic
regions based on where the revenues are derived.
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
North America $ 146,127 $ 150,899 $ 298,760 $ 296,402
United Kingdom 5,400 5,017 11,089 10,436
------------ ------------ ------------ ------------
Total revenues $ 151,527 $ 155,916 $ 309,849 $ 306,838
============ ============ ============ ============
Income before income taxes:
North America $ 9,726 $ 7,948 $ 18,759 $ 14,849
United Kingdom 879 875 1,930 1,987
------------ ------------ ------------ ------------
Total income before income taxes $ 10,605 $ 8,823 $ 20,689 $ 16,836
============ ============ ============ ============
Revenues from Pitney Bowes, substantially all of which are generated in
the North America segment, consisted of the following for the three and six
months ended June 30, 2004 and 2003:
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues from Pitney Bowes:
Pitney Bowes of Canada $ 1,604 $ 6,313 $ 11,747 $ 12,682
Other subsidiaries of Pitney Bowes 5,595 6,940 11,002 13,361
------------ ------------ ------------ ------------
Sub-total 7,199 13,253 22,749 26,043
Pitney Bowes Credit Corporation 24,862 23,924 44,510 45,360
------------ ------------ ------------ ------------
Total $ 32,061 $ 37,177 $ 67,259 $ 71,403
============ ============ ============ ============
For the periods presented, Pitney Bowes Credit Corporation ("PBCC") was
the Company's primary lease vendor and the Company expects PBCC to continue as
the Company's primary lease vendor in the future. However, if PBCC were to cease
being the Company's primary lease vendor, the Company is confident that it could
obtain a replacement primary lease vendor with substantially the same lease
terms as PBCC. No other single customer or controlled group represented 10% or
more of the Company's revenues.
The following tables show identifiable long-lived assets and total assets
for each reportable segment at June 30, 2004 and December 31, 2003.
June 30, December 31,
2004 2003
------------ ------------
Identifiable long-lived assets:
North America $ 182,527 $ 176,157
United Kingdom 3,517 3,954
------------ ------------
Total identifiable long-lived assets $ 186,044 $ 180,111
============ ============
Total assets:
North America $ 438,748 $ 428,885
United Kingdom 15,984 17,847
------------ ------------
Total assets $ 454,732 $ 446,732
============ ============
10
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Identifiable long-lived assets in North America included goodwill of $62.7
million and $55.4 million at June 30, 2004 and December 31, 2003, 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, the
majority of which are from a limited number of Japanese suppliers who operate
manufacturing facilities in Asia. Although the Company currently sources
products from a number of manufacturers throughout the world, a significant
portion of new copier/MFP equipment is currently obtained from four Japanese
suppliers. If these suppliers were unable to deliver products for a significant
period of time, the Company would be required to find replacement products from
an alternative supplier or suppliers, which may not be available on a timely or
cost effective basis. The Company's operating results could be adversely
affected if a significant supplier was unable to deliver sufficient product.
5. 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 applicable 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 applicable period. The calculation of
diluted earnings per share did not include shares underlying approximately 9,200
and 29,550 options for the three months ended June 30, 2004 and 2003,
respectively, since they were antidilutive for the periods presented. The
calculation of diluted earnings per share did not include shares underlying
approximately 9,200 and 341,800 options for the six months ended June 30, 2004
and 2003, respectively, since they were antidilutive for the periods presented.
A reconciliation of the basic and diluted earnings per share computation
is as follows:
For the three months ended For the six months ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income available to common stockholders $ 6,108 $ 5,026 $ 11,855 $ 9,792
=========== =========== =========== ===========
Weighted average common shares for basic earnings per share 16,248,921 16,548,721 16,331,467 17,000,392
Add: dilutive effect of restricted stock 214,143 346,311 208,951 342,988
Add: dilutive effect of stock options 488,159 263,490 494,235 237,450
----------- ----------- ----------- -----------
Weighted average common shares and equivalents
for diluted earnings per share 16,951,223 17,158,522 17,034,653 17,580,830
=========== =========== =========== ===========
Basic earnings per share $ 0.38 $ 0.30 $ 0.73 $ 0.58
Diluted earnings per share $ 0.36 $ 0.29 $ 0.70 $ 0.56
6. Goodwill and Goodwill Amortization
The Company accounts for goodwill in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets," which requires that goodwill and certain
other intangible assets having indefinite lives no longer be amortized to
earnings, but instead be tested for impairment annually and on an interim basis
if events or changes in circumstances indicate that goodwill might be impaired.
The Company performed its annual test for impairment 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. As of June 30, 2004, there were no events or
changes in circumstances that would indicate that goodwill might be impaired.
The carrying value of goodwill as of June 30, 2004 increased $7.3 million as a
result of the Company's recent acquisitions (see Note 10). The carrying value of
goodwill of $62.7 million as of June 30, 2004 is attributable to the North
America geographic segment.
11
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
7. Long-Term Debt
Long-term debt consisted of the following at June 30, 2004 and December
31, 2003:
June 30, December 31,
2004 2003
------------ ------------
Revolving Credit Facillity $ 20,000 $ 10,000
Term Loan 53,177 53,448
Less: current maturities (545) (545)
------------ ------------
Total long-term debt $ 72,632 $ 62,903
============ ============
On November 9, 2001 the Company entered into a Credit Agreement with a
group of lenders (the "Credit Agreement") that provided for secured borrowings
and the issuance of letters of credit in an aggregate amount not to exceed
$225.0 million, comprised of a $125.0 million Revolving Credit Facility (the
"Revolving Credit Facility") and a $100.0 million Term Loan (the "Term Loan").
The Credit Agreement required the Company to manage its interest rate risk with
respect to at least 50% of the aggregate principal amount of the Term Loan for a
period of at least 36 months. Accordingly, the Company entered into two interest
rate swap agreements in notional amounts of $50.0 million and $30.0 million to
convert the variable interest rate payable on the Term Loan to a fixed interest
rate in order to hedge the exposure to variability in expected future cash
flows. These interest rate swap agreements were designated as cash flow hedges.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of the Company's stock permitted to be repurchased from $20.0 million to
$30.0 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 $30.0
million to $58.0 million and to reduce the Term Loan interest rates to LIBOR
plus a margin of from 2.75% to 3.75%, from LIBOR plus a margin of from 3.50% to
3.75%, depending on the Company's leverage ratio, or the Fleet Bank base lending
rate plus a margin of from 1.75% to 2.75%, from the Fleet Bank base lending rate
plus a margin of from 2.50% to 2.75%, depending on the Company's leverage ratio.
On March 5, 2003, the Credit Agreement was amended to increase the total amount
of the Company's stock permitted to be repurchased from $58.0 million to $78.0
million, to reduce the minimum earnings before interest, taxes, depreciation and
amortization covenant to $100.0 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 amended (the "Fourth Amendment") to reduce
the aggregate amount of the Revolving Credit Facility from $125.0 million to
$95.0 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. On May 7, 2004, the Credit Agreement
was amended (the "Fifth Amendment") to increase the amount of the Company's
stock permitted to be repurchased from $78.0 million to $108.0 million, to
increase the aggregate amount of acquisition consideration payable for
acquisitions from $30.0 million to $60.0 million and to remove the requirement
for annual borrowing base audits so long as $50.0 million or more of borrowings
are available under the Credit Agreement and the fixed charge ratio, as defined
in the Fifth Amendment, is 2.0 or higher. Effective June 1, 2004, the Credit
Agreement was further amended (the "Sixth Amendment") to reduce and fix the Term
Loan interest rate to LIBOR plus a margin of 1.25%, from LIBOR plus a margin of
2.25%, 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 1.25%.
During the third quarter of 2003, the Company revised its cash flow
estimates and prepaid $20.0 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 $50.0 million and $22.0 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.
12
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
8. Commitments and Contingencies
Guarantees and indemnifications
The Company has applied the disclosure provisions of FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others," to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The 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.
It is not possible to predict the maximum potential future payments under
these agreements. As of June 30, 2004, 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 adverse effect on the Company's financial
position, results of operations or cash flows.
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the normal course of business, the Company
has been party to occasional lawsuits relating to the Company's business. These
may involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies related to these and other
subsequent proceedings since the ultimate resolutions of the legal matters
cannot be determined and a minimum cost or amount of loss cannot be reasonably
estimated. In the opinion of the Company's management, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on the Company's financial position, results of operations or cash flows.
Risks and uncertainties
In October 2003, the Company implemented Phase II of its 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. The Company believes that it has satisfactorily resolved the issues
relating to delays in product shipments and service responsiveness initially
experienced in connection with the ERP system implementation. However, as the
Company stabilizes the ERP system, it continues to experience certain temporary
processing inefficiencies affecting billings, which in turn have negatively
impacted accounts receivable levels and the calculation of sales compensation.
The Company's ability to return accounts receivable to historical levels has
been impacted by delays in collections resulting from customer inquiries
relating to changes to billing policies and invoice format, an increase in
billing adjustment activity and the temporary suspension of account statement
and collection notice mailings on delinquent amounts. In addition, the increase
in accounts receivable results from the delays in the implementation of certain
automated tools to assist in collection activities. The Company believes that
the increase in accounts receivable is temporary. The Company has provided for
collection losses and adjustment activity on the increase in accounts receivable
at rates higher than its historical experience. However, if
13
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
collection losses related to accounts receivable are significantly higher than
the amounts provided, the Company would recognize an increase in its provision
for bad debt. With respect to the calculation of sales compensation, the Company
continues to work through certain of the temporary processing inefficiencies
resulting in data inaccuracies and potential inaccuracies in calculated sales
compensation. Due to these issues, the Company has continued to apply alternate
methodologies to calculate and pay sales compensation. While the Company
believes that it has recognized the proper amount of sales compensation, there
is a potential that the resolution of these data inaccuracies could result in
additional expense for sales compensation. These issues, coupled with certain
revisions to the Company's billing practices, could have a negative impact on
customer and employee satisfaction and retention, which could result in a
potential loss of business. The Company remains engaged in a period of
stabilization and clean up, as is typical of a large ERP system implementation
and the Company anticipates this transition will be substantially completed
during 2004. Although no assurance can be given that these efforts related to
accounts receivable and sales compensation 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 will have a
material adverse effect on its financial position, results of operations or
future cash flows.
9. Separation Agreements
The Company and Pitney Bowes entered into a transition services agreement
that provided for Pitney Bowes to provide certain services to the Company 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 in accordance with
the terms of the agreements.
The Company and Pitney Bowes entered into a 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.
This agreement, the initial term of which expired on July 1, 2004, has been
extended under the same terms and conditions, through September 30, 2004. The
Company is confident that it will enter into a new service agreement with Pitney
Bowes as it relates to field service of equipment in certain remote geographic
locations in the near future. Services provided under this agreement are at
negotiated prices.
The Company paid Pitney Bowes $1.3 million and $2.6 million for the three
and six months ended June 30, 2004, respectively, in connection with field
service of equipment. The Company paid Pitney Bowes $4.0 million and $10.4
million for the three and six months ended June 30, 2003, respectively, in
connection with the transition services agreement including field service of
equipment and other administrative expenses.
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.
10. Acquisitions
Effective June 15, 2004, 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 in the United States,
to expand the Company's geographic sales and service capabilities. The aggregate
purchase price was $7.4 million, consisting of $6.0 million cash paid at
closing, $0.3 million payable 120 days from closing and four equal annual
installments of $0.3 million payable June 15, 2005 through June 15, 2008. Of the
aggregate purchase price, $2.3 million was allocated to the assets acquired and
liabilities assumed at the date of acquisition and $5.1 million was allocated to
intangible and other assets, of which $3.8 million was goodwill.
Effective March 16, 2004, the Company completed its acquisition of
substantially all of the assets and business of an independent dealer of copier
and multifunctional equipment and related support services in Canada, to
continue to expand the
14
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Company's geographic sales and service capabilities. The aggregate purchase
price was $4.4 million, consisting of $3.8 million cash paid at closing, $0.3
million payable 120 days from closing and $0.3 million payable 24 months after
closing. Of the aggregate purchase price, $0.6 million was allocated to the
assets acquired and liabilities assumed at the date of acquisition and $3.8
million was allocated to intangible and other assets, of which $3.5 million was
goodwill.
Effective August 30, 2003, the Company completed its acquisition of
substantially all of the assets and business of one independent dealer of copier
and multifunctional equipment and related support services in the United States,
to expand the Company's geographic sales and service capabilities. The aggregate
purchase price was $4.1 million, of which $0.8 million was allocated to the
assets acquired and liabilities assumed at the date of acquisition and $3.3
million was allocated to intangible and other assets, of which $2.8 million was
goodwill.
The 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
dates of acquisition.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto, included in our latest
Annual Report on Form 10-K for the year ended December 31, 2003 filed with the
United States Securities and Exchange Commission on March 12, 2004, as well as
the unaudited consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q. This Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. Please see
"Risk Factors That Could Cause Results To Vary" and "Special Note About
Forward-Looking Statements" for a discussion of the uncertainties, risks and
assumptions associated with these forward-looking statements. Our actual results
could differ materially from those forward-looking statements discussed in this
section. For the purposes of the following discussion, unless the context
otherwise requires, "Imagistics International Inc.," "Imagistics," "We" and
"Our," refers to Imagistics International Inc. and subsidiaries.
OVERVIEW
Imagistics is a large direct sales, service and marketing organization
offering business document imaging and management solutions, including copiers,
multifunctional products and facsimile machines, in the United States, Canada
and 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
stand-alone 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. 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.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Revenue Recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/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.
16
Support services contracts, which often include supplies, are generally
for an initial term of one year with automatic renewals unless we receive prior
notice of cancellation. Under the terms of support services contracts, we bill
our customers either a flat 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 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 and our estimates relating to delinquencies
associated with the changes in our billing policies and invoice format
associated with the implementation of our enterprise resource planning ("ERP")
system.
Inventories
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demands.
Rental Equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service prior to October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
Revenues
(Dollars in thousands)
The following table shows our revenue sources by segment for the periods
indicated.
For the three months ended For the six months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
North America $ 146,127 $ 150,899 $ 298,760 $ 296,402
United Kingdom 5,400 5,017 11,089 10,436
------------ ------------ ------------ ------------
Total revenue $ 151,527 $ 155,916 $ 309,849 $ 306,838
============ ============ ============ ============
17
Our revenue consists of three business lines: copier/MFP, facsimile and
sales to Pitney Bowes of Canada. The following table shows our revenue and
growth rates versus the prior year by revenue source and revenue type by our
three business lines, copier/MFP products and facsimile products, each of which
excludes sales to Pitney Bowes of Canada, for the periods indicated. Sales to
Pitney Bowes of Canada are presented separately as it operates under a separate
reseller agreement. There is no rental or support service revenue associated
with Pitney Bowes of Canada.
For the three months ended For the six months ended
June 30, June 30,
------------------------------------------ -------------------------------------------
2004 2003 2004 2003
------------------ ------------------- ------------------ -------------------
Growth Growth Growth Growth
Revenue Rate Revenue Rate Revenue Rate Revenue Rate
-------- ------ -------- ------ -------- ------ -------- ------
Sales
Copier/MFP products $ 56,330 11.6% $ 50,487 8.1% $108,388 13.6% $ 95,429 3.6%
Facsimile products 17,256 (21.8%) 22,076 (9.5%) 37,610 (14.2%) 43,818 (9.8%)
Pitney Bowes of Canada 1,604 (74.6%) 6,313 (20.1%) 11,747 (7.4%) 12,682 (5.6%)
-------- -------- -------- --------
Total Sales 75,190 (4.7%) 78,876 (0.2%) 157,745 3.8% 151,929 (1.4%)
Rentals
Copier/MFP products 27,352 9.4% 24,980 7.6% 53,501 7.8% 49,630 7.9%
Facsimile products 26,827 (13.8%) 31,127 (12.7%) 55,089 (13.3%) 63,545 (11.0%)
-------- -------- -------- --------
Total rentals 54,179 (3.4%) 56,107 (4.7%) 108,590 (4.1%) 113,175 (3.6%)
Support services
Copier/MFP products 20,378 8.0% 18,872 4.5% 39,901 6.9% 37,330 1.3%
Facsimile products 1,780 (13.6%) 2,061 (12.4%) 3,613 (18.0%) 4,404 (13.0%)
-------- -------- -------- --------
Total support services 22,158 5.9% 20,933 2.5% 43,514 4.3% 41,734 (0.4%)
Total revenue $151,527 (2.8%) $155,916 (1.5%) $309,849 1.0% $306,838 (2.1%)
======== ======== ======== ========
The following table shows our revenue and growth rates versus the prior
year, by revenue source, by our three business lines, copier/MFP products,
facsimile products and sales to Pitney Bowes of Canada, for the periods
indicated. Sales to Pitney Bowes of Canada are presented separately as it
operates under a separate reseller agreement.
For the three months ended For the six months ended
June 30, June 30,
------------------------------------------ -------------------------------------------
2004 2003 2004 2003
------------------ ------------------- ------------------ -------------------
Growth Growth Growth Growth
Revenue Rate Revenue Rate Revenue Rate Revenue Rate
-------- ------ -------- ------ -------- ------ -------- ------
Revenue
Copier/MFP products $104,060 10.3% $ 94,339 7.2% $201,790 10.6% $182,389 4.2%
Facsimile products 45,863 (17.0%) 55,264 (11.4%) 96,312 (13.8%) 111,767 (10.6%)
-------- -------- -------- --------
Revenue excluding
Pitney Bowes of Canada 149,923 0.2% 149,603 (0.5%) 298,102 1.3% 294,156 (2.0%)
Pitney Bowes of Canada 1,604 (74.6%) 6,313 (20.1%) 11,747 (7.4%) 12,682 (5.6%)
-------- -------- -------- --------
Total revenue $151,527 (2.8%) $155,916 (1.5%) $309,849 1.0% $306,838 (2.1%)
======== ======== ======== ========
Sales to Pitney Bowes of Canada under a reseller agreement are at margins
significantly below the typical margins on sales to our direct customers. We
expect to maintain a reseller agreement 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 revenue 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.
18
Results of Operations
The following table shows our statement of income data, expressed as a
percentage of total revenue, for the periods indicated. The table also shows
cost of sales as a percentage of sales revenue, cost of rentals as a percentage
of rental revenue and our effective tax rate:
As a % of total revenue, except as noted
For the three months ended For the six months ended
June 30, June 30,
--------------------------- -------------------------
2004 2003 2004 2003
------- ------- ------- -------
Equipment sales 27% 27% 28% 26%
Supplies sales 22% 24% 23% 24%
------- ------- ------- -------
Total sales 49% 51% 51% 50%
Equipment rentals 36% 36% 35% 37%
Support services 15% 13% 14% 13%
------- ------- ------- -------
Total revenue 100% 100% 100% 100%
Cost of sales 28% 31% 30% 30%
Cost of rentals 10% 12% 10% 12%
Selling, service and administrative expenses 54% 50% 53% 51%
------- ------- ------- -------
Operating income 8% 7% 7% 7%
Interest expense 1% 1% 0% 1%
------- ------- ------- -------
Income before income taxes 7% 6% 7% 6%
Provision for income taxes 3% 3% 3% 3%
------- ------- ------- -------
Net income 4% 3% 4% 3%
======= ======= ======= =======
Cost of sales as a percentage of sales revenue 56.4% 61.1% 57.9% 61.5%
======= ======= ======= =======
Cost of rentals as a percentage of rental revenue 28.3% 33.3% 28.7% 33.4%
======= ======= ======= =======
Effective tax rate 42.4% 43.0% 42.7% 41.8%
======= ======= ======= =======
Three months ended June 30, 2004 and June 30, 2003
Revenue. For the three months ended June 30, 2004, total revenue of $151.5
million decreased 2.8% versus revenue of $155.9 million for the three months
ended June 30, 2003 reflecting lower sales to Pitney Bowes of Canada, lower
facsimile sales, rentals and support services revenue, partially offset by
higher copier/MFP rentals, support services revenue and sales. Excluding the
impact of revenue attributable to sales to Pitney Bowes of Canada, which
operates under a reseller agreement, total revenue for the second quarter was
slightly higher versus the prior year.
Equipment and supplies sales revenue of $75.2 million decreased 4.7% for
the three months ended June 30, 2004 from $78.9 million for the three months
ended June 30, 2003, reflecting lower sales to Pitney Bowes of Canada and lower
facsimile sales, partially offset by higher copier/MFP sales. Excluding the
impact of sales to Pitney Bowes of Canada, total sales revenue increased 1.4%
compared with the prior year. Copier/MFP sales increased 11.6% reflecting an
improvement in demand for our mid-market digital black-and-white multifunctional
products. Facsimile equipment and supplies sales declined 21.8% compared with
the prior year reflecting the continuing industry-wide reduction in facsimile
usage.
Equipment rental revenue of $54.2 million for the three months ended June
30, 2004 declined 3.4% versus equipment rental revenue of $56.1 million for the
three months ended June 30, 2003, reflecting the continuing expected decline in
facsimile rental revenues, partially offset by an increase in copier/MFP rental
revenues resulting from a continuing copier/MFP marketing focus. Rental revenue
derived from our copier/MFP product line increased 9.4% primarily reflecting the
impact of a continuing increase in page volumes. Rental revenue from our
facsimile product line declined 13.8% versus the prior year reflecting a lower
installed base and lower unit pricing.
Support services revenue for the three months ended June 30, 2004 of $22.2
million, primarily derived from stand-alone service contracts, increased 5.9%
versus support services revenue of $20.9 million for the three months ended June
30, 2003, reflecting higher copier/MFP service revenue resulting primarily from
higher page volumes, partially offset by lower facsimile service revenue.
19
Cost of sales. Cost of sales was $42.4 for the three months ended June 30,
2004 compared with $48.2 for the same period in 2003 and cost of sales as a
percentage of sales revenue decreased to 56.4% for the three months ended June
30, 2004 from 61.1% for the three months ended June 30, 2003. This decrease was
primarily due to lower product cost, lower inventory obsolescence charges and
improved profit margins on copier/MFP supplies, partially offset by the
continuing shift in product mix toward lower margin copier/MFP products, away
from the facsimile product line, a reduction in lower margin sales to Pitney
Bowes of Canada and lower margins on facsimile equipment and supplies sales.
Cost of rentals. Cost of rentals was $15.3 million for the three months
ended June 30, 2004 compared with $18.7 million for the three months ended June
30, 2003 and cost of rentals as a percentage of rental revenue declined 5.0
percentage points to 28.3% for the three months ended June 30, 2004 from 33.3%
for the three months ended June 30, 2003. This decline was due to product cost
improvements and, to a lesser extent, the impact of our disciplined focus on
improving profit margins, partially offset by an increase in the continuing mix
of copier/MFP product rentals which have a higher cost as a percentage of rental
revenue than facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $82.3 million were 54.3% of total revenue for the
three months ended June 30, 2004 compared with $78.6 million, or 50.4% of total
revenue for the three months ended June 30, 2003. Selling, service and
administrative expenses increased 4.6% versus the prior year primarily resulting
from higher compensation and benefit expenses relating to higher copier/MFP
revenue coupled with increased sales headcount, higher operating expenses
associated with direct distribution expansion, higher administrative costs
related to the implementation and stabilization of our ERP system and an
increase in bad debt expense, partially offset by lower costs resulting from the
absence of payments to Pitney Bowes for information technology charges and lower
service charges under the transition services agreement, lower advertising
expenses and an insurance recovery for business interruption claims related to
the World Trade Center.
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 $0.9 million for the three
months ended June 30, 2004 from $1.6 million for the three months ended June 30,
2003 primarily due to lower interest rates, partially offset by higher debt
levels. The weighted average interest rate for the three months ended June 30,
2004 was 2.9% versus 6.6% for the three months ended June 30, 2003.
Effective tax rate. Our effective tax rate was 42.4% for the three months
ended June 30, 2004 compared with 43.0% for the three months ended June 30, 2003
due to a higher proportion of non-U.S. income.
Six months ended June 30, 2004 and June 30, 2003
Revenue. For the six months ended June 30, 2004, total revenue of $309.8
million increased 1.0% versus revenue of $306.8 million for the six months ended
June 30, 2003 reflecting higher copier/MFP sales, rentals and support services
revenue, partially offset by lower facsimile revenue and lower sales to Pitney
Bowes of Canada. Excluding the impact of revenue attributable to sales to Pitney
Bowes of Canada, which operates under a reseller agreement, total revenue for
the six months ended June 30, 2004 increased 1.3% versus the same period in the
prior year.
Equipment and supplies sales revenue of $157.7 million increased 3.8% for
the six months ended June 30, 2004 from $151.9 million for the six months ended
June 30, 2003, reflecting higher copier/MFP sales, partially offset by lower
facsimile sales and lower sales to Pitney Bowes of Canada. Excluding the impact
of sales to Pitney Bowes of Canada, total sales revenue increased 4.8% compared
with the prior year. Copier/MFP sales increased 13.6% with particular
improvement in mid-market digital black-and-white multifunctional products as
well as increased copier/MFP supplies sales. Facsimile equipment and supplies
sales declined 14.2% compared with the prior year reflecting the continuing
industry-wide reduction in facsimile usage.
Equipment rental revenue of $108.6 million for the six months ended June
30, 2004 declined 4.1% versus equipment rental revenue of $113.2 million for the
six months ended June 30, 2003, reflecting the continuing expected decline in
facsimile rental revenues, partially offset by an increase in copier/MFP rental
revenues resulting from a continuing copier/MFP marketing focus. Rental revenue
derived from our copier/MFP product line increased 7.8% primarily reflecting the
impact of an increase in page volumes. Rental revenue from our facsimile product
line declined 13.3% versus the prior year reflecting a lower installed base and
lower pricing.
Support services revenue for the six months ended June 30, 2004 of $43.5
million, primarily derived from stand-alone service contracts, increased 4.3%
versus support services revenue of $41.7 million for the six months ended June
30, 2003, reflecting higher copier/MFP service revenue resulting primarily from
higher page volumes, partially offset by lower facsimile service revenue.
20
Cost of sales. Cost of sales was $91.3 million for the six months ended
June 30, 2004 compared with $93.4 million for the same period in 2003 and cost
of sales as a percentage of sales revenue decreased to 57.9% for the six months
ended June 30, 2004 from 61.5% for the six months ended June 30, 2003. This
decrease was primarily due to lower product cost, lower inventory obsolescence
charges and improved profit margins on copier/MFP supplies, partially offset by
the continuing shift in product mix toward lower margin copier/MFP products,
away from the facsimile product line and lower margins on facsimile equipment
and supplies sales.
Cost of rentals. Cost of rentals was $31.1 million for the six months
ended June 30, 2004 compared with $37.9 million for the six months ended June
30, 2003 and cost of rentals as a percentage of rental revenue declined 4.7
percentage points to 28.7% for the six months ended June 30, 2004 from 33.4% for
the six months ended June 30, 2003. This decline was due to product cost
improvements coupled with the impact of our disciplined focus on improving
profit margins, partially offset by an increase in the continuing mix of
copier/MFP product rentals which have a higher cost as a percentage of rental
revenue than facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $164.9 million were 53.2% of total revenue for the
six months ended June 30, 2004 compared with $155.5 million, or 50.7% of total
revenue for the six months ended June 30, 2003. Selling, service and
administrative expenses increased 6.0% versus the prior year primarily resulting
from higher compensation and benefit expenses relating to higher copier/MFP
revenue coupled with increased sales headcount, higher operating expenses
associated with direct distribution expansion, higher administrative costs
related to the implementation and stabilization of our ERP system and an
increase in bad debt expense, partially offset by lower costs resulting from the
absence of payments to Pitney Bowes for information technology charges and lower
service charges under the transition services agreement, lower advertising
expenses and an insurance recovery for business interruption claims related to
the World Trade Center.
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 $1.8 million for the six
months ended June 30, 2004 from $3.2 million for the six months ended June 30,
2004 primarily due to lower interest rates, partially offset by higher debt
levels. The weighted average interest rate for the six months ended June 30,
2004 was 3.0% versus 6.8% for the six months ended June 30, 2003.
Effective tax rate. Our effective tax rate was 42.7% for the six months
ended June 30, 2004 compared with 41.8% for the six months ended June 30, 2003
primarily due to an increase in state and local income taxes.
Liquidity and Capital Resources
On November 9, 2001 we entered into a Credit Agreement with a group of
lenders (the "Credit Agreement") that provided for secured borrowings or the
issuance of letters of credit in an aggregate amount not to exceed $225.0
million, comprised of a $125.0 million Revolving Credit Facility (the "Revolving
Credit Facility") and a $100.0 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 subsidiaries as security for our obligations under the Credit Agreement.
Available borrowings and letter of credit issuance under the Revolving Credit
Facility are determined by a borrowing base consisting of a percentage of our
eligible accounts receivable, inventory, rental assets and accrued and advance
billings, less outstanding borrowings under the Term Loan.
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio (total debt to EBITDA), as
well as other covenants, which, among other things, place limits on dividend
payments and capital expenditures.
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at our option, on either the LIBOR rate plus a
margin of from 2.25% to 3.00%, depending on our leverage ratio, or the Fleet
Bank base lending rate plus a margin of from 1.25% to 2.00%, depending on our
leverage ratio. Amounts borrowed under the Term Loan bore interest at variable
rates based, at our option, on either the LIBOR rate plus a margin of 3.50% or
3.75%, depending on our leverage ratio, or the Fleet Bank base lending rate plus
a margin of 2.50% to 2.75%, depending on our leverage ratio. A commitment fee of
from 0.375% to 0.500% on the average daily unused portion of the Revolving
Credit Facility was payable quarterly, in arrears, depending on our leverage
ratio.
The Credit Agreement required us to manage our interest rate risk with
respect to at least 50% of the aggregate principal amount of the Term Loan for a
period of at least 36 months. Accordingly, we entered into two interest rate
swap agreements in the notional amounts of $50.0 million and $30.0 million to
convert the variable interest rate payable on the Term Loan to a fixed interest
rate in order to hedge the exposure to variability in expected future cash
flows. These interest rate swap agreements had been designated as cash flow
hedges. The counterparties to the interest rate swap agreements were major
international financial
21
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 $50.0 million and the $30.0
million swap agreements, respectively.
Our initial borrowings of $150.0 million under the Credit Agreement,
consisting of $100.0 million under the Term Loan and $50.0 million under the
Revolving Credit Facility, were used to repay amounts due to Pitney Bowes and to
pay a dividend to Pitney Bowes.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of our stock permitted to be repurchased from $20.0 million to $30.0
million. On July 19, 2002, the Credit Agreement was further amended to increase
the total amount of our stock permitted to be repurchased from $30.0 million to
$58.0 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 $58.0 million to
$78.0 million, to reduce the minimum EBITDA covenant to $100.0 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 amended (the
"Fourth Amendment") to reduce the aggregate amount of the Revolving Credit
Facility from $125.0 million to $95.0 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. On May 7, 2004, the Credit Agreement was amended (the "Fifth
Amendment") to increase the amount of our stock permitted to be repurchased from
$78.0 million to $108.0 million, to increase the aggregate amount of acquisition
consideration payable for acquisitions from $30.0 million to $60.0 million and
to remove the requirement for annual borrowing base audits so long as $50.0
million or more of borrowings are available under the Credit Agreement and the
fixed charge ratio, as defined in the Fifth Amendment, is 2.0 or higher.
Effective June 1, 2004, the Credit Agreement was further amended (the "Sixth
Amendment") to reduce and fix the Term Loan interest rate to LIBOR plus a margin
of 1.25%, from LIBOR plus a margin of 2.25%, 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 1.25%. At June 30, 2004, we were in compliance with all of the financial
covenants.
During the third quarter of 2002, we revised our cash flow estimates and
prepaid $8.0 million of the amount outstanding under the Term Loan. This
prepayment was covered by a portion of the $30.0 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 $8.0 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 income (loss) into interest
expense. We also unwound $8.0 million of the $30.0 million interest rate swap
agreement.
During the third quarter of 2003, we revised our cash flow estimates and
prepaid $20.0 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
$50.0 million and $22.0 million. Accordingly, we 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.
At June 30, 2004, $73.2 million of borrowings were outstanding under the
Credit Agreement, consisting of $20.0 million of borrowings under the Revolving
Credit Facility and $53.2 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $121.8 million. Approximately $74.0
million of the Revolving Credit Facility was available for borrowing at June 30,
2004. The Term Loan is payable in 10 consecutive equal quarterly installments of
$0.1 million due September 30, 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 June 30, 2004 and 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.
The ratio of current assets to current liabilities increased to 3.0 to 1
at June 30, 2004 compared to 2.8 to 1 at December 31, 2003 due to increases in
accounts receivable, current deferred taxes and accrued billings and a reduction
in accounts payable and accrued liabilities, partially offset by a reduction in
inventories. At June 30, 2004, our total debt as a percentage of total
22
capitalization increased to 21.3% from 19.2% at December 31, 2003 due to an
increase in our debt and stock repurchases under our stock buy back program.
In October 2003, we implemented 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. We
believe that we have satisfactorily resolved the issues relating to delays in
product shipments and service responsiveness initially experienced in connection
with the ERP system implementation. However, as we stabilize the ERP system, we
continue to experience certain temporary processing inefficiencies affecting our
billings, which in turn have negatively impacted accounts receivable levels and
the calculation of sales compensation. Our ability to return accounts receivable
to historical levels has been impacted by delays in collections resulting from
customer inquiries relating to changes to our billing policies and invoice
format, an increase in billing adjustment activity and the temporary suspension
of account statement and collection notice mailings on delinquent amounts. In
addition, the increase in accounts receivable results from the delays in the
implementation of certain automated tools to assist in collection activities. We
believe that the increase in accounts receivable is temporary. We have provided
for collection losses and adjustment activity on the increase in accounts
receivable at rates higher than our historical experience. However, if
collection losses related to accounts receivable are significantly higher than
the amounts we have provided, we would recognize an increase in our provision
for bad debt. With respect to the calculation of sales compensation, we continue
to work through certain of the temporary processing inefficiencies resulting in
data inaccuracies and potential inaccuracies in calculated sales compensation.
Due to these issues, we have continued to apply alternate methodologies to
calculate and pay sales compensation. While we believe that we have recognized
the proper amount of sales compensation, there is a potential that the
resolution of these data inaccuracies could result in additional expense for
sales compensation. These issues, coupled with certain revisions to our billing
practices, could have a negative impact on customer and employee satisfaction
and retention, which could result in a potential loss of business. We remain
engaged in a period of stabilization and clean up, as is typical of a large ERP
system implementation and we anticipate this transition will be substantially
completed during 2004. Although no assurance can be given that these efforts
related to accounts receivable and sales compensation 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 $25.7 million for the six
months ended June 30, 2004 compared with $56.4 million for the six months ended
June 30, 2003. Net income was $11.9 million and $9.8 million, respectively.
Non-cash charges for depreciation and amortization and provisions for bad debt
and inventory obsolescence in the aggregate provided cash of $42.6 million and
$46.3 million for the six months ended June 30, 2004 and 2003, respectively.
Changes in the principal components of working capital required $26.3 million
and $2.9 million of cash in the six months ended June 30, 2004 and 2003,
respectively. Of the $26.3 million increase in our working capital requirements
in the six months ended June 30, 2004, approximately $17.3 million resulted from
an increase in accounts receivable due to delays in collections resulting from
customer inquiries related to changes to the Company's billing policies and
invoice format, an increase in billing adjustment activity, the temporary
suspension of account statement and collection notice mailings on delinquent
amounts and delays in the implementation of automated tools to assist in the
collection activities associated with the implementation of our ERP system, an
increase in accrued billings of approximately $3.8 million and a decrease in
advance billings of $2.2 million, both relating to timing of invoicing to
customers and a decrease in accounts payable and accrued liabilities of
approximately $6.4 million primarily relating to timing of inventory and other
payments. This was partially offset by a decrease in inventory levels of $3.5
million. The $2.9 million of cash used by working capital changes in the six
months ended June 30, 2003 resulted from a decrease in accounts payable and
accrued liabilities of approximately $12.8 million primarily consisting of $4.0
million of incentive compensation payments and $8.1 million of tax payments,
partially offset by $12.3 million of net reductions in accounts receivable
resulting primarily from collections.
We used $37.7 million and $26.4 million in investing activities for the
six months ended June 30, 2004 and 2003, respectively. Investment in rental
equipment assets totaled $21.3 million and $17.4 million for the six months
ended June 30, 2004 and 2003, respectively. The increased level of rental asset
expenditures results from awards of new state rental contracts, partially offset
by lower facsimile placements. Capital expenditures for property, plant and
equipment were $6.7 million and $9.0 million for the six months ended June 30,
2004 and 2003, respectively, of which the investment in our ERP system accounted
for $2.8 million and $5.5 million, respectively. During the six months ended
June 30, 2004, we acquired two independent dealers to expand our sales and
service capabilities as described in Note 10 of our "Notes to Consolidated
Financial Statements."
Cash used in financing activities was $0.2 million for the six months
ended June 30, 2004 compared with $19.1 million for the six months ended June
30, 2003. Cash used in financing activities in the six months ended June 30,
2004 reflects net
23
borrowings under the Revolving Credit Facility of $10.0 million. For the six
months ended June 30, 2004 and 2003 cash was used to repurchase 298,900 shares
of our stock at a cost of $12.3 million and 1,010,000 shares at a cost of $20.5
million, respectively.
During the six month period ended June 30, 2004, we had no material
changes in our contractual obligations and commitments. We had no material
commitments other than supply agreements with vendors that extend only to
equipment supplies and parts ordered under purchase orders; there are no
long-term purchase requirements. We will continue to make additional investments
in facilities, rental equipment, computer equipment and systems and our
distribution network as required to support our operations. We anticipate
investments in rental equipment assets for new and replacement programs in
amounts consistent with the recent past. We estimate that we will spend
approximately $5.0 million over the remainder of 2004 to continue to enhance our
information systems infrastructure and implement our ERP system.
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 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. Although many of our existing rental
placements are analog equipment, the depreciable life of this equipment is three
years and most of this equipment is reaching a fully depreciated status. All of
our new product purchases and new product placements are digital equipment.
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 Asia. In addition, our primary suppliers
sell products in competition with us, either directly or through dealer
channels. Four 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.
We have a geographic dispersion of business and assets located across
North America 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.
A portion of our international business is transacted in local currency.
Currently, approximately 20% of our total product purchases, based on costs, are
denominated in yen. The majority of our remaining product purchases are
denominated in U.S. dollars and are produced by Japanese suppliers in
manufacturing facilities located in China. Currently, the exchange rate of the
Chinese renminbi and the U.S. dollar is fixed. If the Chinese government was 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
24
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
In October 2003, we implemented 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. We
believe that we have satisfactorily resolved the issues relating to delays in
product shipments and service responsiveness initially experienced in connection
with the ERP system implementation. However, as we stabilize the ERP system, we
continue to experience certain temporary processing inefficiencies affecting our
billings, which in turn have negatively impacted accounts receivable levels and
the calculation of sales compensation. Our ability to return accounts receivable
to historical levels has been impacted by delays in collections resulting from
customer inquiries relating to changes to our billing policies and invoice
format, an increase in billing adjustment activity and the temporary suspension
of account statement and collection notice mailings on delinquent amounts. In
addition, the increase in accounts receivable results from the delays in the
implementation of certain automated tools to assist in collection activities. We
believe that the increase in accounts receivable is temporary. We have provided
for collection losses and adjustment activity on the increase in accounts
receivable at rates higher than our historical experience. However, if
collection losses related to accounts receivable are significantly higher than
the amounts we have provided, we would recognize an increase in our provision
for bad debt. With respect to the calculation of sales compensation, we continue
to work through certain of the temporary processing inefficiencies resulting in
data inaccuracies and potential inaccuracies in calculated sales compensation.
Due to these issues, we have continued to apply alternate methodologies to
calculate and pay sales compensation. While we believe that we have recognized
the proper amount of sales compensation, there is a potential that the
resolution of these data inaccuracies could result in additional expense for
sales compensation. These issues, coupled with certain revisions to our billing
practices, could have a negative impact on customer and employee satisfaction
and retention, which could result in a potential loss of business. We remain
engaged in a period of stabilization and clean up, as is typical of a large ERP
system implementation and we anticipate this transition will be substantially
completed during 2004. Although no assurance can be given that these efforts
related to accounts receivable and sales compensation 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. For the three months ended June 30, 2004 and 2003, revenues from
Pitney Bowes, exclusive of equipment sales to PBCC for lease to the end user,
accounted for approximately 5% and 9%, respectively, of our total revenue and
for the six months ended June 30, 2004 and 2003, accounted for approximately 7%
and 8% of our total revenue, respectively. However, no assurance can be given
that Pitney Bowes will continue to purchase our products and services.
In connection with the Distribution, Imagistics and Pitney Bowes entered
into a non-exclusive intellectual property agreement that allowed us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. In 2002, we began introducing new products under the "Imagistics"
brand name and we initiated a major brand awareness advertising campaign to
establish our new brand name. 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.
Special Note About Forward-Looking Statements
Statements contained in this discussion and elsewhere in this report that
are not purely historical are forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, and are based on
management's beliefs, certain assumptions and current expectations. These
statements may be identified by their use of forward-looking terminology such as
the words "expects", "projects", "anticipates", "intends" and other similar
words. Such forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. The
forward-looking statements contained herein are made as of the date hereof and,
except as required by law, we do not undertake any obligation to update any
forward-looking statements, whether as a result of future events, new
information or otherwise.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain exposures to market risk related to changes in interest
rates and foreign currency exchange rates. Currently, we do not utilize any form
of derivative financial instruments to manage our interest rate risk or 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 and the Canadian Dollar as the financial results of
our U.K. subsidiary and Canadian subsidiary are translated into U.S. dollars for
consolidation. The effect of foreign exchange rate fluctuation for the quarter
ended June 30, 2004 was not material.
ITEM 4. 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. Based on our evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring items are recorded,
processed, summarized and reported and alerting them to material information
required to be included in our periodic SEC filings relating to the Company,
including its consolidated subsidiaries in a timely fashion.
We implemented an ERP system in the fourth quarter of 2003 and as a
result, we are in a period of stabilization and clean up. During this period, we
are refining our procedures surrounding order management and fulfillment,
billing, cash application, service management and sales compensation, 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.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we have been party
to occasional lawsuits relating to our business. These may involve litigation or
other claims by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
trademark, patent and other intellectual property matters, equipment, service or
payment disputes with customers, bankruptcy preference claims and disputes with
employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information with respect to the purchase of
shares of our common stock under the stock buy back program during each month in
the second quarter of 2004:
(Dollars in thousands, except per share data)
Total number of Approximate dollar
Total number shares purchased value of shares that
of shares Average price as part of publicly may yet be purchased
Period purchased paid per share announced plan under the plan
- ------------------------------ ------------ -------------- ------------------- --------------------
April 1, 2004 - April 30, 2004 56,600 $ 43.62 56,600 $ 34,343
May 1, 2004 - May 31, 2004 84,500 $ 37.81 84,500 $ 31,149
June 1, 2004 - June 30, 2004 8,900 $ 38.60 8,900 $ 30,805
------- -------
Total 150,000 $ 40.05 150,000
======= =======
In March 2002, the Board of Directors approved a $30.0 million stock buy
back program. In October 2002, the Board of Directors authorized the repurchase
of an additional $28.0 million of our stock, raising the total authorization to
$58.0 million. In July 2003, the Board of Directors authorized the repurchase of
an additional $20.0 million of our stock, raising the total authorization to
$78.0 million. In May 2004, the Board of Directors authorized the repurchase of
an additional $30.0 million of our stock, raising the total authorization to
$108.0 million and, as of June 30, 2004, we have accumulated approximately 3.5
million shares of treasury stock at a cost of approximately $77.2 million. The
stock buy back program has no fixed termination date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on May 11, 2004, two proposals
were voted upon by our stockholders. A brief discussion of each proposal voted
upon at the annual meeting and the number of votes cast for, against and
withheld, as well as the number of abstentions to each proposal are set forth
below.
A vote was taken for the election of three directors to hold office until
our 2007 annual meeting of stockholders and until their respective successors
shall have been duly elected. The aggregate numbers of shares of common stock
voted in person or by proxy for each nominee were as follows:
Nominee For Withheld
-------------------- ------------ ------------
T. Kevin Dunnigan 14,593,935 89,403
James A. Thomas 14,329,250 354,088
Ronald L. Turner 14,426,253 257,085
Other directors include Marc C. Breslawsky and Craig R. Smith, whose terms
of office expire in 2005, and Thelma R. Albright and Ira D. Hall, whose terms of
office expire in 2006.
27
A vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as our auditors for the fiscal year ending December
31, 2004. The aggregate numbers of shares of common stock voted on this proposal
in person or by proxy were as follows:
For Against Abstain
-------------- ----------- -----------
14,242,659 426,962 13,717
Each of the listed proposals were approved by the stockholders in
accordance with our certificate of incorporation, bylaws and the Delaware
General Corporation Law. There were no broker non-votes for either matter.
The foregoing proposals are described more fully in our definitive proxy
statement dated March 29, 2004, filed with the United States Securities and
Exchange Commission pursuant to Section 14 (a) of the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation (3)
3.2 Amended and Restated Bylaws (1)
3.3 Certificate of Designation of Series A Junior Participating Preferred
Stock, dated August 1, 2002 (6)
4.1 Form of Imagistics International Inc. Common Stock Certificate (1)
10.1 Tax Separation Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.2 Transition Services Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.3 Distribution Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.4 Intellectual Property Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.5 Reseller Agreement between Pitney Bowes Management Services and Imagistics
International Inc. (3)
10.6 Reseller Agreement between Pitney Bowes of Canada and Imagistics
International Inc. (3)
10.7 Vendor Financing Agreement between Pitney Bowes Credit Corporation and
Imagistics International Inc. (3)
10.8 Form of Sublease Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (2)
10.9 Form of Sublease and License Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (2)
10.10 Form of Assignment and Novation Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (2)
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky (1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak (1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill Lynch &
Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, as Syndication
Agent, Fleet Capital Corporation, as Administrative Agent (3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe Trust
Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc C.
Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and Joseph D.
Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and Christine
B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John C.
Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris C.
Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark S.
Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and Nathaniel
M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and Joseph W.
Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International Inc.
and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
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)
28
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. (10)
10.35 Amendment No. 5 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 (11)
10.36 Amendment No. 6 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
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.
(10) Incorporated by reference to the Registrant's Form 10-K filed March 12,
2004.
(11) Incorporated by reference to the Registrant's Form 10-Q filed May 10,
2004.
(b) Reports on Form 8-K.
On May 4, 2004, we filed a Current Report on Form 8-K, under Item 12,
which included a copy of our press release dated May 4, 2004 in which we
announced our earnings for the fiscal quarter ended March 31, 2004 and certain
additional matters.
On May 11, 2004, we filed a Current Report on Form 8-K, under Item 9, to
disclose certain executive promotions and the increase of the amount of our
stock buy back program.
On June 1, 2004, we filed a Current Report on Form 8-K, dated June 1,
2004, to furnish under Item 9 of such Form materials used in its presentation to
the financial analyst and investment community.
On July 2, 2004, we filed a Current Report on Form 8-K, reporting under
Item 5 thereof, the Sixth Amendment to the Credit Agreement, dated as of June
30, 2004.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 2004 Imagistics International Inc.
------------------------------------
(Registrant)
By /s/ Timothy E. Coyne
-----------------------------
Name: Timothy E. Coyne
Title: Chief Financial Officer
and Authorized Signatory
30