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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
Commission File Number 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1611068
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 OAKVIEW DRIVE
TRUMBULL, CONNECTICUT 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of Imagistics Common Stock, par value $0.01 per share,
outstanding as of July 31, 2005: 15,461,760
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IMAGISTICS INTERNATIONAL INC.
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION...................................................................................... 3
ITEM 1. FINANCIAL STATEMENTS....................................................................................... 3
Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004 (Unaudited).... 3
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 (Unaudited).......................... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (Unaudited).......... 5
Notes to Consolidated Financial Statements................................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................................................ 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................. 28
ITEM 4. CONTROLS AND PROCEDURES.................................................................................... 28
PART II - OTHER INFORMATION.......................................................................................... 30
ITEM 1. LEGAL PROCEEDINGS.......................................................................................... 30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................................................ 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................ 30
ITEM 6. EXHIBITS................................................................................................... 31
SIGNATURES........................................................................................................... 33
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue:
Sales $ 76,299 $ 75,190 $ 149,159 $ 157,745
Rentals 46,236 54,179 93,821 108,590
Support services 23,147 22,158 44,823 43,514
----------- ----------- ----------- -----------
Total revenue 145,682 151,527 287,803 309,849
Cost of sales 42,476 42,416 84,784 91,362
Cost of rentals 14,645 15,333 28,876 31,123
Selling, service and administrative expenses 75,882 83,110 157,741 166,665
----------- ----------- ----------- -----------
Operating income 12,679 10,668 16,402 20,699
Interest expense 1,143 876 2,271 1,811
----------- ----------- ----------- -----------
Income before income taxes 11,536 9,792 14,131 18,888
Provision for income taxes 4,834 4,153 5,921 8,065
----------- ----------- ----------- -----------
Net income $ 6,702 $ 5,639 $ 8,210 $ 10,823
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.42 $ 0.35 $ 0.51 $ 0.66
=========== =========== =========== ===========
Diluted $ 0.41 $ 0.33 $ 0.50 $ 0.63
=========== =========== =========== ===========
Shares used in computing earnings per share:
Basic 16,047,780 16,248,921 16,038,290 16,331,467
=========== =========== =========== ===========
Diluted 16,397,975 16,951,223 16,419,170 17,034,653
=========== =========== =========== ===========
Prior period restated to include the impact of share-based compensation expense
(see Note 2 for details).
See Notes to Consolidated Financial Statements
3
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
Assets
Current assets:
Cash $ 11,419 $ 12,800
Accounts receivable, net of allowances of $10,703 and $14,991
at June 30, 2005 and December 31, 2004, respectively 99,340 105,680
Accrued billings, net 28,426 29,032
Inventories 82,730 94,747
Current deferred taxes on income 23,285 24,827
Other current assets and prepaid expenses 5,356 6,550
----------- -----------
Total current assets 250,556 273,636
Property, plant and equipment, net 58,487 60,326
Rental equipment, net 59,048 62,824
Goodwill 70,155 66,305
Other assets 3,701 4,445
----------- -----------
Total assets $ 441,947 $ 467,536
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 545 $ 545
Accounts payable and accrued liabilities 57,562 80,340
Advance billings 13,892 14,808
----------- -----------
Total current liabilities 71,999 95,693
Long-term debt 80,586 70,359
Deferred taxes on income 14,328 15,188
Other liabilities 1,069 2,999
----------- -----------
Total liabilities 167,982 184,239
Commitments and contingencies (see Note 9)
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, 20,210,421 and
20,008,325 issued at June 30, 2005 and December 31, 2004, respectively) 202 200
Additional paid-in-capital 320,367 315,090
Retained earnings 58,265 50,055
Treasury stock, at cost (4,477,779 and 3,703,065 shares at
June 30, 2005 and December 31, 2004, respectively) (107,417) (85,620)
Accumulated other comprehensive income 2,548 3,572
----------- -----------
Total stockholders' equity 273,965 283,297
----------- -----------
Total liabilities and stockholders' equity $ 441,947 $ 467,536
=========== ===========
Prior period restated to include the impact of share-based compensation expense
(see Note 2 for details).
See Notes to Consolidated Financial Statements
4
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 8,210 $ 10,823
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 29,874 32,794
Provision for bad debt 4,052 6,385
Provision for inventory obsolescence 1,246 2,513
Share-based compensation expense 2,439 2,678
Excess tax benefits from stock-based compensation (636) (741)
Deferred taxes on income 681 (3,332)
Non-cash restructuring impairment charges 476 --
Change in assets and liabilities, net of acquisitions:
Accounts receivable 3,640 (17,331)
Accrued billings 606 (3,798)
Inventories 12,498 3,504
Other current assets and prepaid expenses 1,197 (52)
Accounts payable and accrued liabilities (25,712) (6,424)
Advance billings (1,100) (2,217)
Other, net (1,905) 53
--------- ---------
Net cash provided by operating activities 35,566 24,855
Cash flows from investing activities:
Expenditures for rental equipment assets (20,242) (21,334)
Expenditures for property, plant and equipment (3,083) (6,673)
Acquistions, net of cash acquired (4,421) (9,737)
--------- ---------
Net cash used in investing activities (27,746) (37,744)
Cash flows from financing activities:
Exercises of stock options, including sales
under employee stock purchase plan 2,813 2,359
Excess tax benefits from share-based compensation 636 741
Purchases of treasury stock (22,326) (12,277)
Repayments under term loan (273) (273)
Net borrowings under revolving credit facility 10,500 10,000
--------- ---------
Net cash (used in) provided by financing activities (8,650) 550
--------- ---------
Effect of exchange rates on cash (551) 97
Decrease in cash (1,381) (12,242)
Cash at beginning of period 12,800 22,938
--------- ---------
Cash at end of period $ 11,419 $ 10,696
========= =========
Prior period restated to include the impact of share-based compensation expense
(see Note 2 for details).
See Notes to Consolidated Financial Statements
5
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
(UNAUDITED)
1. DESCRIPTION OF THE BUSINESS
Imagistics International Inc. (the "Company" or "Imagistics") 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, the United Kingdom and parts of Canada. 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, 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 businesses 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 office systems businesses to
the Company and a distribution of the 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
Basis of presentation
The unaudited interim consolidated financial statements of the Company
have been prepared in accordance with the rules and regulations of the United
States Securities and Exchange Commission (the "SEC") and do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of the management of the Company, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results of
operations, financial position and cash flows as of and for the periods
presented have been included.
Certain previously reported amounts have been reclassified to conform to
the current year presentation.
The Company believes that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and six months ended
June 30, 2005 are not necessarily indicative of the results for the full year.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2004 filed with the SEC on March 10, 2005.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. The Company
records a provision for estimated sales returns and other allowances based upon
historical experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of rental contracts, the Company
bills its customers a flat periodic charge and/or a usage-based fee. Revenues
related to these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. The Company records a
provision for estimated usage adjustments on rental contracts based upon
historical experience.
6
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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
and includes evaluating the credit worthiness of the Company's customers,
analyzing historical bad debt write-offs and reviewing the aging of the
receivables. The Company's allowance for doubtful accounts includes amounts for
specific accounts that it believes are uncollectible, as well as amounts that
have been computed by applying certain percentages based on historic loss
trends, to certain accounts receivable aging categories and estimated amounts
relating to delinquencies associated with the changes in the Company's billing
policies and invoice format resulting from the implementation of the Company's
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
demands.
Rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service prior to October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
Share-based employee compensation
The Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment" on January 1, 2005. SFAS No. 123(R) establishes the accounting for
share-based compensation and requires companies to measure and recognize
compensation expense for all share-based payments at fair value. Accordingly,
share-based compensation cost is measured at grant date, based on the fair value
of the award, and is recognized as expense over the requisite service period.
The Company elected to adopt the modified retrospective application method as
provided by SFAS No. 123(R) and financial statement amounts for all prior years
for which SFAS No. 123, "Accounting for Share-Based Compensation" was effective
have been restated to give effect to the fair value-based method of accounting
under SFAS No. 123(R).
7
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Prior to the adoption of SFAS No. 123(R), the Company accounted for its
share-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.
Share-based compensation expense was $0.6 million and $2.4 million for the
three and six months ended June 30, 2005 and $1.2 million and $2.7 million for
the three and six months ended June 30, 2004, respectively. As of June 30, 2005,
approximately $3.7 million of total unrecognized compensation costs related to
non-vested shares is expected to be recognized over a weighted average period of
approximately three years. These costs will be recognized over a three-year
period for employees that are not retirement eligible and over a shorter period
for those that are or become retirement eligible within the three-year vesting
period.
For the three months ended June 30, 2004, the adoption of SFAS No. 123(R)
resulted in a reduction in income before income taxes of $0.8 million, a
reduction in net income of $0.5 million and a reduction in basic and diluted
earnings per share of $0.03. For the six months ended June 30, 2004, the
adoption of SFAS No. 123(R) resulted in a reduction in income before income
taxes of $1.8 million, a reduction in net income of $1.0 million and a reduction
in basic and diluted earnings per share of $0.07.
The following table details the retrospective application method impact of
SFAS No. 123(R) on previously reported results:
AS
ADOPTION OF PREVIOUSLY
SFAS NO. 123(R) REPORTED
--------------- ------------
FOR THE THREE MONTHS ENDED JUNE 30, 2004:
Operating income $ 10,668 $ 11,481
Income before income taxes $ 9,792 $ 10,605
Provision for income taxes $ 4,153 $ 4,497
Net income $ 5,639 $ 6,108
Earnings per share:
Basic $ 0.35 $ 0.38
Diluted $ 0.33 $ 0.36
FOR THE SIX MONTHS ENDED JUNE 30, 2004:
Operating income $ 20,699 $ 22,500
Income before income taxes $ 18,888 $ 20,689
Provision for income taxes $ 8,065 $ 8,834
Net income $ 10,823 $ 11,855
Earnings per share:
Basic $ 0.66 $ 0.73
Diluted $ 0.63 $ 0.70
Net cash provided by operating activities $ 24,855 $ 25,693
Net cash provided by (used in) financing activities $ 550 $ (191)
FOR THE YEAR ENDED DECEMBER 31, 2004:
Deferred taxes on income $ 15,188 $ 21,442
Total liabilities $ 184,239 $ 190,493
Additional paid-in-capital $ 315,724 $ 299,601
Retained earnings $ 50,055 $ 59,924
Total stockholders' equity $ 283,297 $ 277,043
Total liabilities and stockholders' equity $ 467,536 $ 467,536
8
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company evaluated its valuation method and assumptions in connection
with SFAS No. 123(R). The Company determined that the use of a Black-Scholes
valuation method was appropriate, which is consistent with the Company's pro
forma disclosures under the fair value recognition provisions of SFAS No. 123.
The Company believes it has used appropriate assumptions in accordance with SFAS
No. 123(R) to estimate the fair value of its stock options and its employee
stock purchase plan in the second quarter of 2005.
Prior to the adoption of SFAS No. 123(R) on January 1, 2005, the Company
accounted for share-based compensation expense under the recognition and
measurement provisions of APB No. 25, "Accounting for Stock Issued to Employees"
and followed the accepted practice of recognizing share-based compensation
expense over the explicit vesting period. SFAS No. 123(R) requires the immediate
recognition at the grant date of the full share-based compensation expense for
grants to retirement eligible employees, as the explicit vesting period is
non-substantive. If the Company applied the non-substantive vesting condition to
prior periods, for the three months ended June 30, 2004, compensation expense
would have amounted to $1.0 million compared with $1.2 million under the
recognition and measurement provisions of APB No. 25 and for the six months
ended June 30, 2004, compensation expense would have amounted to $2.0 million
compared with $2.7 million under the recognition and measurement provisions of
APB No. 25.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the non-substantive vesting condition
requirements of SFAS No. 123(R) for the three and six months ended June 30,
2004:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2004
------------- -------------
Net income, as reported $ 6,108 $ 11,855
Add: Stock-based compensation expense
included in net income, net of related tax effects 247 503
Deduct: Total stock-based compensation expense based on the
non-substantive vesting condition, net of related tax effects (577) (1,164)
------------- -------------
Pro forma net income $ 5,778 $ 11,194
============= =============
Basic earnings per share:
As reported $ 0.38 $ 0.73
Pro forma $ 0.36 $ 0.68
Diluted earnings per share:
As reported $ 0.36 $ 0.70
Pro forma $ 0.35 $ 0.65
The following table summarizes the Company's stock options outstanding and
exercisable as of June 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AGGREGATE AVERAGE AVERAGE AGGREGATE
CONTRACTUAL EXERCISE INTRINSIC CONTRACTUAL EXERCISE INTRINSIC
EXERCISE PRICE SHARES TERM PRICE VALUE SHARES TERM PRICE VALUE
---------- ----------- -------- ----------- ---------- ----------- -------- -----------
$ 6.89 - $13.46 88,014 4 $ 9.93 $ 1,834,407 88,014 6 $ 9.93 $ 1,834,407
$13.85 - $18.91 868,309 7 $ 14.09 14,479,414 864,159 6 $ 14.07 14,430,079
$19.48 - $28.81 242,461 8 $ 20.70 2,441,352 125,803 8 $ 19.93 1,363,720
$32.25 - $46.13 269,861 7 $ 33.37 (701,954) 10,214 9 $ 39.05 (84,616)
---------- ----------- ---------- -----------
1,468,645 7 $ 18.48 $18,053,219 1,088,190 7 $ 14.65 $17,543,590
========== =========== ========== ===========
9
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. SUPPLEMENTAL INFORMATION
Inventories
Inventories consisted of the following at June 30, 2005 and December 31,
2004:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
Finished products $ 44,115 $ 52,960
Supplies and service parts 38,615 41,787
----------- -----------
Total inventories $ 82,730 $ 94,747
=========== ===========
Fixed assets and rental equipment assets
Fixed assets and rental equipment assets consisted of the following at
June 30, 2005 and December 31, 2004:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 12,204 12,282
Machinery and equipment 27,686 26,679
Computers and software 63,245 61,007
----------- -----------
Property, plant and equipment, gross 104,491 101,324
Accumulated depreciation (46,004) (40,998)
----------- -----------
Property, plant and equipment, net $ 58,487 $ 60,326
=========== ===========
Rental equipment, gross $ 292,058 $ 304,005
Accumulated depreciation (233,010) (241,181)
----------- -----------
Rental equipment, net $ 59,048 $ 62,824
=========== ===========
Depreciation and amortization expense was $14.8 million and $29.9 million
for the three and six months ended June 30, 2005 and $16.2 million and $32.8
million for the three and six months ended June 30, 2004, respectively.
Unamortized software costs totaled $33.1 million as of June 30, 2005 and $33.5
million as of December 31, 2004. Amortization expense on account of capitalized
software totaled $1.0 million and $2.0 million for each of the three and six
months ended June 30, 2005 and 2004, respectively.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
June 30, 2005 and December 31, 2004:
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
Accounts payable $ 21,456 $ 42,118
Income taxes payable 6,351 3,682
Group medical insurance payable 4,007 4,844
Accrued compensation and benefits 4,085 8,756
Other non-income taxes payable 5,996 5,796
Other accrued liabilities 15,667 15,144
----------- -----------
Accounts payable and accrued liabilities $ 57,562 $ 80,340
=========== ===========
10
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Comprehensive income
Comprehensive income consisted of the following for the three and six
months ended June 30, 2005 and 2004:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income $ 6,702 $ 5,639 $ 8,210 $ 10,823
Translation adjustment (154) (278) (1,024) 80
---------- ---------- ---------- ----------
Comprehensive income $ 6,548 $ 5,361 $ 7,186 $ 10,903
========== ========== ========== ==========
Treasury stock
The following table summarizes the Company's treasury stock transactions.
TREASURY STOCK
-----------------------
SHARES COST
---------- ----------
Balance at December 31, 2004 3,703,065 $ 85,620
Purchases under stock buy back program 796,784 22,326
Sales to employees under employee stock purchase plan (22,070) (529)
---------- ----------
Balance at June 30, 2005 4,477,779 $ 107,417
========== ==========
Cash flow information
Cash paid for income taxes was $2.0 million and $9.1 million for the six
months ended June 30, 2005 and 2004, respectively. Cash paid for interest was
$1.2 million and $1.3 million for the six months ended June 30, 2005 and 2004,
respectively.
4. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable segments based on geographic area:
North America and the United Kingdom. Revenues are attributed to geographic
regions based on where the revenues are derived.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues:
North America $ 140,270 $ 146,127 $ 276,796 $ 298,760
United Kingdom 5,412 5,400 11,007 11,089
---------- ---------- ---------- ----------
Total revenues $ 145,682 $ 151,527 $ 287,803 $ 309,849
========== ========== ========== ==========
Income before income taxes:
North America $ 10,988 $ 8,913 $ 12,963 $ 16,958
United Kingdom 548 879 1,168 1,930
---------- ---------- ---------- ----------
Total income before income taxes $ 11,536 $ 9,792 $ 14,131 $ 18,888
========== ========== ========== ==========
11
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenues from Pitney Bowes, substantially all of which are generated in
the North America segment, consisted of the following for the three and six
months ended June 30, 2005 and 2004:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues from Pitney Bowes:
Pitney Bowes of Canada $ 1,200 $ 1,604 $ 3,285 $ 11,747
Other subsidiaries of Pitney Bowes 4,495 5,595 7,821 11,002
---------- ---------- ---------- ----------
Sub-total 5,695 7,199 11,106 22,749
Pitney Bowes Credit Corporation 23,561 24,862 44,683 44,510
---------- ---------- ---------- ----------
Total $ 29,256 $ 32,061 $ 55,789 $ 67,259
========== ========== ========== ==========
For the periods presented, Pitney Bowes Credit Corporation ("PBCC") was
the Company's primary lease vendor. Although the Company expects PBCC to
continue to be one of its principle lease vendors, the Company has established
business relationships with other lease vendors on substantially similar terms.
The Company believes that Pitney Bowes of Canada and other subsidiaries of
Pitney Bowes have established relationships with other equipment vendors and the
Company expects that its revenue from Pitney Bowes of Canada and other
subsidiaries of Pitney Bowes will continue to decline. No other single customer
or controlled group represented 10% or more of the Company's revenues.
The following tables show identifiable long-lived assets and total assets
for each reportable segment at June 30, 2005 and December 31, 2004.
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
Identifiable long-lived assets:
North America $ 186,071 $ 190,926
United Kingdom 5,320 2,974
---------- ----------
Total identifiable long-lived assets $ 191,391 $ 193,900
========== ==========
Total assets:
North America $ 421,587 $ 450,898
United Kingdom 20,360 16,638
---------- ----------
Total assets $ 441,947 $ 467,536
========== ==========
Identifiable long-lived assets in North America included goodwill of $68.0
million and in the United Kingdom included goodwill of $2.2 million at June 30,
2005. Identifiable long-lived assets in North America included goodwill of $66.3
million at December 31, 2004.
Concentrations
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and relatively small account
balances within the majority of the Company's customer base and their dispersion
across different businesses. The Company periodically evaluates the financial
strength of its customers and believes that its credit risk exposure is limited.
Most of the Company's product purchases are from overseas vendors, the
majority of which are from a limited number of Japanese suppliers who operate
manufacturing facilities in Asia. Although the Company currently sources
products from a number of manufacturers throughout the world, a significant
portion of new copier/MFP equipment is currently obtained from four Japanese
suppliers. If these suppliers were unable to deliver products for a significant
period of time, the Company would be required to find replacement products from
an alternative supplier or suppliers, which may not be available on a timely or
cost effective basis. The Company's operating results could be adversely
affected if a significant supplier was unable to deliver sufficient product.
12
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. RESTRUCTURING CHARGES
On March 31, 2005, the Company announced the closing of its centralized
National Remanufacturing Center in Milford, Connecticut to its employees and
discontinued its remanufactured copier product line, substantially all of which
was analog product. The restructuring plan was a result of the industry shift to
digital technology, which resulted in a decrease in customer demand for
remanufactured product. The Company's analysis of the marketplace confirmed that
the customer demand for remanufactured copiers was in a steady state of decline.
The Company will continue to recondition and refurbish digital products at its
regional distribution centers. In accordance with SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," the Company recorded a
liability in the first quarter of 2005 for the total estimated costs associated
with the exit activity. In the first quarter of 2005, the Company recorded
restructuring charges as a result of this activity of $1.8 million, which
included $1.1 million in inventory write-offs, $0.4 million in asset impairment
charges, $0.2 million in severance charges representing termination benefits for
the staff reduction of nineteen employees and $0.1 million in fixed asset
disposals. The inventory write-off charges in the amount of $1.1 million were
classified in cost of sales and the remaining charges amounting to $0.7 million
were classified in selling, service and administrative expenses. Cash charges of
$0.1 million for both the three and six months ended June 30, 2005 represented
severance payments for staff reductions. There were no additional restructuring
charges incurred during the three months ended June 30, 2005. The Company
completed the closing of the remanufacturing center in the second quarter of
2005. The restructuring activity is attributable to the Company's North America
geographic segment.
6. EARNINGS PER SHARE CALCULATION
Basic earnings per share was calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the applicable period. Diluted earnings per share was
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding plus all dilutive common
stock equivalents outstanding during the applicable period. The calculation of
diluted earnings per share did not include shares underlying approximately
272,093 and 269,861 options for the three and six months ended June 30, 2005 and
approximately 9,200 options for both the three and six months ended June 30,
2004, respectively, since they were antidilutive for the periods presented.
A reconciliation of the basic and diluted earnings per share computation
is as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net income available to common stockholders $ 6,702 $ 5,639 $ 8,210 $ 10,823
=========== =========== =========== ===========
Weighted average common shares for basic earnings per share 16,047,780 16,248,921 16,038,290 16,331,467
Add: dilutive effect of restricted stock 29,760 214,143 28,440 208,951
Add: dilutive effect of stock options 320,435 488,159 352,440 494,235
----------- ----------- ----------- -----------
Weighted average common shares and equivalents
for diluted earnings per share 16,397,975 16,951,223 16,419,170 17,034,653
=========== =========== =========== ===========
Basic earnings per share $ 0.42 $ 0.35 $ 0.51 $ 0.66
Diluted earnings per share $ 0.41 $ 0.33 $ 0.50 $ 0.63
13
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. GOODWILL AND GOODWILL AMORTIZATION
The Company accounts for goodwill in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets," which requires that goodwill and certain
other intangible assets having indefinite lives no longer be amortized to
earnings, but instead be tested for impairment annually and on an interim basis
if events or changes in circumstances indicate that goodwill might be impaired.
The Company performed its annual test for impairment as of October 1, 2004 using
the discounted cash flow valuation method. There was no impairment to the value
of the Company's recorded goodwill. The carrying value of goodwill of $68.0
million as of June 30, 2005 is attributable to the North America geographic
segment and $2.2 million is attributable to the United Kingdom geographic
segment.
8. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2005 and December
31, 2004:
JUNE 30, DECEMBER 31,
2005 2004
---------- ------------
Revolving Credit Facility $ 28,500 $ 18,000
Term Loan 52,631 52,904
Less: current maturities (545) (545)
---------- ----------
Total long-term debt $ 80,586 $ 70,359
========== ==========
The Company is party to a Credit Agreement with a group of lenders (the
"Credit Agreement") that provides for secured borrowings and the issuance of
letters of credit in an aggregate amount not to exceed $195.0 million, comprised
of a $95.0 million Revolving Credit Facility (the "Revolving Credit Facility")
and a $100.0 million Term Loan (the "Term Loan").
The Company pledged substantially all of its assets plus 65% of the stock
of the Company's direct, wholly-owned subsidiaries as security for its
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.
During 2004, the Credit Agreement was amended to increase the amount of
the Company's common stock permitted to be repurchased from $78.0 million to
$108.0 million, to increase the aggregate amount of acquisition consideration
payable for acquisitions from $30.0 million to $60.0 million and to remove the
requirement for annual borrowing base audits as long as $50.0 million or more of
borrowings are available under the Credit Agreement and the fixed charge ratio,
as defined, is 2.0 or higher. In addition, during 2004, the Credit Agreement was
amended to reduce and fix the Term Loan interest rate to LIBOR plus a margin of
1.25% or to the Bank of America base lending rate plus a margin of 0.25%.
During 2005, the Credit Agreement was amended to increase the amount of
the Company's common stock permitted to be repurchased from $108 million to $168
million, to increase the aggregate amount of acquisition consideration payable
for acquisitions from $60 million to $100 million, to increase the amount of
certain categories of indebtedness and contingent obligations that may be
incurred by the Company from $5 million to $15 million and to decrease the
amount that the Company must have the ability to borrow as revolving loans under
the Credit Agreement following the consummation of a permitted stock repurchase
from $30 million to $20 million.
As of June 30, 2005, the Board of Directors authorized repurchases up to
$138.0 million under the Company's stock buy back program as described in Part
II, Item 2 herein.
At June 30, 2005, the Revolving Credit Facility interest rate was LIBOR
plus a margin of 1.25% or the Bank of America base lending rate plus a margin of
0.25%.
At June 30, 2005, $81.1 million of borrowings were outstanding under the
Credit Agreement, consisting of $28.5 million of borrowings under the Revolving
Credit Facility and $52.6 million of borrowings under the Term Loan, and the
borrowing base
14
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amounted to approximately $104.0 million. At June 30, 2005, the weighted average
interest rate was 5.00% on borrowings under the Revolving Credit Facility and
the interest rate was 4.74% on borrowings under the Term Loan. Approximately
$65.3 million of the Revolving Credit Facility was available for borrowing at
June 30, 2005. The Term Loan is payable in six consecutive equal quarterly
installments of $0.1 million due September, 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 June 30, 2005 and December 31, 2004, one irrevocable standby letter of
credit in the amount of $1.4 million was outstanding as security for the
Company's casualty insurance program.
9. COMMITMENTS AND CONTINGENCIES
Guarantees and indemnifications
The Company has applied the disclosure provisions of FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others," to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The following is a description of the arrangements in which the Company
is a guarantor.
In connection with the Distribution, the Company entered into certain
agreements pursuant to which it may be obligated to indemnify Pitney Bowes with
respect to certain matters. The Company agreed to assume all liabilities
associated with the Company's business, and to indemnify Pitney Bowes for all
claims relating to the Company's business. These may be claims by or against
Pitney Bowes or the Company relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property rights, equipment, service or payment disputes with
customers and disputes with employees.
The Company and Pitney Bowes entered into a tax separation agreement,
which governs the Company's and Pitney Bowes' respective rights,
responsibilities and obligations after the Distribution with respect to taxes
for the periods ending on or before the Distribution. In addition, the tax
separation agreement generally obligated the Company not to enter into any
transaction that would adversely affect the tax-free nature of the Distribution
for the two-year period following the Distribution, and obligates the Company to
indemnify Pitney Bowes and affiliates to the extent that any action the Company
takes or fails to take gives rise to a tax liability with respect to the
Distribution.
It is not possible to predict the maximum potential future payments under
these agreements. As of June 30, 2005, the Company has not paid any material
amounts pursuant to the above indemnifications other than expenses incurred in
connection with the defense and settlement of assumed claims asserted in
connection with the operation of the Company in the ordinary course of business.
The Company believes that if it were to incur a loss in any of these matters,
such loss would not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the normal course of business, the Company
has been party to occasional lawsuits relating to the Company's business. These
may involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies related to these and other
subsequent proceedings since the ultimate resolutions of the legal matters
cannot be determined and a minimum cost or amount of loss cannot be reasonably
estimated. In the opinion of the Company's management, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on the Company's financial position, results of operations or cash flows.
15
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. 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 in accordance with
the terms of the agreements.
The Company and Pitney Bowes entered into a one-year service agreement on
an arms-length basis relating to field service of equipment in certain remote
geographic locations not covered by the Company's direct service organization.
This agreement, the initial term of which expired on July 1, 2004, 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 $1.3 million and $2.6 million for each of
the three and six months ended June 30, 2005 and 2004, respectively, in
connection with field service of equipment.
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.
11. ACQUISITIONS
Effective June 30, 2005, the Company acquired substantially all of the
assets and business of a dealer of copier and multifunctional equipment and
related support services in the United Kingdom, to expand the Company's
geographic sales and service capabilities in that market. The aggregate purchase
price was $3.1 million, consisting of $2.6 million paid at closing and $0.5
million payable within 21 days after closing. Of the aggregate purchase price,
$0.5 million was allocated to the assets acquired and liabilities assumed at the
date of acquisition, $0.4 million was recorded as a prepaid asset on account of
a contingent payment to be made within the allocation period upon attainment of
certain targets and $2.2 million was allocated to intangible and other assets,
including goodwill.
Effective April 6, 2005, the Company acquired all of the stock and
business 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 in British Columbia, Canada. The
aggregate purchase price was $2.0 million, consisting of $1.5 million cash paid
at closing, $0.2 million payable 150 days from closing and a total of $0.1
million payable in four equal annual installments payable April 6, 2006 through
April 6, 2009. Of the aggregate purchase price, $0.3 million was allocated to
the net assets and liabilities assumed at the date of acquisition and $1.7
million was allocated to intangible and other assets, of which $1.6 million was
allocated to goodwill.
Effective August 30, 2004, the Company acquired all of the stock and
business 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 in Ontario, Canada. 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.
Effective June 15, 2004, the Company acquired substantially all of the
assets and business of an independent dealer of copier and multifunctional
equipment and related support services in the United States, to expand the
Company's geographic sales and service capabilities in Arkansas. The aggregate
purchase price was $7.4 million, consisting of $6.0 million cash paid at
closing, $0.3 million payable 120 days from closing and four equal annual
installments of $0.3 million payable June 15, 2005 through
16
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
June 15, 2008. Of the aggregate purchase price, $2.3 million was allocated to
the assets acquired and liabilities assumed at the date of acquisition and $5.1
million was allocated to intangible and other assets, of which $3.8 million was
allocated to goodwill.
Effective March 16, 2004, the Company acquired substantially all of the
assets and business of an independent dealer of copier and multifunctional
equipment and related support services in Canada, to continue to expand the
Company's geographic sales and service capabilities in Ontario, Canada. The
aggregate purchase price was $4.4 million, consisting of $3.8 million cash paid
at closing, $0.3 million payable 120 days from closing and $0.3 million payable
24 months after closing. Of the aggregate purchase price, $0.6 million was
allocated to the assets acquired and liabilities assumed at the date of
acquisition and $3.8 million was allocated to intangible and other assets, of
which $3.5 million was allocated to goodwill.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of the acquired businesses have been
included in the Company's consolidated financial statements from the respective
dates of acquisition. The Company has not yet completed the valuation and
allocation of the purchase price for the acquisitions that occurred during the
six months ended June 30, 2005, and these amounts may be subject to adjustment
in subsequent quarters.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto, included in our Annual
Report on Form 10-K for the year ended December 31, 2004 filed with the United
States Securities and Exchange Commission on March 10, 2005, as well as the
unaudited consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report on Form 10-Q. This Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Please see "Risk Factors That
Could Cause Results To Vary" and "Special Note About Forward-Looking Statements"
for a discussion of the uncertainties, risks and assumptions associated with
these forward-looking statements. Our actual results could differ materially
from those forward-looking statements discussed in this section. For the
purposes of the following discussion, unless the context otherwise requires,
"Imagistics International Inc.," "Imagistics," "We" and "Our," refers to
Imagistics International Inc. and subsidiaries.
OVERVIEW
Imagistics 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, the United Kingdom and parts of Canada. Our primary customers include
large corporate customers known as national accounts, government entities and
mid-size and regional businesses known as commercial accounts. MFPs 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, black and white, color and/or networked products, systems and
solutions.
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 in 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 stand-alone facsimile
machines and analog copiers. This transition has resulted in decreased demand
for and usage of single function facsimile equipment in the marketplace. In
addition, the industry is now migrating towards color and color-enabled
products. We have responded to this market development by focusing our efforts
on the growth opportunities for digital connectivity and color-enabled products
in our copier/MFP product line.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. We record a
provision for estimated sales returns and other allowances based upon historical
experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless we receive prior
notice of cancellation. Under the terms of rental contracts, we bill our
customers a flat periodic charge and/or a usage-based fee. Revenues related to
these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. We record a provision
for estimated usage adjustments on rental contracts based upon historical
experience.
18
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 our customers, analyzing historical
bad debt write-offs and reviewing the aging of the receivables. Our allowance
for doubtful accounts includes amounts for specific accounts that we believe are
uncollectible, as well as amounts that have been computed by applying certain
percentages based on historic loss trends, to certain accounts receivable aging
categories and estimated amounts relating to delinquencies associated with the
changes in our billing policies and invoice format resulting from 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
demands.
Rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service prior to October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
Share-based employee compensation
We adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" on
January 1, 2005. SFAS No. 123(R) establishes the accounting for share-based
compensation and requires companies to measure and recognize compensation
expense for all share-based payments at fair value. Accordingly, share-based
compensation cost is measured at grant date, based on the fair value of the
award, and is recognized as expense over the requisite service period. We
elected to adopt the modified retrospective application method as provided by
SFAS No. 123(R) and financial statement amounts for all prior years for which
SFAS No. 123, "Accounting for Stock-Based Compensation" was effective have been
restated to give effect to the fair value-based method of accounting under SFAS
No. 123(R).
19
REVENUE
(Dollars in thousands)
The following table shows our revenue sources by segment for the periods
indicated.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
North America $ 140,270 $ 146,127 $ 276,796 $ 298,760
United Kingdom 5,412 5,400 11,007 11,089
---------- ---------- ---------- ----------
Total revenue $ 145,682 $ 151,527 $ 287,803 $ 309,849
========== ========== ========== ==========
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 separate reseller agreement. There
is no rental or support service revenue associated with Pitney Bowes of Canada.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------- ---------------------------------------------
2005 2004 2005 2004
--------------------- --------------------- --------------------- ---------------------
GROWTH GROWTH GROWTH GROWTH
REVENUE RATE REVENUE RATE REVENUE RATE REVENUE RATE
--------- --------- --------- --------- --------- --------- --------- ---------
Sales
Copier/MFP products $ 60,026 6.6% $ 56,330 11.6% $116,313 7.3% $108,388 13.6%
Facsimile products 15,073 (12.7%) 17,256 (21.8%) 29,561 (21.4%) 37,610 (14.2%)
Pitney Bowes of Canada 1,200 (25.2%) 1,604 (74.6%) 3,285 (72.0%) 11,747 (7.4%)
-------- -------- -------- --------
Total sales 76,299 1.5% 75,190 4.7% 149,159 (5.4%) 157,745 3.8%
Rentals
Copier/MFP products 28,275 3.4% 27,352 9.4% 55,844 4.4% 53,501 7.8%
Facsimile products 17,961 (33.0%) 26,827 (13.8%) 37,977 (31.1%) 55,089 (13.3%)
-------- -------- -------- --------
Total rentals 46,236 (14.7%) 54,179 (3.4%) 93,821 (13.6%) 108,590 (4.1%)
Support services
Copier/MFP products 21,492 5.5% 20,378 8.0% 41,446 3.9% 39,901 6.9%
Facsimile products 1,655 (7.0%) 1,780 (13.6%) 3,377 (6.5%) 3,613 (18.0%)
-------- -------- -------- --------
Total support services 23,147 4.5% 22,158 5.9% 44,823 3.0% 43,514 4.3%
-------- -------- -------- --------
Total revenue $145,682 (3.9%) $151,527 (2.8%) $287,803 (7.1%) $309,849 1.0%
======== ======== ======== ========
Our year over year copier/MFP rental growth continued to be impacted by
the expiration of certain contracts with the Federal government that were not
renewed. We expect that year over year copier/MFP rental growth will continue to
be modest in the third quarter of 2005, but will improve in the fourth quarter
of 2005 due to a strong level of recent business activity and the aforementioned
Federal government contracts which are expected to have less of a negative year
over year impact.
20
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 separate
reseller agreement.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------- ---------------------------------------------
2005 2004 2005 2004
--------------------- --------------------- --------------------- ---------------------
GROWTH GROWTH GROWTH GROWTH
REVENUE RATE REVENUE RATE REVENUE RATE REVENUE RATE
--------- --------- --------- --------- --------- --------- --------- ---------
Revenue
Copier/MFP products $109,793 5.5% $104,060 10.3% $213,603 5.9% $201,790 10.6%
Facsimile products 34,689 (24.4%) 45,863 (17.0%) 70,915 (26.4%) 96,312 (13.8%)
-------- -------- -------- --------
Revenue excluding
Pitney Bowes of Canada 144,482 (3.6%) 149,923 0.2% 284,518 (4.6%) 298,102 1.3%
Pitney Bowes of Canada 1,200 (25.2%) 1,604 (74.6%) 3,285 (72.0%) 11,747 (7.4%)
-------- -------- -------- --------
Total revenue $145,682 (3.9%) $151,527 (2.8%) $287,803 (7.1%) $309,849 1.0%
======== ======== ======== ========
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 statement of income data, expressed as a
percentage of total revenue, for the periods indicated. The table also shows
cost of sales as a percentage of sales revenue, cost of rentals as a percentage
of rental revenue and our effective tax rate:
AS A % OF TOTAL REVENUE, EXCEPT AS NOTED
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2005 2004 2005 2004
-------- -------- -------- --------
Equipment sales 30% 27% 29% 28%
Supplies sales 22% 22% 23% 23%
-------- -------- -------- --------
Total sales 52% 49% 52% 51%
Equipment rentals 32% 36% 33% 35%
Support services 16% 15% 15% 14%
-------- -------- -------- --------
Total revenue 100% 100% 100% 100%
Cost of sales 29% 28% 29% 29%
Cost of rentals 10% 10% 10% 10%
Selling, service and administrative expenses 52% 55% 55% 54%
-------- -------- -------- --------
Operating income 9% 7% 6% 7%
Interest expense 1% 0% 1% 1%
-------- -------- -------- --------
Income before income taxes 8% 7% 5% 6%
Provision for income taxes 3% 3% 2% 3%
-------- -------- -------- --------
Net income 5% 4% 3% 3%
======== ======== ======== ========
Cost of sales as a percentage of sales revenue 55.7% 56.4% 56.8% 57.9%
======== ======== ======== ========
Cost of rentals as a percentage of rental revenue 31.7% 28.3% 30.8% 28.7%
======== ======== ======== ========
Effective tax rate 41.9% 42.4% 41.9% 42.7%
======== ======== ======== ========
21
THREE MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
Revenue. For the three months ended June 30, 2005, total revenue of $145.7
million declined 3.9% versus revenue of $151.5 million for the three months
ended June 30, 2004 reflecting lower facsimile revenue, partially offset by
higher copier/MFP revenue.
Equipment and supplies sales revenue of $76.3 million increased 1.5% for
the three months ended June 30, 2005 from $75.2 million for the three months
ended June 30, 2004, reflecting higher copier/MFP sales, partially offset by
lower facsimile sales. Copier/MFP sales increased 6.6% primarily due to
continued unit volume growth, including strong demand for color copier/MFP
products and growth in aftermarket supplies. Facsimile equipment and supplies
sales declined 12.7% compared with the prior year reflecting lower supplies
sales due to the continuing industry-wide reduction in facsimile usage,
partially offset by a large rental to sale conversion of facsimile equipment in
the second quarter of 2005.
Equipment rental revenue of $46.2 million for the three months ended June
30, 2005 declined 14.7% versus equipment rental revenue of $54.2 million for the
three months ended June 30, 2004, 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 3.4% reflecting
growth in the overall installed rental population and increased page volumes.
The growth in copier/MFP rentals in the second quarter of 2005 continued to be
impacted by the expiration of certain Federal government contracts not renewed,
as our current product offerings are manufactured in China and are not
authorized under applicable U.S. government purchase regulations. Rental revenue
from our facsimile product line declined 33.0% versus the prior year reflecting
acceleration of the expected decline in the rental installed base due in part to
the impact of rental to sale conversions coupled with lower per unit pricing.
Support services revenue for the three months ended June 30, 2005 of $23.2
million, primarily derived from stand-alone service contracts, increased 4.5%
versus support services revenue of $22.1 million for the three months ended June
30, 2004, reflecting higher copier/MFP service revenue due to increased page
volumes and copier/MFP equipment sales growth, partially offset by lower
facsimile service revenue.
Cost of sales. Cost of sales was $42.5 million for the three months ended
June 30, 2005 compared with $42.4 million for the three months ended June 30,
2004. Cost of sales as a percentage of sales revenue decreased 0.7 percentage
points to 55.7% for the three months ended June 30, 2005 from 56.4% for the
three months ended June 30, 2004. The decrease in cost of sales as a percentage
of sales revenue was due to lower inventory obsolescence charges, a large rental
to sale conversion of facsimile equipment and product cost reductions, partially
offset by the impact of certain competitively bid large sales transactions and
the continuing shift in product mix away from the higher margin facsimile
product line toward the lower margin copier/MFP product line.
Cost of rentals. Cost of rentals was $14.6 million for the three months
ended June 30, 2005 compared with $15.3 million for the three months ended June
30, 2004 and cost of rentals as a percentage of rental revenue increased 3.4
percentage points to 31.7% for the three months ended June 30, 2005 from 28.3%
for the three months ended June 30, 2004. This increase was due to the
continuing shift in product revenue mix from facsimile to 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 $75.9 million were 52.1% of total revenue for the
three months ended June 30, 2005 compared with $83.1 million, or 54.8% of total
revenue for the three months ended June 30, 2004. Selling, service and
administrative expenses decreased 8.7% versus the prior year primarily resulting
from lower compensation and benefit expenses related to reduced headcount, lower
incentive compensation and lower ERP-implementation and related administrative
support costs. This was partially offset by the absence of an insurance recovery
of $1.5 million, or $0.05 per share for business interruption claims related to
the World Trade Center received in the second quarter of 2004 and higher
operating expenses associated with direct distribution expansion. Selling,
service and administrative expenses for the three months ended June 30, 2005
included $0.6 million, or $0.02 per share in severance charges.
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 increased to $1.2 million for the three
months ended June 30, 2005 compared with $0.9 million for the three months ended
June 30, 2004 resulting from higher debt levels and higher interest rates. The
weighted average interest rate for the three months ended June 30, 2005 was 4.5%
compared with 2.9% for the three months ended June 30, 2004.
Effective tax rate. Our effective tax rate decreased to 41.9% for the
three months ended June 30, 2005 compared with 42.4% for the three months ended
June 30, 2004 due to a decrease in state and local income taxes and lower tax
reserves.
22
SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
Revenue. For the six months ended June 30, 2005, total revenue of $287.8
million declined 7.1% versus revenue of $309.8 million for the six months ended
June 30, 2004 reflecting lower facsimile revenue and lower sales to Pitney Bowes
of Canada. Excluding the impact of revenue attributable to sales to Pitney Bowes
of Canada, which operates under a reseller agreement, total revenue for the six
months ended June 30, 2005 declined 4.6% versus the prior year.
Equipment and supplies sales revenue of $149.2 million decreased 5.4% for
the six months ended June 30, 2005 from $157.7 million for the six months ended
June 30, 2004, reflecting lower sales to Pitney Bowes of Canada and lower
facsimile sales. Excluding the impact of sales to Pitney Bowes of Canada, total
sales revenue decreased slightly compared with the prior year. Copier/MFP sales
increased 7.3% primarily due to continued unit volume growth in low end digital
and color multifunctional product segments, including strong demand for color
copier/MFP products and our geographic expansion of sales as described in Note
11 of our "Notes to Consolidated Financial Statements." Facsimile equipment and
supplies sales declined 21.4% compared with the prior year reflecting lower
equipment and supplies sales due to the continuing industry-wide reduction in
facsimile usage.
Equipment rental revenue of $93.8 million for the six months ended June
30, 2005 declined 13.6% versus equipment rental revenue of $108.6 million for
the six months ended June 30, 2004, reflecting the continued 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 4.4% reflecting
growth in the overall installed rental population and increased page volumes.
The growth in copier/MFP rentals for the six months ended June 30, 2005
continued to be impacted by the expiration of certain Federal government
contracts not renewed, as our current product offerings are manufactured in
China and are not authorized under applicable U.S. government purchase
regulations. Rental revenue from our facsimile product line declined 31.1%
versus the prior year reflecting acceleration of the expected decline in the
rental installed base due to the impact of rental to sale conversions and lower
per unit pricing.
Support services revenue for the six months ended June 30, 2005 of $44.8
million, primarily derived from stand-alone service contracts, increased 3.0%
versus support services revenue of $43.5 million for the six months ended June
30, 2004, reflecting higher copier/MFP service revenue due to increased page
volumes and copier/MFP equipment sales growth, partially offset by lower
facsimile service revenue.
Cost of sales. Cost of sales was $84.8 million for the six months ended
June 30, 2005 compared with $91.4 million for the six months ended June 30,
2004. Cost of sales as a percentage of sales revenue decreased 1.1 percentage
points to 56.8% for the six months ended June 30, 2005 from 57.9% for the six
months ended June 30, 2004. The decrease in cost of sales as a percentage of
sales revenue was due to lower inventory obsolescence charges, a large rental to
sale conversion of facsimile equipment and product cost reductions, partially
offset by the impact of certain competitively bid large sales transactions in
the second quarter of 2005 and the continuing shift in product mix away from the
higher margin facsimile product line toward the lower margin copier/MFP product
line. In the six months ended June 30, 2005, cost of sales included $1.1
million, or $0.03 per share in restructuring inventory charges as a result of
the closing of our National Remanufacturing Center (see "Restructuring Charges"
below).
Cost of rentals. Cost of rentals was $28.9 million for the six months
ended June 30, 2005 compared with $31.1 million for the six months ended June
30, 2004 and cost of rentals as a percentage of rental revenue increased 2.1
percentage points to 30.8% for the six months ended June 30, 2005 from 28.7% for
the six months ended June 30, 2004. This increase was due to the continuing
shift in product revenue mix from facsimile to 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 $157.7 million were 54.8% of total revenue for the
six months ended June 30, 2005 compared with $166.7 million, or 53.8% of total
revenue for the six months ended June 30, 2004. Selling, service and
administrative expenses decreased 5.4% versus the prior year primarily resulting
from lower compensation and benefit expenses related to reduced headcount, lower
incentive compensation and lower ERP-implementation and related administrative
support costs. This was partially offset by higher operating expenses associated
with direct distribution expansion and the absence of an insurance recovery of
$1.5 million, or $0.05 per share for business interruption claims related to the
World Trade Center received in the second quarter of 2004. Selling, service and
administrative expenses for the six months ended June 30, 2005 included $0.7
million, or $0.02 per share in restructuring charges as a result of the closing
of our National Remanufacturing Center (see "Restructuring Charges" below) and
$2.4 million, or $0.08 per share in severance charges.
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.
23
Interest expense. Interest expense increased to $2.3 million for the six
months ended June 30, 2005 compared with $1.8 million for the six months ended
June 30, 2004 resulting from higher debt levels and higher interest rates. The
weighted average interest rate for the six months ended June 30, 2005 was 4.2%
compared with 3.0% for the six months ended June 30, 2004.
Effective tax rate. Our effective tax rate decreased to 41.9% for the six
months ended June 30, 2005 compared with 42.7% for the six months ended June 30,
2004 due to a decrease in state and local income taxes and lower tax reserves.
RESTRUCTURING CHARGES
On March 31, 2005, we announced the closing of our centralized National
Remanufacturing Center in Milford, Connecticut to our employees and discontinued
our remanufactured copier product line, substantially all of which was analog
product. The restructuring plan was a result of the industry shift to digital
technology, which resulted in a decrease in customer demand for remanufactured
product. Our analysis of the marketplace confirmed that the customer demand for
remanufactured copiers was in a steady state of decline. We will continue to
recondition and refurbish digital products at our regional distribution centers.
In the first quarter of 2005, we recorded restructuring charges as a result of
this activity of $1.8 million, which included $1.1 million in inventory
write-offs, $0.4 million in asset impairment charges, $0.2 million in severance
charges representing termination benefits for the staff reduction of nineteen
employees and $0.1 million in fixed asset disposals. The inventory write-off
charges amounting to $1.1 million have been classified in cost of sales and the
remaining charges amounting to $0.7 million have been classified in selling,
service and administrative expenses in the Income Statement included in Part I,
Item 1 herein. Cash charges of $0.1 million for both the three and six months
ended June 30, 2005 represented severance payments for staff reductions. There
were no additional restructuring charges incurred during the three months ended
June 30, 2005. We completed the closing of the remanufacturing center in the
second quarter of 2005. The restructuring activity is attributable to our North
America geographic segment.
LIQUIDITY AND CAPITAL RESOURCES
We are party to a Credit Agreement with a group of lenders (the "Credit
Agreement") that provides for secured borrowings or the issuance of letters of
credit in an aggregate amount not to exceed $195.0 million, comprised of a $95.0
million Revolving Credit Facility (the "Revolving Credit Facility") and a $100.0
million Term Loan (the "Term Loan").
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.
During 2004, the Credit Agreement was amended to increase the amount of
our stock permitted to be repurchased from $78.0 million to $108.0 million, to
increase the aggregate amount of acquisition consideration payable for
acquisitions from $30.0 million to $60.0 million and to remove the requirement
for annual borrowing base audits as long as $50.0 million or more of borrowings
are available under the Credit Agreement and the fixed charge ratio, as defined,
is 2.0 or higher. In addition, during 2004, the Credit Agreement was amended to
reduce and fix the Term Loan interest rate to LIBOR plus a margin of 1.25% or to
the Bank of America base lending rate plus a margin of 0.25%.
During 2005, the Credit Agreement was amended to increase the amount of
our common stock permitted to be repurchased from $108 million to $168 million,
to increase the aggregate amount of acquisition consideration payable for
acquisitions from $60 million to $100 million, to increase the amount of certain
categories of indebtedness and contingent obligations that may be incurred by us
from $5 million to $15 million and to decrease the amount that we must have the
ability to borrow as revolving loans under the Credit Agreement following the
consummation of a permitted stock repurchase from $30 million to $20 million. At
June 30, 2005, we were in compliance with all of the financial covenants.
As of June 30, 2005, the Board of Directors authorized repurchases up to
$138.0 million under our stock buy back program as described in Part II, Item 2
herein.
At June 30, 2005, the Revolving Credit Facility interest rate was LIBOR
plus a margin of 1.25% or the Bank of America base lending rate plus a margin of
0.25%.
At June 30, 2005, $81.1 million of borrowings were outstanding under the
Credit Agreement, consisting of $28.5 million of borrowings under the Revolving
Credit Facility and $52.6 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $104.0 million. At June 30, 2005, the
weighted average interest rate was 5.00% on borrowings under
24
the Revolving Credit Facility and the interest rate was 4.74% on borrowings
under the Term Loan. Approximately $65.3 million of the Revolving Credit
Facility was available for borrowing at June 30, 2005. The Term Loan is payable
in six consecutive equal quarterly installments of $0.1 million due September
30, 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 June 30, 2005 and December 31, 2004, one irrevocable standby letter of
credit in the amount of $1.4 million was outstanding as security for our
casualty insurance program.
The ratio of current assets to current liabilities increased to 3.5 to 1
at June 30, 2005 compared to 2.9 to 1 at December 31, 2004 due to a decrease in
accounts payable and accrued liabilities, partially offset by decreases in
inventories and accounts receivable. At June 30, 2005, our total debt as a
percentage of total capitalization increased to 22.8% from 20.0% at December 31,
2004 due to an increase in our debt and stock repurchases under our stock
buyback program.
In 2002, we began the development and implementation of a complex
comprehensive ERP system consisting of financial modules, order management,
order fulfillment, billing, cash collection, service management and sales
compensation. In conjunction with the ERP implementation, we experienced certain
processing inefficiencies affecting billings and delays in implementing certain
automated collection tools, 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.
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 $35.6 million for the six
months ended June 30, 2005 compared with $24.9 million for the six months ended
June 30, 2004. Net income was $8.2 million and $10.8 million for the six months
ended June 30, 2005 and 2004, respectively. Non-cash charges, which included
depreciation and amortization, provisions for bad debt, inventory obsolescence
and share-based compensation expense in the aggregate provided cash of $37.6
million and $44.4 million for the six months ended June 30, 2005 and 2004,
respectively. Changes in the principal components of working capital required
$8.9 million and $26.3 million of cash for the six months ended June 30, 2005
and 2004, respectively. Of the $8.9 million increase in our working capital
requirements for the six months ended June 30, 2005, $25.7 million resulted from
a decrease in accounts payable and accrued liabilities consisting of $16.6
million related to timing of payments for inventory shipped from Asia in late
2004, $5.0 million of incentive compensation payments and $4.1 related to timing
of other payments. This was partially offset by a decrease in inventories of
$12.5 million due to reduced inventory levels and a decrease in accounts
receivable of $3.6 million resulting from improved collection activity. Of the
$26.3 million increase in our working capital requirements for the six months
ended June 30, 2004, $17.3 million resulted from an increase in accounts
receivable due to delays in collections resulting from customer inquiries
related to changes our billing policies and invoice format, an increase in
billing adjustment activity, the temporary suspension of account statement and
collection notice mailings on delinquent amounts and delays in the
implementation of automated tools to assist in the collection activities
associated with the implementation of our ERP system, an increase in accrued
billings of approximately $3.8 million and a decrease in advance billings of
$2.2 million, both relating to timing of invoicing to customers and a decrease
in accounts payable and accrued liabilities of approximately $6.4 million
primarily relating to timing of inventory and other payments. This was partially
offset by a decrease in inventory levels of $3.5 million.
Net cash used in investing activities was $27.7 million and $37.7 million
for the six months ended June 30, 2005 and 2004, respectively. Investment in
rental equipment assets totaled $20.2 million and $21.3 million for the six
months ended June 30, 2005 and 2004, respectively. The slight reduction in the
level of rental asset expenditures resulted from lower facsimile placements,
offset by higher copier/MFP placements. Capital expenditures for property, plant
and equipment were $3.1 million and $6.7 million for the six months ended June
30, 2005 and 2004, respectively, of which the investment in our ERP system
accounted for $1.6 million and $2.8 million, respectively. During the six months
ended June 30, 2005, we acquired two independent dealers to expand our sales and
service capabilities and during the six months ended June 30, 2004, we acquired
two independent dealers to expand our sales and service capabilities as
described in Note 11 of our "Notes to Consolidated Financial Statements"
included in Item I herein.
Net cash used in financing activities was $8.7 million for the six months
ended June 30, 2005 compared with net cash provided by financing activities of
$0.5 million for the six months ended June 30, 2004. Net borrowings under the
Revolving Credit Facility were $10.5 million for the six months ended June 30,
2005 compared with $10.0 million for the six months ended June 30, 2004. For the
six months ended June 30, 2005 and 2004, cash was used to repurchase 796,784
shares of our stock at a cost of $22.3 million and 298,900 shares at a cost of
$12.3 million, respectively.
25
During the six month period ended June 30, 2005, we had no material
changes in our contractual obligations and commitments. We had no material
commitments other than supply agreements with vendors that extend only to
equipment supplies and parts ordered under purchase orders; there are no
long-term purchase requirements. We will continue to make additional investments
in facilities, rental equipment, computer equipment and systems and our
distribution network as required to support our operations. We anticipate
investments in rental equipment assets for new and replacement programs in
amounts consistent with the recent past. We estimate that we will spend
approximately $1.8 million over the remainder of 2005 to continue to enhance our
information systems infrastructure and implement our ERP system.
RISK FACTORS THAT COULD CAUSE RESULTS TO VARY
Risk factors relating to our business
The document imaging and management industry is undergoing an evolution in
product offerings, moving toward the use of networked, digital and color
technology in a multifunctional office environment. Our continued success will
depend to a great extent on our ability to respond to this changing environment
by developing new options and document imaging solutions for our customers.
The proliferation of e-mail, multifunctional products and other
technologies in the workplace has led to a reduction in the use of traditional
copiers and facsimile machines. We must be able to continue to obtain products
with the appropriate technological advancements in order to remain successful.
We cannot anticipate whether other technological advancements will substantially
minimize the need for our products in the future.
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 consistent revenue growth and earnings
is dependent upon new copier/MFP 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.
An acceleration in the rate of decline in facsimile revenues greater than
our forecast, could 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 Asia. In addition, our primary suppliers
sell products in competition with us, either directly or through dealer
channels. Four manufacturers supply a significant portion of our new copier and
multifunctional equipment. If these manufacturers discontinue their products or
are unable to deliver us products in the future or if political changes,
economic disruptions or natural disasters occur where their production
facilities are located, we will be forced to identify an alternative supplier or
suppliers for the affected product. In addition, although we have worked with
our suppliers and freight forwarders to mitigate the potential impacts of an
outbreak of infectious disease affecting our supply chain, should our
manufacturers become affected by epidemics of infectious diseases, we could be
forced to identify an alternative supplier or suppliers for the affected
product. Although we are confident that we can identify alternate sources of
supply, we may not be successful in doing so. Even if we are successful, the
replacement product may be more expensive or may lack certain features of the
discontinued product and we may experience some delay in obtaining the product.
Other events that disrupt the shipment to or receipt of ocean freight at U.S.
ports, such as labor unrest, war or terrorist activity could delay, prevent or
add substantial cost to our receipt of such products. Any of these events would
cause disruption to our customers and could have an adverse effect on our
business.
We have a geographic dispersion of business and assets located across
North America and the United Kingdom comprised of our sales, service and
distribution facilities. Changes in international, national or political
conditions, including terrorist attacks could impact the sales, service and
distribution of our products to our customers and could have an adverse effect
on our business.
A portion of our international business is transacted in local currency.
Currently, approximately 10% of our total product purchases, based on costs, are
denominated in yen. The majority of our remaining product purchases are
denominated in U.S. dollars and are produced by Japanese suppliers in
manufacturing facilities located in China. The Chinese government's revaluation
of the Chinese yuan, also known as the renminbi, the increase in the nominal
value of the yuan and the resultant impact on the exchange rate of the Chinese
yuan and the U.S. dollar could have a negative impact on our product cost. We do
not currently
26
utilize any form of derivative financial instruments to manage our exchange rate
risk. We attempt 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.
Pitney Bowes has been and is expected to continue to be a significant
customer. For the three months ended June 30, 2005 and 2004, revenues from
Pitney Bowes, exclusive of equipment sales to PBCC for lease to the end user,
accounted for approximately 4% and 5%, respectively, of our total revenue and
for the six months ended June 30, 2005 and 2004, accounted for approximately 4%
and 7% of our total revenue, respectively. However, we believe that Pitney Bowes
has established relationships with other equipment vendors and no assurance can
be given that Pitney Bowes will continue to purchase our products and services.
In connection with the Distribution, Imagistics and Pitney Bowes entered
into a non-exclusive intellectual property agreement that allowed us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. In 2002, we began introducing new products under the "Imagistics"
brand name and we initiated a major brand awareness advertising campaign to
establish our new brand name. Effective December 2003, we no longer use the
Pitney Bowes brand name and all new products are introduced under the Imagistics
brand name. Brand name recognition is an important part of our overall business
strategy and we cannot assure you that customers will maintain the same level of
interest in our products now that we can no longer use the Pitney Bowes brand
name.
Risk factors relating to our ERP system implementation
In 2002, we began the development and implementation of a complex
comprehensive ERP system consisting of financial modules, order management,
order fulfillment, billing, cash collection, service management and sales
compensation. In conjunction with the ERP implementation, we experienced certain
processing inefficiencies affecting billings and delays in implementing certain
automated collection tools, 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 are in the process of implementing the automated calculation of sales
compensation and plan to begin paying based on the ERP calculation in the third
quarter of 2005. Should we experience issues with the automated calculation of
sales compensation, we would have to return to the alternate methodology to
calculate and pay sales compensation.
We remain engaged in a period of stabilization, as is typical of a large
ERP system implementation. 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.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Statements contained in this discussion and elsewhere in this report that
are not purely historical are forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, and are based on
management's beliefs, certain assumptions and current expectations. These
statements may be identified by their use of forward-looking terminology such as
the words "expects", "projects", "anticipates", "intends" and other similar
words. Such forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. The
forward-looking statements contained herein are made as of the date hereof and
we do not undertake any obligation to update any forward-looking statements,
whether as a result of future events, new information or otherwise.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain limited exposures to market risk related to changes in
interest rates and foreign currency exchange rates. Currently, we do not utilize
any form of derivative financial instruments to manage our interest rate risk or
our exchange rate risk. We attempt to pass through to our customers any cost
increases related to foreign currency exchange. In addition, we are exposed to
foreign exchange rate fluctuations with respect to the British Pound and the
Canadian Dollar as the financial results of our U.K. subsidiary and Canadian
subsidiaries are translated into U.S. dollars for consolidation. The effect of
foreign exchange rate fluctuation for the quarter ended June 30, 2005 was not
material.
ITEM 4. CONTROLS AND PROCEDURES
Restatement of first quarter financial results
Subsequent to the issuance of our March 31, 2005 financial statements, we
discovered an error in the calculation of share-based compensation expense in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment,"
related to the recognition of share-based compensation expense for awards
subject to acceleration of vesting for retirement eligible employees. The error
resulted in a $1.1 million understatement of share-based compensation expense in
the quarterly period ended March 31, 2005. The restatement reflected
adjustments, which were corrections of errors in the application of U.S.
generally accepted accounting principles (GAAP) related to our early adoption of
SFAS No. 123(R) for the non-substantive vesting conditions for retirement
eligible employees.
Disclosure controls and procedures
We are responsible for maintaining disclosure controls and procedures, as
defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
(the "Exchange Act") as amended, that are designed to ensure that information
required to be disclosed in the Company's filings under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding required disclosure.
Because of the inherent limitations in all control systems, internal
control over financial reporting may not prevent or detect misstatements. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. 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.
We carried out an evaluation, under the supervision and with the
participation of our management, including our CEO and our CFO, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2005. Based upon that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were effective as of June
30, 2005.
Changes in internal control/remediation of material weakness in internal
control
As of the filing date of our amended Form 10-Q for the quarterly period
ended March 31, 2005, we fully remediated the material weakness in our internal
control over financial reporting with respect to accounting for share-based
compensation expense under SFAS No. 123(R). The remediation actions included
enhancing the process used to prepare and review the calculation of share-based
compensation expense under the provisions of SFAS No. 123(R) and strengthening
our internal process to analyze and interpret new accounting pronouncements and
related interpretations.
During our evaluation of the effectiveness of the design and operation of
internal control over financial reporting as of December 31, 2004, 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 of the significant deficiencies related to the
maintenance of documentation and the validation of the accuracy of certain
components of our sales compensation program. We anticipate that these
deficiencies will be remediated in the third quarter of 2005 upon use of the ERP
system to pay sales compensation. Two significant deficiencies exist related to
the timing of certain billing and invoice adjustment activities. Management is
implementing procedures to refine its processes surrounding these items. One
significant deficiency related to an immaterial unreconciled difference in
accounts receivable arising during the transition to our ERP system was
remediated in the second quarter of 2005.
28
In 2002, we began the development and implementation of a complex
comprehensive ERP system and as a result, we remain 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,
sales compensation and collections, and the controls surrounding processing in
these areas have been adjusted accordingly. For additional details, see Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Risk Factors that Could Cause Results to Vary."
Other than the remedial action described above, there have been no changes
in the Company's internal control over financial reporting that occurred during
the quarterly period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we have been party
to occasional lawsuits relating to our business. These may involve litigation or
other claims by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
trademark, patent and other intellectual property matters, equipment, service or
payment disputes with customers, bankruptcy preference claims and disputes with
employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to the purchase of
shares of our common stock under the stock buyback program during each month in
the second quarter of 2005, which includes shares repurchased in connection with
tax withholdings on restricted stock:
(Dollars in thousands, except per share data)
TOTAL NUMBER OF APPROXIMATE DOLLAR
TOTAL NUMBER SHARES PURCHASED VALUE OF SHARES THAT
OF SHARES AVERAGE PRICE AS PART OF PUBLICLY MAY YET BE PURCHASED
PERIOD PURCHASED PAID PER SHARE ANNOUNCED PLAN UNDER THE PLAN
---------------------------------- ------------ -------------- ------------------- --------------------
April 1, 2005 - April 30, 2005 -- $ -- -- $ 14,533
May 1, 2005 - May 31, 2005 470,900 $ 26.55 470,900 $ 2,029
June 1, 2005 - June 30, 2005 182,520 $ 28.15 182,520 $ 26,890
---------- ----------
Total 653,420 $ 27.00 653,420
========== ==========
In March 2002, the Board of Directors approved a $30.0 million stock
buyback 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. In June 2005, the Board of Directors authorized
the repurchase of an additional $30.0 million, raising the total authorization
to $138.0 million. As of June 30, 2005, on a cumulative basis, we have
repurchased approximately 4.7 million shares of Imagistics stock at a cost of
approximately $111.1 million. The stock buyback program has no fixed termination
date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on May 10, 2005, two proposals
were voted upon by our stockholders. A brief discussion of each proposal voted
upon at the annual meeting and the number of votes cast for, against and
withheld, as well as the number of abstentions to each proposal are set forth
below.
A vote was taken for the election of two directors to hold office until
our 2008 annual meeting of stockholders and until their respective successors
shall have been duly elected. The aggregate numbers of shares of common stock
voted in person or by proxy for each nominee were as follows:
NOMINEE FOR WITHHELD
------------------------ ---------------- ----------------
Marc C. Breslawsky 14,176,208 747,888
Craig R. Smith 14,631,826 292,270
Other directors include Thelma R. Albright and Ira D. Hall, whose terms of
office expire in 2006, and T. Kevin Dunnigan, James A. Thomas and Ronald L.
Turner, whose terms of office expire in 2007.
30
A vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as our auditors for the fiscal year ending December
31, 2005. The aggregate numbers of shares of common stock voted on this proposal
in person or by proxy were as follows:
FOR AGAINST ABSTAIN
---------------- --------------- ----------------
14,617,205 296,502 10,389
Each of the listed proposals were approved by the stockholders in
accordance with our certificate of incorporation, bylaws and the Delaware
General Corporation Law. There were no broker non-votes for either matter.
The foregoing proposals are described more fully in our definitive proxy
statement dated March 31, 2005, filed with the United States Securities and
Exchange Commission pursuant to Section 14 (a) of the Securities Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
ITEM 6. EXHIBITS
The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation (3)
3.2 Amended and Restated Bylaws (1)
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock, dated August 1, 2002 (6)
4.1 Form of Imagistics International Inc. Common Stock Certificate (1)
10.1 Tax Separation Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.2 Transition Services Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (3)
10.3 Distribution Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.4 Intellectual Property Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (3)
10.5 Reseller Agreement between Pitney Bowes Management Services and
Imagistics International Inc. (3)
10.6 Reseller Agreement between Pitney Bowes of Canada and Imagistics
International Inc. (3)
10.7 Vendor Financing Agreement between Pitney Bowes Credit Corporation
and Imagistics International Inc. (3)
10.8 Form of Sublease Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (2)
10.9 Form of Sublease and License Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (2)
10.10 Form of Assignment and Novation Agreement between Pitney Bowes Inc.
and Imagistics International Inc. (2)
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky
(1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak
(1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, as
Syndication Agent, Fleet Capital Corporation, as Administrative
Agent (3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe
Trust Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc
C. Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and
Joseph D. Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and
Christine B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John
C. Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris
C. Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark
S. Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and
Nathaniel M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and
Joseph W. Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
10.28 Amendment No. 2 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (5)
10.29 First Amendment to Imagistics International Inc. 2001 Stock Plan (6)
10.30 First Amendment to Rights Agreement between Imagistics International
Inc. and EquiServe Trust Company, N.A. (6)
31
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 (15)
10.51 Form of Non-Employee Directors' Stock Plan Agreement to 2001 Stock
Plan (15)
10.52 Amendment No. 7 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Bank of America, as
Administrative Agent, and the Lenders identified therein (16)
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.
(15) Incorporated by reference to the Registrant's Form 10-K filed March 10,
2005.
(16) Incorporated by reference to the Registrant's Form 10-Q/A filed June 17,
2005.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 5, 2005 Imagistics International Inc.
---------------------------------
(Registrant)
By /s/ Timothy E. Coyne
---------------------------------
Name: Timothy E. Coyne
Title: Chief Financial Officer
and Authorized Signatory
33