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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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1611068
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
100 OAKVIEW DRIVE
TRUMBULL, CONNECTICUT 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X - No __
Number of shares of Imagistics Common Stock, par value $ .01 per share,
outstanding as of July 31, 2003: 16,951,052
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IMAGISTICS INTERNATIONAL INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION..........................................................................3
ITEM 1. FINANCIAL STATEMENTS.......................................................................3
Consolidated Income Statements for the three and six months ended June 30, 2003 and
2002 (Unaudited)........................................................................3
Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002.........4
Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and
2002 (Unaudited)........................................................................5
Notes to Consolidated Financial Statements................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...........................................................................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................25
ITEM 4. CONTROLS AND PROCEDURES...................................................................25
PART II - OTHER INFORMATION............................................................................26
ITEM 1. LEGAL PROCEEDINGS.........................................................................26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................27
SIGNATURES.............................................................................................29
Page 2 of 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Revenue:
Sales $ 78,876 $ 79,006 $ 151,929 $ 154,135
Rentals 56,107 58,866 113,175 117,418
Support services 20,933 20,419 41,734 41,899
-------------- -------------- -------------- --------------
Total revenue 155,916 158,291 306,838 313,452
Cost of sales 48,166 48,592 93,410 97,808
Cost of rentals 18,677 21,557 37,848 43,455
Selling, service and administrative expenses 78,658 78,882 155,523 154,335
-------------- -------------- -------------- --------------
Operating income 10,415 9,260 20,057 17,854
Interest expense 1,592 1,989 3,221 4,189
-------------- -------------- -------------- --------------
Income before income taxes 8,823 7,271 16,836 13,665
Provision for income taxes 3,797 2,890 7,044 5,428
-------------- -------------- -------------- --------------
Net income $ 5,026 $ 4,381 $ 9,792 $ 8,237
============== ============== ============== ==============
Earnings per share:
Basic $ 0.30 $ 0.23 $ 0.58 $ 0.43
============== ============== ============== ==============
Diluted $ 0.29 $ 0.22 $ 0.56 $ 0.42
============== ============== ============== ==============
Shares used in computing earnings per share:
Basic 16,548,721 19,116,493 17,000,392 19,270,061
============== ============== ============== ==============
Diluted 17,158,522 19,637,033 17,580,830 19,728,307
============== ============== ============== ==============
See Notes to Consolidated Financial Statements
Page 3 of 29
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2003 2002
--------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash $ 42,238 $ 31,325
Accounts receivable, net of allowances of $8,944 and $5,792
at June 30, 2003 and December 31, 2002, respectively 67,436 84,142
Accrued billings 27,497 26,125
Inventories 103,114 106,002
Current deferred taxes on income 20,325 20,518
Other current assets and prepaid expenses 3,550 5,173
--------------- ----------------
Total current assets 264,160 273,285
Property, plant and equipment, net 49,907 43,812
Rental equipment, net 71,906 88,433
Goodwill, net 52,600 52,600
Other assets 4,674 6,776
--------------- ----------------
Total assets $ 443,247 $ 464,906
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 749 $ 749
Accounts payable and accrued liabilities 64,803 77,590
Advance billings 25,536 27,243
--------------- ----------------
Total current liabilities 91,088 105,582
Long-term debt 73,025 73,399
Deferred taxes on income 17,097 15,320
Other liabilities 5,152 6,358
--------------- ----------------
Total liabilities 186,362 200,659
Commitments and contingencies (see Note 8)
Stockholders' equity:
Preferred stock ($1.00 par value; 10,000,000 shares authorized,
none issued at June 30, 2003 and December 31, 2002) - -
Common stock ($0.01 par value; 150,000,000 shares authorized,
19,848,531 and 19,813,517 issued at June 30, 2003
and December 31, 2002, respectively) 198 198
Additional paid-in-capital 294,778 294,370
Retained earnings 24,315 14,522
Treasury stock, at cost (2,867,286 and 1,936,760 at
June 30, 2003 and December 31, 2002, respectively) (55,554) (36,549)
Unearned compensation (2,725) (3,217)
Accumulated other comprehensive loss (4,127) (5,077)
--------------- ----------------
Total stockholders' equity 256,885 264,247
--------------- ----------------
Total liabilities and stockholders' equity $ 443,247 $ 464,906
=============== ================
See Notes to Consolidated Financial Statements
Page 4 of 29
IMAGISTICS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net income $ 9,792 $ 8,237
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 38,033 40,286
Provision for bad debt 4,442 3,019
Provision for inventory obsolescence 3,795 8,358
Deferred taxes on income 1,970 6,527
Change in assets and liabilities:
Accounts receivable 12,264 5,086
Accrued billings (1,372) (368)
Inventories (906) (1,792)
Other current assets and prepaid expenses 1,622 424
Accounts payable and accrued liabilities (12,787) 20,178
Advance billings (1,707) (1,360)
Other, net 1,238 211
----------------- -----------------
Net cash provided by operating activities 56,384 88,806
Cash flows from investing activities:
Expenditures for rental equipment assets (17,374) (24,700)
Expenditures for property, plant and equipment (9,036) (7,711)
----------------- -----------------
Net cash used in investing activities (26,410) (32,411)
Cash flows from financing activities:
Exercises of stock options, including sales
under employee stock purchase plan 1,838 35
Purchases of treasury stock (20,525) (12,509)
Repayments under term loan (374) (17,457)
Repayments under revolving credit facility - (17,000)
----------------- -----------------
Net cash used in financing activities (19,061) (46,931)
----------------- -----------------
Increase in cash 10,913 9,464
Cash at beginning of period 31,325 18,844
----------------- -----------------
Cash at end of period $ 42,238 $ 28,308
================= =================
See Notes to Consolidated Financial Statements
Page 5 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
(UNAUDITED)
1. BACKGROUND AND BASIS OF PRESENTATION
Background
Imagistics International Inc. (the "Company" or "Imagistics") is a large
independent direct sales, service and marketing organization offering document
imaging solutions, including copiers, facsimile machines and multifunctional
products, primarily to large corporate and government customers, as well as to
mid-size and regional businesses. In addition, the Company offers specialized
document imaging options including digital, analog, color and/or networked
products and systems.
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") initiated a plan to spin-off substantially all of its office systems
businesses to its stockholders as an independent publicly traded company. On
February 28, 2001, the Company was incorporated in Delaware as Pitney Bowes
Office Systems, Inc., a wholly owned subsidiary of Pitney Bowes, at which time
100 shares of the Company's common stock, par value $.01 per share, were
authorized, issued and outstanding. On October 12, 2001, the Company changed its
name to Imagistics International Inc. On December 3, 2001, Imagistics was spun
off from Pitney Bowes pursuant to a contribution by Pitney Bowes of
substantially all of its office systems businesses to the Company and a
distribution (the "Distribution") of the stock of the Company to stockholders of
Pitney Bowes based on a distribution ratio of 1 share of Imagistics stock for
every 12.5 shares of Pitney Bowes stock held at the close of business on
November 19, 2001. At the Distribution, the Company's authorized capital stock
consisted of 10,000,000 shares of preferred stock, par value $1.00 per share and
150,000,000 shares of common stock, par value $.01 per share. The Company issued
19,463,007 shares of common stock in connection with the Distribution.
Pitney Bowes has received a tax ruling from the Internal Revenue Service
stating that, subject to certain representations, the Distribution qualifies as
tax-free to Pitney Bowes and its stockholders for United States federal income
tax purposes.
Basis of presentation
The unaudited interim consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States of America and the rules and regulations of the Securities and
Exchange Commission (the "SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of results of operations, financial position and cash flows as of
and for the periods presented. Certain previously reported amounts have been
reclassified to conform to the current year presentation.
The Company believes that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and six months ended
June 30, 2003 are not necessarily indicative of the results for the full year.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the SEC on March 28, 2003.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the copier equipment at the customer location. For facsimile equipment and
facsimile supplies, the satisfaction of contractual obligations and the passing
of title and risk of loss to the customer occur upon the delivery of the
facsimile equipment and the facsimile supplies to the customer location. The
Company records a provision for estimated sales returns and other allowances
based upon historical experience.
Page 6 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of rental contracts, the Company
bills its customers 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.
Support services contracts, which often include supplies, are generally for
an initial term of one year with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of support services contracts, the
Company bills its customers either a flat periodic charge or a usage-based fee.
Revenues related to these contracts are recognized each month as earned, either
using the straight-line method or based upon usage, as applicable.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
The Company enters into arrangements that include multiple deliverables,
which typically consist of the sale of equipment with a support services
contract. The Company accounts for each element within an arrangement with
multiple deliverables as separate units of accounting. Revenue is allocated to
each unit of accounting based on the residual method, which requires the
allocation of the revenue based on the fair value of the undelivered items. Fair
value of support services is primarily determined by reference to renewal
pricing of support services contracts when sold on a stand-alone basis.
Stock-based employee compensation
The Company accounts for its stock-based employee compensation plans under
the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company recognizes stock-based compensation expense on its
restricted stock on a straight-line basis over the vesting period. The Company
does not recognize stock-based compensation expense on its stock options in its
reported results as all options granted, other than adjustment options in
connection with the Distribution, had an exercise price equal to the market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
Net income, as reported $ 5,026 $ 4,381 $ 9,792 $ 8,237
Compensation expense based on the
fair value method, net of related tax benefits 668 447 1,117 894
--------------- --------------- -------------- ---------------
Pro forma net income $ 4,358 $ 3,934 $ 8,675 $ 7,343
=============== =============== ============== ===============
Basic earnings per share:
As reported $ 0.30 $ 0.23 $ 0.58 $ 0.43
Pro forma $ 0.26 $ 0.21 $ 0.51 $ 0.38
Diluted earnings per share:
As reported $ 0.29 $ 0.22 $ 0.56 $ 0.42
Pro forma $ 0.25 $ 0.20 $ 0.49 $ 0.37
Page 7 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Recent accounting pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149 "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003 and all provisions should be applied
prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. Certain provisions relating to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to existing contracts as well as new contracts entered into
after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact
on the Company's financial position, results of operations or cash flows.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
and disposal activities that are initiated after December 31, 2002 and provides
guidance on the recognition and measurement of liabilities associated with
disposal activities. The Company adopted SFAS No. 146 on January 1, 2003. The
adoption of SFAS No. 146 did not have a material impact on the Company's
financial position, results of operations or cash flows.
In November 2002, the FASB Emerging Issues Task Force reached a consensus
on issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 applies to certain contractually
binding arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed or determinable. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on the Company's financial
position, results of operations or cash flows.
3. GOODWILL AND GOODWILL AMORTIZATION
The Company accounts for goodwill in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets," which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be tested for impairment annually and on an interim basis if events
or changes in circumstances indicate that goodwill might be impaired. The
Company performed its annual test for impairment using the discounted cash flow
valuation method as of October 1, 2002, and, based on that review, has
determined that its recorded goodwill was not impaired. As of June 30, 2003,
there were no events or changes in circumstances that would indicate that
goodwill might be impaired. For the three and six months ended June 30, 2003 and
2002, there was no goodwill amortization. The carrying value of goodwill of
$52.6 million as of June 30, 2003 is attributable to the United States
geographic segment.
4. SUPPLEMENTAL INFORMATION
Inventories
Inventories consisted of the following at June 30, 2003 and December 31,
2002:
JUNE 30, DECEMBER 31,
2003 2002
---------------- ----------------
Finished products $ 70,406 $ 77,447
Supplies and service parts 32,708 28,555
---------------- ----------------
Total inventories $ 103,114 $ 106,002
================ ================
Page 8 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Fixed assets
Fixed assets consisted of the following at June 30, 2003 and December 31,
2002:
JUNE 30, DECEMBER 31,
2003 2002
---------------- ----------------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 10,581 10,088
Machinery and equipment 23,663 21,372
Computers and software 42,812 36,483
---------------- ----------------
Property, plant and equipment, gross 78,412 69,299
Accumulated depreciation (28,505) (25,487)
---------------- ----------------
Property, plant and equipment, net $ 49,907 $ 43,812
================ ================
Rental equipment, gross $ 351,262 $ 365,793
Accumulated depreciation (279,356) (277,360)
---------------- ----------------
Rental equipment, net $ 71,906 $ 88,433
================ ================
Depreciation and amortization expense was $19.1 million and $38.0 million
for the three and six months ended June 30, 2003, respectively, and $20.2
million and $40.3 million for the three and six months ended June 30, 2002,
respectively. Unamortized software costs totaled $24.7 million as of June 30,
2003 and $18.8 million as of December 31, 2002. Amortization expense on account
of capitalized software totaled $0.2 million and $0.4 million for the three and
six months ended June 30, 2003, respectively. Amortization expense on account of
capitalized software totaled $0.2 million and $0.3 million for the three and six
months ended June 30, 2002, respectively.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at June
30, 2003 and December 31, 2002:
JUNE 30, DECEMBER 31,
2003 2002
----------------- -----------------
Accounts payable $ 20,623 $ 21,553
Accrued compensation and benefits 5,532 8,631
Other non-income taxes payable 6,745 6,973
Other accrued liabilities 31,903 40,433
----------------- -----------------
Accounts payable and accrued liabilities $ 64,803 $ 77,590
================= =================
Comprehensive income
Comprehensive income consisted of the following for the three and six
months ended June 30, 2003 and 2002:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------- ------------- --------------
Net income $ 5,026 $ 4,381 $ 9,792 $ 8,237
Translation adjustment 825 736 872 291
Unrealized gain (loss) on cash flow hedges 48 (2,410) 77 (1,767)
------------ ------------- ------------- --------------
Comprehensive income $ 5,899 $ 2,707 $ 10,741 $ 6,761
============ ============= ============= ==============
The Company had interest rate swap agreements in the aggregate notional
amount of $72 million at both June 30, 2003 and December 31, 2002 designated as
cash flow hedges. The Company recorded a liability of $3,632 and $3,709 for the
fair market
Page 9 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
value of the interest rate swap agreements at June 30, 2003 and December 31,
2002, respectively. The changes in the fair value of the outstanding swap
agreements are included in accumulated other comprehensive loss in stockholders'
equity.
Treasury stock
The following table summarizes the Company's treasury stock transactions:
TREASURY STOCK
SHARES COST
--------------- ---------------
Balance at December 31, 2002 1,936,760 $ 36,549
Purchases under stock buy back program 1,010,000 20,525
Sales to employees under employee stock purchase plan (79,474) (1,520)
--------------- ---------------
Balance at June 30, 2003 2,867,286 $ 55,554
=============== ===============
Cash flow information
Cash paid for income taxes was $8,085 and $1,487 for the six months ended
June 30, 2003 and 2002, respectively. Cash paid for interest was $2,746 and
$4,108 for the six months ended June 30, 2003 and 2002, respectively.
5. BUSINESS SEGMENT INFORMATION
Geographic information
The Company operates in two reportable segments based on geographic area:
the United States and the United Kingdom. Revenues are attributed to geographic
regions based on where the revenues are derived.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2003 2002 2003 2002
-------------- -------------- ------------- -------------
Revenues:
United States $ 150,899 $ 153,288 $ 296,402 $ 303,020
United Kingdom 5,017 5,003 10,436 10,432
-------------- -------------- ------------- -------------
Total revenues $ 155,916 $ 158,291 $ 306,838 $ 313,452
============== ============== ============= =============
Income before income taxes:
United States $ 7,948 $ 6,549 $ 14,849 $ 12,097
United Kingdom 875 722 1,987 1,568
-------------- -------------- ------------- -------------
Total income before income taxes $ 8,823 $ 7,271 $ 16,836 $ 13,665
============== ============== ============= =============
Revenues from Pitney Bowes, substantially all of which are generated in the
United States segment, consisted of the following for the three and six months
ended June 30, 2003 and 2002:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2003 2002 2003 2002
-------------- -------------- ------------- -------------
Revenues from Pitney Bowes:
Pitney Bowes Canada $ 6,313 $ 7,898 $ 12,682 $ 13,438
Other subsidiaries of Pitney Bowes 7,014 7,010 13,435 13,134
-------------- -------------- ------------- -------------
Sub-total 13,327 14,908 26,117 26,572
Pitney Bowes Credit Corporation 23,924 20,512 45,360 42,670
-------------- -------------- ------------- -------------
Total $ 37,251 $ 35,420 $ 71,477 $ 69,242
============== ============== ============= =============
Page 10 of 29
IMAGISTICS INTERNATIONAL INC,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
For the periods presented, Pitney Bowes Credit Corporation ("PBCC") was
the Company's primary lease vendor and the Company expects PBCC to continue as
the Company's primary lease vendor in the future. However, if PBCC were to cease
being the Company's primary lease vendor, the Company is confident that it could
obtain a replacement primary lease vendor with substantially the same lease
terms as PBCC. No other single customer or controlled group represented 10% or
more of the Company's revenues.
The following tables shows identifiable long-lived assets and total assets
for each reportable segment at June 30, 2003 and December 31, 2002.
JUNE 30, DECEMBER 31,
2003 2002
---------------- ----------------
Identifiable long-lived assets:
United States $ 175,374 $ 187,310
United Kingdom 3,713 4,311
---------------- ----------------
Total identifiable long-lived assets $ 179,087 $ 191,621
================ ================
Total assets:
United States $ 417,336 $ 440,508
United Kingdom 25,911 24,398
---------------- ----------------
Total assets $ 443,247 $ 464,906
================ ================
Identifiable long-lived assets in the United States at June 30, 2003 and
December 31, 2002 include goodwill of $52.6 million.
Concentrations
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and relatively small account
balances within the majority of the Company's customer base and their dispersion
across different businesses. The Company periodically evaluates the financial
strength of its customers and believes that its credit risk exposure is limited.
Most of the Company's product purchases are from overseas vendors, the
majority of which are from a limited number of Japanese suppliers who operate
manufacturing facilities in Japan and China. Although the Company currently
sources products from a number of manufacturers throughout the world, a
significant portion of new copier equipment is currently obtained from two
suppliers. If these suppliers were unable to deliver products for a significant
period of time, the Company would be required to find replacement products from
an alternative supplier or suppliers, which may not be available on a timely or
cost effective basis. The Company's operating results could be adversely
affected if a significant supplier is unable to deliver sufficient product.
6. EARNINGS PER SHARE CALCULATION
Basic earnings per share was calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share was calculated by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding plus all dilutive common shares outstanding during the
period. The calculation of diluted earnings per share did not include 29,550 and
52,403 options for the three months ended June 30, 2003 and 2002, respectively,
since they were antidilutive for the periods presented.
Page 11 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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,
----------------------------- ------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
Net income available to common stockholders $ 5,026 $ 4,381 $ 9,792 $ 8,237
============== ============== ============== ==============
Weighted average common shares outstanding 16,895,032 19,457,695 17,343,380 19,595,523
Less: non-vested restricted stock 346,311 341,202 342,988 325,462
------------- -------------- -------------- --------------
Weighted average common shares for basic earnings per share 16,548,721 19,116,493 17,000,392 19,270,061
Add: dilutive effect of restricted stock 346,311 341,202 342,988 325,462
Add: dilutive effect of stock options 263,490 179,338 237,450 132,784
------------- -------------- -------------- --------------
Weighted average common shares and equivalents
for diluted earnings per share 17,158,522 19,637,033 17,580,830 19,728,307
============== ============== ============== ==============
Basic earnings per share $ 0.30 $ 0.23 $ 0.58 $ 0.43
Diluted earnings per share $ 0.29 $ 0.22 $ 0.56 $ 0.42
7. LONG-TERM DEBT
Long-term debt consisted of the following at June 30, 2003 and December 31,
2002:
JUNE 30, DECEMBER 31,
2003 2002
---------------- ----------------
Term loan $ 73,774 $ 74,148
Less: current maturities 749 749
---------------- ----------------
Total long-term debt $ 73,025 $ 73,399
================ ================
On November 9, 2001 the Company entered into a Credit Agreement with a
group of lenders (the "Credit Agreement") that provided for secured borrowings
and the issuance of letters of credit in an aggregate amount not to exceed $225
million, comprised of a $125 million Revolving Credit Facility (the "Revolving
Credit Facility") and a $100 million Term Loan (the "Term Loan"). The Credit
Agreement required the Company to manage its interest rate risk with respect to
at least 50% of the aggregate principal amount of the Term Loan for a period of
at least 36 months. Accordingly, the Company entered into two interest rate swap
agreements in notional amounts of $50 million and $30 million to convert the
variable interest rate payable on the Term Loan to a fixed interest rate in
order to hedge the exposure to variability in expected future cash flows. These
interest rate swap agreements have been designated as cash flow hedges.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of the Company's stock permitted to be repurchased from $20 million to
$30 million. On July 19, 2002, the Credit Agreement was further amended to
increase the total amount of the Company's stock permitted to be repurchased
from $30 million to $58 million and to reduce the Term Loan interest rates to
LIBOR plus a margin of from 2.75% to 3.75%, from LIBOR plus a margin of from
3.50% to 3.75%, depending on the Company's leverage ratio, or to the Fleet Bank
base lending rate plus a margin of from 1.75% to 2.75%, from the Fleet Bank base
lending rate plus a margin of from 2.50% to 2.75%, depending on the Company's
leverage ratio.
On March 5, 2003, the Credit Agreement was amended to increase the total
amount of the Company's stock permitted to be repurchased from $58 million to
$78 million, to reduce the minimum earnings before interest, taxes, depreciation
and amortization covenant to $100 million for the remainder of the term of the
Credit Agreement and to revise the limitation on capital expenditures.
Page 12 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
On May 16, 2003, the Credit Agreement was further amended (the "Fourth
Amendment") to reduce the aggregate amount of the Revolving Credit Facility from
$125 million to $95 million, to delete the requirement that the Company maintain
its interest rate risk with respect to at least 50% of the aggregate principal
amount of the Term Loan for a period of at least 36 months, to reduce and fix
the Term Loan interest rate to LIBOR plus a margin of 2.25%, from LIBOR plus a
margin of from 2.75% to 3.75%, depending on the Company's leverage ratio, or to
the Fleet Bank base lending rate plus a margin of 1.25%, from the Fleet Bank
base lending rate plus a margin of from 1.75% to 2.75%, depending on the
Company's leverage ratio, to reduce and fix the Revolving Credit Facility
interest rate to LIBOR plus a margin of 1.25%, from LIBOR plus a margin of from
2.25% to 3.00%, depending on the Company's leverage ratio, or to the Fleet Bank
base lending rate plus a margin of 0.25%, from the Fleet Bank base lending rate
plus a margin of from 1.25% to 2.00%, depending on the Company's leverage ratio
and to fix the commitment fee at 0.375% on the average daily unused portion of
the Revolving Credit Facility from 0.375% to 0.500% on the average daily unused
portion of the Revolving Credit Facility, depending on the Company's leverage
ratio.
During the third quarter of 2002, the Company revised its cash flow
estimates and prepaid $8 million of the amount outstanding under the Term Loan.
This prepayment was covered by a portion of the $30 million interest rate swap
agreement that had been designated as a cash flow hedge. Since it was no longer
probable that the hedged forecasted transactions related to the $8 million Term
Loan prepayment would occur, the Company recognized a loss related to that
portion of the swap agreement underlying the amount of the prepayment by
reclassifying $0.4 million from accumulated other comprehensive loss into
interest expense. The Company also unwound $8 million of the $30 million
interest rate swap agreement.
At June 30, 2003, two interest rate swap agreements in the notional amounts
of $50 million and $22 million were outstanding, the aggregate fair value of
which was an obligation of $3.6 million. This obligation is reported in other
liabilities in the consolidated balance sheet and the unrealized loss relating
to the outstanding swap agreements was included in other comprehensive loss in
stockholders' equity. The Company routinely reviews its cash flow estimates in
the normal course of business. In light of recent market developments affecting
interest rates, the impact of the Fourth Amendment and the Company's consistent
historical positive cash flow and near term estimated operating and capital
expenditure requirements, the Company is considering unwinding the interest rate
swap agreements. Although no final determination to unwind the interest rate
swap agreements has been made, if the Company were to unwind the interest rate
swap agreements, approximately $3.6 million would be reclassified into interest
expense from other comprehensive loss.
8. COMMITMENTS AND CONTINGENCIES
Guarantees and indemnifications
The Company has applied the disclosure provisions of FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others," to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The Company is a guarantor in the arrangements described below.
In connection with the Distribution, the Company entered into certain
agreements pursuant to which it may be obligated to indemnify Pitney Bowes with
respect to certain matters. The Company agreed to assume all liabilities
associated with the Company's business, and to indemnify Pitney Bowes for all
claims relating to the Company's business. These may be claims by or against
Pitney Bowes or the Company relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property rights, equipment, service or payment disputes with
customers and disputes with employees.
The Company and Pitney Bowes entered into a tax separation agreement, which
governs the Company's and Pitney Bowes' respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. In addition, the tax separation agreement
generally obligates the Company not to enter into any transaction that would
adversely affect the tax-free nature of the Distribution for the two-year period
following the Distribution, and obligates the Company to indemnify Pitney Bowes
and affiliates to the extent that any action the Company takes or fails to take
gives rise to a tax liability with respect to the Distribution.
In each of these circumstances, payment by the Company is contingent on
Pitney Bowes making a claim. As such, it is not possible to predict the maximum
potential future payments under these agreements. As of June 30, 2003, the
Company has not
Page 13 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
paid any amounts pursuant to the above indemnifications other than expenses
incurred in connection with the defense and settlement of assumed claims
asserted in connection with the operation of the Company in the ordinary course
of business. The Company believes that if it were to incur a loss in any of
these matters, such loss would not have a material effect on the Company's
financial position, results of operations or cash flows.
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the normal course of business, the Company
has been party to occasional lawsuits relating to the Company's business. These
may involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies since the ultimate resolutions
of the legal matters cannot be determined and a minimum cost or amount of loss
cannot be reasonably estimated. In the opinion of the Company's management, none
of these proceedings, individually or in the aggregate, should have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
In May 2003, the Company entered into a settlement agreement with respect
to the previously reported trademark litigation filed in October 2002 by
Imagetec, L.P., which resolved the action in its entirety. The resolution of
this litigation did not have a material impact on the Company's financial
position, results of operations or cash flows.
Risks and uncertainties
Prior to the Distribution, the Company's business was operated by Pitney
Bowes as a division of its broader corporate organization rather than as a
separate stand-alone entity. Pitney Bowes assisted the Company by providing
corporate functions such as legal, tax and information technology functions.
Following the Distribution, Pitney Bowes has no obligation to provide assistance
to the Company other than certain interim and transitional services to be
provided by Pitney Bowes. Because the Company has a limited history operating as
a stand-alone entity, there can be no assurance that the Company will be able to
successfully implement the changes necessary to operate independently in the
future. The Company's inability to successfully implement the changes necessary
to operate independently would have a material adverse affect on the Company's
financial position, results of operations and cash flows.
The Company is implementing an enterprise resource planning ("ERP") system
intended to replace the information technology ("IT") services provided by
Pitney Bowes under the transition services agreement. Due to unanticipated
delays in implementation of Phase II of the ERP system, the Company and Pitney
Bowes have agreed to an extension until December 31, 2003 of the transition
services agreement as it relates to IT services. In January 2003, the Company
received a favorable ruling from the Internal Revenue Service indicating that
the extension of the transition services agreement as it relates to IT services,
through December 2003, will not affect the tax-free nature of the spin-off. The
Company expects to implement the critical ERP applications necessary to replace
the IT services provided by Pitney Bowes in the second half of 2003. Any failure
to implement the critical ERP applications appropriately by the given extension
date would have a material adverse affect on the Company's financial position,
results of operations and cash flows.
9. SEPARATION AGREEMENTS
The Company and Pitney Bowes entered into a transition services agreement
that provided for Pitney Bowes to supply certain services to the Company at cost
for a limited time following the Distribution. These services included
information technology, computing, telecommunications, certain accounting, field
service of equipment and dispatch call center services. The Company and Pitney
Bowes have agreed to an extension until December 31, 2003, of the transition
services agreement as it relates to information technology and related services.
Services provided under this extension are at negotiated market rates. The
Company and Pitney Bowes entered into a separate service agreement effective
July 1, 2003 until June 30, 2004 relating to field service of equipment and
dispatch call center services.
The Company paid Pitney Bowes $4.0 million and $10.4 million for the three
and six months ended June 30, 2003, respectively, in connection with the
transition services agreement and other administrative services. The Company
paid Pitney
Page 14 of 29
IMAGISTICS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Bowes $5.0 million and $12.2 million for the three and six months ended June 30,
2002, respectively, in connection with the transition services agreement and
certain shared corporate and administrative services.
The Company also entered into certain other agreements covering
intellectual property, commercial relationships and leases and licensing
arrangements. The pricing terms of the products and services covered by the
other commercial agreements reflect negotiated prices.
The Company and Pitney Bowes entered into a tax separation agreement, which
governs the Company's and Pitney Bowes' respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. In addition, the tax separation agreement
generally obligates the Company not to enter into any transaction that would
adversely affect the tax-free nature of the Distribution for the two-year period
following the Distribution, and obligates the Company to indemnify Pitney Bowes
and affiliates to the extent that any action the Company takes or fails to take
gives rise to a tax liability with respect to the Distribution.
Page 15 of 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the audited
consolidated financial statements and the notes thereto, included in our latest
Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission on March 28, 2003, as well as the unaudited
consolidated financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q. This Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Please see "Risk Factors That
Could Cause Results To Vary" and "Special Note About Forward-Looking Statements"
for a discussion of the uncertainties, risks and assumptions associated with
these forward-looking statements. Our actual results could differ materially
from those forward-looking statements discussed in this section. For the
purposes of the following discussion, unless the context otherwise requires,
"Imagistics International Inc.," "Imagistics," refers to Imagistics
International Inc. and subsidiary.
The unaudited interim consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in our opinion, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
results of operations, financial position and cash flows as of and for the
periods presented. We believe that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three and six months ended
June 30, 2003 are not necessarily indicative of the results for the full year.
OVERVIEW
Imagistics is a large direct sales, service and marketing organization
offering document imaging solutions, including copiers, facsimile machines and
multifunctional products, sometimes referred to as MFPs, primarily to large
corporate customers known as national accounts, government entities and mid-size
and regional businesses known as commercial accounts. In addition, we offer a
range of document imaging options, including digital, analog, color and/or
networked products and systems.
Our strategic vision is to become the leading independent direct provider
of enterprise office imaging and document solutions by providing world-class
products and services with unparalleled customer support and satisfaction with a
focus on multiple location customers, thus building value for our shareholders.
Our strategic initiatives include:
o Executing our unique business model,
o Leveraging product and marketplace strengths to drive market share,
o Leveraging strengths in customer support to drive customer loyalty,
o Achieving operational excellence and benchmark productivity and
o Pursuing opportunistic expansion and investments.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Revenue Recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the copier equipment at the customer location. For facsimile equipment and
facsimile supplies, the satisfaction of contractual obligations and the passing
of title and risk of loss to the customer occur upon the delivery of the
facsimile equipment and the facsimile supplies to the customer location. We
record a provision for estimated sales returns and other allowances based upon
historical experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless we receive prior
notice of cancellation. Under the terms of rental contracts, we bill our
customers 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.
Support services contracts, which often include supplies, are generally for
an initial term of one year with automatic renewals unless we receive prior
notice of cancellation. Under the terms of support services contracts, we bill
our customers either a flat
Page 16 of 29
periodic charge or a usage-based fee. Revenues related to these contracts are
recognized each month as earned, either using the straight-line method or based
upon usage, as applicable.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
We enter into arrangements that include multiple deliverables, which
typically consist of the sale of equipment with a support services contract. We
account for each element within an arrangement with multiple deliverables as
separate units of accounting. Revenue is allocated to each unit of accounting
based on the residual method, which requires the allocation of the revenue based
on the fair value of the undelivered items. Fair value of support services is
primarily determined by reference to renewal pricing of support services
contracts when sold on a stand-alone basis.
Accounts Receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that we believe are
uncollectible. Our estimate of losses is based on prior collection experience
including evaluating the credit worthiness of each of our customers, analyzing
historical bad debt write-offs and reviewing the aging of the receivables. Our
allowance for doubtful accounts includes amounts for specific accounts that we
believe are uncollectible, as well as amounts that have been computed by
applying certain percentages based on historic loss trends, to certain accounts
receivable aging categories.
Inventories
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demands.
Rental Equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier equipment is depreciated over three years and facsimile
equipment is depreciated over five years.
REVENUES
(Dollars in thousands)
The following table shows our revenue sources by product line for the
periods indicated.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Copier product line $ 99,313 $ 91,712 $ 191,536 $ 182,777
Facsimile product line 56,603 66,579 115,302 130,675
--------------- --------------- --------------- ---------------
Total revenue $ 155,916 $ 158,291 $ 306,838 $ 313,452
=============== =============== =============== ===============
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,
-------------------------------- -------------------------------
2003 2002 2003 2002
--------------- --------------- -------------- ---------------
United States $ 150,899 $ 153,288 $ 296,402 $ 303,020
United Kingdom 5,017 5,003 10,436 10,432
--------------- --------------- -------------- ---------------
Total revenue $ 155,916 $ 158,291 $ 306,838 $ 313,452
=============== =============== ============== ===============
Page 17 of 29
The following table shows the growth rates by revenue type and product line
for the three and six months ended June 30, 2003 compared with the same periods
in the prior year.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Sales
Copier products 10.0% (0.4%) 4.6% 4.7%
Facsimile products (18.1%) 2.7% (12.6%) (0.6%)
Total sales (0.2%) 0.7% (1.4%) 2.8%
Rentals
Copier products 7.6% 8.9% 7.9% 8.6%
Facsimile products (12.7%) (5.2%) (11.0%) (5.2%)
Total rentals (4.7%) (0.1%) (3.6%) (0.2%)
Support services
Copier products 4.5% (0.1%) 1.3% 0.9%
Facsimile products (12.4%) (3.2%) (13.0%) 2.7%
Total support services 2.5% (0.4%) (0.4%) 1.1%
Total revenue (1.5%) 0.3% (2.1%) 1.4%
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,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- --------------
Equipment sales 27% 26% 26% 25%
Supplies sales 24% 24% 24% 24%
-------------- ------------- -------------- --------------
Total sales 51% 50% 50% 49%
Equipment rentals 36% 37% 37% 38%
Support services 13% 13% 13% 13%
-------------- ------------- -------------- --------------
Total revenue 100% 100% 100% 100%
Cost of sales 31% 31% 30% 31%
Cost of rentals 12% 13% 12% 14%
Selling, service and administrative expenses 50% 50% 51% 49%
-------------- ------------- -------------- --------------
Operating income 7% 6% 7% 6%
Interest expense 1% 1% 1% 1%
-------------- ------------- -------------- --------------
Income before income taxes 6% 5% 6% 5%
Provision for income taxes 3% 2% 3% 2%
-------------- ------------- -------------- --------------
Net income 3% 3% 3% 3%
============== ============= ============== ==============
Cost of sales as a percentage of sales revenue 61.1% 61.5% 61.5% 63.5%
============== ============= ============== ==============
Cost of rentals as a percentage of rental revenue 33.3% 36.6% 33.4% 37.0%
============== ============= ============== ==============
Effective tax rate 43.0% 39.7% 41.8% 39.7%
============== ============= ============== ==============
Page 18 of 29
THREE MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Revenue. For the three months ended June 30, 2003, total revenue of
$155,916 declined 2% versus revenue of $158,291 for the three months ended June
30, 2002 primarily resulting from lower rental revenue, partially offset by
higher support services revenue.
Equipment and supply sales revenue of $78,876 declined slightly for the
three months ended June 30, 2003 from $79,006 for the three months ended June
30, 2002. Copier equipment sales increased 10% with particular improvement in
our color product category as well as increased copier supply sales. Facsimile
sales declined 18% due to lower equipment and supply sales resulting from the
decline in facsimile usage.
Equipment rental revenue of $56,107 for the three months ended June 30,
2003 declined 5% versus equipment rental revenue of $58,866 for the three months
ended June 30, 2002, reflecting the continuing expected decline in facsimile
rental revenues, partially offset by an increase in copier rental revenues
resulting from a continuing copier marketing focus on national accounts, which
prefer a rental placement strategy similar to that of our historic facsimile
product placement strategy as well as increases in both usage and new placements
in the mid-level digital black and white product categories. Rental revenue
derived from our copier product line increased 8% reflecting growth in the
overall installed rental population as well as the impact of increased
placements of our high-end copiers and MFPs. Rental revenue from our facsimile
product line declined 13% versus the prior year reflecting lower pricing and a
lower installed base.
Support services revenue for the three months ended June 30, 2003 of
$20,933, primarily derived from stand-alone service contracts, increased 3%
versus support services revenue of $20,419 for the three months ended June 30,
2002, reflecting higher copier service revenue resulting from the product mix
shift to high-end digital products and increased usage, partially offset by
lower facsimile service revenue due to lower pricing.
Cost of sales. Cost of sales was $48,166 for the three months ended June
30, 2003 compared with $48,592 for the same period in 2002 and cost of sales as
a percentage of sales revenue declined to 61.1% for the three months ended June
30, 2003 from 61.5% for the three months ended June 30, 2002. This decline was
primarily due to lower inventory obsolescence provisions, partially offset by
the increase in the mix of copier and multifunctional products, which have a
higher cost of sales percentage than facsimile sales.
Cost of rentals. Cost of rentals was $18,677 for the three months ended
June 30, 2003 compared with $21,557 for the three months ended June 30, 2002 and
cost of rentals as a percentage of rental revenue declined 3.3 percentage points
to 33.3% for the three months ended June 30, 2003 from 36.6% for the three
months ended June 30, 2002. This decline was due to product cost improvements
coupled with the impact of our disciplined focus on improving profit margins,
partially offset by an increase in the mix of copier and multifunctional product
rentals which have a higher cost as a percentage of rental revenue than
facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $78,658 were 50.4% of total revenue for the three
months ended June 30, 2003 compared with $78,882, or 49.8% of total revenue for
the three months ended June 30, 2002. Selling, service and administrative
expenses decreased slightly versus the prior year primarily resulting from lower
employee compensation and employee benefit expenses and lower marketing
expenses, partially offset by higher information technology expenses related to
maintaining legacy systems while incurring costs relating to our resource
planning ("ERP") project.
Interest expense. Interest expense decreased to $1,592 for the three months
ended June 30, 2003 from $1,989 for the three months ended June 30, 2002, as a
result of lower debt levels coupled with lower interest rates. The weighted
average interest rate for the three months ended June 30, 2003 was 6.6% versus
7.6% for the three months ended June 30, 2002.
Effective tax rate. Our effective tax rate was 43.0% for the three months
ended June 30, 2003 compared with 39.7% for the three months ended June 30, 2002
due to an increase in state and local income tax rates coupled with a change in
the estimate of the deductibility for tax purposes of certain expenses.
SIX MONTHS ENDED JUNE 30, 2003 AND JUNE 30, 2002
Revenue. For the six months ended June 30, 2003, total revenue of $306,838
declined 2% versus revenue of $313,452 for the six months ended June 30, 2002
primarily reflecting lower rental revenue and to a lesser extent, lower sales.
Page 19 of 29
Equipment and supply sales revenue of $151,929 declined 1% for the six
months ended June 30, 2003 from $154,135 for the six months ended June 30, 2002.
Copier sales increased 5% resulting from increased placements of our high-end
digital and color copiers and MFPs and higher supply sales. Facsimile sales
declined 13% due to lower equipment and supply sales resulting from the lower
facsimile usage.
Equipment rental revenue of $113,175 for the six months ended June 30, 2003
declined 4% versus equipment rental revenue of $117,418 for the six months ended
June 30, 2002, reflecting the continuing expected decline in facsimile rental
revenues, partially offset by an increase in copier rental revenues. Rental
revenue derived from our copier product line increased 8% reflecting growth in
the overall installed rental population resulting from a continuing copier
marketing focus on national accounts, which prefer a rental placement strategy
similar to that of our historic facsimile product placement strategy as well as
increases in both usage and new placements in the mid-level digital black and
white product categories. Rental revenue from our facsimile product line
declined 11% versus the prior year reflecting a lower installed base and lower
pricing on new placements and renewals compared to expiring contracts.
Support services revenue for the six months ended June 30, 2003 of $41,734,
primarily derived from stand-alone service contracts, declined slightly versus
support services revenue of $41,899 for the six months ended June 30, 2002,
reflecting a product mix shift toward higher-end copiers, offset by lower
facsimile service revenue due to lower pricing.
Cost of sales. Cost of sales was $93,410 for the six months ended June 30,
2003 compared with $97,808 for the same period in 2002 and cost of sales as a
percentage of sales revenue declined to 61.5% for the six months ended June 30,
2003 from 63.5% for the six months ended June 30, 2002. This decline was due to
lower obsolete inventory provisions and the impact of our disciplined focus on
improving profit margins and lower product cost, partially offset by an increase
in the mix of copier and multifunctional product sales, which have a higher cost
of sales percentage than facsimile sales.
Cost of rentals. Cost of rentals was $37,848 for the six months ended June
30, 2003 compared with $43,455 for the six months ended June 30, 2002 and cost
of rentals as a percentage of rental revenue declined 3.6 percentage points to
33.4% for the six months ended June 30, 2003 from 37.0% for the six months ended
June 30, 2002. This decline was due to product cost improvements coupled with
the impact of our disciplined focus on improving profit margins, partially
offset by an increase in the mix of copier and multifunctional product rentals
which have a higher cost as a percentage of rental revenue than facsimile
machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $155,523 were 50.7% of total revenue for the six
months ended June 30, 2003 compared with $154,335, or 49.2% of total revenue for
the six months ended June 30, 2002. Selling, service and administrative expenses
increased 1% over the prior year primarily resulting from higher information
technology expenses related to maintaining legacy systems while incurring costs
relating to our ERP project, higher provisions for bad debt expenses and higher
marketing expenses, offset by lower employee compensation and benefit expenses.
Interest expense. Interest expense decreased to $3,221 for the six months
ended June 30, 2003 from $4,189 for the six months ended June 30, 2002, as a
result of lower debt levels coupled with lower interest rates. The weighted
average interest rate for the six months ended June 30, 2003 was 6.8% versus
7.1% for the six months ended June 30, 2002.
Effective tax rate. Our effective tax rate was 41.8% for the six months
ended June 30, 2003 compared with 39.7% for the six months ended June 30, 2002
primarily due to a change in the estimate of the deductibility for tax purposes
of certain expenses.
LIQUIDITY AND CAPITAL RESOURCES
On November 9, 2001 we entered into a Credit Agreement with a group of
lenders (the "Credit Agreement") that provided for secured borrowings or the
issuance of letters of credit in an aggregate amount not to exceed $225 million,
comprised of a $125 million Revolving Credit Facility (the "Revolving Credit
Facility") and a $100 million Term Loan (the "Term Loan"). The term of the
Revolving Credit Facility is five years and the term of the Term Loan is six
years. Our Credit Agreement has a rating of Ba3 from Moody's Investor Services
and a BB+ rating from Standard & Poor's.
We have pledged substantially all of our assets plus 65% of the stock of
our subsidiary as security for our obligations under the Credit Agreement.
Available borrowings and letter of credit issuance under the Revolving Credit
Facility are determined by a borrowing base consisting of a percentage of our
eligible accounts receivable, inventory, rental assets and accrued and advance
billings, less outstanding borrowings under the Term Loan.
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio (total debt to EBITDA), as
well as other covenants, which, among other things, place limits on dividend
payments and capital expenditures.
Page 20 of 29
Originally, amounts borrowed under the Revolving Credit Facility bore
interest at variable rates based, at our option, on either the LIBOR rate plus a
margin of from 2.25% to 3.00%, depending on our leverage ratio, or the Fleet
Bank base lending rate plus a margin of from 1.25% to 2.00%, depending on our
leverage ratio. Amounts borrowed under the Term Loan bore interest at variable
rates based, at our option, on either the LIBOR rate plus a margin of 3.50% or
3.75%, depending on our leverage ratio, or the Fleet Bank base lending rate plus
a margin of 2.50% to 2.75%, depending on our leverage ratio. A commitment fee of
from 0.375% to 0.500% on the average daily unused portion of the Revolving
Credit Facility was payable quarterly, in arrears, depending on our leverage
ratio.
On March 19, 2002, the Credit Agreement was amended to increase the total
amount of our stock permitted to be repurchased from $20 million to $30 million.
On July 19, 2002, the Credit Agreement was further amended to increase the total
amount of our stock permitted to be repurchased from $30 million to $58 million
and to reduce the Term Loan interest rates to LIBOR plus a margin of from 2.75%
to 3.75%, depending on our leverage ratio, or to the Fleet Bank base lending
rate plus a margin of from 1.75% to 2.75%, depending on our leverage ratio. On
March 5, 2003, the Credit Agreement was further amended to increase the total
amount of stock permitted to be repurchased from $58 million to $78 million, to
reduce the minimum EBITDA covenant to $100 million for the remainder of the term
of the Credit Agreement and to revise the limitation on capital expenditures. On
May 16, 2003, the Credit Agreement was further amended (the "Fourth Amendment")
to reduce the aggregate amount of the Revolving Credit Facility from $125
million to $95 million, to delete the requirement that we maintain our interest
rate risk with respect to at least 50% of the aggregate principal amount of the
Term Loan for a period of at least 36 months, to reduce and fix the Term Loan
interest rate to LIBOR plus a margin of 2.25%, from LIBOR plus a margin of from
2.75% to 3.75%, depending on our leverage ratio, or to the Fleet Bank base
lending rate plus a margin of 1.25%, from the Fleet Bank base lending rate plus
a margin of from 1.75% to 2.75%, depending on our leverage ratio, to reduce and
fix the Revolving Credit Facility interest rate to LIBOR plus a margin of 1.25%,
from LIBOR plus a margin of from 2.25% to 3.00%, depending on our leverage
ratio, or to the Fleet Bank base lending rate plus a margin of .25%, from the
Fleet Bank base lending rate plus a margin of from 1.25% to 2.00%, depending on
our leverage ratio and to fix our commitment fee at 0.375% on the average daily
unused portion of the Revolving Credit Facility from 0.375% to 0.500% on the
average daily unused portion of the Revolving Credit Facility, depending on our
leverage ratio. At June 30, 2003, we were in compliance with all of the
financial covenants.
The Credit Agreement required us to manage our interest rate risk with
respect to at least 50% of the aggregate principal amount of the Term Loan for a
period of at least 36 months. Accordingly, we entered into two interest rate
swap agreements in the notional amounts of $50 million and $30 million expiring
in February 2005 to convert the variable interest rate payable on the Term Loan
to a fixed interest rate in order to hedge the exposure to variability in
expected future cash flows. These interest rate swap agreements have been
designated as cash flow hedges. The counterparties to the interest rate swap
agreements are major international financial institutions. We monitor the credit
quality of these financial institutions and do not anticipate any losses as a
result of counterparty nonperformance. Under the terms of the swap agreements,
we will receive payments based upon the 90-day LIBOR rate and remit payments
based upon a fixed rate. The fixed interest rates are 4.17% and 4.32% for the
$50 million and the $30 million swap agreements, respectively.
Our initial borrowings of $150 million under the Credit Agreement,
consisting of $100 million under the Term Loan and $50 million under the
Revolving Credit Facility, were used to repay amounts due to Pitney Bowes and to
pay a dividend to Pitney Bowes. At December 31, 2001, Pitney Bowes Credit
Corporation ("PBCC") provided substantially all of our Term Loan. During 2002,
PBCC disposed of its commitments under the Credit Agreement and is no longer a
participant in the Credit Agreement.
During the third quarter of 2002, we revised our cash flow estimates and
prepaid $8 million of the amount outstanding under the Term Loan. This
prepayment was covered by a portion of the $30 million interest rate swap
agreement that had been designated as a cash flow hedge. Since it was no longer
probable that the hedged forecasted transactions related to the $8 million Term
Loan prepayment would occur, we recognized a loss related to that portion of the
swap agreement underlying the amount of the prepayment by reclassifying $0.4
million from accumulated other comprehensive loss into interest expense. We also
unwound $8 million of the $30 million interest rate swap agreement.
At June 30, 2003, two interest rate swap agreements in the notional amounts
of $50 million and $22 million were outstanding, the aggregate fair value of
which was an obligation of $3.6 million. This obligation is reported in other
liabilities in the consolidated balance sheet and the unrealized loss relating
to the outstanding swap agreements was included in other comprehensive loss in
stockholders' equity. We routinely review cash flow estimates in the normal
course of business. In light of recent market developments affecting interest
rates, the impact of the Fourth Amendment and our consistent historical positive
cash flow and near term estimated operating and capital expenditure
requirements, we are considering unwinding the interest rate swap agreements.
Although no final determination to unwind the interest rate swap agreements has
been made, if we were to unwind the interest rate swap agreements, approximately
$3.6 million would be reclassified into interest expense from other
comprehensive loss. The interest rate swap agreements were 100% effective for
the three and six months ended June 30, 2003.
Page 21 of 29
At June 30, 2003, $74 million of borrowings were outstanding under the
Credit Agreement, consisting solely of $74 million of borrowings under the Term
Loan and the borrowing base amounted to approximately $99 million. The Term Loan
is payable in 14 consecutive equal quarterly installments of $0.2 million due
September 30, 2003 through December 31, 2006, three consecutive equal quarterly
installments of $17.8 million due March 31, 2007 through September 30, 2007 and
a final payment of $17.8 million due at maturity.
At June 30, 2003, one irrevocable standby letter of credit in the amount of
$0.6 million was outstanding as security for our casualty insurance program.
There were no letters of credit outstanding at December 31, 2002.
The ratio of current assets to current liabilities increased to 2.9 to 1 at
June 30, 2003 compared to 2.6 to 1 at December 31, 2002 due to reductions in
accounts payable and accrued liabilities and an increase in cash, partially
offset by reductions in accounts receivable and inventories. At June 30, 2003,
our total debt as a percentage of total capitalization increased to 22.3% from
21.9% at December 31, 2002 due to stock repurchases under our stock buy back
program.
Net cash provided by operating activities was $56,384 and $88,806 for the
six months ended June 30, 2003 and 2002, respectively. Net income was $9,792 and
$8,237, respectively. Non-cash charges for depreciation and amortization and
provisions for bad debt and inventory obsolescence in the aggregate provided
cash of $46,270 and $51,663 for the six months ended June 30, 2003 and 2002,
respectively. The provision for bad debt of $4,442 for the six months ended June
30, 2003 was higher than historical levels reflecting an increase in the rate of
delinquencies. For the six months ended June 30, 2003, the provision to write
down excess and obsolete inventory amounted to $3,795 and was lower than prior
year as substantially all of the value of analog equipment has been written down
to its nominal net realizable value. For the six months ended June 30, 2002, the
provision to write down excess and obsolete inventory amounted to $8,358.
Changes in the principal components of working capital required $2,886 of cash
in the six months ended June 30, 2003 and provided cash of $22,168 in the six
months ended June 30, 2002. Cash used by working capital changes in the six
months ended June 30, 2003 of $2,886 included a reduction in accounts payable
and other liabilities of $13 million primarily consisting of $4 million for 2002
incentive compensation programs and $8 million of income tax payments, partially
offset by $12 million of net reductions in accounts receivable resulting
primarily from collections.
We used $26,410 and $32,411 in investing activities for the six months
ended June 30, 2003 and 2002, respectively. Investment in rental equipment
assets totaled $17,374 and $24,700 for the six months ended June 30, 2003 and
2002, respectively. The decline in rental asset expenditures reflects product
cost improvements and a reduction in new facsimile rental equipment placements
resulting from continuing lower demand. Capital expenditures for property, plant
and equipment were $9,036 and $7,711 for the six months ended June 30, 2003 and
2002, respectively, of which the investment in ERP accounted for $5,512 and
$4,972, respectively.
Cash used in financing activities was $19,061 and $46,931 for the six
months ended June 30, 2003 and 2002, respectively. Cash used in financing
activities for the six months ended June 30, 2003 and 2002 reflects the
repurchase of 1,010,000 shares of our stock at a cost of $20,525 and 690,160
shares at a cost of $12,509, respectively. In March 2002, the Board of Directors
approved a $30 million stock buy back program. In October 2002, the Board of
Directors authorized the repurchase of an additional $28 million of our stock,
raising the total authorization to $58 million and, as of June 30, 2003, we have
accumulated approximately 2.9 million shares of treasury stock at a cost of $57
million.
During the six month period ended June 30, 2003, we had no material changes
in our contractual obligations and commitments. We had no material commitments
other than supply agreements with vendors that extend only to equipment supplies
and parts ordered under purchase orders; there are no long-term purchase
requirements. We will continue to make additional investments in facilities,
rental equipment, computer equipment and systems and our distribution network as
required to support our operations. We anticipate investments in rental
equipment assets for new and replacement programs in amounts consistent with the
recent past. We estimate that we will spend approximately $15 million to $20
million over the next six to nine months to continue to enhance our information
systems infrastructure and implement our ERP system.
Historically, our cash flow has been positive. We expect our cash flow to
remain positive although we do expect our cash generation to moderate compared
with the same period in the prior year as our ability to continue to provide
cash through changes in working capital is reduced. Our cash flow from
operations, together with borrowings under the Credit Agreement, are expected to
adequately finance our ordinary operating cash requirements and capital
expenditures for the foreseeable future. We expect to fund further expansion and
long-term growth primarily with cash flows from operations, borrowings under the
Credit Agreement and possible future sales of additional equity or debt
securities.
We are in the process of implementing Phase II of our ERP system,
consisting of order entry to cash collection, which will be completed in the
second half of 2003. If we were to experience unanticipated difficulties in the
order processing and billing
Page 22 of 29
functionality, timely customer billing and cash collection could be affected.
This would have an adverse affect on our financial position, results of
operations and cash flows.
RISK FACTORS THAT COULD CAUSE RESULTS TO VARY
Risk Factors Relating to Our Business
The document imaging and management industry is undergoing an evolution in
product offerings, moving toward the use of digital and color technology in a
multifunctional office environment. Our continued success will depend to a great
extent on our ability to respond to this rapidly changing environment by
developing new options and document imaging solutions for our customers.
The proliferation of e-mail, multifunctional products and other
technologies in the workplace may lead to a reduction in the use of traditional
copiers and fax machines. We cannot anticipate whether other technological
advancements will substantially minimize the need for our products in the
future.
Many of our rental customers have contract provisions allowing for
technology and product upgrades during the term of their contract. If we have
priced these upgrades improperly, this may have an adverse effect on our
profitability and future business. If many of our customers exercise their
contractual rights to upgrade to digital equipment, we may experience returns of
a large number of analog machines and a subsequent loss of book value on these
machines.
The document imaging solutions industry is very competitive; we may be
unable to compete favorably, causing us to lose sales to our competitors. Our
future success depends, in part, on our ability to deliver enhanced products,
service packages and business processes such as e-commerce capabilities, while
also offering competitive price levels.
We rely on outside suppliers to manufacture the products that we
distribute, many of whom are located in the Far East. In addition, two
manufacturers supply a significant portion of our new copier and multifunctional
equipment. If these manufacturers discontinue their products or are unable to
deliver us products in the future or if political changes, economic disruptions
or natural disasters occur where their production facilities are located, we
will be forced to identify an alternative supplier or suppliers for the affected
product. In addition, although we have worked with our suppliers and freight
forwarders to mitigate the potential impacts of an outbreak of infectious
disease affecting our supply chain, should our manufacturers become affected by
epidemics of infectious diseases, including the recent outbreak of severe acute
respiratory syndrome, we could be forced to identify an alternative supplier or
suppliers for the affected product. Although we are confident that we can
identify alternate sources of supply, we may not be successful in doing so. Even
if we are successful, the replacement product may be more expensive or may lack
certain features of the discontinued product and we may experience some delay in
obtaining the product. Other events that disrupt the shipment to or receipt of
ocean freight at U.S. ports, such as labor unrest, war or terrorist activity
could delay, prevent or add substantial cost to our receipt of such products.
Any of these events would cause disruption to our customers and could have an
adverse effect on our business.
Much of our international business is transacted in local currency.
Currently, approximately 20% of our total product purchases, based on costs, are
denominated in yen. The majority of our remaining product purchases are
denominated in U.S. dollars and are produced by Japanese suppliers in
manufacturing facilities located in China. Currently, the exchange rate of the
Chinese renminbi and the U.S. dollar is fixed. If the Chinese government were to
revalue the Chinese renminbi and the nominal value of the renminbi rises, the
resultant impact on the exchange rate of the Chinese renminbi and the U.S.
dollar could have a negative impact on our product cost. We do not currently
utilize any form of derivative financial instruments to manage our exchange rate
risk. We manage our foreign exchange risk by attempting to pass through to our
customers any cost increases related to foreign currency exchange. However, no
assurance can be given that we will be successful in passing cost increases
through to our customers in the future.
Risk Factors Relating to Separating Our Company From Pitney Bowes
We have a limited history operating as an independent entity and may be
unable to make the changes necessary to operate successfully as a stand-alone
entity, or may incur greater costs as a stand-alone entity that may cause our
profitability to decline.
Prior to the Distribution, our business was operated by Pitney Bowes as a
division of its broader corporate organization, rather than as a separate
stand-alone entity. Pitney Bowes assisted us by providing corporate functions
such as legal, tax and information technology functions. Following the
Distribution, Pitney Bowes has no obligation to provide assistance to us other
than certain interim and transitional services. Because our business had not
previously been operated as a stand-alone entity, there can be no assurance that
we will be able to successfully implement the changes necessary to operate
independently or will not incur additional costs as a result of operating
independently. We are implementing an ERP system intended to replace the
Page 23 of 29
information technology ("IT") services provided by Pitney Bowes under the
transition services agreement. Due to unanticipated delays in implementation of
Phase II of the ERP system, we and Pitney Bowes have agreed to an extension
until December 31, 2003, of the transition services agreement as it relates to
IT related services. In January 2003, we received a favorable ruling from the
Internal Revenue Service indicating that the extension of the transition
services agreement as it relates to IT services, through December 2003, will not
affect the tax-free nature of the spin-off. Any failure to implement the
critical ERP applications appropriately by the given extension date would have a
material adverse affect on our financial position, results of operations and
cash flows.
Pitney Bowes has been and is expected to continue to be a significant
customer. For three months ended June 30, 2003 and 2002, revenues from Pitney
Bowes, exclusive of equipment sales to PBCC for lease to the end user, accounted
for approximately 9% and 8%, respectively, of our total revenue and for the six
months ended June 30, 2003 and 2002, accounted for approximately 8% and 9% of
our total revenue, respectively. However, no assurance can be given that Pitney
Bowes will continue to purchase our products and services.
In connection with the Distribution, Imagistics and Pitney Bowes entered
into a non-exclusive intellectual property agreement that allows us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. However, this agreement may be terminated if we or Pitney Bowes
elect to terminate the non-competition obligations contained in the distribution
agreement. In 2002, we began introducing new products under the "Imagistics"
brand name and we initiated a major brand awareness advertising campaign to
establish our new brand name. Brand name recognition is an important part of our
overall business strategy and we cannot assure you that customers will maintain
the same level of interest in our products when we can no longer use the Pitney
Bowes brand name.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Statements contained in this discussion and elsewhere in this report that
are not purely historical are forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, and are based on
management's beliefs, certain assumptions and current expectations. These
statements may be identified by their use of forward-looking terminology such as
the words "expects", "projects", "anticipates", "intends" and other similar
words. Such forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. The
forward-looking statements contained herein are made as of the date hereof and,
except as required by law, we do not undertake any obligation to update any
forward-looking statements, whether as a result of future events, new
information or otherwise.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and hedging relationships designated after June 30, 2003 and
all provisions should be applied prospectively. The provisions of SFAS No. 149
that relate to SFAS No. 133 implementation issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be applied
in accordance with their respective effective dates. Certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The adoption of SFAS No. 149 did not
have a material impact on our financial position, results of operations or cash
flows.
In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective for exit
and disposal activities initiated after December 31, 2002 and provides guidance
on the recognition and measurement of liabilities associated with disposal
activities. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No.
146 did not have a material impact on our financial position, results of
operations or cash flows.
In November 2002, the FASB Emerging Issues Task Force reached a consensus
on issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables" ("EITF 00-21"). EITF 00-21 applies to certain contractually
binding arrangements under which a company performs multiple revenue generating
activities and requires that all companies account for each element within an
arrangement with multiple deliverables as separate units of accounting if (a)
the delivered item has value on a stand-alone basis, (b) there is objective and
reliable evidence of fair value and (c) the amount of the total arrangement
consideration is fixed or determinable. EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
adoption of EITF 00-21 did not have a material impact on our financial position,
results of operations or cash flows.
Page 24 of 29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain exposures to market risk related to changes in interest
rates, foreign currency exchange rates and commodities. There have been no
material changes in market risk since the filing of our Annual Report on Form
10-K for the fiscal year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as described in Exchange Act Rule 13a-15. In conducting the
evaluation, such officers noted that we continued to be reliant on certain
Pitney Bowes information systems for the generation of financial information.
Based upon our existing internal controls, such officers' knowledge of Pitney
Bowes' systems and internal controls and a review of Pitney Bowes' Exchange Act
filings and related certifications, the Chief Executive Officer and the Chief
Financial Officer have concluded that the information generated by the Pitney
Bowes information systems is subject to adequate controls. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC filings
relating to our Company (including our consolidated subsidiary).
There were no significant changes in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting subsequent to the date of
such evaluation.
Page 25 of 29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we have been party
to occasional lawsuits relating to our business. These may involve litigation or
other claims by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
trademark, patent and other intellectual property matters, equipment, service or
payment disputes with customers, bankruptcy preference claims and disputes with
employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
In May 2003, we entered into a settlement agreement with respect to the
previously reported trademark litigation filed in October 2002 by Imagetec,
L.P., which resolved the action in its entirety. The resolution of this
litigation did not have a material impact on our financial position, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on May 13, 2003, 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 2006 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
------------------------ ---------------- ----------------
Thelma R. Albright 14,223,296 204,434
Ira D. Hall 14,222,022 205,708
Other directors include T. Kevin Dunnigan and James A. Thomas, whose
terms of office expire in 2004, and Marc C. Breslawsky and Craig R. Smith, whose
terms of office expire in 2005.
A vote was taken on the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as our auditors for the fiscal year ending December
31, 2003. The aggregate numbers of shares of common stock voted on this proposal
in person or by proxy were as follows:
FOR AGAINST ABSTAIN
------------------------ ---------------- ----------------
14,064,066 347,657 16,007
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 April 14, 2003, filed with the Securities and Exchange
Commission pursuant to Section 14 (a) of the Securities Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
Page 26 of 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation (3)
3.2 Amended and Restated Bylaws (1)
3.3 Certificate of Designation of Series A Junior Participating Preferred Stock, dated August 1, 2002 (6)
4.1 Form of Imagistics International Inc. Common Stock Certificate (1)
10.1 Tax Separation Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.2 Transition Services Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.3 Distribution Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.4 Intellectual Property Agreement between Pitney Bowes Inc. and Imagistics International Inc. (3)
10.5 Reseller Agreement between Pitney Bowes Management Services and Imagistics International Inc. (3)
10.6 Reseller Agreement between Pitney Bowes of Canada and Imagistics International Inc. (3)
10.7 Vendor Financing Agreement between Pitney Bowes Credit Corporation and Imagistics International Inc. (3)
10.8 Form of Sublease Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.9 Form of Sublease and License Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.10 Form of Assignment and Novation Agreement between Pitney Bowes Inc. and Imagistics International Inc. (2)
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky (1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak (1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce
Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as Administrative Agent (3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe Trust Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc C. Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and Joseph D. Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and Christine B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John C. Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris C. Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark S. Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and Nathaniel M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and Joseph W. Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
10.28 Amendment No. 2 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (5)
10.29 First Amendment to Imagistics International Inc. 2001 Stock Plan (6)
10.30 First Amendment to Rights Agreement between Imagistics International Inc. and EquiServe Trust Company,
N.A. (6)
10.31 Amendment No. 3 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (7)
10.32 Amendment No. 1 to Transition Services Agreement between Pitney Bowes Inc. and Imagistics International
Inc. (8)
10.33 Amendment No. 4 to Credit Agreement between Imagistics International Inc. and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (9)
31.1 Certification of 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.
------------------------
Page 27 of 29
(1) Incorporated by reference to Amendment No. 1 to the Registrant's Form 10 filed July 13, 2001.
(2) Incorporated by reference to Amendment No. 2 to the Registrant's Form 10 filed August 13, 2001.
(3) Incorporated by reference to the Registrant's Form 10-K filed March 28, 2002.
(4) Incorporated by reference to the Registrant's Form 10-Q filed May 14, 2002.
(5) Incorporated by reference to the Registrant's Form 8-K dated July 23, 2002.
(6) Incorporated by reference to the Registrant's Form 10-Q filed August 14, 2002.
(7) Incorporated by reference to the Registrant's Form 8-K dated March 7, 2003.
(8) Incorporated by reference to the Registrant's Form 10-K dated March 28, 2003.
(9) Incorporated by reference to the Registrant's Form 8-K dated May 16, 2003.
(b) Reports on Form 8-K.
On May 8, 2003, we filed a Current Report on Form 8-K, under Item 9
furnished pursuant to Item 12, which included a copy of our press release dated
May 8, 2003 in which we announced our earnings for the fiscal quarter ended
March 31, 2003 and certain additional matters.
On May 21, 2003, we filed a Current Report on Form 8-K, reporting under
Item 5 thereof, the Fourth Amendment to the Credit Agreement, dated as of May
16, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2003 Imagistics International Inc.
---------------------------------
(Registrant)
By: /s/ Joseph D. Skrzypczak
---------------------------------
Name: Joseph D. Skrzypczak
Title: Chief Financial Officer
and Authorized Signatory
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