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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 06-1611068
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
100 Oakview Drive
Trumbull, Connecticut 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
------------------- registered
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Common Stock, par value $0.01 per share The New York Stock Exchange
(together with associated preferred stock purchase rights)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No|_|
The aggregate market value of the common stock held by non-affiliates was
$574,474,563 as of June 30, 2004. The amount shown is based on the closing price
of Imagistics International Inc. Common Stock as reported on the New York Stock
Exchange composite tape on that date.
Number of shares of Imagistics International Inc. Common Stock, par value $0.01,
outstanding as of February 28, 2005: 16,260,007
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Imagistics International Inc. Proxy Statement for the 2005
Annual Meeting of Stockholders - Part III
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IMAGISTICS INTERNATIONAL INC.
Annual Report on Form 10-K
For the Year Ended December 31, 2004
Table of Contents
Item Description Page
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PART I
1 Business............................................................................................... 3
2 Properties............................................................................................. 11
3 Legal Proceedings...................................................................................... 11
4 Submission of Matters to a Vote of Security Holders.................................................... 11
Executive Officers..................................................................................... 12
PART II
5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities................................................................................... 14
6 Selected Financial Data................................................................................ 15
7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 16
7A Quantitative and Qualitative Disclosures About Market Risk............................................. 30
8 Financial Statements and Supplementary Data............................................................ 31
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 59
9A Controls and Procedures................................................................................ 59
9B Other Information...................................................................................... 60
PART III
10 Directors and Executive Officers of the Registrant..................................................... 61
11 Executive Compensation................................................................................. 61
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......... 61
13 Certain Relationships and Related Transactions......................................................... 62
14 Principal Accountant Fees and Services................................................................. 62
PART IV
15 Exhibits and Financial Statement Schedules............................................................. 63
Signatures............................................................................................. 66
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Certain statements contained in this filing with the United States Securities
and Exchange Commission on Form 10-K that are not purely historical are
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, 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. These risks and
uncertainties include, but are not limited to, general economic, business and
market conditions, competitive pricing pressures, timely development and
acceptance of new products, our reliance on third party suppliers, potential
disruptions affecting the international shipment of goods, disruptions in
implementing information technology systems, our ability to create brand
recognition and currency and interest rate fluctuations. Certain of these risks
and uncertainties are discussed more fully in Part II, Management's Discussion
and Analysis of Financial Condition and Results of Operations, Risk Factors That
Could Cause Results to Vary and elsewhere in this filing on Form 10-K. The
forward-looking statements contained herein are made as of the date hereof and
we, except as may be required by law, do not undertake any obligation to update
any forward-looking statements, whether as a result of future events, new
information or otherwise.
PART I
ITEM 1. BUSINESS
General
Imagistics International Inc. ("Imagistics" or the "Company"),
headquartered in Trumbull, Connecticut, is an independent direct sales, service
and marketing organization offering business document imaging and management
solutions, including copiers, multifunctional products, often referred to as
MFPs, and facsimile machines, in the United States, Canada and the United
Kingdom that sources its products from various suppliers throughout the world.
MFPs provide businesses with the ability to copy, print, fax, email and scan
documents on a single device and eliminate costs associated with multiple
devices. MFPs also allow businesses to easily move documents from paper images
to digital files and back. We provide our customers with flexible, comprehensive
document imaging products and services at competitive market prices.
History
Imagistics traces its origins to Pitney Bowes Inc. ("Pitney Bowes").
Pitney Bowes began marketing and distributing copiers in 1967 and started
selling facsimile products in 1982. Pitney Bowes' office systems division, which
combined the copier and facsimile product lines, was created in 1998. In 2000,
Pitney Bowes decided to spin-off the United States and the United Kingdom
operations of the office systems division to, among other things, enable the
newly formed company, Imagistics, to more fully realize its potential within the
dynamic office document markets. In connection with the planned spin-off, Pitney
Bowes incorporated the Company as Pitney Bowes Office Systems, Inc. in February
2001 and, in August 2001, contributed substantially all of the business and
assets of its office systems division to the Company. The name of the Company
was changed to Imagistics International Inc. on October 12, 2001, and on
December 3, 2001, 100% of the common stock of the Company was distributed by
Pitney Bowes to the common shareholders of Pitney Bowes based on a distribution
ratio of 1 share of Imagistics common stock for every 12.5 shares of Pitney
Bowes common stock held at the close of business on November 19, 2001 (the
"Distribution" or "Spin-off").
In connection with the Spin-off, we entered into several agreements with
Pitney Bowes and Pitney Bowes subsidiaries including a transition services
agreement with Pitney Bowes providing for certain essential services for a
limited period following the Spin-off, including technology related services and
field equipment maintenance services, agreements with Pitney Bowes Management
Services and Pitney Bowes of Canada Ltd. ("Pitney Bowes of Canada"), under which
they could continue to purchase and use our products and a vendor financing
agreement providing for Pitney Bowes Credit Corporation ("PBCC") to continue as
our primary lease vendor on a multi-year basis after the Spin-off, an
intellectual property agreement with Pitney Bowes allowing us to continue using
the "Pitney Bowes" brand name in the United States and the United Kingdom for a
period of up to two years following the Spin-off, a tax separation agreement and
certain other agreements. Substantially all of the services provided by Pitney
Bowes under these agreements, other than the vendor financing agreement, which
had an initial term of five years, have ceased in accordance with the terms of
the agreements.
The implementation of the order to cash phase of our enterprise resource
planning ("ERP") system in October 2003 permitted us to replace the remaining
information technology related services that had been provided by Pitney Bowes.
We reached a new agreement with Pitney Bowes of Canada in the fourth quarter of
2003 through which Pitney Bowes of Canada may purchase and resell Imagistics'
products in Canada for an additional period of two years on a non-exclusive
basis. In the fourth quarter of 2004, we negotiated an agreement with Pitney
Bowes for the continued provision of equipment maintenance services in remote
areas
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that we do not directly service. There are alternative providers for both the
vendor financing and equipment maintenance services on substantially similar
terms and conditions and these ongoing arms length relationships with Pitney
Bowes are not considered to be material.
Available Information
Additional information about us is available on the Internet at our
corporate website, www.imagistics.com, or our investor website,
www.IGIinvestor.com. In addition to other information, we make available free of
charge on our investor website our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after electronically filing with or
furnishing such material to the Securities and Exchange Commission. The
Securities and Exchange Commission maintains an Internet site at www.sec.gov,
which contains reports, proxy and information statements, and other information
regarding us. You may also read and copy any document we file with the SEC at
its Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. The
SEC can be contacted at 1-800-SEC-0330 for further information on the operation
of the Public Reference Room. Our investor website also provides shareholders
and other interested parties with access to important corporate governance
information including our Corporate Governance Guidelines, Code of Ethics, and
the Charters of our Audit, Executive Compensation and Development, and
Governance Committees. These documents are also available in print to any
shareholder requesting a copy from our Investor Relations department. Amendments
to our Code of Ethics and any waiver related to our Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer or Controller will also be made
available on our investor website. Currently, there are no waivers related to
our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or
Controller.
Industry Overview
The document imaging and management industry consists of the production
and supply of various imaging products, as well as the provision of pre-sale and
after-market product services and related software and professional services. We
have participated in the copier business for over 35 years and have been a
leader in the facsimile machine segment of this industry for 20 years. Our
competitors include the distribution units of large office equipment
manufacturers such as Ricoh, Canon and Xerox, and other independent distributors
such as Ikon, Danka and Global Imaging as well as numerous local independent
office equipment dealers and, as technologies continue to merge, traditional
printer companies such as Hewlett Packard and Lexmark.
Companies in the document imaging industry sell products primarily through
three channels of distribution: direct sales, independent dealer sales and
retail sales. Recently, the Internet has begun to emerge as an additional
channel, primarily for lower-end equipment and supplies. Direct sales involve
the marketing of products by sales representatives working directly for the
company whose products they offer. Independent dealer sales result from customer
calls performed by independent dealer outlets that generally sell
manufacturer-branded products. Retail sales include sales of low-end products,
typically through national retail outlets or local retailers.
The document imaging industry is rapidly changing. The copier industry has
moved from standalone analog devices to connected products that utilize digital
technologies and from monochrome to color capable devices. Digital technology
provides more reliability, more functionality and higher quality. All new
copier/MFP placements are digital machines. Digital products can connect with
computer networks and communicate with other office imaging equipment, enabling
customers to more efficiently connect and utilize their document management
solutions over a wide array of more useful features, such as higher quality
copies, color capability, finishing capability and the multifunctional
capability of copying, printing, faxing, emailing and scanning. The scanning
capability allows organizations to easily move between hard copy paper documents
and electronic documents. MFPs can efficiently copy, print, fax and email
documents. In addition, technological advances, added features and functionality
and reduced pricing have led to a trend of increased placements of color copiers
and MFPs. The migration from single function digital copiers to MFPs is now
seeing the emergence of universal copiers/printers that provide cost efficient
output in both black and white and color.
Today's busy corporate environment demands office equipment, software and
solutions that work faster and more efficiently than ever before, while
providing reliable high-quality output. The expanding use of MFPs designed to
address copying, printing, faxing, emailing and scanning needs in the workplace
is a direct result of these demands. MFPs efficiently send, receive and print
documents, thus eliminating office bottlenecks, improving employee productivity
and saving valuable workspace in offices of all sizes. As workplaces
increasingly rely on computer networks, document imaging providers are also
developing more products that allow for shared communication and that work
seamlessly with other office systems. These networked solutions offer greater
speed and, by diverting print streams to more efficient output devices, can
lower a company's imaging costs significantly. The cost of managing documents is
high for most companies and increased use of the Internet for desktop research
and printing has further increased the volume and cost of imaging activity for
most businesses. In addition to searching for ways to minimize
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business document costs, customers continue to demand high-performance machines
that produce well-finished documents. In addition, corporations struggle with
the issue of how to deploy new technology and get users to embrace it.
Currently, the industry is producing a greater number of color machines to
offer customers a range of options for their copying and printing needs. Color
machines allow companies to increase their level of in-house document production
and produce "finished" copies for meetings, presentations and mailings, often
times at much lower costs than if they purchased these jobs externally.
Corporate customers are also searching for new ways to manage their
document imaging needs. Corporations are continuing to outsource non-core
competencies, including document imaging. This is especially true as the
complexity of these solutions increases and corporations seek to avoid hiring,
training and retraining personnel to use new machines. In recent years, many
large document-imaging providers have developed management services capabilities
to address this need. Through management services relationships, document
imaging providers offer a full range of services, from installation and training
of employees to complete on-site document imaging management, including
selection of equipment and provision of personnel, allowing corporate customers
to choose the solution that is best for them.
Vision and Strategy
Our 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. To achieve this vision, we plan to build on our
strengths and pursue the following strategies:
Maintain and Further Strengthen Major Account Relationships. We have
maintained successful relationships with many large Fortune 1000 companies for
20 years. We believe that our strong relationships with many of these customers,
as well as our integrated sales and service organization and the broad national
reach of our organization, have been the keys to our success in acquiring new
business and retaining our current customers. Our sales effort is organized to
create customer-centric national account and commercial user sales
organizations, each offering our full range of products to their respective
customer bases. This customer-centric organization allows us to leverage our
customer relationships with major accounts while also expanding our product
offerings to our commercial user customers.
In light of competitive pressures, technological advances and changes in
the corporate workplace, we must strive to meet our customers' needs in new
ways. As many corporate customers seek to reduce administrative expenses through
centralized purchasing and consolidation of their vendors, we believe that we
are well positioned to offer a range of products and services, including
technological innovations and consulting services that will provide new options,
from a single source.
Expand Our Product Offerings Through Sourcing and Distribution
Relationships. We believe that one of our greatest strengths is our strategy of
sourcing cost-effective "families" of products from different manufacturers to
best suit our customers' requirements. We seek to form relationships with
various manufacturers, each with different specialties and different strengths.
Although we source from multiple vendors, all of our products meet our demanding
specifications. In addition, we supplement our product offerings with
value-added software and service offerings to optimize ease of use and operation
and support them with trained staff.
In January 2005, Better Buys for Business selected the Imagistics DL 850
as Editors Choice for 2005. In 2004, J.D. Power and Associates Copier Customer
Satisfaction Study ranked Imagistics #1 Copier/Multifunction Product in Overall
Customer Satisfaction Among Business Users, Two Years in a Row, Tied in 2003. We
believe the study validates Imagistics' product sourcing strategy and direct
sales and service infrastructure. In 2004, Imagistics also received the 2004
Buyers Laboratories Pick of the Year award for the im3520 in six different
product categories and the ix3010 in five different product categories, as well
as the Highly Recommended award for the im2020 in six different product
categories and the Recommended award for six additional Imagistics products, all
in more than five different product categories. In 2003, Imagistics received the
2003 Buyers Laboratories Most Outstanding Multifunctional Product Line of the
Year award as well as six Pick of the Year awards in four different product
categories.
We continuously evaluate various imaging products from multiple
manufacturers and software developers. We believe that our supply contracts
provide us access to the best products and solutions. We believe that the
transition to digital monochrome, full color and universal black and white and
color copier/MFPs provides an important opportunity for us to reach new
customers as manufacturers develop machines with increased capabilities. We
continue to launch new digital products that offer faster, more efficient
multifunctional features for our high-volume corporate customers. These new
digital products offer increased document imaging options and capabilities as
well as overall savings. We will continue to expand our digital document imaging
product offerings in order to meet the needs of our current customers and to
allow us to reach a new customer base. In order to remain
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competitive in light of the many technological options that are available to our
customers, we will continue to collaborate with companies that develop
integrated document solutions that incorporate multifunctional capabilities. Our
success will also depend on our ability to accurately gauge shifts in market
demand and to anticipate potentially unforeseen changes in market dynamics that
may result from new technologies.
Increase Outreach of Our Direct Sales and Service Force to the Copier/MFP
Market. Our direct sales and service strategy aims to provide our customers with
one point of contact for their product needs. Regardless of their location in
the United States, the United Kingdom or our served markets in Canada, our
customers can contact one of our representatives in their geographic area and
receive consistent sales and service assistance. This allows us to control the
quality of our sales and service effort and ensure a consistent positive
experience for our customers. It also provides us with an opportunity to keep in
regular contact with our customers, which we believe often leads to future
sales. In some remote areas, however, we rely on Imagistics-trained third-party
service providers for service of our products. Our marketing strategy is to
offer an extensive portfolio of product offerings and diverse technology and to
utilize our national direct sales and service organization to establish
long-term relationships to meet customer document imaging and management needs.
We have implemented an acquisition strategy, as described below, to
expand, on a highly selective basis, service and distribution capabilities in
areas where such presence will enhance our ability to serve national accounts,
while increasing our sales effort with local companies and public agencies.
Focus on Customer Needs. Since we have direct access to our end user
customers through our direct sales force, we are able to monitor their changing
needs and requirements and respond in an appropriate manner. Our goal is to meet
all of our customers' needs and where price is particularly critical, we have
offered them refurbished and remanufactured analog and refurbished digital
systems as well as standalone devices. Because of our purchasing structure, we
believe that we will be able to provide digital equipment and solutions as our
customers require them. Because we source digital products and train our
workforce on the sales, use and service of these products, and because we
continue to research and source new products, we believe that we will be able to
respond effectively as the industry changes in the future. However, if we fail
to accurately predict changes in market demand we may lose sales or incur losses
due to excess or obsolete inventories.
Pursue an Expansion Strategy. In order to remain competitive, we will
continue to expand our copier, MFP, software and solutions businesses in
geographic markets in the United States and abroad. Our direct sales and service
strategy has been an effective method for attracting and retaining customers and
we believe we can use it to further expand our document imaging business. We
currently supply document imaging products and services to a variety of large
corporations, many of which have an international presence and seek global
sourcing of their document imaging needs. In order to serve these clients more
effectively, we purchased two dealerships in 2004 to establish direct operations
in Canada. We expect to use our United Kingdom operation as a platform for
expansion of our business into the larger European market over time. Our United
Kingdom product offerings, which were limited to facsimile products, were
expanded to include a full range of MFPs in January 2003.
In March 2004, we acquired substantially all of the assets and business of
Canadian Business Systems and Office Solutions Group, a combined business
dealership in Mississauga, a suburb of Toronto, Canada and in August 2004, we
acquired substantially all of the capital stock of Doering & Brown Corporation,
an independent dealership based in London, Ontario, Canada. These acquisitions
reflect our strategy to expand service and distribution capabilities
internationally where such presence will enhance our ability to provide direct
service to our broad base of global customers.
In June 2004, we acquired substantially all of the assets and business of
Copy Systems, an independent dealership based in Little Rock, Arkansas
reflecting our continued strategy to expand direct service and distribution
capabilities in areas of the country where such presence will enhance our
ability to serve national accounts, while increasing our sales effort with local
companies and public agencies.
Business Segments
We operate in two reportable segments based on geographic area: North
America and the United Kingdom. Revenues from external customers and from Pitney
Bowes are attributed to geographic regions based on where the revenues are
derived. Financial information by segment is set forth in Note 5, "Business
Segment Information," of the "Notes to Consolidated Financial Statements"
included in Item 8 herein.
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Products
We offer a broad range of office copier/MFPs, facsimile machines and
related products and services. These products and services serve a wide range of
customer needs from departmental to workgroup solutions. The utilization of
digital technology has led to development of equipment that contains multiple
capabilities and greater options for document imaging and management
applications. Historically, we have used standard industry classifications to
classify our equipment product offerings as part of either the copier product
line or the facsimile product line based upon the primary function of the
equipment.
The evolution of technology has blurred distinctions between traditional
copiers and facsimiles since most new products are multifunctional. Imagistics
has not introduced a single function machine in over four years. Facsimile has
evolved into a feature found on machines ranging in speed from 10 pages per
minute to 65 pages per minute rather than a dedicated single function machine.
Some time in the future, differentiating between facsimile and copier equipment
will not be meaningful.
We offer a broad range of products for departmental applications including
color, universal black and white and color, black and white, digital, networked
and stand-alone copiers/MFPs. Our definition of departmental machines
incorporates the standard industry product segments 2 through 5, which range in
speed from 20 to 90 pages per minute for black and white prints and typically
produce a maximum size output consisting of ledger size copies/prints.
Our digital black and white copier/MFP departmental solutions include
twelve products with speeds from 20 to 85 pages per minute. Our line of products
can address application needs of workgroups with as few as several hundred to as
many as 750,000 impressions per month. Most of these solutions are available as
multifunctional devices and offer a range of finishing solutions from simple
collating to booklet making, Z-folding, hole punching and multi-position
stapling.
During 2004, we discontinued our black and white analog refurbished
product line offerings and are currently concentrating on refurbished digital
copier/MFP offerings and will be migrating our remanufactured copier/MFPs from
analog to digital during 2005.
Our current 22 and 31 page per minute digital color copier products are
positioned to provide both color capable and color centric solutions to clients,
ranging in speed from 31 to 45 pages per minute in monochrome and 11 to 31 pages
per minute in full color. We currently offer four color products. These
multifunctional digital copiers offer copying and networking functionality and
are designed to support both color and monochrome applications and offer
enhanced image quality color printing and copying, a wide range of digital art
functions and enhanced finishing options that include booklet making
capabilities.
We also offer a broad range of lower-end workgroup products and solutions.
Our definition of workgroup machines is the standard industry product Segment 1
which range in speed from 11 to 19 pages per minute for black and white prints
and typically produce a maximum size output consisting of legal size
copies/prints. Our workgroup products include traditional copiers, MFPs and
facsimile solutions.
We have historically been a leader in workgroup facsimile systems and one
of the largest suppliers of facsimile equipment to the Fortune 1000. We
currently offer a full range of workgroup facsimile solutions that range from
traditional new and remanufactured facsimile equipment to MFPs. We currently
offer eight new MFP solutions; five remanufactured facsimile machines and one
new facsimile machine.
We also maintain alliances with leading document software solutions
providers to satisfy our customers' document management requirements. Through
our alliances, we provide our customers with access to software solutions
providers that enable printing from host applications directly to lower cost
Imagistics' networked MFPs without re-coding, that deliver documents directly to
point of need whenever required and that allow our customers to build customized
document management applications, from simple scan-store-retrieve, to complex
enterprise systems involving automated workflows, web-access, and multi-level
security. Other partners provide facsimile server solutions that increase
productivity and decrease costs of traditional facsimile applications and
software tools for the design, generation and delivery of all types of forms,
reports and other documents.
Supplies
We offer a full complement of consumable supplies for our products, such
as copier and facsimile toner and cartridges, staples and paper. Many of our
copier/MFP customers enter into cost-per-copy rental and/or maintenance
agreement plans that include supplies. This accounts for a constant source of
copier/MFP supply revenue and helps to achieve a high level of customer
retention. Demand for facsimile supplies has decreased with the use of e-mail
and the availability of third-party refilled toner cartridges. In response to
this decrease in demand, we introduced our own line of refilled cartridges under
the "ECO" brand. Refilled ECO cartridges work with many of our own facsimile
machines and also with many competitor facsimile machines and
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laser printers. With increased printing on multifunctional devices and the
deployment of color solutions, we expect related supplies revenue related to
these MFPs to increase, which will offset a portion of the loss in facsimile
supplies revenue.
Service
Our continued commitment to our products and customers is evident in the
many aftermarket service options that we provide. Our products are serviced by
our nationwide service organization of approximately 1,200 Imagistics and
contracted service representatives. We believe that this dedicated service force
provides us with a distinct advantage over many of our competitors. These
representatives are trained to service our product line and are managed through
a central dispatch system to meet strict customer response time requirements.
These representatives provide a full range of preventative maintenance and
repair services to major account customers and commercial users.
We support all of our customers through our 24 hour-a-day, 7 day-a-week
diagnostic center. Located in Melbourne, Florida, the diagnostic center is
staffed with Imagistics employees who are experts in the use and servicing of
our products and who help minimize any downtime or disruption to our customers.
The diagnostic center usually handles over 3,500 calls from customers each day.
Financing Options
We provide our customers with flexible financing options that allow for
the sale, lease or rental of our products. In the past, we have sold products to
commercial users either directly to the end user or to a leasing company that,
in turn, leases the product to the end user. Where leasing is involved, we sell
equipment to either Pitney Bowes' wholly owned subsidiary, PBCC, or to other
finance companies. Currently, PBCC is the primary source of lease financing for
our products. We have entered into an agreement with PBCC that provides for an
ongoing lease-purchase equipment-financing program for our products. In December
2004, Pitney Bowes announced their intent to spin-off PBCC to shareholders. We
do not believe that this will have a material impact on our relationship with
PBCC. In 2004 and 2003, approximately 15% and 14% respectively, of our revenues
were derived from sales to PBCC for lease to the end user.
Historically, in offering products to our major account customers, we have
used a rental strategy. Most often, we rent our facsimile machines at a flat
rate and we are increasingly renting copier and MFP based solutions to our large
major account customers as well. We typically rent our copiers on either a
cost-per-copy basis, with minimum monthly page volumes, or at a flat rate with
allowance and overage plans for certain services and other options. In the case
of rentals, we seek to negotiate a master rental contract with our customers
that can be revised to reflect rental of additional products and upgrades to
current products or additional services. Generally, our rental contracts are for
36-month terms with renewal options that are automatic unless the customer gives
prior notice of cancellation. These rental contracts also cover service and, in
most cases, include supplies for use with our equipment. We believe that this
approach provides the flexibility this customer base requires and many prefer
compared to owning these assets.
Customers
Our primary customers are mid-to-large corporate customers and government
entities. We serve major companies in the manufacturing, distribution, financial
services, government and education markets as well as others. While continuing
to strengthen and expand our relationships with our current customers, we have
also established new initiatives geared specifically toward more efficiently
serving mid-sized and regional companies or commercial users, while shifting our
focus to multi-location customers. We plan to maintain our relationships with
commercial users through the use of our trained team of commercial sales
representatives. In an effort to expand our distribution organization and
increase service coverage for multi-location customers, Imagistics has from time
to time acquired independent regional office equipment dealerships. Imagistics'
products are incorporated into their product mix and their sales and service
teams are fully trained by Imagistics.
We market and distribute our products to the following types of customers:
o major national accounts, including large corporate customers,
o government and education entities and
o commercial accounts, including mid-size and regional businesses.
National account customers include major national and international
corporations. Because we began our business by serving major account customers
in the facsimile market 20 years ago and have maintained steady relationships
with many of these same customers, our major accounts provide us with recurring
rental revenues over longer-term contracts. Our marketing strategy includes
establishing long-term copier/MFP-based relationships with our customers,
similar to those we have established with our
8
facsimile customers, by leveraging our national sales and service organization
to meet their needs. In addition, because of their individual and complex needs,
we are able to provide our major account customers with cutting-edge products as
well as customized approaches to their specific needs. We believe customers in
these markets have a preference for doing business with companies they have a
long-term relationship with and our existing business relationships allow us to
monitor customer needs and provide appropriate upgrades.
We target state governments and agencies, counties, cities, local
governments and other political sub-divisions. These customers provide a
long-term source of business and, because of our experience we can anticipate
their document imaging needs. Government entities may source products through
varied bidding processes or through negotiated agreements. Our government
contracts are generally for a period of four to five years. State and local
government entities typically acquire products through their own varied bidding
processes. Although many of these contracts are terminable for
non-appropriations of funds by our customers, we have not had a significant
number of early terminations of these contracts for non-appropriation.
We also target commercial accounts, which generally have more discrete
document imaging needs for one specific area or portion of their business or
workplace. We customarily sell or lease equipment to these customers and, in
most instances, our contracts provide ongoing supplies and service to them.
Because of our approach of providing a system of national direct sales and
service, our ability to provide a range of products, system options and
after-market arrangements to our major account customers and our attention to
maintaining our relationships with customers through consistent product service,
we believe that we can expand these markets in the future.
Due to our diversified customer base, no single customer is large enough
to have a material impact on our overall business. Also, due to our diverse
customer base and the recurring nature of our rental, service and supply
revenues, seasonal variations do not significantly impact our business.
Sales and Marketing
We believe that our sales and marketing approach is uncommon in our
industry. While many of our competitors offer either their own or other
manufacturers branded products either by dealer sales or retail sales, we rely
solely on distributing Imagistics' branded products through direct sales with
support by direct service. Research conducted by CAP Ventures and J.D. Power and
Associates indicates a preference for direct sales and service. Our direct sales
and service personnel are located throughout the United States, Canada and the
United Kingdom, marketing and servicing our products to our customers and
potential customers. Our representatives use national sales and service
standards so that our customers receive consistent and reliable assistance
regardless of where they are located or which one of our locations they call.
In addition to our United States business, we currently operate in Canada
and the United Kingdom. Our Canadian and U.K. businesses offer a complete
product line. We plan to continue to increase the international marketing of our
products. Our goal is to increase our service to our current customers as well
as broaden our existing customer base. Our Canadian business is headquartered in
Mississauga, Canada. Our U.K. business is headquartered in Harlow, England. Our
products are also offered in Canada through Pitney Bowes of Canada, a subsidiary
of Pitney Bowes.
Suppliers and Distribution
For maximum flexibility in product development and to assure our clients
of the best possible business document solutions, we purchase equipment from a
number of different firms throughout the world, rather than manufacture our
products ourselves. We impose high quality standards on all of our equipment
suppliers. We do internal testing of all products before adding them to the
Imagistics family. The testing focuses on our customers' applications to ensure
that we have the best offering to meet these needs.
We source our equipment from suppliers throughout the world including
Konica Minolta, Muratec, Brother, Sharp and Toshiba. We have contractual
relationships with these suppliers, although we continue to search for the best
products and do not enter into exclusive relationships with any of our
suppliers. We do not have minimum order quantities with any of our suppliers.
Konica Minolta, Sharp, Toshiba and Brother currently supply a significant
portion of our new copier/MFP equipment. If Konica Minolta, Sharp, Toshiba or
Brother were unable to deliver products for a significant period of time, we
would be required to find replacement products, which may not be available on a
timely or cost-effective basis. This could have a material adverse effect on our
business, financial condition and results of operations. We do not believe that
we are materially dependent upon any other supplier of products, whether new
products, parts or consumable supplies. To mitigate against disruptions to our
business, we keep an adequate level of inventory on hand to meet the needs of
our customers for several months.
Using third-party suppliers allows us to offer our customers products with
the most current features and technologies. We believe that this sourcing
strategy also offers us maximum flexibility. As we expand or upgrade our product
line, we are able to
9
choose from the best available products for each product range. We select
products by balancing costs and availability of features with ease of customer
use, service personnel training, parts availability, reliability and
serviceability. Because of these benefits, in most cases, we purchase similar
products from one manufacturer to cover several product levels.
We generally require manufacturers to build our products to order with 60
day or less lead times. We usually take title to the goods at the factory, or in
the case of Asian factories, at the closest seaport. Finished goods are shipped
by ocean freight to a United States port, primarily in California, and then
trans-shipped to one of approximately nine warehouses in the United States. In
the normal course of business, when a customer order is received, equipment is
unpacked, set up and tested in the warehouse prior to shipping to the customer
location. Supplies are stored primarily at one warehouse located in Columbus,
Ohio and are shipped via ground service or overnight delivery directly to our
customers or service engineers. Our Canadian and United Kingdom businesses use
similar manufacturing and shipping procedures and finished goods are shipped
directly to two contract warehouses in Canada and one of two contract warehouses
in the United Kingdom. Our reliance on Asian manufacturing could make our
business susceptible to disruptions in international transportation due to port
strikes, acts of war or other factors beyond our control.
Patents, Trademarks and Copyrights
In connection with the Spin-off, we entered into a trademark license,
patent license and copyright license agreement that provided us with a
non-exclusive license to the Pitney Bowes trademark for a period of up to two
years following the Spin-off. In addition, the agreement provides for us to
license certain patents and patent applications on a non-exclusive basis in
connection with our business in the United States and the United Kingdom, for
the term of the relevant patents, none of which are material to our business.
Finally, the agreement provides for us to license all copyrighted material used
in connection with our business in the United States and the United Kingdom for
the term of the relevant copyrights.
We have registered "Imagistics" as a trademark in the United States,
Canada, the European Community and other jurisdictions and we have completely
transitioned to the use of the "Imagistics" brand name. In addition, as a
reseller of equipment supplied to us by major manufacturers of imaging
equipment, we benefit from the use of patents and patent licenses secured by our
suppliers.
Employees
We employ approximately 3,600 individuals throughout the world including
approximately 1,200 sales personnel. We employ approximately 100 people in
Canada. We also employ approximately 100 people in the United Kingdom, almost
all of whom are subject to the European Works Council regulations. None of our
other employees are covered by a collective bargaining agreement. We believe
that we have good relations with our employees.
Competition
We are primarily involved in the supply of document imaging equipment to
corporate, governmental and commercial customers. The document imaging equipment
supply industry is highly competitive. Customers rigorously evaluate suppliers
on the basis of product features, functions, reliability and quality, service
expertise, geographic reach and price competitiveness. Many of our competitors
manufacture their own products. Although we believe that our reliance on third
parties for manufacturing provides us with certain benefits, it is possible that
our competitors' guaranteed access to product supply through captive
manufacturing operations may provide them with a competitive advantage. In
addition, our primary suppliers sell products in competition with us, either
directly or through independent office equipment dealers. Some of our
competitors have substantially greater financial resources than we do.
Our primary competitors are Xerox, Ikon, Danka, Canon, Ricoh, Global
Imaging, Hewlett Packard and Lexmark.
Environmental Matters
We are subject to federal, state and local laws intended to protect the
environment. We believe that, as a general matter, our policies, practices and
procedures are properly designed to reasonably prevent the risk of environmental
damage and financial liability to the Company.
Backlog
Generally, equipment sales and rental orders are shipped within 30 days
and supplies orders are shipped immediately. Accordingly, our backlog is not
significant.
10
ITEM 2. PROPERTIES
The following table provides information regarding our primary owned and leased
properties:
Own/ Square Expiration
Location Lease Footage Date Facility Type
--------------------------------- ---------- ----------- ------------- --------------------------------------------------
North America:
United States:
Columbus, Ohio Lease 217,864 2009 Warehouse and distribution center
Trumbull, Connecticut Own 74,000 N/A Corporate headquarters
Beacon Falls, Connecticut Lease 66,050 2006 Warehouse and equipment refurbishing center
Milford, Connecticut Own 41,000 N/A Warehouse and equipment refurbishing center
Denver, Colorado Lease 29,178 2008 Administration and customer support call center
Melbourne, Florida Lease 17,103 2008 Diagnostic call and equipment refurbishing center
Shelton, Connecticut Lease 14,509 2009 Diagnostic and technical services center
Shelton, Connecticut Lease 11,439 2005 Administrative office
Canada:
Mississauga, Ontario Lease 11,675 2009 Headquarters and warehouse
United Kingdom:
Harlow Lease 18,800 2009 Warehouse
Harlow Lease 11,866 2007 Headquarters and sales office
We also lease space in approximately 174 sales and service locations
throughout North America. In the United States, we lease space in approximately
167 sales and service locations totaling approximately 717,000 square feet.
Leases relating to approximately 32 of our sales and service locations totaling
approximately 119,000 square feet expire in 2005. We plan to renew or replace
these leases to the extent they are for stand-alone facilities, and for certain
other facilities, we plan to relocate and enter into new leases with less square
footage. In Canada, we also lease seven locations throughout Ontario, Canada,
consisting of one warehouse and six sales and service locations. The seven
leases aggregate approximately 22,500 square feet. In the United Kingdom, we
also lease two sales offices near London and Birmingham on one-year leases and
one sales office in Newbury on a five-year lease. These three leases aggregate
approximately 2,700 square feet.
ITEM 3. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we are party to
litigation relating to our business. These may involve claims by or against
Pitney Bowes or Imagistics relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property matters, equipment, service or payment disputes with
customers, bankruptcy preference claims and disputes with employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during
the fourth quarter ended December 31, 2004.
11
SUPPLEMENTAL ITEM: EXECUTIVE OFFICERS
Information concerning the executive officers of Imagistics is set forth
below:
Name Age Position
---- --- --------
Marc C. Breslawsky..................................... 62 Chairman and Chief Executive Officer; Director
Joseph D. Skrzypczak................................... 49 President and Chief Operating Officer
Christine B. Allen..................................... 55 Chief Human Resources Officer
John C. Chillock....................................... 48 Vice President, Customer Service Operations
George E. Clark........................................ 58 Vice President and General Manager, Business Product Centers
Timothy E. Coyne....................................... 50 Chief Financial Officer
Chris C. Dewart........................................ 50 Vice President, Sales
Mark S. Flynn.......................................... 50 Vice President, General Counsel and Secretary
Nathaniel M. Gifford................................... 52 Vice President, Product Development and Marketing
William H. Midgley..................................... 55 Chief Administrative Officer
John R. Reilly......................................... 38 Vice President, Marketing
Marc C. Breslawsky. Mr. Breslawsky has served as Chairman and Chief
Executive Officer of Imagistics since February 2001. In connection with the
Spin-off, Mr. Breslawsky was elected to our board of directors as Chairman. From
1996 to 2001, Mr. Breslawsky was President and Chief Operating Officer of Pitney
Bowes. From 1994 to 1996, Mr. Breslawsky was Vice Chairman of Pitney Bowes. Mr.
Breslawsky is a director of C. R. Bard, Inc., The Brink's Company and UIL
Holdings Corporation.
Joseph D. Skrzypczak. In May 2004, Mr. Skrzypczak was appointed to the
role of President and Chief Operating Officer. Prior to this appointment, Mr.
Skrzypczak served as our Chief Financial Officer since February 2001. Mr.
Skrzypczak was the Chief Operating Officer and acting Chief Financial Officer at
Dictaphone Corporation from October 1998 until December 2000. Prior to being
elected Chief Operating Officer, Mr. Skrzypczak served as Senior Vice President
and Chief Financial Officer from October 1997 to October 1998 and served as Vice
President and Chief Financial Officer from May 1994 to October 1997 at
Dictaphone. After being acquired by Lernout & Hauspie in May 2000, Dictaphone
declared bankruptcy in November 2000, as part of Lernout & Hauspie's overall
bankruptcy filing. Mr. Skrzypczak initially joined Pitney Bowes in 1981 and held
various management positions until May 1994. Prior to working for Dictaphone
Corporation, Mr. Skrzypczak served as Vice President of Finance for Pitney
Bowes' office systems division, and was directly responsible for all financial
and administrative activities. Prior to initially joining Pitney Bowes in 1981,
Mr. Skrzypczak worked for Price Waterhouse. He is a certified public accountant.
Christine B. Allen. Ms. Allen became our Chief Human Resources Officer in
January 2002. From 1995 to 2001, she was with The Hartford Financial Services
Group, Inc.; she joined The Hartford as Director, Human Resources, Commercial
Market and subsequently assumed responsibilities as Vice President, Human
Resources, Commercial Lines. Ms. Allen served as Vice President of Human
Resources for The Walden Book Company from 1988 until 1994. She began her career
with Macy's New York in 1973 and served in a variety of human resources related
capacities for large retailing companies, such as Caldor and Abraham & Straus
prior to joining Waldenbooks.
John C. Chillock. In October 2000, Mr. Chillock assumed the role of our
Vice President, Customer Service Operations. Mr. Chillock joined Pitney Bowes'
office systems division in 1998 as Vice President, Field Operations. Prior to
joining office systems, Mr. Chillock served in various management positions at
Dictaphone Corporation from 1977 to 1998. Prior to joining Dictaphone
Corporation, Mr. Chillock was a Director of Operations for Intellisys Electronic
Commerce, a division of the Chase Manhattan Bank.
George E. Clark. In October 2000, Mr. Clark assumed the role of Vice
President and General Manager, Business Product Centers. Prior to the Spin-off,
Mr. Clark was employed by Pitney Bowes for over 25 years in varying capacities
pertaining to the sales and marketing of imaging equipment at Pitney Bowes. Mr.
Clark served as Vice President of Copier Systems for the Northeast Region from
1988 to 1990, Vice President of Marketing for Copier Systems from 1990 to 1997
and Vice President of Business Products Centers East Region from 1997 to 2000.
Prior to joining Pitney Bowes, Mr. Clark was employed by Regenesys, Inc., a
financial reorganization firm in Boston, Massachusetts.
Timothy E. Coyne. In May 2004, Mr. Coyne was appointed to the role of
Chief Financial Officer. Mr. Coyne joined Imagistics in 2001 as the Vice
President and Corporate Controller. Prior to joining Imagistics, Mr. Coyne was
employed by TransPro, Inc. as the Chief Financial Officer from 1998 to 2001 and
Vice President and Corporate Controller from 1996 to 1998. From 1990 to 1996,
Mr. Coyne served as the Vice President of Finance and Administration for Keene
Corporation. Mr. Coyne was the Vice President, Finance and Administration,
Treasurer and Secretary of Kasco Corp, a subsidiary of Bairnco Corp. from
12
1986 to 1990. Mr. Coyne held a variety of positions with The Coca-Cola Bottling
Company of New York, including Vice President and Corporate Controller from 1984
to 1986. Mr. Coyne began his career at Peat Marwick Mitchell & Co. in New York.
Chris C. Dewart. In August 2004, Mr. Dewart was appointed to the role of
Vice President, Sales. Prior to this appointment, Mr. Dewart held the title of
Vice President, Commercial Sales. Prior to the Spin-off he was employed by
Pitney Bowes in the office systems division since 1983, and served as Vice
President since 1990. Mr. Dewart served as Vice President of European
Operations--facsimile systems division from 1990 to 1991, Vice President and
General Manager of Canadian Operations from 1991 to 1998 and Vice President of
U.S. Sales for Facsimile Systems from 1998 to August 2000. In August 2000, he
assumed the position of Vice President of Sales for Commercial Markets. Prior to
joining office systems, Mr. Dewart held various positions at General Electric
Corporation and Monroe/Litton.
Mark S. Flynn. Mr. Flynn became our Vice President, General Counsel and
Secretary in April 2001. Most recently, he was a partner in the corporate
department of the law firm Wiggin & Dana LLP from 1999 to 2001. From 1997 to
1999, Mr. Flynn served as Senior Deputy General Counsel to Olin Corporation. Mr.
Flynn held the position of Executive Vice President, General Counsel and
Secretary at ServiceMaster Diversified Health Services, a subsidiary of the
ServiceMaster Company, from 1993 to 1997 and Vice President, General Counsel and
Secretary at Arcadian Corporation/Arcadian Partners, L.P. from 1989 to 1993.
Prior to those positions, Mr. Flynn served in various counsel positions at Olin
Corporation from 1986 to 1989, as an attorney at Intercontinental Hotels
Corporation from 1983 to 1986 and as an associate at the law firm of Hughes
Hubbard & Reed from 1980 to 1983. Mr. Flynn serves on the advisory board of
Integra Ventures, a Seattle-based venture fund specializing in life sciences and
health care services.
Nathaniel M. Gifford. Mr. Gifford is currently our Vice President, Product
Development and Marketing. Prior to the Spin-off he was employed in the Pitney
Bowes office products business for over 20 years in varying capacities
pertaining to product management, planning and marketing. Prior to joining
Pitney Bowes, Mr. Gifford worked at Travelers Insurance Company and Cititrust
Bank in the area of securities analysis and investments.
William H. Midgley. In December 2004, Mr. Midgley was appointed to the
role of Chief Administrative Officer. Mr. Midgley joined Imagistics in 2003 as
the Vice President, Global Supply Chain. Prior to joining Imagistics, Mr.
Midgley was the Vice President, Supply Chain for PSS World Medical, Inc. Mr.
Midgley began his career at Sony Electronics where he held a variety of
financial, operations and business process positions with responsibilities in
order management, inventory control, billing, collections and accounts
receivable, logistics and supply chain.
John R. Reilly. In April 2004, Mr. Reilly was appointed to the role Vice
President, Marketing. Prior to joining Imagistics, Mr. Reilly held the position
of Vice President, Strategic Planning with Konica Minolta Business Solutions,
U.S.A. from 2003 to 2004, where he was responsible for the integration of
Konica's and Minolta's distribution channels due to their merger. From 1994 to
2003, Mr. Reilly managed Minolta's marketing department with responsibilities
for both the dealer and direct channels. During his career at Minolta, Mr.
Reilly led all aspects of marketing, including product planning and management,
field marketing, sales training, marketing communications, advertising and lead
generation. From 1990 to 1994, Mr. Reilly worked for MCS/Canon Business
Solutions, with varying roles in sales management. Mr. Reilly began his career
as a business development manager for PC Concepts in Wayne, PA.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Imagistics common stock (trading symbol "IGI") is listed for trading on
the New York Stock Exchange ("NYSE"). On June 3, 2004, our Chief Executive
Officer submitted to the NYSE a written certification pursuant to Section
303A.12(a) of the NYSE Listed Company Manual certifying that he was not aware of
any violation by Imagistics of applicable NYSE listing standards. Information on
the high and low sales prices for Imagistics common stock during the two most
recent fiscal years is included in Note 16, "Quarterly Financial Data," of the
"Notes to Consolidated Financial Statements" included in Item 8 herein. At
February 28, 2005 there were approximately 16,260,007 shares outstanding and
approximately 16,698 stockholders of record. Imagistics has not declared or paid
any cash dividends on its common stock.
We anticipate that future earnings will be used principally to support
operations and finance the growth of our business. Thus, we do not intend to pay
cash dividends on our common stock in the foreseeable future. We have entered
into a senior secured credit facility providing for both term and revolving
credit borrowings, which allows us to borrow funds for general corporate
purposes, including the repayment of other debt, working capital and
acquisitions. The credit facility contains affirmative and negative covenants
that, among other things, require us to satisfy certain financial tests and
maintain certain financial ratios. The credit facility also limits our ability
to declare and pay dividends on our shares. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." If our lenders permit us to declare dividends, the dividend
amounts, if any, will be determined by our board after considering a number of
factors, including our financial condition, capital requirements, funds
generated from operations, future business prospects, applicable contractual
restrictions and any other factors our board may deem relevant.
Issuer Purchases of Equity Securities
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 December 31, 2004, we have accumulated approximately
3.9 million shares of treasury stock at a cost of approximately $88.8 million.
The stock buy back program has no fixed termination date.
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 fourth quarter of 2004:
(Dollars in thousands, except per share amounts)
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
---------------------------------------- ------------- -------------- ------------------- ---------------------
October 1, 2004 - October 31, 2004 52,500 $ 34.73 52,500 $20,783
November 1, 2004 - November 30, 2004 12,500 $ 35.23 12,500 $20,343
December 1, 2004 - December 31, 2004 32,700 $ 34.44 32,700 $19,217
------ ------
Total 97,700 $ 34.70 97,700
====== ======
14
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected financial data. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes thereto included in Items 7 and 8 herein.
(Dollars in thousands, except per share amounts)
Year ended December 31,
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Consolidated Statement of Operations Data
Sales $310,530 $316,002 $314,899 $307,929 $323,620
Rentals 209,501 222,183 232,228 237,449 232,156
Support services 89,022 84,011 82,803 80,698 86,982
-------- -------- -------- -------- --------
Total revenue 609,053 622,196 629,930 626,076 642,758
-------- -------- -------- -------- --------
Cost of sales (1) 171,344 192,772 198,437 197,300 184,265
Cost of rentals 59,102 72,254 84,114 92,191 88,506
Selling, service and administrative expenses 331,460 312,759 311,924 305,799 252,799
-------- -------- -------- -------- --------
Operating income 47,147 44,411 35,455 30,786 117,188
Interest expense 3,693 8,437 8,106 9,825 11,281
-------- -------- -------- -------- --------
Income before income taxes 43,454 35,974 27,349 20,961 105,907
Provision for income taxes 18,511 15,515 10,906 8,402 41,903
-------- -------- -------- -------- --------
Net income $ 24,943 $ 20,459 $ 16,443 $ 12,559 $ 64,004
======== ======== ======== ======== ========
Basic earnings per share (2) $ 1.54 $ 1.22 $ 0.88 $ 0.65 $ 3.29
Diluted earnings per share (2) $ 1.48 $ 1.19 $ 0.86 $ 0.65 $ 3.29
Consolidated Balance Sheet Data
Total current assets $273,636 $266,621 $264,153 $283,575 $297,038
Total assets $467,536 $446,732 $461,238 $494,009 $499,434
Current portion of long-term debt $ 545 $ 545 $ 749 $ 1,000 $ --
Due to Pitney Bowes $ -- $ -- $ -- $ -- $122,182
Total current liabilities, including amounts
due to Pitney Bowes $ 95,693 $ 96,159 $101,914 $ 81,479 $178,121
Long-term debt $ 70,359 $ 62,903 $ 73,399 $116,000 $ --
Total long-term liabilities $ 94,800 $ 83,172 $ 95,077 $127,091 $ 11,285
Stockholders' equity $277,043 $267,401 $264,247 $285,439 $310,028
Other Data
Net cash provided by operating activities $ 79,398 $ 83,042 $158,451 $147,813 $137,789
Depreciation and amortization $ 65,780 $ 74,513 $ 81,593 $ 82,725 $ 73,755
Capital expenditures $ 63,374 $ 50,954 $ 66,599 $ 84,347 $ 83,615
Certain previously reported amounts have been reclassified to conform to the
current year presentation.
(1) On December 31, 2001 the Company changed its method of accounting for
the cost of inventory from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. In accordance with Accounting Principles Board Opinion
No. 20, "Accounting Changes," this change in accounting method has been applied
retroactively by restating the prior year's financial statements for all periods
presented.
(2) The basic and diluted earnings per share amounts for the year ended
December 31, 2000 are for comparative purposes only as common shares were not
issued until December 2001. Outstanding shares for 2000 is based on actual
shares issued plus assumed conversions, at Spin-off.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Imagistics International Inc. ("Imagistics" or the "Company") is an
independent direct sales, service and marketing organization offering business
document imaging and management solutions, including copiers, multifunctional
products, often referred to as MFPs, and facsimile machines in the United
States, Canada and the United Kingdom. Our primary customers include large
corporate customers known as national accounts, government entities and mid-size
and regional businesses known as commercial accounts. Multifunctional products
offer the multiple functionality of copying, printing, faxing, emailing and
scanning 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.
Our revenue is generated from three lines of business: copier/MFP,
facsimile and sales to Pitney Bowes of Canada. We report sales to Pitney Bowes
of Canada separately as it operates under a separate reseller agreement. The
principal evolution in our industry and business has been the transition to
networked digital copiers/MFPs, away from single-function standalone facsimile
machines and analog copiers. This transition has resulted in decreased demand
for and usage of single function facsimile equipment in the marketplace. We have
responded to this market development by focusing our efforts on the growth
opportunities existing in our digital copier/MFP product line. As a result, the
increase in our copier/MFP product line revenues has offset the decrease in
facsimile product line revenues.
Imagistics Spin-off from Pitney Bowes
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") approved the spin-off of the U.S. and U.K. operations of its office
systems business to its common stockholders as an independent, publicly traded
company. On December 3, 2001, Imagistics was spun-off from Pitney Bowes pursuant
to a contribution by Pitney Bowes of substantially all of Pitney Bowes' U.S. and
U.K. office systems businesses to us and a distribution of our common stock to
common stockholders of Pitney Bowes based on a distribution ratio of 1 share of
our common stock for every 12.5 shares of Pitney Bowes common stock held at the
close of business on November 19, 2001 (the "Distribution" or "Spin-off").
Pitney Bowes no longer has a financial investment in our business. We
entered into a transition services agreement with Pitney Bowes providing for
certain essential services to us for a limited period following the
Distribution. These services were provided at cost and included information
technology, computing, telecommunications, certain accounting, field service of
equipment and dispatch call center services. We and Pitney Bowes had agreed to
an extension until December 31, 2003, of the transition services agreement as it
related to information technology and related services. Services provided under
this extension were at negotiated market rates. Except for field service of
equipment, all of the services provided by Pitney Bowes under these agreements
have ceased in accordance with the terms of the agreements.
Effective July 1, 2003, we 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 our direct service
organization. This agreement, the initial term of which expired on July 1, 2004,
had been extended under the same terms and conditions, through September 30,
2004. Effective October 1, 2004, we and Pitney Bowes entered into a three-year
service agreement under similar terms and conditions. This agreement expires on
September 30, 2007. Services provided under this agreement are at negotiated
prices.
For 2004, we paid Pitney Bowes $5.1 million in connection with the field
service of equipment agreement. In 2003, we paid Pitney Bowes $16.1 million in
connection with the transition services agreement, including field service of
equipment and other administrative expenses. For 2002, we paid Pitney Bowes
$20.4 million in connection with these agreements and certain shared corporate
and administrative services.
16
We also entered into certain other agreements covering intellectual
property, commercial relationships, leases and licensing arrangements and tax
separation matters. The pricing terms of the products and services covered by
the other commercial agreements reflect negotiated prices.
Critical Accounting Policies and Significant Estimates
The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates include usage
of equipment for rental assets billed in arrears, sales returns, usage
adjustments and other allowances for equipment sales, equipment rentals and
service contract billings, the collectibility of accounts receivable, the use
and recoverability of inventory, the useful lives of tangible assets, the
realization of deferred taxes and an evaluation of the potential impairment, if
any, of goodwill and other long-lived assets, among others. The markets for our
products are characterized by intense competition, rapid technological
development and pricing pressures, all of which could affect the future
realizability of our assets. Estimates and assumptions are reviewed periodically
and the effects of revisions are reflected in the consolidated financial
statements in the period they are determined to be necessary. Actual results
could differ from these estimates. We have identified certain accounting
policies that are critical to the understanding of our results of operations due
to the judgment management must make in their application. These significant
accounting policies are outlined below.
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. We record a
provision for estimated sales returns and other allowances based upon historical
experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless we receive prior
notice of cancellation. Under the terms of rental contracts, we bill our
customers a flat periodic charge and/or a usage-based fee. Revenues related to
these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. We record a provision
for estimated usage adjustments on rental contracts based upon historical
experience.
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 product returns and
invoice adjustment experience as well as prior collection experience and
includes 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
17
loss trends, to certain accounts receivable aging categories and estimated
amounts relating to delinquencies associated with the changes in our billing
practices with the implementation of our enterprise resource planning ("ERP")
system.
Inventory valuation
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demand.
Rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated using the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service on or after October 1, 2003 is depreciated over
three years. Facsimile equipment placed in service before October 1, 2003 is
depreciated over five years.
Capitalized computer software costs
We capitalize certain costs of internally developed software. Capitalized
internal costs include purchased materials and services and payroll and payroll
related costs. Costs for general administration, overhead, maintenance and
training, as well as the cost of software that does not add functionality to the
existing system, are expensed as incurred. The cost of internally developed
software is amortized on a straight-line basis over appropriate periods,
principally three to seven years. The unamortized balance of internally
developed software is included in property, plant and equipment in the
consolidated balance sheets.
Goodwill
We evaluate goodwill for impairment annually in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 142. SFAS No. 142 requires the
use of a nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
are not amortized into results of operations, but instead are reviewed
periodically for impairment with any resulting impairment charged to results of
operations only in the periods in which the recorded value of goodwill and
intangibles is more than their fair value. SFAS No.142 prescribes a two-step
method for determining goodwill impairment. In the first step, the implied fair
value of the reporting unit's goodwill is compared to the carrying amount of
goodwill. If the carrying amount of goodwill is greater than the implied fair
value of goodwill, the second step of the impairment test is required and the
fair value of the reporting unit's goodwill is determined by allocating the
reporting unit's fair value to all of the assets and liabilities in the same
manner performed in a purchase price allocation. The fair value of the goodwill
is then compared to its carrying amount to determine if there is goodwill
impairment. We completed our review of goodwill in accordance with SFAS No. 142
effective October 1, 2004 and have determined that our recorded goodwill is not
impaired.
Deferred taxes on income
Income taxes are accounted for under the asset and liability method, which
requires the recognition of deferred tax assets and liabilities based on the
estimated future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the periods the temporary differences are expected to be settled.
A valuation allowance is established, as needed, to reduce net deferred tax
assets to realizable value. A valuation allowance has not been established for
our deferred tax assets as we believe it is more likely than not, they will be
realized.
Financial instruments
We recognize all derivative financial instruments as assets and
liabilities and measure them at fair value. All derivative financial instruments
were designated and qualified as cash flow hedges and, accordingly, the
effective portions of changes in fair value of the derivative were recorded in
other comprehensive income and were recognized in the income statement when the
hedged item affected earnings.
Historically, we used interest rate swap agreements to manage and reduce
risk related to interest payments on our debt instruments. During the third
quarter of 2003, we revised our cash flow estimates, disposed of our two
interest rate swap agreements and reclassified the cumulative change in the fair
market value of the interest rate swap agreements from other comprehensive
income into interest expense.
18
Overview of 2004 Financial Results
Total revenue for 2004 decreased 2% to $609 million from 2003 revenue of
$622 million. Net income in 2004 was $25 million, or $1.48 per diluted common
share, compared with net income of $20 million, or $1.19 per diluted common
share in 2003.
Revenue
The following table shows our revenue by geographic segment for the
periods indicated.
Dollars in millions
Year ended December 31,
2004 2003 2002
------ ------ ------
North America $ 588 $ 602 $ 608
United Kingdom 21 20 22
------ ------ ------
Total revenue $ 609 $ 622 $ 630
====== ====== ======
Our revenue is generated from three lines of business: 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 type for our three
business lines, for the periods indicated. Sales to Pitney Bowes of Canada are
presented separately as it operates under a reseller agreement. There is no
rental or support service revenue associated with Pitney Bowes of Canada.
Dollars in millions
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Growth Growth Growth
Revenue rate Revenue rate Revenue rate
------- ------ ------- ------ ------- ------
Sales
Copier/MFP products $ 223 9% $ 204 7% $ 190 (3%)
Facsimile products 73 (13%) 83 (14%) 97 (10%)
Pitney Bowes of Canada 15 (46%) 29 4% 28 380%
------ ------ ------
Total sales 311 (2%) 316 -- 315 2%
Rentals
Copier/MFP products 110 9% 101 7% 94 7%
Facsimile products 99 (18%) 121 (12%) 138 (8%)
------ ------ ------
Total rentals 209 (6%) 222 (4%) 232 (2%)
Support services
Copier/MFP products 82 7% 76 4% 74 3%
Facsimile products 7 (6%) 8 (16%) 9 2%
------ ------ ------
Total support services 89 6% 84 1% 83 3%
------ ------ ------
Total revenue $ 609 (2%) $ 622 (1%) $ 630 1%
====== ====== ======
19
The following table shows our revenue and growth rates versus the prior
year for our three business lines, for the periods indicated. Sales to Pitney
Bowes of Canada are presented separately as it operates under a reseller
agreement.
Dollars in millions
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Growth Growth Growth
Revenue rate Revenue rate Revenue rate
------- ------ ------- ------ ------- ------
Revenue
Copier/MFP products $ 415 9% $ 381 6% $ 358 1%
Facsimile products 179 (16%) 212 (13%) 244 (8%)
------ ------ ------
Revenue excluding
Pitney Bowes of Canada 594 -- 593 (1%) 602 (3%)
Pitney Bowes of Canada 15 (46%) 29 4% 28 380%
------ ------ ------
Total revenue $ 609 (2%) $ 622 (1%) $ 630 1%
====== ====== ======
Sales to Pitney Bowes of Canada are pursuant to a reseller agreement and
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. Although revenue, excluding sales to Pitney Bowes of Canada
represents a non-GAAP financial measure, 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, including the
transition of our business from facsimile to copier/MFP products, and our
pricing policies.
Results of Operations
The following table shows our income statement data, expressed as a
percentage of total revenue, for the periods indicated. The table also shows
cost of sales as a percentage of sales revenue, cost of rentals as a percentage
of rental revenue and our effective income tax rate.
As a % of total revenue,
except as noted
Year ended December 31,
2004 2003 2002
---- ---- ----
Equipment sales 28% 27% 25%
Supplies sales 23% 24% 25%
---- ---- ----
Total sales 51% 51% 50%
Equipment rentals 34% 36% 37%
Support services 15% 13% 13%
---- ---- ----
Total revenue 100% 100% 100%
Cost of sales 28% 31% 32%
Cost of rentals 10% 12% 13%
Selling, service and administrative expenses 54% 50% 50%
---- ---- ----
Operating income 8% 7% 5%
Interest expense 1% 1% 1%
---- ---- ----
Income before income taxes 7% 6% 4%
Provision for income taxes 3% 3% 2%
---- ---- ----
Net income 4% 3% 2%
==== ==== ====
Cost of sales as a percentage of sales revenue 55.2% 61.0% 63.0%
==== ==== ====
Cost of rentals as a percentage of rental revenue 28.2% 32.5% 36.2%
==== ==== ====
Effective tax rate 42.6% 43.1% 39.9%
==== ==== ====
20
We consider revenue from equipment rentals, supplies sales and support
services to be recurring because they typically are derived from equipment
rentals subject to multi-year contracts and from supplies sales and support
services, which are a natural consequence of the use of our installed base of
equipment. Although the initial term of our rental contracts are generally three
years, they typically provide a continuing stream of revenue resulting from
automatic renewal options or new rental contracts for replacement equipment.
Historically, our recurring revenue has consistently been in the range of
approximately 72% - 75% of total revenue. However, we cannot provide any
assurance that our recurring revenue will continue at these rates. We believe
this information is useful because it indicates our ability to generate a
consistent revenue base.
Years ended December 31, 2004 and December 31, 2003
Revenue. In 2004, total revenue of $609 million declined 2% from the prior
year total revenue of $622 million, reflecting lower facsimile revenue and lower
sales to Pitney Bowes of Canada, partially offset by higher copier/MFP revenue.
Excluding the impact of revenue attributable to Pitney Bowes of Canada, which
operates under a reseller agreement, total revenue increased slightly versus the
prior year.
Equipment and supplies sales revenue of $311 million decreased 2% in 2004
from $316 million in 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 3%
compared with the prior year. Copier/MFP sales increased 9% primarily due to
growth in both low and high end digital and color multifunctional product
segments, our geographic expansion as described in Note 15 of our "Notes to
Consolidated Financial Statements" and increased supplies sales related to the
growth in equipment sales. Facsimile equipment and supplies sales declined 13%
compared with the prior year reflecting lower sales of supplies primarily due to
the expected continuing industry-wide reduction in facsimile usage, partially
offset by higher sales of facsimile equipment reflecting rental to sale
conversions.
Equipment rental revenue of $209 million declined 6% in 2004 from $222
million in 2003, reflecting the continued expected decline in facsimile rental
revenues, partially offset by an increase in copier/MFP rental revenues
resulting from our continuing copier/MFP marketing focus. Rental revenue derived
from our copier/MFP product line increased 9% reflecting increased page volumes
as well as growth in the overall installed rental population resulting from
awards of new state rental contracts and equipment placements at our national
accounts, which prefer a rental placement strategy similar to that of our
historic facsimile product placement strategy. Rental revenue from our facsimile
product line declined 18% versus the prior year reflecting the expected
continuing decline in the installed base and lower pricing on new placements and
renewals compared to expiring contracts.
Support services revenue, primarily derived from stand-alone service
contracts, increased 6% to $89 million in 2004 from $84 million in 2003,
resulting primarily from higher copier/MFP page volumes as well as growth in the
installed base of copier/MFP equipment and our geographic expansion of sales as
described in Note 15 of our "Notes to Consolidated Financial Statements,"
partially offset by lower facsimile service revenue.
Cost of sales. Cost of sales was $171 million in 2004 compared with $193
million in 2003 and as a percentage of sales revenue declined to 55.2% in 2004
from 61.0% in 2003. This decline was due to lower copier/MFP product cost, lower
inventory obsolescence charges and a lower proportion of sales to Pitney Bowes
of Canada, which are at substantially lower gross margins than direct sales,
partially offset by the continuing shift in product mix toward copier/MFP
products, which have a higher cost as a percentage of sales revenue than the
facsimile product line.
Cost of rentals. Cost of rentals was $59 million in 2004 compared with $72
million in 2003 and as a percentage of rental revenue declined to 28.2% in 2004
from 32.5% in 2003. This decline resulted from product cost improvements coupled
with the impact of our disciplined focus on improving profit margins, partially
offset by an increase in the 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 $331 million were 54.4% of total revenue in 2004
compared with $313 million or 50.3% of total revenue in 2003. Selling, service
and administrative expenses increased 6% over 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 increased
bad debt expense. This was partially offset by reduced advertising expenses,
reduced 2004 bonus and certain employee benefit accruals, lower costs resulting
from the absence of payments to Pitney Bowes for information technology charges
and the absence of service charges from Pitney Bowes, which were included under
the transition services agreement. The impact of the employee benefit accrual
reduction was $2.6 million and the impact of the reduction in the 2004 bonus
accrual was $2.7 million.
21
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $19 million and $17
million for the years ended December 31, 2004 and 2003, respectively.
Field sales and service operating expenses are included in selling,
service and administrative expenses because no meaningful allocation of these
expenses to cost of sales, cost of rentals or cost of support services is
practicable.
Interest expense. Interest expense decreased to $4 million in 2004 from $8
million in 2003. Interest expense in 2003 included a loss of $2.8 million
reclassified from accumulated other comprehensive loss related to the revision
of our cash flow estimates and subsequent disposition of our two interest rate
swap agreements. Excluding the impact of this loss, interest expense decreased
as a result of lower interest rates, partially offset by higher average debt
levels. The weighted average interest rate was 3.0% for 2004 versus 5.8% for
2003. As of December 31, 2004 we had no interest rate swap agreements
outstanding.
Effective tax rate. Our effective tax rate was 42.6% in 2004 compared with
43.1% in 2003, which reflects the tax on a foreign dividend net of foreign tax
credits. Our future effective tax rate will depend on our structure and tax
strategies as well as any future jurisdictional rate changes and could vary from
our historical effective tax rates.
Years ended December 31, 2003 and December 31, 2002
Revenue. In 2003, total revenue of $622 million declined 1% from the prior
year total revenue of $630 million, primarily reflecting lower rental revenue,
partially offset by higher support services revenue.
Equipment and supplies sales revenue of $316 million increased slightly in
2003 from $315 million in 2002. Excluding the impact of sales to Pitney Bowes of
Canada, total sales revenue was essentially flat compared to prior year.
Copier/MFP sales revenue increased 7% resulting from increased placements in our
mid-market digital black and white and color copiers/MFPs as well as higher
supplies sales. Facsimile sales revenue declined 14% due to lower equipment and
supplies sales resulting from the anticipated lower industry-wide facsimile
usage.
Equipment rental revenue of $222 million declined 4% in 2003 from $232
million in 2002, reflecting the continued expected decline in facsimile rental
revenues, partially offset by an increase in copier/MFP rental revenues. Rental
revenue derived from our copier/MFP product line increased 7% reflecting
increases in page volumes and new placements in our mid-level digital black and
white and color product categories as well as growth in the overall installed
rental population resulting from a continuing copier/MFP marketing focus on
national accounts, which prefer a rental placement strategy similar to that of
our historic facsimile product placement strategy. Rental revenue from our
facsimile product line declined 12% versus the prior year reflecting a lower
installed base and lower pricing on new placements and renewals compared to
expiring contracts.
Support services revenue, primarily derived from stand-alone service
contracts, increased 1% to $84 million in 2003 from $83 million in 2002,
reflecting a product mix shift toward higher-end copiers/MFPs, offset by lower
facsimile service revenue due to lower pricing.
Cost of sales. Cost of sales was $193 million in 2003 compared with $198
million in 2002 and as a percentage of sales revenue declined to 61.0% in 2003
from 63.0% in 2002. This decline was due to lower obsolete inventory provisions,
the impact of our disciplined focus on improving profit margins and lower
product cost, partially offset by an increase in the mix of copier/MFP product
sales, which have a higher cost of sales percentage than facsimile sales. The
provision to write our inventory down to net realizable value declined $8
million to $7 million in 2003 from $15 million in 2002.
Cost of rentals. Cost of rentals was $72 million in 2003 compared with $84
million in 2002 and as a percentage of rental revenue declined to 32.5% in 2003
from 36.2% in 2002. This decline resulted from product cost improvements coupled
with the impact of our disciplined focus on improving profit margins, partially
offset by an increase in the mix of copier/MFP product rentals, which have a
higher cost as a percentage of rental revenue than facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $313 million were 50.3% of total revenue in 2003
compared with $312 million or 49.5% of total revenue in 2002. Selling, service
and administrative expenses increased slightly over the prior year primarily
resulting from higher information technology and associated administrative
expenses related to maintaining legacy systems while incurring costs relating to
our enterprise resource planning ("ERP") project, partially offset by lower
employee compensation and benefit expenses and lower advertising.
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $17 million and $16
million for the years ended December 31, 2003 and 2002, respectively.
22
Field sales and service operating expenses are included in selling,
service and administrative expenses because no meaningful allocation of these
expenses to cost of sales, cost of rentals or cost of support services is
practicable.
Interest expense. Interest expense was $8 million in 2003 and 2002.
Interest expense in 2003 included a loss of $2.8 million resulting from the
reclassification from accumulated other comprehensive loss related to the
disposition of our two interest rate swap agreements. Interest expense for 2002
included a loss of $0.4 million resulting from the prepayment of $8 million of
the Term Loan and associated unwinding of a portion of one of the interest rate
swap agreements. Excluding the impact of these losses, interest expense
decreased as a result of lower debt levels coupled with lower interest rates.
The weighted average interest rate was 5.8% for 2003 versus 7.1% for 2002. As of
December 31, 2003 we had no interest rate swap agreements outstanding.
Effective tax rate. Our effective tax rate was 43.1 % in 2003 compared
with 39.9% in 2002 due to an increase in state and local income taxes, a change
in the estimate of the deductibility for tax purposes of certain expenses, and
the tax on a foreign dividend net of foreign tax credits. Our future effective
tax rate will depend on our structure and tax strategies as well as any future
jurisdictional rate changes and could vary from our historical effective tax
rates.
Expansion of Sales and Service Capabilities
During 2004, we acquired substantially all of the assets and business of
two independent dealers of copier and multifunctional equipment and related
support services and all of the capital stock of one independent dealer of
copier and multifunctional equipment and related support services to expand our
geographic sales and service capabilities. During 2003, we acquired
substantially all of the assets and business of one independent dealer of copier
and multifunctional equipment and related support services, to expand our
geographic sales and service capabilities. These acquisitions, individually or
in the aggregate, were not significant to our financial position or results of
operations. These acquisitions were accounted for using the purchase method of
accounting. The purchase price, including direct costs of the acquisitions, was
allocated to acquired assets and assumed liabilities. The excess of the purchase
price over the net tangible assets acquired was recorded as goodwill. The
operating results of these acquisitions are included in our financial statements
from the dates of the respective acquisitions.
Liquidity and Capital Resources
On November 9, 2001 we entered into a Credit Agreement with a group of
lenders (the "Credit Agreement") that provided for secured borrowings or the
issuance of letters of credit in an aggregate amount not to exceed $225 million,
comprised of a $125 million Revolving Credit Facility (the "Revolving Credit
Facility") and a $100 million Term Loan (the "Term Loan"). The term of the
Revolving Credit Facility is five years and the term of the Term Loan is six
years.
We have pledged substantially all of our assets plus 65% of the stock of
our direct wholly-owned 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. The Credit Agreement allowed us to originally
repurchase up to $20 million of our stock and to make acquisitions up to an
aggregate consideration of $30 million. At December 31, 2004 and 2003, we were
in compliance with all of the financial covenants.
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at our option, on either the LIBOR rate plus a
margin of from 2.25% to 3.00%, depending on our leverage ratio, or the Fleet
Bank base lending rate plus a margin of from 1.25% to 2.00%, depending on our
leverage ratio. Amounts borrowed under the Term Loan bore interest at variable
rates based, at our option, on either the LIBOR rate plus a margin of 3.50% or
3.75%, depending on our leverage ratio, or the Fleet Bank base lending rate plus
a margin of 2.50% or 2.75%, depending on our leverage ratio. A commitment fee of
from 0.375% to 0.500% on the average daily unused portion of the Revolving
Credit Facility was payable quarterly, in arrears, depending on our leverage
ratio.
The Credit Agreement required us to manage our interest rate risk with
respect to at least 50% of the aggregate principal amount of the Term Loan for a
period of at least 36 months. Accordingly, we entered into two interest rate
swap agreements in the notional amounts of $50.0 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 institutions. Under the terms of the swap agreements, we
received payments based upon the 90-day LIBOR rate and remitted
23
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 million under the Credit Agreement,
consisting of $100 million under the Term Loan and $50 million under the
Revolving Credit Facility, were used to repay amounts due to Pitney Bowes and to
pay a dividend to Pitney Bowes.
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 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
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 Bank of America (formerly
Fleet Bank) base lending rate plus a margin of 0.25%, from the Bank of America
base lending rate plus a margin of 1.25%. On April 1, 2004, Bank of America
Corporation acquired 100% of the outstanding common stock of FleetBoston
Financial Corporation, the parent of Fleet Bank and our Credit Agreement was
assigned to Bank of America.
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.
For the years ended December 31, 2004 and 2003, our average debt
outstanding was $75.8 million and $69.2 million, respectively.
At December 31, 2004, $71 million of borrowings were outstanding under the
Credit Agreement, consisting of $18 million of borrowings under the Revolving
Credit Facility and $53 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $122 million. At December 31, 2004, the
weighted average interest rate was 3.99% on borrowings under the Revolving
Credit Facility and the interest rate was 3.81% on borrowings under the Term
Loan. As of January 31, 2005, $83 million of borrowings were outstanding under
the Credit Agreement, consisting of $31 million of borrowings under the
Revolving Credit Facility and $52 million of borrowings under the Term Loan.
Approximately $76 million of the Revolving Credit Facility was available for
borrowing at December 31, 2004 and approximately $64 million of the Revolving
Credit Facility was available for borrowing at January 31, 2005. The Term Loan
is payable in 8 consecutive equal quarterly installments of
24
$0.1 million due March 31, 2005 through December 31, 2006, three consecutive
equal quarterly installments of $12.9 million due March 31, 2007 through
September 30, 2007 and a final payment of $12.9 million due at maturity.
At December 31, 2004 and 2003, one irrevocable standby letter of credit in
the amount of $1.4 million and $0.9 million, respectively was outstanding as
security for our casualty insurance program. There were no letters of credit
outstanding at December 31, 2002.
The ratio of current assets to current liabilities was 2.9 to 1 at
December 31, 2004 compared to 2.8 to 1 at December 31, 2003 due to an increase
in accrued billings and inventories, partially offset by a decrease in cash. At
December 31, 2004, our total debt as a percentage of total capitalization
increased to 20.4% from 19.2% at December 31, 2003 due to an increase in our
debt coupled with 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. During the initial stages of the
implementation and throughout our subsequent stabilization efforts, we
experienced certain processing inefficiencies affecting billings, which impacted
accounts receivable levels. We have provided for collection losses on the
increase in accounts receivable at rates higher than our historical experience.
However, if collection losses related to accounts receivable are higher than the
amounts provided, we would recognize an additional increase in our provision for
bad debt.
We began implementing Phase III of our ERP system during the fourth
quarter of 2004, primarily comprised of certain automated tools to assist in
invoice dispute resolution and collection activities. While we encountered
performance issues in the implementation of these automated tools, these issues
have been substantially remedied and these automated tools have begun to assist
in our progress in collecting our accounts receivable. During 2005, we expect to
complete the implementation of Phase III of our ERP implementation, which will
further enhance our efficiencies with respect to our collection activities.
We remain engaged in a period of stabilization, as is typical of a large
ERP system implementation. During October 2004, we experienced certain
unforeseen system performance issues, which resulted in delays in invoicing our
customers. We identified the causes of these performance issues and implemented
appropriate remedies, however, as a result of the delayed October invoicing, we
experienced delays in customer cash receipts negatively impacting accounts
receivable during the fourth quarter.
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 $79 million, $83 million and
$158 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Net income was $25 million, $20 million and $16 million in 2004, 2003 and 2002,
respectively. Non-cash charges for depreciation and amortization and provisions
for bad debt and inventory obsolescence in the aggregate provided cash of $81
million, $89 million and $102 million for 2004, 2003 and 2002, respectively. In
2004 and 2003, the provision to write down excess and obsolete inventory
amounted to $2 million and $7 million, respectively. In 2002 the provision to
write down excess and obsolete inventory amounted to $15 million to recognize
the impact of the continuing market shift from analog to digital equipment on
the market value of our inventory. Changes in the principal components of
working capital required cash of $29 million in 2004 and $30 million in 2003,
and provided cash of $38 million in 2002. Of the $29 million increase in our
working capital requirements in 2004, $9 million resulted from an increase in
net accounts receivable, primarily due to increased delinquencies, $8 million
resulted from an increase in accrued billings and $2 million resulted from a
decrease in advance billings. The change in accrued billings and advance
billings was related to timing of invoicing to customers. Inventory levels
increased $9 million resulting from our geographic expansion of sales and
service capabilities (See Note 15 of our "Notes to Consolidated Financial
Statements") as well as purchases in the fourth quarter in support of scheduled
new product introductions. Of the $30 million increase in our working capital
requirements in 2003, $29 million resulted from an increase in accounts
receivable due to the planned temporary suspension of invoicing our customers
during the conversion to a new invoicing system associated with the
implementation of our ERP system and $11 million from a reduction in advance
billings related to the rescheduling of our facsimile product line billings to
coincide with our copier/MFP billings associated with our ERP implementation.
This was partially offset by a decrease of $12 million in inventories related to
reduced inventory levels. Of the $38 million of cash provided by working capital
changes in 2002, approximately $17 million was due to improved collection
results. In addition, $18 million resulted from the accrual in our accounts of
costs that had been included in amounts due to Pitney Bowes prior to the
Distribution and included $7 million in income taxes, $5 million in employee
medical and benefit costs and $6 million of higher accrual levels for
administrative costs associated with becoming an independent public company. In
addition, $3 million of the increase in accounts payable and accrued liabilities
in 2002 resulted from costs associated with the ERP project.
25
We used $76 million, $55 million and $67 million in investing activities
for the years ended December 31, 2004, 2003 and 2002, respectively. Investment
in rental equipment assets totaled $46 million, $35 million and $48 million in
2004, 2003 and 2002, respectively. The increased level of rental asset
expenditures in 2004 results primarily from awards of new state rental
contracts, partially offset by lower facsimile placements. The lower level of
rental equipment expenditures in 2003 results from product cost improvements and
a reduction in new facsimile rental equipment placements resulting from expected
continuing lower demand. Capital expenditures for property, plant and equipment
were $17 million, $16 million and $19 million in 2004, 2003 and 2002,
respectively, of which the investment in our ERP system accounted for $11
million, $9 million and $10 million, respectively. In 2004 and 2003, we acquired
independent dealers to expand our sales and service capabilities as described
above under "Expansion of Sales and Service Capabilities."
Cash used in financing activities was $13 million, $36 million and $79
million for the years ended December 31, 2004, 2003 and 2002, respectively. Net
repayments under the Term Loan were $0.5 million for 2004, while net borrowings
under the Revolving Credit Facility were $8 million for 2004. Cash used in
financing activities in 2003 reflects repayments under the Term Loan of $21
million and net borrowings under the Revolving Credit Facility of $10 million.
Cash used in financing activities in 2002 reflects repayments of $17 million
under the Revolving Credit Facility and $26 million under the Term Loan. Cash
used in financing activities in 2004, 2003 and 2002 reflects the repurchase of
0.7 million shares of our stock at a cost of $24 million, 1.3 million shares of
our stock at a cost of $28 million and 1.9 million shares at a cost of $37
million, respectively.
The following table depicts our future payments under material contractual
obligations as of December 31, 2004:
Dollars in millions
Payments Due By Period
-----------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 year years years years
------ ---------- ------- ------- --------
Long-term debt $ 71 $ 1 $ 70 $ -- $ --
Operating leases 32 11 20 1 --
Long-term debt payments are related to the Credit Agreement. Payments
under operating leases relate to the lease and sub-lease of properties including
sales and service offices under long-term lease agreements with initial terms
extending from two to fifteen years as described in "Properties" located in Part
I, Item 2 of this 2004 Annual Report on Form 10-K.
We have no material commitments other than supply agreements with vendors
that extend only to equipment, supplies and parts ordered under purchase orders;
there are no long-term purchase requirements. We do not have any capital leases
or off-balance sheet arrangements to finance our business.
We will continue to make additional investments in facilities, rental
equipment, computer equipment and systems and our distribution network as
required to support our operations. We anticipate investments in rental
equipment assets for new and replacement programs in amounts consistent with the
recent past.
We estimate that we will spend approximately $4.0 million during 2005 to
continue to enhance our information systems infrastructure and complete the
implementation of our ERP system.
In connection with the Distribution, we entered into certain agreements
pursuant to which we may be obligated to indemnify Pitney Bowes with respect to
certain matters.
We agreed to assume all liabilities associated with our business, and to
indemnify Pitney Bowes for all claims relating to our business. These may be
claims by or against Pitney Bowes or us relating to, among other things,
contractual rights under vendor, insurance or other contracts, trademark, patent
and other intellectual property rights, equipment, service or payment disputes
with customers and disputes with employees.
We and Pitney Bowes entered into a tax separation agreement, which governs
our and Pitney Bowes' respective rights, responsibilities and obligations after
the Distribution with respect to taxes for the periods ending on or before the
Distribution. In addition, the tax separation agreement generally obligated us
not to enter into any transaction that would adversely affect the tax-free
nature of the Distribution for the two-year period following the Distribution,
and obligates us to indemnify Pitney Bowes and affiliates to the extent that any
action we take or fail to take gives rise to a tax liability with respect to the
Distribution.
In each of these circumstances, payment by us is contingent on Pitney
Bowes making a claim. As such, it is not possible to predict the maximum
potential future payments under these agreements. As of December 31, 2004, we
had not paid any material amounts to Pitney Bowes pursuant to the above
indemnifications. However, we have paid amounts to defend and resolve claims
26
and litigation related to our business that we assumed as part of the Spin-off.
We believe that if we were to incur a loss in any of these matters, such loss
would not have a material effect on our financial position, results of
operations or cash flows.
Risk Factors That Could Cause Results to Vary
Risk factors relating to our business
The document imaging and management industry is undergoing an evolution in
product offerings, moving toward the use of networked, digital and color
technology in a multifunctional office environment. Our continued success will
depend to a great extent on our ability to respond to this rapidly changing
environment by developing new options and document imaging solutions for our
customers.
The proliferation of email, 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.
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.
In order to be successful, we must retain and motivate executives and
other key employees, including those in managerial, financial, technical, sales,
marketing and IT support positions. The loss of key employees could have an
adverse effect on our operations.
Our ability to achieve and maintain a consistent trend of revenue growth
and earnings is dependent upon new equipment placements, as well as sales of
services and supplies occurring after the initial equipment placements of our
copier/MFP products. The inability to place new equipment and capture the
aftermarket supplies and service revenue would have an adverse affect on our
results of operations and financial condition.
We rely on outside suppliers to manufacture the products that we
distribute, many of whom are located in the Far East. In addition, our primary
suppliers sell products in competition with us, either directly or through
dealer channels. 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 products. 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, we could be
forced to identify an alternative supplier or suppliers for the affected
products. 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 products may be more expensive or may lack certain features of the
discontinued products and we may experience some delay in obtaining the
products. 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.
Pitney Bowes has been and is expected to continue to be a significant
customer. Revenues from Pitney Bowes, exclusive of equipment sales to PBCC for
lease to the end user, accounted for approximately 6% of our total revenue in
2004 and 9% of our total revenue in both 2003 and 2002. 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. Beginning in December 2003, we discontinued the
use of the Pitney
27
Bowes brand name and all new products have been 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.
Inflation
Inflation, although moderate in recent years, continues to affect
worldwide economies and the ways companies operate. Although the cost of copier,
facsimile and multifunctional equipment has been declining for the last two
years, inflation increases labor costs and operating expenses and may, in the
future, raise costs associated with replacement of fixed assets such as rental
equipment. Industry-wide pricing pressures have negatively impacted our profit
margins, but we have generally been able to offset the impact of lower selling
prices with reductions in our product costs.
Foreign currency
A portion of our international business is transacted in local currency.
In 2004, approximately 12% and in 2003 and 2002, approximately 20% of our total
product purchases, based on costs, were denominated in yen. Our margins were
negatively impacted in 2004, 2003 and 2002 because the strong Japanese yen
resulted in higher product costs on yen denominated purchases from our Japanese
vendors. In 2004, 2003 and 2002, the value of the yen increased approximately
4%, 9% and 8% against the U.S. dollar, respectively. The majority of our
remaining product purchases are denominated in U.S. dollars and are produced by
Japanese suppliers in manufacturing facilities located in Asia, primarily China.
Currently, the exchange rate of the Chinese renminbi and the U.S. dollar is
fixed. If the Chinese government were to revalue the Chinese renminbi and the
nominal value of the renminbi rises, the resultant impact on the exchange rate
of the Chinese renminbi and the U.S. dollar could have a negative impact on our
product cost. We do not currently utilize any form of derivative financial
instruments to manage our exchange rate risk. We manage our foreign exchange
risk by attempting to pass through to our customers any cost increases related
to foreign currency exchange. However, no assurance can be given that we will be
successful in passing cost increases through to our customers in the future.
Risk factors relating to our ERP system implementation
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. During the initial stages of the
implementation and throughout our subsequent stabilization efforts, we
experienced certain processing inefficiencies affecting billings, which impacted
accounts receivable levels. We have provided for collection losses on the
increase in accounts receivable at rates higher than our historical experience.
However, if collection losses related to accounts receivable are higher than the
amounts provided, we would recognize an additional increase in our provision for
bad debt.
We began implementing Phase III of our ERP system during the fourth
quarter of 2004, primarily comprised of certain automated tools to assist in
invoice dispute resolution and collection activities. While we encountered
performance issues in the implementation of these automated tools, these issues
have been substantially remedied and these automated tools have begun to assist
in our progress in collecting our accounts receivable. During 2005, we expect to
complete the implementation of Phase III of our ERP implementation, which will
further enhance our efficiencies with respect to our collection activities.
With respect to the calculation of sales compensation, we continue to work
through certain of the 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. We implemented a new sales compensation program and plan to
begin paying based on the ERP calculation in the first quarter of 2005. We will
continue to implement this program and anticipate that we will pay all sales
compensation based on the ERP calculation in 2005.
We remain engaged in a period of stabilization, as is typical of a large
ERP system implementation. During October 2004, we experienced certain
unforeseen system performance issues, which resulted in delays in invoicing our
customers. We identified the causes of these performance issues and implemented
appropriate remedies, however, as a result of the delayed October invoicing, we
experienced delays in customer cash receipts negatively impacting accounts
receivable during the fourth quarter.
We anticipate that we will resolve the issues related to our ERP system
implementation that are impacting our customer billings, accounts receivable and
sales compensation. However, if we are unable to do so in a reasonable time
frame, these issues could have a negative impact on customer and employee
satisfaction and retention, which could result in a potential loss of business.
Although no assurance can be given that these efforts related to customer
billings, 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.
28
Legal Matters
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the course of normal business, we have been party
to litigation relating to our business. These may involve litigation by or
against Pitney Bowes or Imagistics relating to, among other things, contractual
rights under vendor, insurance or other contracts, intellectual property or
patent rights, equipment, service or payment disputes with customers and
disputes with employees.
In connection with the Distribution, liabilities were transferred to us
for matters where Pitney Bowes was a plaintiff or a defendant in lawsuits,
relating to our business or products. We have not recorded liabilities for loss
contingencies since the ultimate resolutions of the legal matters cannot be
determined and a minimum cost or amount of loss cannot be reasonably estimated.
In our opinion, none of these proceedings, individually or in the aggregate,
would have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
Environmental Matters
We are subject to federal, state and local laws intended to protect the
environment. We believe that, as a general matter, our policies, practices and
procedures are properly designed to reasonably prevent the risk of environmental
damage and financial liability to our Company.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R) "Share-Based
Payment." SFAS No. 123(R) is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123(R)
requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. SFAS No. 123(R) is effective for all interim
or annual reporting periods that begin after June 15, 2005. Early adoption is
encouraged and retroactive application of the provisions of SFAS No. 123(R) to
the beginning of the fiscal year that includes the effective date is permitted,
but not required. We are currently evaluating the impact of SFAS No. 123(R) on
our financial position, results of operations and cash flows.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is set forth under the headings
"Liquidity and Capital Resources" and "Risk Factors That Could Cause Results to
Vary" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 herein.
Interest Rate Risk
We have certain exposures to market risk related to changes in interest
rates. Historically, we used interest rate swap agreements to manage our risk
related to interest payments on our debt instruments and to hedge the exposure
to variability in future cash flows. During the third quarter of 2003, we
disposed of our interest rate swap agreements and currently do not utilize any
form of derivative financial instruments to manage our interest rate risk.
Foreign Currency Exchange Risk
We do not currently utilize any form of derivative financial instruments
to manage our exchange rate risk. We manage our foreign exchange risk by
attempting to pass through to our customers any cost increases related to
foreign currency exchange. In addition, we are exposed to foreign exchange rate
fluctuations with respect to the Canadian Dollar and British Pound as the
financial results of our Canadian and U.K. subsidiaries are translated into U.S.
dollars for consolidation. The effect of foreign exchange rate fluctuation for
the year ended December 31, 2004 was not material.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Page
Report of Independent Registered Public Accounting Firm....................................................... 32
Consolidated Income Statements for the years ended December 31, 2004, 2003 and 2002........................... 34
Consolidated Balance Sheets as of December 31, 2004 and 2003.................................................. 35
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss) for the
years ended December 31, 2004, 2003 and 2002.............................................................. 36
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002.................... 37
Notes to Consolidated Financial Statements.................................................................... 38
31
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Imagistics International Inc.:
We have completed an integrated audit of Imagistics International Inc.'s
2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Imagistics International Inc. and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjuction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
32
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 4, 2005
33
IMAGISTICS INTERNATIONAL INC.
Consolidated Income Statements
(Dollars in thousands, except per share amounts)
Year ended December 31,
2004 2003 2002
----------- ----------- -----------
Revenue:
Sales $ 310,530 $ 316,002 $ 314,899
Rentals 209,501 222,183 232,228
Support services 89,022 84,011 82,803
----------- ----------- -----------
Total revenue 609,053 622,196 629,930
Cost of sales 171,344 192,772 198,437
Cost of rentals 59,102 72,254 84,114
Selling, service and administrative expenses 331,460 312,759 311,924
----------- ----------- -----------
Operating income 47,147 44,411 35,455
Interest expense 3,693 8,437 8,106
----------- ----------- -----------
Income before income taxes 43,454 35,974 27,349
Provision for income taxes 18,511 15,515 10,906
----------- ----------- -----------
Net income $ 24,943 $ 20,459 $ 16,443
=========== =========== ===========
Earnings per share:
Basic $ 1.54 $ 1.22 $ 0.88
=========== =========== ===========
Diluted $ 1.48 $ 1.19 $ 0.86
=========== =========== ===========
Shares used in computing earnings per share:
Basic 16,186,047 16,710,686 18,631,895
=========== =========== ===========
Diluted 16,868,086 17,230,261 19,134,158
=========== =========== ===========
See Notes to Consolidated Financial Statements
34
IMAGISTICS INTERNATIONAL INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
2004 2003
--------- ---------
Assets
Current assets:
Cash $ 12,800 $ 22,938
Accounts receivable, net of allowances of $14,991 and $10,575 at
December 31, 2004 and 2003, respectively 105,680 107,690
Accrued billings 29,032 20,862
Inventories 94,747 86,134
Current deferred taxes on income 24,827 24,191
Other current assets and prepaid expenses 6,550 4,806
--------- ---------
Total current assets 273,636 266,621
Property, plant and equipment, net 60,326 53,204
Rental equipment, net 62,824 67,179
Goodwill 66,305 55,447
Other assets 4,445 4,281
--------- ---------
Total assets $ 467,536 $ 446,732
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 545 $ 545
Accounts payable and accrued liabilities 80,340 79,291
Advance billings 14,808 16,323
--------- ---------
Total current liabilities 95,693 96,159
Long-term debt 70,359 62,903
Deferred taxes on income 21,442 17,919
Other liabilities 2,999 2,350
--------- ---------
Total liabilities 190,493 179,331
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock ($1.00 par value; 10,000,000 shares authorized, none issued) -- --
Common stock ($0.01 par value; 150,000,000 shares authorized, 20,008,325
and 19,871,061 issued at December 31, 2004 and 2003, respectively) 200 199
Additional paid in capital 299,601 295,176
Retained earnings 59,924 34,981
Treasury stock, at cost (3,703,065 and 3,096,878 shares at December 31, 2004
and 2003, respectively) (85,620) (62,783)
Unearned compensation (634) (1,934)
Accumulated other comprehensive income 3,572 1,762
--------- ---------
Total stockholders' equity 277,043 267,401
--------- ---------
Total liabilities and stockholders' equity $ 467,536 $ 446,732
========= =========
See Notes to Consolidated Financial Statements
35
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss)
(Dollars in thousands)
Common stock Additional Retained Treasury Stock
------------------------ paid in earnings ------------------------
Shares Par value capital (deficit) Shares Cost
------ --------- ------- --------- ------ ----
Balance at January 1, 2002 19,463,007 $ 195 $289,517 $ (1,921) -- $ --
Net income 16,443
Translation adjustment
Unrealized loss on cash flow hedges
Issuance of restricted stock
under stock plans 347,000 3 4,823
Exercise of stock options 3,510 30
Purchase of treasury stock 1,936,760 (36,549)
Amortization of unearned compensation
----------------------------------------------------------------------------------
Balance at December 31, 2002 19,813,517 198 294,370 14,522 1,936,760 (36,549)
Net income 20,459
Translation adjustment
Reclassification of realized loss on
cash flow hedges included in net income
Issuance of restricted stock
under stock plans 12,700 313
Exercise of stock options 44,844 1 595
Issuance of stock under employee
stock purchase plan (102) (109,782) 2,135
Purchase of treasury stock 1,269,900 (28,369)
Amortization of unearned compensation
----------------------------------------------------------------------------------
Balance at December 31, 2003 19,871,061 199 295,176 34,981 3,096,878 (62,783)
Net income 24,943
Translation adjustment
Issuance of restricted stock
under stock plans 14,000 522
Exercise of stock options 123,264 1 170
Tax benefit from exercise of stock options 1,714
Issuance of stock under employee
stock purchase plan 2,019 (45,513) 1,028
Purchase of treasury stock 651,700 (23,865)
Amortization of unearned compensation
----------------------------------------------------------------------------------
Balance at December 31, 2004 20,008,325 $ 200 $299,601 $ 59,924 3,703,065 $(85,620)
==================================================================================
Accumulated
other
Unearned Comprehensive comprehensive
compensation income income (loss)
------------ ------ -------------
Balance at January 1, 2002 $ -- $ 12,930 $ (2,352)
========
Net income $ 16,443
Translation adjustment 1,285 1,285
Unrealized loss on cash flow hedges (4,010) (4,010)
Issuance of restricted stock
under stock plans (4,826)
Exercise of stock options
Purchase of treasury stock
Amortization of unearned compensation 1,609
------------------------------------------------
Balance at December 31, 2002 (3,217) $ 13,718 (5,077)
========
Net income $ 20,459
Translation adjustment 3,130 3,130
Reclassification of realized loss on
cash flow hedges included in net income 3,709 3,709
Issuance of restricted stock
under stock plans (375)
Exercise of stock options
Issuance of stock under employee
stock purchase plan
Purchase of treasury stock
Amortization of unearned compensation 1,658
------------------------------------------------
Balance at December 31, 2003 (1,934) $ 27,298 1,762
========
Net income $ 24,943
Translation adjustment 1,810 1,810
Issuance of restricted stock
under stock plans (522)
Exercise of stock options
Tax benefit from exercise of stock options
Issuance of stock under employee
stock purchase plan
Purchase of treasury stock
Amortization of unearned compensation 1,822
------------------------------------------------
Balance at December 31, 2004 $ (634) $ 26,753 $ 3,572
================================================
See Notes to Consolidated Financial Statements
36
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended December 31,
2004 2003 2002
-------- -------- ---------
Cash flows from operating activities:
Net income $ 24,943 $ 20,459 $ 16,443
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 65,780 74,513 81,593
Provision for bad debt 12,438 6,656 4,886
Provision for inventory obsolescence 2,350 7,491 15,153
Deferred taxes on income 2,887 (923) 467
Change in assets and liabilities, net of acquisitions:
Accounts receivable (8,703) (29,474) 16,886
Accrued billings (8,170) 1,596 (981)
Inventories (8,799) 12,479 2,850
Other current assets and prepaid expenses (1,684) 392 (1,198)
Accounts payable and accrued liabilities 175 (3,494) 22,819
Advance billings (2,006) (11,132) (2,133)
Other, net 187 4,479 1,666
-------- -------- ---------
Net cash provided by operating activities 79,398 83,042 158,451
Cash flows from investing activities:
Expenditures for rental equipment assets (46,365) (34,854) (48,062)
Expenditures for property, plant and equipment (17,009) (16,100) (18,537)
Acquisitions, net of cash acquired (12,973) (4,139) --
-------- -------- ---------
Net cash used in investing activities (76,347) (55,093) (66,599)
Cash flows from financing activities:
Exercises of stock options, including purchases
under employee stock purchase plan 3,220 2,732 30
Purchases of treasury stock (23,865) (28,369) (36,549)
Net repayments under term loan (544) (20,699) (25,852)
Net borrowings (repayments) under revolving credit
facility 8,000 10,000 (17,000)
-------- -------- ---------
Net cash used in financing activities (13,189) (36,336) (79,371)
-------- -------- ---------
(Decrease) increase in cash (10,138) (8,387) 12,481
Cash at beginning of period 22,938 31,325 18,844
-------- -------- ---------
Cash at end of period $ 12,800 $ 22,938 $ 31,325
======== ======== =========
See Notes to Consolidated Financial Statements
37
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except as otherwise indicated)
1. Description of the Business
Imagistics International Inc. (the "Company" or "Imagistics") is an
independent direct sales, service and marketing organization offering document
imaging and management solutions, including copiers, multifunctional products,
often referred to as MFPs, and facsimile machines in the United States, Canada
and the United Kingdom. The Company's primary customers include large corporate
and government entities and mid-size and regional businesses. 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") approved the spin-off of substantially all of the U.S. and U.K.
operations of its office systems business to its common stockholders as an
independent, publicly traded company. On December 3, 2001, Imagistics was
spun-off from Pitney Bowes pursuant to a contribution by Pitney Bowes of
substantially all of Pitney Bowes' United States and United Kingdom office
systems businesses to the Company and a distribution of the common stock of the
Company to common 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").
2. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the United
States, Canada and United Kingdom operations of the Company. All significant
transactions between the United States, Canada and the United Kingdom operations
have been eliminated.
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates include usage
of equipment for rental assets billed in arrears, sales returns, usage
adjustments and other allowances for equipment sales, equipment rentals and
service contract billings, the collectibility of accounts receivable, the use
and recoverability of inventory, the useful lives of tangible assets, the
realization of deferred taxes and an evaluation of the potential impairment, if
any, of goodwill and other long-lived assets, among others. The markets for the
Company's products are characterized by intense competition, rapid technological
development and pricing pressures, all of which could affect the future
realizability of the Company's assets. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary. Actual
results could differ from those estimates.
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. The Company
records a provision for estimated sales returns and other allowances based upon
historical experience.
Rental contracts, which 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
38
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
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 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
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.
Shipping and handling fees and costs
The Company records shipping and handling costs as part of cost of sales,
as these costs are generally absorbed by the Company. Any amounts billed to a
customer for reimbursement of shipping and handling costs are included in
revenue.
Costs and expenses
Inbound freight charges are included in inventory. When the inventory is
sold, the cost of the inventory, including the inbound freight charges, is
relieved and charged to cost of sales. When the inventory is rented, the cost of
the inventory, including the inbound freight charges, is relieved and
transferred to the rental equipment asset account. The cost of the rental
equipment asset is then depreciated over the estimated useful life of the
equipment. The depreciation of rental equipment assets is included in cost of
rentals.
Purchasing and receiving costs, inspection costs, warehousing costs and
other distribution costs are included in selling, service and administrative
costs because no meaningful allocation of these expenses to cost of sales or
cost of rentals is practicable. These costs amounted to $19.1 million, $17.1
million and $16.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively.
Field sales and service operating expenses are included in selling,
service and administrative expenses because no meaningful allocation of these
expenses to cost of sales, cost of rentals or cost of support services is
practicable.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
Accounts Receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that the Company believes are
uncollectible. The Company's estimate of losses is based on prior product
returns and invoice adjustment experience as well as prior collection experience
including evaluating the credit worthiness of each of its customers, analyzing
historical bad debt write-offs and reviewing the aging of the receivables. The
allowance for doubtful accounts includes amounts for specific accounts that the
Company believes are uncollectible, as well as amounts that have been computed
by applying certain percentages based on historic loss trends, to certain
accounts receivable aging categories and estimated amounts relating to
delinquencies associated with the changes in the Company's billing practices
with the implementation of the Company's enterprise resource planning ("ERP")
system.
39
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Inventory valuation
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in, first-out method for inventory valuation. Provisions, when
required, are made to reduce excess and obsolete inventories to the estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demand.
Fixed assets and depreciation
Property, plant and equipment are stated at cost and depreciated
principally using the straight-line method over appropriate periods, buildings
at fifty years, machinery and equipment principally three to fifteen years and
computers principally three to seven years. Major improvements that add to
productive capacity or extend the life of an asset are capitalized while repairs
and maintenance are charged to expense as incurred.
Rental Equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated using the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service on or after October 1, 2003 is depreciated over
three years. Facsimile equipment placed in service before October 1, 2003 is
depreciated over five years.
Capitalized computer software costs
The Company capitalizes certain costs of internally developed software.
Capitalized internal costs include purchased materials and services and payroll
and payroll related costs. Costs for general administration, overhead,
maintenance and training, as well as the cost of software that does not add
functionality to the existing system, are expensed as incurred. The capitalized
cost of internally developed software is amortized on a straight-line basis over
appropriate periods, principally three to seven years. The unamortized balance
of internally developed software is included in property, plant and equipment,
net in the consolidated balance sheets.
Goodwill
Effective January 1, 2002, the Company accounts for goodwill in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and
Other Intangible Assets", which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be tested for impairment annually as well as on an interim basis if
events or changes in circumstances indicate that goodwill might be impaired. The
Company performed its annual test for impairment as of October 1, 2004 using the
discounted cash flow valuation method. There was no impairment to the value of
the Company's recorded goodwill for the years ended December 31, 2004, 2003 or
2002.
Impairment of long-lived assets
The carrying value of long-lived assets, including property and equipment,
rental equipment, and capitalized computer software costs, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. If such a change in circumstances
occurs, the related estimated future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition are compared to the
carrying amount. If the sum of the expected cash flows is less than the carrying
amount, the Company would record an impairment loss. The impairment loss would
be measured as the amount by which the carrying amount exceeds the fair value of
the asset. There was no impairment of long-lived assets recorded for the years
ended December 31, 2004, 2003 and 2002.
Income taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized based on the
estimated future tax consequences of differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the periods the temporary differences are expected to be settled.
A valuation allowance is established, as needed, to
40
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
reduce net deferred tax assets to realizable value. A valuation allowance has
not been established for the Company's deferred tax assets as the Company
believes it is more likely than not, they will be realized.
Research and development
The Company did not incur any significant research and development costs
in 2004 and 2003. Historically, research and development activities, if any,
were limited to identifying new technology to enhance the operating efficiency
of the Company's products. Research and development costs, which are expensed as
incurred, consist mainly of salaries and consulting expenditures relating to
customized solutions for document imaging products. Research and development
costs, which are included in selling, service and administrative expenses in the
consolidated income statements, were approximately $0.4 million for the year
ended December 31, 2002.
Foreign exchange
Assets and liabilities of the Company's Canadian and United Kingdom
operations are translated at rates in effect at the end of the period, and
revenues and expenses are translated at average rates during the period.
Cumulative translation gains and losses are included in accumulated other
comprehensive income (loss) in stockholders' equity. Gains and losses resulting
from foreign currency transactions (transactions denominated in a currency other
than the entity's functional currency) are included in the consolidated income
statements.
Financial instruments
The Company recognizes all derivative financial instruments as assets and
liabilities and measures them at fair value. All derivative financial
instruments were designated and qualified as cash flow hedges and, accordingly,
the effective portions of changes in fair value of the derivative financial
instruments were recorded in other comprehensive income (loss) and were
recognized in the income statements when the hedged item affected earnings.
Historically, the Company used interest rate swap agreements to manage and
reduce risk related to interest payments on its debt instruments. During the
third quarter of 2003, the Company revised its cash flow estimates and disposed
of its interest rate swap agreements and as a result, reclassified the
cumulative change in the fair market value of the interest rate swap agreements
from other comprehensive income (loss) into interest expense. The Company did
not have any derivative financial instruments at December 31, 2004.
The Company monitors the creditworthiness of its financial institutions,
including depositories, on a periodic basis. The carrying amount of investments
held at financial institutions approximates fair market value because of the
short maturity of these instruments.
Comprehensive income (loss)
Comprehensive income (loss) is recorded directly to a separate section of
stockholders' equity and includes unrealized gains and losses excluded from the
consolidated income statements. These unrealized gains and losses have consisted
of foreign currency translation adjustments and unrealized gains and losses on
cash flow hedges.
Stock-based employee compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. The Company recognizes stock-based compensation expense on its
restricted stock on a straight-line basis over the vesting period. The Company
does not recognize stock-based compensation expense on its stock options in its
reported results as all options granted had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
will account for its stock-based compensation as required under SFAS No. 123(R),
"Share-Based Payment," beginning in the third quarter of 2005, described below
under "Recent Accounting Pronouncements."
41
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," to
stock-based employee compensation:
Year ended December 31,
2004 2003 2002
------- ------- -------
Net income, as reported $24,943 $20,459 $16,443
Add: Stock-based compensation expense
included in net income, net of
related tax effects 1,046 943 967
Deduct: Total stock-based compensation
expense, based on the fair value method,
net of related tax effects (3,286) (3,259) (2,756)
------- ------- -------
Pro forma net income $22,703 $18,143 $14,654
======= ======= =======
Basic earnings per share:
As reported $ 1.54 $ 1.22 $ 0.88
Pro forma $ 1.40 $ 1.09 $ 0.79
Diluted earnings per share:
As reported $ 1.48 $ 1.19 $ 0.86
Pro forma $ 1.35 $ 1.05 $ 0.77
The fair value of stock options granted to employees of the Company in
2004, 2003 and 2002 under the 2001 Stock Plan was estimated on the date of grant
using the Black-Scholes option-pricing method. The assumptions used are as
follows:
Year ended December 31,
2004 2003 2002
---- ---- ----
Expected stock price volatility 31% 35% 43%
Risk-free interest rate 3.5% 4% 4%
Expected life (years) 5 5 5
Expected dividend yield 0% 0% 0%
Recent accounting pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R) "Share-Based Payment." SFAS No. 123(R) is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation" and supersedes APB No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123(R) requires companies
to measure and recognize compensation expense for all stock-based payments at
fair value. SFAS No. 123(R) is effective for all interim or annual reporting
periods that begin after June 15, 2005. Early adoption is encouraged and
retroactive application of the provisions of SFAS No. 123(R) to the beginning of
the fiscal year that includes the effective date is permitted, but not required.
The Company is currently evaluating the impact of SFAS No. 123(R) on its
financial position, results of operations and cash flows.
3. Goodwill and Goodwill Amortization
The Company accounts for goodwill in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets." In accordance with SFAS No. 142, the
Company completed its annual reviews of goodwill for impairment as of October 1,
2004 and 2003, and, based on these reviews, has determined that its recorded
goodwill was not impaired. Accordingly, for the years ended December 31, 2004,
2003 and 2002, there was no goodwill amortization or goodwill impairment.
42
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
The carrying value of goodwill increased $10.9 million and $2.8 million as
of December 31, 2004 and December 31, 2003, respectively, as a result of the
Company's acquisition of certain dealers (see Note 15). The carrying value of
goodwill of $66.3 million and $55.4 million at December 31, 2004 and 2003,
respectively, is attributable to the North America geographic segment.
4. Supplemental Information
Accounts receivable
Accounts receivable consisted of the following at December 31, 2004 and
2003:
December 31,
2004 2003
-------- --------
Trade accounts receivable $120,671 $118,265
Allowance for doubtful accounts 14,991 10,575
-------- --------
Accounts recevable, net $105,680 $107,690
======== ========
Changes in the allowance for doubtful accounts during the years ended
December 31, 2004, 2003 and 2002 were as follows:
Year ended December 31,
2004 2003 2002
-------- -------- --------
Balance at the beginning of the year $ 10,575 $ 5,792 $ 6,188
Charges, costs and expenses 12,438 6,656 4,886
Deductions (8,022) (1,873) (5,282)
-------- -------- --------
Balance at the end of the year $ 14,991 $ 10,575 $ 5,792
======== ======== ========
Inventories
Inventories consisted of the following at December 31, 2004 and 2003:
December 31,
2004 2003
------- -------
Finished products $52,960 $50,726
Supplies and service parts 41,787 35,408
------- -------
Total inventories $94,747 $86,134
======= =======
43
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Fixed assets and rental equipment assets
Fixed assets consisted of the following at December 31, 2004 and 2003:
December 31,
2004 2003
--------- ---------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 12,282 10,976
Machinery and equipment 26,679 23,474
Computers and software 61,007 47,356
--------- ---------
Property, plant and equipment, gross 101,324 83,162
Accumulated depreciation and amortization (40,998) (29,958)
--------- ---------
Property, plant and equipment, net $ 60,326 $ 53,204
========= =========
Rental equipment, gross $ 304,005 $ 333,563
Accumulated depreciation (241,181) (266,384)
--------- ---------
Rental equipment, net $ 62,824 $ 67,179
========= =========
Depreciation and amortization expense was $65.8 million, $74.5 million and
$81.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Unamortized capitalized software costs totaled $33.5 million,
$27.0 million and $19.6 million at December 31, 2004, 2003 and 2002,
respectively. Amortization expense on account of capitalized software totaled
$4.0 million and $1.6 million at December 31, 2004 and 2003, respectively.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
December 31, 2004 and 2003:
December 31,
2004 2003
--------- ---------
Accounts payable $ 42,118 $ 33,237
Accrued compensation and benefits 8,756 8,321
Group medical insurance payable 4,844 8,068
Income taxes payable 3,682 6,743
Other non-income taxes payable 5,796 6,626
Other accrued liabilities 15,144 16,296
--------- ---------
Accounts payable and accrued liabilities $ 80,340 $ 79,291
========= =========
Cash flow information
Cash paid for income taxes was $17.2 million, $15.6 million and $5.6
million for the years ended December 31, 2004, 2003 and 2002, respectively. Cash
paid for interest was $2.8 million, $8.0 million and $7.8 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
44
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
The following table provides details of the Company's acquisitions for the
years ended December 31, 2004 and 2003. There were no acquisitions for the year
ended Decmeber 31, 2002.
December 31,
2004 2003
-------- --------
Fair value of assets acquired,
excluding Goodwill $ 6,145 $ 2,591
Goodwill 10,182 2,847
Liabilities assumed 3,354 1,297
-------- --------
Cash paid for acquisitions 12,973 4,141
Less cash acquired -- 2
-------- --------
Cash used for acquisitions, net
of cash acquired $ 12,973 $ 4,139
======== ========
5. Business Segment Information
Geographic 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.
Year ended December 31,
2004 2003 2002
-------- -------- --------
Revenues:
North America $587,671 $602,167 $608,291
United Kingdom 21,382 20,029 21,639
-------- -------- --------
Total revenues $609,053 $622,196 $629,930
======== ======== ========
Income before income taxes:
North America $ 39,787 $ 32,953 $ 24,524
United Kingdom 3,667 3,021 2,825
-------- -------- --------
Total income before taxes $ 43,454 $ 35,974 $ 27,349
======== ======== ========
Revenues from Pitney Bowes consisted of the following for the years ended
December 31, 2004, 2003 and 2002:
Year ended December 31,
2004 2003 2002
-------- -------- --------
Revenues from Pitney Bowes:
Pitney Bowes of Canada $ 15,515 $ 28,920 $ 27,843
Other subsidiaries of Pitney Bowes 20,998 27,683 31,055
-------- -------- --------
Sub-total 36,513 56,603 58,898
Pitney Bowes Credit Corporation 92,251 87,620 84,753
-------- -------- --------
Total $128,764 $144,223 $143,651
======== ======== ========
Revenues from external customers were approximately $480.3 million, $478.0
million and $486.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Revenues from Pitney Bowes, substantially all of which were
generated in the North America segment, were approximately $128.8 million,
$144.2 million and $143.6 million during the years ended 2004, 2003 and 2002,
respectively. For the periods presented, Pitney Bowes Credit Corporation
("PBCC") was the Company's primary lease vendor and the Company expects PBCC to
continue as the Company's primary lease vendor in the future. No other single
customer or controlled group represents 10% or more of the Company's revenues.
In connection with these revenues, the
45
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Company recorded $14.0 million and $24.3 million due from Pitney Bowes as
accounts receivable in the consolidated balance sheets at December 31, 2004 and
2003, respectively.
The following tables show identifiable long-lived assets and total assets
for each reportable segment at December 31, 2004 and 2003:
December 31,
2004 2003
-------- --------
Identifiable long-lived assets
North America $190,926 $176,157
United Kingdom 2,974 3,954
-------- --------
Total identifiable long-lived assets $193,900 $180,111
======== ========
Total assets
North America $450,898 $417,704
United Kingdom 16,638 29,028
-------- --------
Total assets $467,536 $446,732
======== ========
Identifiable long-lived assets in North America include goodwill of $66.3
million and $55.4 million for the years ended December 31, 2004 and 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 and a
portion are transacted in local currency. In 2004 and 2003, approximately 12%
and 20%, respectively, of the Company's total product purchases, based on costs,
were from a limited number of Japanese suppliers and were denominated in yen.
Although the Company currently sources products from a number of manufacturers
throughout the world, a significant portion of new copier/MFP equipment is
currently obtained from four suppliers whose manufacturing facilities are
located in Asia, primarily China. If these suppliers were unable to deliver
products for a significant period of time, the Company would be required to find
replacement products from an alternative supplier or suppliers, which may not be
available on a timely or cost effective basis. The Company's operating results
could be adversely affected if a significant supplier is unable to deliver
sufficient product.
46
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
6. Provision for Income Taxes
The following table presents the U.S. and foreign components of income
before income taxes and the provision (benefit) for income taxes:
Year ended December 31,
2004 2003 2002
-------- -------- --------
Income before income taxes:
U.S $ 39,787 $ 32,953 $ 24,524
Outside the U.S. 3,667 3,021 2,825
-------- -------- --------
Total income before income taxes $ 43,454 $ 35,974 $ 27,349
======== ======== ========
Provision (benefit) for income taxes:
U.S. federal
Current $ 9,894 $ 12,086 $ 6,838
Deferred 3,430 (737) 1,206
-------- -------- --------
Total U.S. federal 13,324 11,349 8,044
U.S. state and local
Current 3,900 3,811 2,407
Deferred 126 (532) (399)
-------- -------- --------
Total U.S. state and local 4,026 3,279 2,008
Outside the U.S.
Current 1,759 511 1,197
Deferred (598) 376 (343)
-------- -------- --------
Total outside the U.S. 1,161 887 854
Total current 15,553 16,408 10,442
Total deferred 2,958 (893) 464
-------- -------- --------
Total provision for income taxes $ 18,511 $ 15,515 $ 10,906
======== ======== ========
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate is as follows:
Year ended December 31,
2004 2003 2002
---- ---- ----
U.S. federal statutory rate 35.0% 35.0% 35.0%
State and local income taxes 6.0% 5.9% 4.8%
Foreign dividend 1.7% 7.0% 0.0%
Foreign tax credit (1.4%) (6.2%) 0.0%
Other, net 1.3% 1.4% 0.1%
---- ---- ----
Effective income tax rate 42.6% 43.1% 39.9%
==== ==== ====
47
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
The components of deferred tax assets and liabilities as of December 31,
2004 and 2003 are as follows:
December 31,
2004 2003
------- -------
Deferred tax assets:
Inventory $16,022 $18,112
State and local property taxes 1,501 1,599
Accounts receivable 6,713 3,903
Employee benefits and compensation 2,261 2,202
Other 1,133 1,376
------- -------
Deferred tax assets 27,630 27,192
Deferred tax liabilities:
Fixed assets 18,009 15,597
Goodwill 5,124 4,120
Other 1,112 1,203
------- -------
Deferred tax liabilities 24,245 20,920
------- -------
Net deferred tax asset $ 3,385 $ 6,272
======= =======
Deferred tax assets and liabilities are reflected on the Company's
consolidated balance sheets as follows:
December 31,
2004 2003
------- -------
Current deferred taxes on income $24,827 $24,191
Non-current deferred taxes on income 21,442 17,919
------- -------
Net deferred taxes on income $ 3,385 $ 6,272
======= =======
At December 31, 2004 and 2003, cumulative undistributed earnings of the
Company's foreign subsidiaries were $5.7 million and $3.9 million, respectively.
No deferred provision for U.S. income taxes has been provided since the Company
considers the undistributed earnings to be permanently reinvested for continued
use in the Company's foreign subsidiaries operations.
7. Earnings Per Share Calculation
Basic earnings per share was calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share was calculated by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding plus all dilutive common stock equivalents
outstanding during the period. The calculation of diluted earnings per share did
not include shares underlying approximately 22,900, 87,775 and 26,424 options
for the years ended December 31, 2004, 2003 and 2002, respectively, since they
were antidilutive for the periods presented.
48
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
A reconciliation of the basic and diluted earnings per share computation
is as follows:
Year ended December 31,
2004 2003 2002
----------- ----------- -----------
Net income available to common
stockholders $ 24,943 $ 20,459 $ 16,443
=========== =========== ===========
Weighted average common shares for
basic earnings per share 16,186,047 16,710,686 18,631,895
Add: dilutive effect of
restricted stock 224,690 185,548 337,681
Add: dilutive effect of stock
options 457,349 334,027 164,582
----------- ----------- -----------
Weighted average common shares
and equivalents for diluted
earnings per share 16,868,086 17,230,261 19,134,158
=========== =========== ===========
Basic earnings per share $ 1.54 $ 1.22 $ 0.88
Diluted earnings per share $ 1.48 $ 1.19 $ 0.86
8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, cash equivalents, accounts receivable and accounts payable
The carrying amounts approximate fair value because of the short maturity
of these instruments.
Long-term debt
The carrying amounts approximate fair value because of the market-based
floating interest rate of the instrument.
9. Long-Term Debt
The Company's long-term debt consisted of the following at December 31,
2004 and 2003:
December 31,
2004 2003
------- -------
Revolving Credit Facility $18,000 $10,000
Term Loan 52,904 53,448
------- -------
Total debt 70,904 63,448
Less: current maturities 545 545
------- -------
Total long-term debt $70,359 $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
million, comprised of a $125 million Revolving Credit Facility (the "Revolving
Credit Facility") and a $100 million Term Loan (the "Term Loan"). The term of
the Revolving Credit Facility is five years and the term of the Term Loan is six
years.
The obligations under the Credit Agreement are secured by a blanket first
perfected security interest in substantially all of the Company's assets plus
the pledge of 65% of the stock of the Company's direct wholly-owned
subsidiaries. Available borrowings and letter of credit issuance under the
Revolving Credit Facility are determined by a borrowing base consisting of a
percentage of the Company's eligible accounts receivable, inventory, rental
equipment assets and accrued and advance billings, less outstanding borrowings
under the Term Loan.
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio, as well as other
covenants, which, among other
49
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
things, place limits on dividend payments and capital expenditures. The Credit
Agreement allowed the Company to originally repurchase up to $20 million of the
Company's stock and to make acquisitions up to an aggregate consideration of $30
million. At December 31, 2004 and 2003, the Company was in compliance with all
financial covenants.
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at the Company's option, on either the LIBOR
rate plus a margin of from 2.25% to 3.00% depending on the Company's leverage
ratio, or the Fleet Bank base lending rate plus a margin of from 1.25% to 2.00%,
depending on the Company's leverage ratio. Amounts borrowed under the Term Loan
bore interest at variable rates based, at the Company's option, on either the
LIBOR rate plus a margin of 3.50% or 3.75%, depending on the Company's leverage
ratio, or the Fleet Bank base lending rate plus a margin of 2.50% or 2.75%,
depending on the Company's leverage ratio. A commitment fee of from 0.375% to
0.500% on the average daily unused portion of the Revolving Credit Facility was
payable quarterly, in arrears, depending on the Company's leverage ratio.
The Credit Agreement required the Company to manage its interest rate risk
with respect to at least 50% of the aggregate principal amount of the Term Loan
for a period of at least 36 months. Accordingly, the Company entered into two
interest rate swap agreements in the notional amounts of $50 million and $30
million expiring in February 2005 to convert the variable interest rate payable
on the Term Loan to a fixed interest rate in order to hedge the exposure to
variability in expected future cash flows. These interest rate swap agreements
had been designated as cash flow hedges. The counterparties to the interest rate
swap agreements were major international financial institutions. Under the terms
of the swap agreements, the Company received payments based upon the 90-day
LIBOR rate and remitted payments based upon a fixed rate. The fixed interest
rates were 4.17% and 4.32% for the $50 million and the $30 million swap
agreements, respectively.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of the Company's stock permitted to be repurchased from $20.0 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 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 Bank of America (formerly Fleet Bank) base lending rate plus a
margin of 0.25%, from the Bank of America base lending rate plus a margin of
1.25%. On April 1, 2004, Bank of America Corporation acquired 100% of the
outstanding common stock of FleetBoston Financial Corporation, the parent of
Fleet Bank and the Company's Credit Agreement was assigned to Bank of America.
During the third quarter of 2002, the Company revised its cash flow
estimates and prepaid $8 million of the amount outstanding under the Term Loan.
This prepayment was covered by a portion of the $30 million interest rate swap
agreement that had been designated as a cash flow hedge. Since it was no longer
probable that the hedged forecasted transactions related to the $8 million Term
Loan prepayment would occur, the Company recognized a loss related to that
portion of the swap agreement underlying the amount of the prepayment by
reclassifying $0.4 million from accumulated other comprehensive income (loss)
into interest expense. The Company also unwound $8 million of the $30 million
interest rate swap agreement.
50
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
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.
For the years ended December 31, 2004 and 2003, the Company's average debt
outstanding was $75.8 million and $69.2 million, respectively.
At December 31, 2004, $71 million of borrowings were outstanding under the
Credit Agreement, consisting of $18 million of borrowings under the Revolving
Credit Facility and $53 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $122 million. At December 31, 2004, the
weighted average interest rate was 3.99% on borrowings under the Revolving
Credit Facility and the interest rate was 3.81% on borrowings under the Term
Loan. As of January 31, 2005, $83 million of borrowings were outstanding under
the Credit Agreement, consisting of $31 million of borrowings under the
Revolving Credit Facility and $52 million of borrowings under the Term Loan.
Approximately $76 million of the Revolving Credit Facility was available for
borrowing at December 31, 2004 and approximately $64 million of the Revolving
Credit Facility was available for borrowing at January 31, 2005. The Term Loan
is payable in 8 consecutive equal quarterly installments of $0.1 million due
March 31, 2005 through December 31, 2006, three consecutive equal quarterly
installments of $12.9 million due March 31, 2007 through September 30, 2007 and
a final payment of $12.9 million due at maturity.
10. Commitments and Contingencies
Guarantees and indemnifications
The Company has applied the disclosure provisions of FIN No. 45 to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The following is a description of the arrangements in which the Company
is a guarantor.
In connection with the Distribution, the Company entered into certain
agreements pursuant to which it may be obligated to indemnify Pitney Bowes with
respect to certain matters. The Company agreed to assume all liabilities
associated with the Company's business, and to indemnify Pitney Bowes for all
claims relating to the Company's business. These may be claims by or against
Pitney Bowes or the Company relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property rights, equipment, service or payment disputes with
customers and disputes with employees.
The Company and Pitney Bowes entered into a tax separation agreement,
which governs the Company's and Pitney Bowes' respective rights,
responsibilities and obligations after the Distribution with respect to taxes
for the periods ending on or before the Distribution. In addition, the tax
separation agreement generally obligated the Company not to enter into any
transaction that would adversely affect the tax-free nature of the Distribution
for the two-year period following the Distribution, and obligates the Company to
indemnify Pitney Bowes and affiliates to the extent that any action the Company
takes or fails to take gives rise to a tax liability with respect to the
Distribution.
It is not possible to predict the maximum potential future payments under
these agreements. As of December 31, 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 effect on the Company's financial position,
results of operations or cash flows.
51
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the course of normal business, the Company
has been party to litigation relating to the Company's business. These may
involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies since the ultimate resolutions
of the legal matters cannot be determined and a minimum cost or amount of loss
cannot be reasonably estimated. In the opinion of the Company's management, none
of these proceedings, individually or in the aggregate, should have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
11. Leases
In addition to owned distribution and office facilities, the Company
leases or subleases similar properties, as well as sales and service offices,
equipment and other properties, generally under long-term lease agreements with
initial terms extending from two to fifteen years.
Future minimum lease payments under non-cancelable operating leases at
December 31, 2004 are as follows:
Years ending December 31,
2005 $10,565
2006 8,765
2007 7,135
2008 4,443
2009 1,385
Thereafter 127
-------
Total minimum lease payments $32,420
=======
Rental expense was $13.0 million, $11.1 million and $10.1 million in 2004,
2003 and 2002, respectively.
12. Stock Plans
2001 Stock Plan
The Company's employees are eligible to participate in the Imagistics
International Inc. 2001 Stock Plan. Under the provisions of this plan, the Board
of Directors is authorized to grant stock options, restricted stock and other
stock-based awards.
Adjustment Options. Prior to the Distribution, certain employees of the
Company were granted stock options under Pitney Bowes' stock based plans. At the
time of the Distribution, options outstanding under the Pitney Bowes stock plans
that were held by Pitney Bowes employees who were transferred to the Company
remained options to acquire Pitney Bowes common stock. Certain adjustments of
the exercise price, but not the number of options, were made to reflect the
reduced value of Pitney Bowes stock as a result of the Distribution. In
addition, such holders were granted options to acquire Imagistics stock in an
amount calculated to restore the reduction in the aggregate intrinsic value of
the options held by each such holder. The Imagistics stock options have the same
vesting provisions, option periods and other terms and conditions as the related
Pitney Bowes options. The exercise price has been calculated so that each
Imagistics option has the same ratio of exercise price per share to market value
per share as the Pitney Bowes stock options immediately prior to the
Distribution. The Company granted options to purchase 162,368 shares of common
stock of the Company in connection with this adjustment. The per share weighted
average fair value of options granted was $10.83.
Stock Options. Under the 2001 Stock Plan, certain officers and employees of
the Company are granted options at prices equal to the fair market value of the
Company's common stock on the date of the grant. Options generally become
exercisable over a three-year period and expire in seven to ten years. The plan
authorizes a maximum of 3,162,368 options to purchase shares
52
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
of common stock, of which a maximum of 750,000 shares may be issued as
restricted stock. Options to purchase a total of 1,471,130 shares of common
stock were outstanding at December 31, 2004. Pursuant to SFAS No. 123, companies
can, but are not required to, elect to recognize compensation expense for all
stock-based awards using a fair value methodology. The Company has adopted the
disclosure-only provisions, as permitted by SFAS No. 123. The Company applies
APB No. 25 and related interpretations in accounting for its stock-based plans.
The Company will account for its stock-based compensation as required under SFAS
No. 123(R), "Share-Based Payment," described in Note 2, "Recent Accounting
Pronouncements."
The following table summarizes information about stock option
transactions:
Year ended December 31,
2004 2003 2002
-------------------- ---------------------- --------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- --------- ---------- ---------- --------- ---------
Options outstanding at the
beginning of the year 1,500,117 $15.21 1,211,368 $13.63 161,166 $10.83
Granted 135,525 $34.21 378,700 $20.14 1,086,400 $14.03
Exercised 123,264 $15.30 44,847 $13.31 3,510 $ 8.60
Forfeited 38,628 $20.10 41,307 $16.70 30,230 $13.99
Expired 2,620 $14.35 3,797 $13.91 2,458 $13.94
--------- --------- ---------
Options outstanding at the
end of the year 1,471,130 $16.81 1,500,117 $15.21 1,211,368 $13.63
========= ========= =========
Exercisable at the end of the year 781,105 $14.25 429,741 $13.35 99,505 $11.87
========= ========= =========
Weighted average fair value
of options granted $11.52 $ 7.52 $ 6.03
The following table summarizes information regarding the Company's stock
options outstanding and exercisable as of December 31, 2004:
Options outstanding Options exercisable
--------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
remaining exercise exercise
Exercise Price Shares contractual life price Shares price
------------------- -------- ---------------- -------- ---------- ----------
$ 4.61 - $13.84 98,186 4.4 $ 9.74 87,941 $ 9.85
$13.85 - $18.45 918,831 7.0 $13.92 587,166 $13.93
$18.46 - $23.06 312,595 7.9 $19.63 102,940 $19.50
$27.68 - $32.29 29,018 9.3 $31.98 850 $29.17
$32.30 - $36.90 89,600 6.7 $33.37 500 $35.06
$36.91 - $46.13 22,900 9.0 $40.58 1,708 $37.43
Restricted Stock. During 2004, one newly appointed executive officer of
the Company was granted a total of 2,000 shares of restricted stock at no cost
to the employee. The per share weighted average fair value of the shares granted
was $37.30. During 2003, one newly appointed executive officer of the Company
was granted a total of 4,700 shares of restricted stock at no cost to the
employee. The per share weighted average fair value of the shares granted was
$18.86. During 2002, certain executive officers of the Company were granted a
total of 323,000 shares of restricted stock at no cost to the employees. The per
share weighted average fair value of the shares granted was $13.85. The
restricted stock awards vest three years after grant. Under this plan, stock
will vest only if the executive is still employed by the Company at the end of
the restricted period and, if applicable, the executive has attained or
partially attained the performance objectives as determined by the Executive
Compensation and
53
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Development Committee of the Board of Directors. None of the restricted stock
grants have performance criteria. The compensation expense for these awards is
recognized over the vesting period. The compensation expense relating to
restricted stock awards totaled $1.5 million for each of the years ended
December 31, 2004, 2003 and 2002. The shares carry full voting and dividend
rights but may not be assigned or transferred. Of the total 3,162,368 shares of
common stock authorized under the 2001 Stock Plan, the Plan has authorized a
maximum of 750,000 shares of common stock for issuance to employees as
restricted stock.
The following table summarizes information about employee restricted stock
transactions:
Year ended December 31,
2004 2003 2002
--------------------- ----------------------- ------------------------
Weighted Weighted Weighted
average average average
Shares fair value Shares fair value Shares fair value
------- ----------- ---------- ------------ ---------- -------------
Shares restricted at the
beginning of the year 327,700 $13.92 323,000 $13.85 -- $ --
Granted 2,000 $37.30 4,700 $18.86 323,000 $13.85
------- ------- -------
Shares restricted at the
end of the year 329,700 $14.06 327,700 $13.92 323,000 $13.85
======= ======= =======
Vested at the end of the year -- $ -- -- $ -- -- $ --
======= ======= =======
Non Employee Director Stock Plan
Under this plan, on the date of initial election to the Company's Board of
Directors, each director who is not an employee of the Company was granted 2,000
shares of restricted stock at no cost to the director and on the date of each
Annual Meeting of Stockholders thereafter, each director who is not an employee
of the Company has been and will be granted 2,000 shares of restricted stock at
no cost to the director. In 2004, the Plan was amended to eliminate the grant to
non-employee directors upon initial election to the Board of Directors. The
restricted shares vest in equal installments over a three-year period beginning
on the first anniversary of the grant date, subject to the director's continued
service. The compensation expense for these awards is recognized over the
vesting period. The shares carry full voting and dividend rights but may not be
assigned or transferred until vested. The Company has authorized a maximum of
100,000 shares of common stock for issuance under this plan. The Company
recorded minimal compensation expense in 2004, 2003 and 2002, related to these
shares.
The following table summarizes information about non-employee director
restricted stock transactions:
Year ended December 31,
2004 2003 2002
--------------------- ----------------------- ------------------------
Weighted Weighted Weighted
average average average
Shares fair value Shares fair value Shares fair value
------- ----------- ---------- ------------ ---------- -------------
Shares outstanding at the
beginning of the year 32,000 $18.12 24,000 $14.64 10,000 $11.75
Granted 12,000 $37.30 12,000 $23.88 14,000 $16.73
Cancelled -- $ -- 4,000 $14.46 -- $ --
------ ------ ------
Shares outstanding at the
end of the year 44,000 $23.35 32,000 $18.12 24,000 $14.64
====== ====== ======
Vested at the end of the year 20,000 $16.12 9,334 $13.84 3,335 $17.18
====== ====== ======
54
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
Employee Stock Purchase Plan
In May 2002, the Company's Board of Directors adopted the Employee Stock
Purchase Plan. Under this plan, a total of 1,000,000 shares of the Company's
common stock have been reserved for issuance. The plan, which is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code, provides for consecutive six-month offering periods
and enables substantially all eligible United States employees to purchase
shares of Imagistics common stock at a discounted offering price. Offering
periods begin each July 1 and January 1. For offering periods prior to January
1, 2005, the purchase price was equal to 85% of the lesser of the average high
and low price of Imagistics common stock on the New York Stock Exchange on the
first or last business day of the offering period. Effective November 5, 2004,
the Plan was amended to eliminate the look back provision and for periods
beginning after January 1, 2005, the purchase price is equal to 85% of the
average high and low price of Imagistics common stock on the New York Stock
Exchange on the last business day of the offering period. Participation in the
plan is voluntary. Employees are eligible to participate in the plan if they are
employed by the Company, or a United States subsidiary of the Company, for at
least 20 hours per week. The plan permits eligible employees to purchase common
stock through payroll deductions, which may not exceed 10% of an employee's
compensation, subject to certain limitations. Employees may modify or end their
participation at any time during the offering period, subject to certain
limitations. Participation ends automatically on termination of employment with
the Company.
Stockholder Rights Plan
Prior to the Distribution, the Board of Directors adopted a stockholder
rights plan (the "Rights Plan") under which one right (the "Right") was issued
for each share of common stock. The description and terms of the Rights Plan and
Rights are set forth in a Rights Agreement between the Company and EquiServe, as
Rights Agent.
The Rights will become exercisable on the Rights Distribution Date, which
is the earlier of ten business days after a person has acquired 15% or more of
the outstanding shares of the Company's common stock (an "Acquiring Person") or
ten business days (or such later date as the Company's Board of Directors may
designate before any person has become an Acquiring Person) after the
commencement by a person of a tender or exchange offer that would result in such
person becoming an Acquiring Person. Rights owned by an Acquiring Person will be
void after the Rights Distribution Date.
The Rights are not exercisable prior to the Rights Distribution Date.
Prior to the Rights Distribution Date, the Rights will be evidenced by and
transferred with the Company's common stock. After the Rights Distribution Date,
the Rights Agent will mail separate certificates evidencing the Rights to each
registered holder of the Company's common stock, and thereafter the Rights will
be transferable separately from the Company's common stock.
After the Rights Distribution Date, but before any person has become an
Acquiring Person, each Right will entitle the registered holder to purchase from
the Company one one-hundredth of a share of Series A junior participating
preferred stock at a price of $100.00 (the "Purchase Price"). If any person has
become an Acquiring Person and the Company is not involved in a merger or other
business combination or sale of 50% or more of the assets or earnings power of
the Company, each Right will entitle the registered holder to purchase for the
Purchase Price a number of shares of the Company's common stock having a market
value of twice the Purchase Price. If the Company is involved in a merger or
other business combination or sale of 50% or more of the assets or earnings
power of the Company, each Right will entitle the registered holder to purchase
for the Purchase Price a number of shares of the common stock of the other party
to the business combination or sale having a market value of twice the Purchase
Price.
At any time after any person has become an Acquiring Person, but before
any person becomes the beneficial owner of 50% or more of the outstanding shares
of the Company's common stock or the Company is involved in a merger or other
business combination or sale of 50% or more of the assets or earnings power of
the Company, the Board of Directors may exchange all or part of the Rights for
shares of the Company's common stock at an exchange ratio of one share of the
Company's common stock per Right. Before any person becomes an Acquiring Person,
the Board of Directors may redeem all or part of the Rights at a price of $0.01
per Right. The Rights will expire ten years from the Distribution and the Board
of Directors may amend the Rights Agreement and Rights as long as the Rights are
redeemable. The Rights Agreement contains antidilution provisions designed to
prevent efforts to diminish the effectiveness of the Rights.
Stock Buy-Back Program
In March 2002, the Board of Directors authorized a $30.0 million stock
buy-back program. In October 2002, the Board of Directors authorized an
additional $28.0 million for the stock buy-back program, and in July 2003, the
Board of Directors
55
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
authorized the repurchase of an additional $20.0 million of the Company's stock.
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.
The following table summarizes information regarding the Company's stock
buy-back program:
Shares Average Total
purchased cost per share cost
------------- ---------------- --------
Balance at December 31, 2002 1,936,760 $ 18.87 $36,549
Purchases under stock buy-back program:
Three months ended:
March 31, 2003 642,000 $ 19.62 12,597
June 30, 2003 368,000 $ 21.54 7,928
September 30, 2003 195,900 $ 28.90 5,661
December 31, 2003 64,000 $ 34.10 2,183
--------- -------
Balance at December 31, 2003 3,206,660 $ 20.24 64,918
Three months ended:
March 31, 2004 148,900 $ 42.11 6,270
June 30, 2004 150,000 $ 40.05 6,007
September 30, 2004 255,100 $ 32.14 8,198
December 31, 2004 97,700 $ 34.70 3,390
--------- -------
Balance at December 31, 2004 3,858,360 $ 23.01 $88,783
========= =======
13. Employee Benefit Plans
Imagistics 401(k) Plan
Substantially all of the Company's employees are eligible to participate
in the Imagistics 401(k) plan that was established in 2001. Under the plan, the
Company matches 100% of contributions to the plan of between 1% and 4% of a
participant's compensation, and 50% of contributions to the plan from 5% to 6%
of a participant's compensation, up to certain limitations required by
government laws or regulations. Contributions to the plan on behalf of employees
of the Company were $7.9 million, $5.7 million and $4.3 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Imagistics Supplemental Savings Plan
In December 2003, the Company's Board of Directors adopted the
Supplemental Savings Plan. Beginning in 2004, eligible employees contributed
tax-deferred amounts of their compensation, up to certain limitations required
by government laws or regulations. Eligibility under the plan is determined at
the discretion of the Employee Benefits Committee. The Plan, which is considered
a non-qualified deferred compensation plan, is designed to provide a select
group of management and other highly compensated employees with a tax-advantaged
opportunity to save for retirement and it is not subject to the regulations and
protections of the Employee Retirement Income Security Act of 1974 (ERISA). The
Plan is an unfunded plan and all benefits paid from the plan are paid from the
Company's general assets. The Company reserves the right to amend, suspend, or
terminate the plan at its discretion at any time for any reason. Contributions
to the plan were minimal for the year ended December 31, 2004.
14. Distribution 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 effective December
31, 2003, in accordance with the terms of the agreements.
56
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
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, had been
extended under the same terms and conditions, through September 30, 2004.
Effective October 1, 2004, the Company and Pitney Bowes entered into a
three-year service agreement under similar terms and conditions. This agreement
expires on September 30, 2007. Services provided under this agreement are at
negotiated prices.
The Company paid Pitney Bowes $5.1 million for the year ended December 31,
2004 in connection with the field service of equipment agreement and $16.1
million for the year ended December 31, 2003 in connection with the transition
services agreement including field service of equipment and other administrative
expenses. The Company paid Pitney Bowes $20.4 million for the year ended
December 31, 2002 in connection with these agreements and certain shared
corporate and administrative services.
The Company also entered into certain other agreements covering
intellectual property, commercial relationships and leases and licensing
arrangements. The pricing terms of the products and services covered by the
other commercial agreements reflect negotiated prices.
The Company and Pitney Bowes entered into a tax separation agreement,
which governs the Company's and Pitney Bowes' respective rights,
responsibilities and obligations after the Distribution with respect to taxes
for the periods ending on or before the Distribution. In addition, the tax
separation agreement generally obligated the Company not to enter into any
transaction that would adversely affect the tax-free nature of the Distribution
for the two-year period following the Distribution, and obligates the Company to
indemnify Pitney Bowes and affiliates to the extent that any action the Company
takes or fails to take gives rise to a tax liability with respect to the
Distribution.
15. Acquisitions
During the year ended December 31, 2004, the Company completed its
acquisition of substantially all of the assets and business of two independent
dealers of copier and multifunctional equipment and related support services
(one in the United States and one in Canada), to continue to expand the
Company's geographic sales and service capabilities. The aggregate purchase
price was $11.8 million, consisting of $9.8 million cash paid at closing, $0.6
million due 120 days from closing, $0.3 million payable 24 months after closing
and four equal annual installments of $0.3 million payable June 15, 2005 through
June 15, 2008. Of the aggregate purchase price, $2.9 million was allocated to
the assets acquired and liabilities assumed at the date of acquisition and $8.9
million was allocated to intangible and other assets, of which $7.3 million was
allocated to goodwill. During the year ended, 2004, the Company also acquired
all of the capital stock of an independent dealer of copier and multifunctional
equipment and related support services in Canada, to continue to expand the
Company's geographic sales and service capabilities. The aggregate purchase
price was $2.4 million, of which $0.4 million was allocated to the net
liabilities assumed at the date of acquisition and $2.8 million was allocated to
goodwill.
During the year ended December 31, 2003, the Company completed its
acquisition of substantially all of the assets and business of one independent
dealer of copier and multifunctional equipment and related support services, to
expand the Company's geographic sales and service capabilities. The aggregate
purchase price was $4.1 million, of which $0.8 million was allocated to the
assets acquired and liabilities assumed at the date of acquisition and $3.3
million was allocated to intangible and other assets, of which $2.8 million was
goodwill.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of the acquired businesses have been
included in the Company's consolidated financial statements from the respective
date of acquisition.
57
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (Continued)
16. Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 2004 and 2003 follows:
Three months ended
2004 March 31 June 30 September 30 December 31 (1)
--------------- --------------- --------------- ---------------
Total revenue $ 158,322 $ 151,527 $ 153,055 $ 146,149
Operating income $ 11,019 $ 11,481 $ 12,007 $ 12,640
Income before income taxes $ 10,084 $ 10,605 $ 11,127 $ 11,638
Net income $ 5,747 $ 6,108 $ 6,407 $ 6,681
Basic earnings per share $ 0.35 $ 0.38 $ 0.40 $ 0.42
Diluted earnings per share $ 0.34 $ 0.36 $ 0.38 $ 0.40
Common stock price high - low $45.50 - $37.40 $46.85 - $34.80 $35.70 - $30.10 $36.85 - $32.32
Three months ended
2003 March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
Total revenue $ 150,922 $ 155,916 $ 159,549 $ 155,809
Operating income $ 9,642 $ 10,415 $ 13,252 $ 11,102
Income before income taxes $ 8,013 $ 8,823 $ 8,963 $ 10,175
Net income $ 4,766 $ 5,026 $ 5,130 $ 5,537
Basic earnings per share $ 0.28 $ 0.30 $ 0.31 $ 0.34
Diluted earnings per share $ 0.27 $ 0.29 $ 0.30 $ 0.33
Common stock price high - low $21.68 - $17.55 $26.30 - $18.50 $30.85 - $25.65 $39.20 - $29.00
(1) Results of operations for this period include an employee benefit
accrual reduction of $2.6 million and a reduction in the 2004 bonus accrual of
$2.2 million.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure 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, Chief Operating Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in ensuring
items are authorized, 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
manner.
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.
For additional details, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Risk Factors that Could Cause
Results to Vary."
Changes in Internal Control
During our evaluation of the effectiveness of the design and operation of
internal control over financial reporting, management identified certain
significant deficiencies, as defined in Public Company Accounting Oversight
Board ("PCAOB") Auditing Standard No. 2, "An Audit of Internal Control Over
Financial Reporting Performed in Conjunction With an Audit of Financial
Statements." Two significant deficiencies related to the maintenance of
documentation and the validation of the accuracy of certain components of our
sales compensation program, two significant deficiencies related to the timing
of certain billing and invoice adjustment activities and one significant
deficiency related to an immaterial unreconciled difference in accounts
receivable arising during the transition to our ERP system. These significant
deficiencies do not, in the aggregate, amount to a material weakness, as defined
in PCAOB Auditing Standard No. 2. Management has informed the Audit Committee
and its independent registered public accounting firm, PricewaterhouseCoopers
LLP, of these significant deficiencies and intends to implement the procedures
necessary to remediate these significant deficiencies in 2005.
During the fourth quarter of 2004, 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.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934. Internal control over financial reporting is a process
designed by our management, including our Chief Executive Officer, Chief
Operational Officer and Chief Financial Officer, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America and includes those
policies and procedures that:
(i) Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the company;
(ii) Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in
the United States of America, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the
company; and
59
(iii) Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness of internal control over financial reporting to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The Company's management assessed the effectiveness of its internal
control over financial reporting as of December 31, 2004. In making this
assessment, the management of the Company used the criteria set forth in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO").
Based on our assessment, using the COSO criteria, management has
determined that, as of December 31, 2004, the Company's internal control over
financial reporting is effective. The Company's independent registered public
accounting firm, PricewaterhouseCoopers LLP, has audited our assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2004 as stated in their report, which is included in Item 8.
"Financial Statements and Supplementary Data."
ITEM 9B. OTHER INFORMATION
None.
60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning the directors of Imagistics is set forth
under the headings "Election of Directors", "Nominees for Election
to Terms Expiring at the 2008 Annual Meeting", "Incumbent Directors
Whose Terms Expire at the 2007 Annual Meeting", "Incumbent Directors
Whose Terms Expire at the 2006 Annual Meeting", "Board Information
and Committees" and "Directors Compensation" in the Imagistics Proxy
Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
(b) Information concerning executive officers of Imagistics is set forth
under the caption "EXECUTIVE OFFICERS OF THE REGISTRANT" in Part I,
Item 4 of this report.
(c) Information concerning compliance with beneficial ownership
reporting requirements is set forth under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Imagistics Proxy
Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
(d) The Company's Board of Directors has determined that there is at
least one audit committee financial expert serving on the Company's
Audit Committee. Information concerning the audit committee
financial expert is set forth under the heading "Board Information
and Committees - The Audit Committee" in the Imagistics Proxy
Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
(e) The Company has adopted a code of ethics that applies to all
employees of the Company, including its Chief Executive Officer and
Chief Financial Officer, or other officers performing similar
functions. This code of ethics is publicly available on the
Company's investor website at www.igiinvestor.com. Amendments to our
code of ethics and any grant of a waiver from a provision of the
code requiring disclosure under applicable SEC rules will be
disclosed on the Company's investor website.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is set forth under the
headings "Executive Officer Compensation", "Executive Contracts and Severance
and Change of Control Arrangements" and "Report on Executive Compensation" in
the Imagistics Proxy Statement for the 2005 Annual Meeting of Stockholders and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning shares of Imagistics equity securities beneficially
owned by certain beneficial owners and by management is set forth under the
heading "Security Ownership" in the Imagistics Proxy Statement for the 2005
Annual Meeting of Stockholders and is incorporated herein by reference.
61
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information regarding our equity compensation
plans as of December 31, 2004:
Number of securities Number of securities
to be issued upon Weighted-average remaining available for future
exercise of exercise price of issuance under equity
Plan Category outstanding options outstanding options compensation plans
-------------------------------------- ------------------- ------------------- ------------------------------
Equity compensation plans
approved by security holders:
2001 Stock Plan (1) 1,800,830 $ 13.73 1,361,538
Non-Employee Director Stock Plan (2) 24,000 $ -- 56,000
Equity compensation plans
not approved by security holders -- $ -- --
--------- ---------
Total (3) 1,824,830 $ 13.55 1,417,538
========= =========
(1) The number of securities to be issued upon exercise of outstanding
options for the 2001 Stock Plan includes 329,700 shares of restricted stock. The
calculation of the weighted-average exercise price of outstanding options for
the 2001 Stock Plan includes 329,700 shares of restricted stock for which the
exercise price is zero. The number of securities remaining available for future
issuance under equity compensation plans includes 420,300 shares that may be
issued as restricted stock.
(2) The Non-Employee Director Stock Plan is comprised solely of restricted
stock for which the exercise price is zero.
(3) Included in the total number of securities to be issued upon exercise
of outstanding options are 353,700 shares of restricted stock. The calculation
of the total weighted-average exercise price of outstanding options includes
353,700 shares of restricted stock for which the exercise price is zero. The
number of securities remaining available for future issuance under equity
compensation plans includes 420,300 shares that may be issued as restricted
stock and 56,000 shares available for issuance solely as restricted stock.
For further details relating to our equity compensation plans, see Note
12, "Stock Plans" of our "Notes to Consolidated Financial Statements" included
in Item 8 herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning Principal Accountant Fees and Services is set forth
under the headings "Proposal 2: Approval of Appointment of Imagistics'
Independent Accountants" and "Audit Committee Pre-Approval Policy" in the
Imagistics Proxy Statement for the 2005 Annual Meeting of Stockholders and is
incorporated herein by reference.
62
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following financial statements are filed as part of this Annual
Report on Form 10-K under "Item 8. Financial Statements and
Supplementary Data" in Part II of this report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Income Statements for the years ended
December 31, 2004, 2003 and 2002
Consolidated Balance Sheets as of December 31, 2004 and
2003
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income (Loss) for the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. Financial Statement Report and Schedule filed as part of this
report pursuant to Item 8 of this report
Schedule II Valuation and Qualifying Accounts
Financial statement schedules not included with this
report have been omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or the notes thereto.
3. Exhibits
Those exhibits required to be filed by Item 601 of
Regulation S-K are listed in the Exhibit Index included
in this report below.
(b) 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)
63
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky (1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak
(1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
Syndication Agent, Fleet Capital Corporation, as Administrative Agent
(3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe
Trust Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc C.
Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and Joseph
D. Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and
Christine B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John C.
Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris
C. Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark S.
Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and
Nathaniel M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and Joseph
W. Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
10.28 Amendment No. 2 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (5)
10.29 First Amendment to Imagistics International Inc. 2001 Stock Plan (6)
10.30 First Amendment to Rights Agreement between Imagistics International
Inc. and EquiServe Trust Company, N.A. (6)
10.31 Amendment No. 3 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (7)
10.32 Amendment No. 1 to Transition Services Agreement between Pitney Bowes
Inc. and Imagistics International Inc. (8)
10.33 Amendment No. 4 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (9)
10.34 Reseller Agreement between Pitney Bowes of Canada Ltd. and Imagistics
International Inc. (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 (12)
10.37 Second Amendment to the Imagistics International Inc. Employee Stock
Purchase Plan (13)
10.38 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Marc C. Breslawsky (14)
10.39 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Joseph D. Skrzypczak (14)
10.40 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Christine B. Allen (14)
10.41 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and John C. Chillock (14)
10.42 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and George E. Clark (14)
10.43 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Timothy E. Coyne (14)
10.44 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Chris C. Dewart (14)
10.45 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Mark S. Flynn (14)
10.46 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Nathaniel M. Gifford (14)
10.47 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and William H. Midgley (14)
10.47 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and John R. Reilly (14)
10.48 Form of Non-Qualified Stock Option Award Agreement to 2001 Stock Plan
(14)
10.49 Form of Restricted Stock Award Agreement to 2001 Stock Plan (14)
10.50 Amendment to the Imagistics International Inc. Non-Employee Directors'
Stock Plan
10.51 Form of Non-Employee Directors' Stock Plan Agreement to 2001 Stock
Plan
21.1 Subsidiaries of Imagistics International Inc.
23.1 Consent of PricewaterhouseCoopers LLP
64
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 filed 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 filed March 7,
2003.
(8) Incorporated by reference to the Registrant's Form 10-K filed March 28,
2003.
(9) Incorporated by reference to the Registrant's Form 8-K filed May 21, 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.
(12) Incorporated by reference to the Registrant's Form 10-Q filed August 3,
2004.
(13) Incorporated by reference to the Registrant's Form 10-Q filed November 9,
2004.
(14) Incorporated by reference to the Registrant's Form 8-K filed January 13,
2005.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMAGISTICS INTERNATIONAL INC.
Dated: March 10, 2005 By /s/ MARC C. BRESLAWSKY
------------------
Marc C. Breslawsky
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
/s/ MARC C. BRESLAWSKY Chairman, Chief Executive Officer and Director March 10, 2005
------------------
Marc C. Breslawsky
/s/ TIMOTHY E. COYNE Chief Financial Officer March 10, 2005
----------------
Timothy E. Coyne
/s/ PETER F. MADURI Vice President, Corporate Controller and March 10, 2005
--------------- Principal Accounting Officer
Peter F. Maduri
/s/ THELMA R. ALBRIGHT Director March 10, 2005
------------------
Thelma R. Albright
/s/ T. KEVIN DUNNIGAN Director March 10, 2005
-----------------
T. Kevin Dunnigan
/s/ IRA D. HALL Director March 10, 2005
-----------
Ira D. Hall
/s/ CRAIG R. SMITH Director March 10, 2005
--------------
Craig R. Smith
/s/ JAMES A. THOMAS Director March 10, 2005
---------------
James A. Thomas
/s/ RONALD L. TURNER Director March 10, 2005
----------------
Ronald L. Turner
66
IMAGISTICS INTERNATIONAL INC.
Schedule (II) - Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2003 and 2004
(Thousands)
The information set forth below should be read in conjunction with our
consolidated financial statements and notes thereto included in Item 8 herein.
Balance at
beginning of Additions to Charges/ Balance at
period Allowance Returns end of period
------------ -------------- ------------- ---------------
Sales, rental and service revenue
returns and allowance
2002 $ 2,150 $ 30,974 $ (30,104) $ 3,020
2003 $ 3,020 $ 30,025 $ (30,475) $ 2,570
2004 $ 2,570 $ 30,840 $ (30,840) $ 2,570