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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 1-16449
IMAGISTICS INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1611068
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
100 Oakview Drive
Trumbull, Connecticut 06611
(Address of Principal Executive Offices) (Zip Code)
(203) 365-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of Imagistics Common Stock, par value $0.01 per share,
outstanding as of April 30, 2005: 16,335,432
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IMAGISTICS INTERNATIONAL INC.
EXPLANATORY NOTE
The Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment" on January 1, 2005. The Company elected to adopt the modified
retrospective application method as provided by SFAS No. 123(R) and accordingly,
financial statement amounts for all prior periods have been restated.
This Form 10-Q/A (Amendment No. 1) amends Imagistics International Inc.'s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005. The
purpose for this amendment to the Company's Quarterly Report on Form 10-Q is to
restate share-based compensation expense for the three months ended March 31,
2005 to correct an error in the calculation of share-based compensation expense.
The error relates to the impact of the application of the non-substantive
vesting condition in accordance with SFAS No. 123(R), for share-based payment
awards issued to retirement eligible employees as announced in the Company's
Current Report on Form 8-K, filed on June 17, 2005.
Accordingly, changes in this Form 10-Q/A amend and restate the financial
information and disclosures related to Items 1 and 2 of Part I of the original
Form 10-Q, only for the effects of share-based compensation expense. It also
amends the previously filed Form 10-Q to include in Part 1, Item 4, "Controls
and Procedures," the revised conclusion of the Chief Executive Officer and Chief
Financial Officer regarding the effectiveness of the Company's disclosure
controls and procedures as of March 31, 2005. All other financial information
and disclosures remain unchanged.
Subsequent to the issuance of the March 31, 2005 financial statements, the
Company discovered an error in the calculation of share-based compensation
expense in accordance with SFAS No. 123(R) related to the recognition of
share-based compensation expense for awards subject to acceleration of vesting
for retirement eligible employees. Prior to the adoption of SFAS No. 123(R) on
January 1, 2005, the Company accounted for share-based compensation expense
under the recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and followed
the accepted practice of recognizing share-based compensation expense over the
explicit vesting period. SFAS No. 123(R) requires the immediate recognition at
the grant date of the full share-based compensation expense for grants to
retirement eligible employees, as the explicit vesting period is
non-substantive. Upon adoption of SFAS No. 123(R) on January 1, 2005, the
Company continued to follow the practice of recognizing share-based compensation
expense over the explicit service period in error. The error resulted in a $1.1
million understatement of share-based compensation expense in the quarterly
period ended March 31, 2005. The effect of this restatement is to accelerate the
non-cash share-based compensation expense of grants to retirement eligible
employees in January 2005 to the first quarter of 2005 rather than recognizing
the share-based compensation expense over the explicit three-year vesting
period. As a result, income before income taxes was reduced by $1.1 million, net
income was reduced by $0.6 million and both basic and diluted earnings per share
were reduced by $0.04 for the quarterly period ended March 31, 2005. See Note 2
of the "Notes to Consolidated Financial Statements" included in Part 1, Item 1
herein for a comparison of all restated amounts to previously filed amounts.
2
IMAGISTICS INTERNATIONAL INC.
Table of Contents
PART 1 - FINANCIAL INFORMATION (Restated)........................................................................... 4
ITEM 1. FINANCIAL STATEMENTS (Restated)............................................................................ 4
Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (Unaudited)........... 4
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 (Unaudited)......................... 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (Unaudited)....... 6
Notes to Consolidated Financial Statements................................................................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Restated)................................................................................. 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................................. 28
ITEM 4. CONTROLS AND PROCEDURES (Restated)......................................................................... 28
PART II -OTHER INFORMATION.......................................................................................... 30
ITEM 1. LEGAL PROCEEDINGS.......................................................................................... 30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS................................................ 30
ITEM 6. EXHIBITS................................................................................................... 30
SIGNATURES.......................................................................................................... 33
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
For the three months ended
March 31,
----------------------------
(Restated)
2005 2004
----------- -----------
Revenue:
Sales $ 72,860 $ 82,555
Rentals 47,585 54,411
Support services 21,676 21,356
----------- -----------
Total revenue 142,121 158,322
Cost of sales 42,308 48,946
Cost of rentals 14,231 15,790
Selling, service and administrative expenses 81,859 83,555
----------- -----------
Operating income 3,723 10,031
Interest expense 1,128 935
----------- -----------
Income before income taxes 2,595 9,096
Provision for income taxes 1,087 3,912
----------- -----------
Net income $ 1,508 $ 5,184
=========== ===========
Earnings per share:
Basic $ 0.09 $ 0.31
=========== ===========
Diluted $ 0.09 $ 0.30
=========== ===========
Shares used in computing earnings per share:
Basic 16,134,324 16,385,689
=========== ===========
Diluted 16,577,200 17,111,771
=========== ===========
Prior period restated to include the impact of the modified retrospective
application method of share-based compensation expense (see Note 2 for details).
See Notes to Consolidated Financial Statements
4
IMAGISTICS INTERNATIONAL INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
(Restated)
March 31, December 31,
2005 2004
----------- ------------
Assets
Current assets:
Cash $ 13,397 $ 12,800
Accounts receivable, net of allowances of $12,265 and $14,991
at March 31, 2005 and December 31, 2004, respectively 99,701 105,680
Accrued billings 30,786 29,032
Inventories 88,962 94,747
Current deferred taxes on income 22,910 24,827
Other current assets and prepaid expenses 5,992 6,550
----------- -----------
Total current assets 261,748 273,636
Property, plant and equipment, net 59,505 60,326
Rental equipment, net 60,086 62,824
Goodwill 66,305 66,305
Other assets 4,005 4,445
----------- -----------
Total assets $ 451,649 $ 467,536
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 545 $ 545
Accounts payable and accrued liabilities 56,862 80,340
Advance billings 14,244 14,808
----------- -----------
Total current liabilities 71,651 95,693
Long-term debt 79,223 70,359
Deferred taxes on income 16,276 15,188
Other liabilities 1,253 2,999
----------- -----------
Total liabilities 168,403 184,239
Commitments and contingencies (see Note 8)
Stockholders' equity:
Preferred stock ($1.00 par value; 10,000,000 shares authorized, none issued) -- --
Common stock ($0.01 par value; 150,000,000 shares authorized, 20,162,065 and
20,008,325 issued at March 31, 2005 and December 31, 2004, respectively) 202 200
Additional paid-in-capital 320,197 315,724
Retained earnings 51,563 50,055
Treasury stock, at cost (3,846,161 and 3,703,065 shares at
March 31, 2005 and December 31, 2004, respectively) (90,298) (85,620)
Unearned compensation (1,120) (634)
Accumulated other comprehensive income 2,702 3,572
----------- -----------
Total stockholders' equity 283,246 283,297
----------- -----------
Total liabilities and stockholders' equity $ 451,649 $ 467,536
=========== ===========
Prior period restated to include the impact of the modified retrospective
application method of share-based compensation expense (see Note 2 for details).
See Notes to Consolidated Financial Statements
5
IMAGISTICS INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
For the three months ended
March 31,
-------------------------------
(Restated)
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 1,508 $ 5,184
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,149 17,083
Provision for bad debt 1,983 2,380
Provision for inventory obsolescence 1,372 1,368
Share-based compensation expense 756 988
Excess tax benefits from stock-based compensation (556) (537)
Deferred taxes on income 3,006 (2,951)
Non-cash restructuring impairment charges 476 --
Change in assets and liabilities, net of acquisitions:
Accounts receivable 3,996 (13,706)
Accrued billings (1,754) (1,310)
Inventories 5,566 1,508
Other current assets and prepaid expenses 559 (1,023)
Accounts payable and accrued liabilities (24,200) (13,097)
Advance billings (564) (1,271)
Other, net (2,347) 964
------------ ------------
Net cash provided by (used in) operating activities 5,950 (4,420)
Cash flows from investing activities:
Expenditures for rental equipment assets (9,421) (9,776)
Expenditures for property, plant and equipment (2,095) (2,791)
Acquistions, net of cash acquired -- (3,806)
------------ ------------
Net cash used in investing activities (11,516) (16,373)
Cash flows from financing activities:
Exercises of stock options, including sales
under employee stock purchase plan 1,580 1,056
Excess tax benefits from stock-based compensation 556 537
Purchases of treasury stock (4,683) (6,270)
Repayments under term loan (137) (136)
Net borrowings under revolving credit facility 9,000 15,000
------------ ------------
Net cash provided by financing activities 6,316 10,187
------------ ------------
Effect of exchange rates on cash (153) 189
Increase (decrease) in cash 597 (10,417)
Cash at beginning of period 12,800 22,938
------------ ------------
Cash at end of period $ 13,397 $ 12,521
============ ============
Prior period restated to include the impact of the modified retrospective
application method of share-based compensation expense (see Note 2 for details).
See Notes to Consolidated Financial Statements
6
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts and as otherwise indicated)
(Unaudited)
1. Description of the Business
Imagistics International Inc. (the "Company" or "Imagistics") is an
independent direct sales, service and marketing organization offering business
document imaging and management solutions, including copiers, multifunctional
products, often referred to as MFPs, and facsimile machines, in the United
States, Canada and United Kingdom. The Company's primary customers include large
corporate and government entities and mid-size and regional businesses. MFPs
offer the multiple functionality of printing, copying, scanning and faxing in a
single unit. In addition, the Company offers a range of document imaging options
including digital, analog, color and/or networked products and systems.
On December 11, 2000, the board of directors of Pitney Bowes Inc. ("Pitney
Bowes") approved the spin-off of substantially all of the U.S. and U.K.
operations of its office systems businesses to its common stockholders as an
independent, publicly traded company. On December 3, 2001, Imagistics was spun
off from Pitney Bowes pursuant to a contribution by Pitney Bowes of
substantially all of Pitney Bowes' United States office systems businesses to
the Company and a distribution of the stock of the Company to common
stockholders of Pitney Bowes based on a distribution ratio of 1 share of
Imagistics common stock for every 12.5 shares of Pitney Bowes common stock held
at the close of business on November 19, 2001 (the "Distribution").
2. Summary of Significant Accounting Policies
Basis of presentation
The unaudited interim consolidated financial statements of the Company
have been prepared in accordance with the rules and regulations of the United
States Securities and Exchange Commission (the "SEC") and do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of the management of the Company, all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of results of
operations, financial position and cash flows as of and for the periods
presented have been included. Certain previously reported amounts have been
reclassified to conform to the current year presentation.
The Company believes that the disclosures contained in the unaudited
interim consolidated financial statements are adequate to keep the information
presented from being misleading. The results for the three months ended March
31, 2005 are not necessarily indicative of the results for the full year. These
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K for the year ended
December 31, 2004 filed with the SEC on March 10, 2005.
Restatement of quarterly financial statements
Subsequent to the issuance of the March 31, 2005 financial statements, the
Company discovered an error in the calculation of share-based compensation
expense in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment," related to the recognition of share-based compensation expense for
awards subject to acceleration of vesting for retirement eligible employees.
Prior to the adoption of SFAS No. 123(R) on January 1, 2005, the Company
accounted for share-based compensation expense under the recognition and
measurement provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and followed the accepted practice of
recognizing share-based compensation expense over the explicit vesting period.
SFAS No. 123(R) requires the immediate recognition at the grant date of the full
share-based compensation expense for grants to retirement eligible employees, as
the explicit vesting period is non-substantive. Upon adoption of SFAS No. 123(R)
on January 1, 2005, the Company continued to follow the practice of recognizing
share-based compensation expense over the explicit service period in error. The
error resulted in a $1.1 million understatement of share-based compensation
expense in the quarterly period ended March 31, 2005. The effect of this
restatement is to accelerate the non-cash share-based compensation expense of
grants to retirement eligible employees in January 2005 to the first quarter of
2005 rather than recognizing the share-based compensation expense over the
explicit three-year vesting period. The restatement reflects adjustments, which
are corrections of errors in the application of U.S. generally accepted
accounting principles (GAAP) related to the early adoption of SFAS No. 123(R)
for the non-substantive vesting period condition for retirement eligible
employees.
7
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
The following table sets forth the effects of the restatement on the line
items within the Company's previously reported consolidated financial statements
for the three months ended March 31, 2005:
For the three months ended
March 31, 2005
-----------------------------
As
previously
Restated reported
----------- -----------
Consolidated Statement of Income:
Selling, service and administrative expenses $ 81,859 $ 80,785
Operating income $ 3,723 $ 4,797
Income before income taxes $ 2,595 $ 3,669
Provision for income taxes $ 1,087 $ 1,537
Net income $ 1,508 $ 2,132
Earnings per share:
Basic $ 0.09 $ 0.13
Diluted $ 0.09 $ 0.13
Shares used in computing earnings per share:
Diluted 16,577,200 16,547,087
Consolidated Balance Sheet:
Accounts payable and accrued liabilities $ 56,862 $ 57,312
Total current liabilities $ 71,651 $ 72,101
Total liabilities $ 168,403 $ 168,853
Additional paid-in-capital $ 320,197 $ 319,983
Retained earnings $ 51,563 $ 52,187
Unearned compensation $ (1,120) $ (1,980)
Total stockholders' equity $ 283,246 $ 282,796
Consolidated Statement of Cash Flows:
Net income $ 1,508 $ 2,132
Depreciation and amortization $ 16,149 $ 15,289
Share-based compensation expense $ 756 $ 542
Accounts payable and accrued liabilities $ (24,200) $ (23,750)
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. The Company
records a provision for estimated sales returns and other allowances based upon
historical experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless the Company receives
prior notice of cancellation. Under the terms of rental contracts, the Company
bills its customers a flat
8
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
periodic charge and/or a usage-based fee. Revenues related to these contracts
are recognized each month as earned, either using the straight-line method or
based upon usage, as applicable. The Company records a provision for estimated
usage adjustments on rental contracts based upon historical experience.
Support services contracts, which often include supplies, are generally
for an initial term of one year with automatic renewals unless the Company
receives prior notice of cancellation. Under the terms of support services
contracts, the Company bills its customers either a flat periodic charge and/or
a usage-based fee. Revenues related to these contracts are recognized each month
as earned, either using the straight-line method or based upon usage, as
applicable. The Company records a provision for estimated usage adjustments on
service contracts based upon historical experience.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
The Company enters into arrangements that include multiple deliverables,
which typically consist of the sale of equipment with a support services
contract. The Company accounts for each element within an arrangement with
multiple deliverables as separate units of accounting. Revenue is allocated to
each unit of accounting based on the residual method, which requires the
allocation of the revenue based on the fair value of the undelivered items. Fair
value of support services is primarily determined by reference to renewal
pricing of support services contracts when sold on a stand-alone basis.
Accounts receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that the Company believes are
uncollectible. The Company's estimate of losses is based on prior product
returns and invoice adjustment experience as well as prior collection experience
and includes evaluating the credit worthiness of the Company's customers,
analyzing historical bad debt write-offs and reviewing the aging of the
receivables. The Company's allowance for doubtful accounts includes amounts for
specific accounts that it believes are uncollectible, as well as amounts that
have been computed by applying certain percentages based on historic loss
trends, to certain accounts receivable aging categories and estimated amounts
relating to delinquencies associated with the changes in the Company's billing
policies and invoice format resulting from the implementation of the Company's
enterprise resource planning ("ERP") system.
Inventory valuation
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demands.
Rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service prior to October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
Share-based employee compensation
The Company adopted SFAS No. 123(R), "Share-Based Payment" on January 1,
2005. SFAS No. 123(R) establishes the accounting for share-based compensation
and requires companies to measure and recognize compensation expense for all
share-based payments at fair value. Accordingly, share-based compensation cost
is measured at grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period. The Company elected to
adopt the modified retrospective application method as provided by SFAS No.
123(R) and financial statement amounts for all prior years for which SFAS No.
123, "Accounting for Stock-Based Compensation" was effective have been restated
to give effect to the fair value-based method of accounting under SFAS No.
123(R).
9
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Prior to the adoption of SFAS No. 123(R), the Company accounted for its
share-based employee compensation plans under the recognition and measurement
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees," and related interpretations.
Share-based compensation expense for stock option grants was $0.8 million
and amortization of restricted share grants was $1.1 million for the three
months ended March 31, 2005. Share-based compensation expense for stock option
grants was $1.0 million and amortization of restricted share grants was $0.4
million for the three months ended March 31, 2004. As of March 31, 2005,
approximately $2.3 million of total unrecognized compensation costs related to
non-vested shares is expected to be recognized over a weighted average period of
approximately three years. These costs will be recognized over a three-year
period for employees that are not retirement eligible and over a shorter period
for those that are or become retirement eligible within the three-year vesting
period.
For the first quarter of 2004, the adoption of SFAS No. 123(R) resulted in
a reduction in income before income taxes of $1.0 million, a reduction in net
income of $0.6 million and a reduction in basic and diluted earnings per share
of $0.04.
The following table details the retrospective application method impact of
SFAS No. 123(R) on previously reported results:
As
previously
Restated reported
--------- ----------
For the three months ended March 31, 2004:
Operating income $ 10,031 $ 11,019
Income before income taxes $ 9,096 $ 10,084
Provision for income taxes $ 3,912 $ 4,337
Net income $ 5,184 $ 5,747
Earnings per share:
Basic $ 0.31 $ 0.35
Diluted $ 0.30 $ 0.34
Net cash used in operating activities $ (4,420) $ (3,694)
Net cash provided by financing activities $ 10,187 $ 9,650
For the year ended December 31, 2004:
Deferred taxes on income $ 15,188 $ 21,442
Total liabilities $ 184,239 $ 190,493
Additional paid-in-capital $ 315,724 $ 299,601
Retained earnings $ 50,055 $ 59,924
Total stockholders' equity $ 283,297 $ 277,043
Total liabilities and stockholders' equity $ 467,536 $ 467,536
The Company evaluated its valuation method and assumptions in connection
with SFAS No. 123(R). The Company determined that the use of a Black-Scholes
valuation method was appropriate, which is consistent with the Company's pro
forma disclosures under the fair value recognition provisions of SFAS No. 123.
The Company believes it has used appropriate assumptions in accordance with SFAS
No. 123(R) to estimate the fair value of its stock options and its employee
stock purchase plan in the first quarter of 2005.
Prior to the adoption of SFAS No. 123(R) on January 1, 2005, the Company
accounted for share-based compensation expense under the recognition and
measurement provisions of APB No. 25, "Accounting for Stock Issued to Employees"
and followed the accepted practice of recognizing share-based compensation
expense over the explicit vesting period. SFAS No. 123(R) requires the immediate
recognition at the grant date of the full share-based compensation expense for
grants to retirement eligible employees, as the explicit vesting period is
non-substantive. If the Company applied the non-substantive vesting period
condition to prior periods, compensation expense for the first quarter of 2004
would have amounted to $1.0 million compared with $1.4 million under the
recognition and measurement provisions of APB No. 25.
10
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
The following table illustrates the effect on net income and earnings per
share if the Company had applied the non-substantive vesting condition
requirements of SFAS No. 123(R) for the period ended March 31, 2004:
For the three months ended
March 31, 2004
--------------
Net income, as reported $ 5,184
Add: Stock-based compensation expense
included in net income, net of related tax effects 815
Deduct: Total stock-based compensation expense based on the
non-substantive vesting condition, net of related tax effects $ (587)
---------
Pro forma net income $ 5,412
=========
Basic earnings per share:
As reported $ 0.31
Pro forma $ 0.33
Diluted earnings per share:
As reported $ 0.30
Pro forma $ 0.32
The following table summarizes the Company's stock options outstanding and
exercisable as of March 31, 2005:
Options outstanding Options exercisable
---------------------------------------------------- ---------------------------------------------------
Weighted Weighted Weighted Weighted
average average Aggregate average average Aggregate
contractual exercise intrinsic contractual exercise intrinsic
Exercise Price Shares term price value Shares term price value
-------------- --------- ----------- -------- ----------- --------- ----------- -------- -----------
$6.89 - $13.46 90,261 4 $ 9.92 $ 2,257,468 90,261 7 $ 9.92 $ 2,257,468
$13.85 - $18.91 901,663 7 $ 14.19 18,704,845 884,722 7 $ 14.10 18,426,975
$19.48 - $28.81 234,104 8 $ 19.92 3,514,511 128,892 8 $ 19.72 1,961,071
$32.25 - $46.13 278,109 7 $ 33.36 566,033 7,777 9 $ 39.68 267
--------- ----------- --------- -----------
1,504,137 7 $ 18.37 $25,042,857 1,111,652 8 $ 14.59 $22,645,781
========= =========== ========= ===========
3. Supplemental Information
Inventories
Inventories consisted of the following at March 31, 2005 and December 31,
2004:
March 31, December 31,
2005 2004
----------- ------------
Finished products $ 48,914 $ 52,960
Supplies and service parts 40,048 41,787
----------- -----------
Total inventories $ 88,962 $ 94,747
=========== ===========
11
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Fixed assets and rental equipment assets
Fixed assets and rental equipment assets consisted of the following at
March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
----------- ------------
Land $ 1,356 $ 1,356
Buildings and leasehold improvements 12,013 12,282
Machinery and equipment 26,734 26,679
Computers and software 62,799 61,007
----------- -----------
Property, plant and equipment, gross 102,902 101,324
Accumulated depreciation (43,397) (40,998)
----------- -----------
Property, plant and equipment, net $ 59,505 $ 60,326
=========== ===========
Rental equipment, gross $ 296,579 $ 304,005
Accumulated depreciation (236,493) (241,181)
----------- -----------
Rental equipment, net $ 60,086 $ 62,824
=========== ===========
Depreciation and amortization expense was $15.0 million and $16.7 million
for the three months ended March 31, 2005 and 2004, respectively. Unamortized
software costs totaled $34.3 million as of March 31, 2005 and $33.5 million as
of December 31, 2004. Amortization expense on account of capitalized software
totaled $0.9 million for both the three months ended March 31, 2005 and 2004.
Current liabilities
Accounts payable and accrued liabilities consisted of the following at
March 31, 2005 and December 31, 2004:
(Restated)
March 31, December 31,
2005 2004
----------- ------------
Accounts payable $ 24,064 $ 42,118
Income taxes payable 447 3,682
Group medical insurance payable 3,898 4,844
Accrued compensation and benefits 5,888 8,756
Other non-income taxes payable 5,661 5,796
Other accrued liabilities 16,904 15,144
----------- -----------
Accounts payable and accrued liabilities $ 56,862 $ 80,340
=========== ===========
Comprehensive income
Comprehensive income consisted of the following for the three months ended
March 31, 2005 and 2004:
For the three months ended
March 31,
----------------------------
(Restated)
2005 2004
----------- -----------
Net income $ 1,508 $ 5,184
Translation adjustment (870) 357
----------- -----------
Comprehensive income $ 638 $ 5,541
=========== ===========
12
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Treasury stock
The following table summarizes the Company's treasury stock transactions:
Treasury stock
----------------------------
Shares Cost
----------- -----------
Balance at December 31, 2004 3,703,065 $ 85,620
Purchases under stock buy back program 143,364 4,683
Sales to employees under employee stock purchase plan (268) (5)
----------- -----------
Balance at March 31, 2005 3,846,161 $ 90,298
=========== ===========
Cash flow information
Cash paid for income taxes was $0.4 million and $0.6 million for the three
months ended March 31, 2005 and 2004, respectively. Cash paid for interest was
$0.9 million and $0.7 million for the three months ended March 31, 2005 and
2004, respectively.
4. Business Segment Information
The Company operates in two reportable segments based on geographic area:
North America and the United Kingdom. Revenues are attributed to geographic
regions based on where the revenues are derived.
For the three months ended
March 31,
---------------------------
2005 2004
----------- -----------
Revenues:
North America $ 136,526 $ 152,633
United Kingdom 5,595 5,689
----------- -----------
Total revenues $ 142,121 $ 158,322
=========== ===========
For the three months ended
March 31,
---------------------------
(Restated)
2005 2004
----------- -----------
Income before income taxes:
North America $ 1,755 $ 8,045
United Kingdom 840 1,051
----------- -----------
Total income before income taxes $ 2,595 $ 9,096
=========== ===========
Revenues from Pitney Bowes, substantially all of which are generated in
the North America segment, consisted of the following for the three months ended
March 31, 2005 and 2004:
For the three months ended
March 31,
---------------------------
2005 2004
----------- -----------
Revenues from Pitney Bowes:
Pitney Bowes of Canada $ 2,085 $ 10,143
Other subsidiaries of Pitney Bowes 3,326 5,407
----------- -----------
Sub-total 5,411 15,550
Pitney Bowes Credit Corporation 21,122 19,648
----------- -----------
Total $ 26,533 $ 35,198
=========== ===========
13
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 show identifiable long-lived assets and total assets
for each reportable segment at March 31, 2005 and December 31, 2004:
March 31, December 31,
2005 2004
------------ ------------
Identifiable long-lived assets:
North America $ 187,042 $ 190,926
United Kingdom 2,859 2,974
------------ ------------
Total identifiable long-lived assets $ 189,901 $ 193,900
============ ============
Total assets:
North America $ 433,529 $ 450,898
United Kingdom 18,120 16,638
------------ ------------
Total assets $ 451,649 $ 467,536
============ ============
Identifiable long-lived assets in North America included goodwill of $66.3
million at March 31, 2005 and December 31, 2004.
Concentrations
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers and relatively small account
balances within the majority of the Company's customer base and their dispersion
across different businesses. The Company periodically evaluates the financial
strength of its customers and believes that its credit risk exposure is limited.
Most of the Company's product purchases are from overseas vendors, the
majority of which are from a limited number of Japanese suppliers who operate
manufacturing facilities in Asia. Although the Company currently sources
products from a number of manufacturers throughout the world, a significant
portion of new copier/MFP equipment is currently obtained from four Japanese
suppliers. If these suppliers were unable to deliver products for a significant
period of time, the Company would be required to find replacement products from
an alternative supplier or suppliers, which may not be available on a timely or
cost effective basis. The Company's operating results could be adversely
affected if a significant supplier was unable to deliver sufficient product.
5. Restructuring Charges
On March 31, 2005, the Company announced the closing of its centralized
National Remanufacturing Center in Milford, Connecticut to its employees and
discontinued its remanufactured copier product line. The restructuring plan was
a result of the industry shift to digital technology, which resulted in a
decrease in customer demand for remanufactured product. The Company's analysis
of the marketplace confirmed that the customer demand for remanufactured copiers
was in a steady state of decline. The Company will continue to recondition and
refurbish digital products at its regional distribution centers. In accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," the Company recorded a liability in the first quarter of 2005 for
the total estimated costs associated with the exit activity. Total restructuring
charges as a result of this activity amounted to $1.8 million, which included
$1.1 million in inventory write-offs, $0.4 million in asset impairment charges,
$0.2 million in severance charges representing termination benefits for the
staff reduction of nineteen employees and $0.1 million in fixed asset disposals.
The inventory write-off charges in the amount of $1.1 million have been
classified in cost of sales and the remaining charges amounting to $0.7 million
have been classified in selling, service and administrative expenses in the
accompanying Income Statement. The Company anticipates that it will complete the
closing of the remanufacturing center in the second quarter of 2005. The
restructuring activity is attributable to the Company's North America geographic
segment.
14
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
6. Earnings Per Share Calculation
Basic earnings per share was calculated by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the applicable period. Diluted earnings per share was
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding plus all dilutive common
stock equivalents outstanding during the applicable period. The calculation of
diluted earnings per share did not include shares underlying approximately
26,534 and 7,300 options for the three months ended March 31, 2005 and 2004,
respectively, since they were antidilutive for the periods presented.
A reconciliation of the basic and diluted earnings per share computation
is as follows:
For the three months ended
March 31,
-----------------------------
(Restated)
2005 2004
----------- -----------
Net income available to common stockholders $ 1,508 $ 5,184
=========== ===========
Weighted average common shares for basic earnings per share 16,134,324 16,385,689
Add: dilutive effect of restricted stock 44,336 211,994
Add: dilutive effect of stock options 398,540 514,088
----------- -----------
Weighted average common shares and equivalents
for diluted earnings per share 16,577,200 17,111,771
=========== ===========
Basic earnings per share $ 0.09 $ 0.31
Diluted earnings per share $ 0.09 $ 0.30
7. Goodwill and Goodwill Amortization
The Company accounts for goodwill in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets," which requires that goodwill and certain
other intangible assets having indefinite lives no longer be amortized to
earnings, but instead be tested for impairment annually and on an interim basis
if events or changes in circumstances indicate that goodwill might be impaired.
The Company performed its annual test for impairment as of October 1, 2004 using
the discounted cash flow valuation method. There was no impairment to the value
of the Company's recorded goodwill. The carrying value of goodwill of $66.3
million as of March 31, 2005 is attributable to the North America geographic
segment.
8. Long-Term Debt
Long-term debt consisted of the following at March 31, 2005 and December
31, 2004:
March 31, December 31,
2005 2004
------------ ------------
Revolving Credit Facility $ 27,000 $ 18,000
Term Loan 52,768 52,904
Less: current maturities (545) (545)
------------ ------------
Total long-term debt $ 79,223 $ 70,359
============ ============
The Company is party to a Credit Agreement with a group of lenders (the
"Credit Agreement") that provides for secured borrowings and the issuance of
letters of credit in an aggregate amount not to exceed $195.0 million, comprised
of a $95.0 million Revolving Credit Facility (the "Revolving Credit Facility")
and a $100.0 million Term Loan (the "Term Loan").
The Company pledged substantially all of its assets plus 65% of the stock
of the Company's direct, wholly-owned subsidiaries as security for its
obligations under the Credit Agreement. Available borrowings and letter of
credit issuance under the Revolving Credit Facility are determined by a
borrowing base consisting of a percentage of our eligible accounts receivable,
inventory, rental assets and accrued and advance billings, less outstanding
borrowings under the Term Loan.
15
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio (total debt to EBITDA), as
well as other covenants, which, among other things, place limits on dividend
payments and capital expenditures.
During 2004, the Credit Agreement was amended (the "Fifth Amendment") to
increase the amount of the Company's stock permitted to be repurchased from
$78.0 million to $108.0 million, to increase the aggregate amount of acquisition
consideration payable for acquisitions from $30.0 million to $60.0 million and
to remove the requirement for annual borrowing base audits so long as $50.0
million or more of borrowings are available under the Credit Agreement and the
fixed charge ratio, as defined in the Fifth Amendment, is 2.0 or higher. In
addition, during 2004, the Credit Agreement was amended to reduce and fix the
Term Loan interest rate to LIBOR plus a margin of 1.25% or to the Bank of
America base lending rate plus a margin of 0.25. At March 31, 2005, the
Revolving Credit Facility interest rate was LIBOR plus a margin of 1.25% or the
Bank of America base lending rate plus a margin of 0.25%.
At March 31, 2005, $79.8 million of borrowings were outstanding under the
Credit Agreement, consisting of $27.0 million of borrowings under the Revolving
Credit Facility and $52.8 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $111.1 million. At March 31, 2005, the
weighted average interest rate was 4.27% on borrowings under the Revolving
Credit Facility and the interest rate was 3.82% on borrowings under the Term
Loan. Approximately $66.6 million of the Revolving Credit Facility was available
for borrowing at March 31, 2005. The Term Loan is payable in 7 consecutive equal
quarterly installments of $0.1 million due June 30, 2005 through December 31,
2006, three consecutive equal quarterly installments of $12.9 million due March
31, 2007 through September 30, 2007 and a final payment of $12.9 million due at
maturity.
At March 31, 2005 and December 31, 2004, one irrevocable standby letter of
credit in the amount of $1.4 million was outstanding as security for the
Company's casualty insurance program.
9. Commitments and Contingencies
Guarantees and indemnifications
The Company has applied the disclosure provisions of FASB Interpretation
("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others," to its
agreements that contain guarantee or indemnification clauses. FIN No. 45 expands
the disclosure provisions required by SFAS No. 5, "Accounting for
Contingencies," by requiring the guarantor to disclose certain types of
guarantees, even if the likelihood of requiring the guarantor's performance is
remote. The following is a description of the arrangements in which the Company
is a guarantor.
In connection with the Distribution, the Company entered into certain
agreements pursuant to which it may be obligated to indemnify Pitney Bowes with
respect to certain matters. The Company agreed to assume all liabilities
associated with the Company's business, and to indemnify Pitney Bowes for all
claims relating to the Company's business. These may be claims by or against
Pitney Bowes or the Company relating to, among other things, contractual rights
under vendor, insurance or other contracts, trademark, patent and other
intellectual property rights, equipment, service or payment disputes with
customers and disputes with employees.
The Company and Pitney Bowes entered into a tax separation agreement, which
governs the Company's and Pitney Bowes' respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. In addition, the tax separation agreement
generally obligated the Company not to enter into any transaction that would
adversely affect the tax-free nature of the Distribution for the two-year period
following the Distribution, and obligates the Company to indemnify Pitney Bowes
and affiliates to the extent that any action the Company takes or fails to take
gives rise to a tax liability with respect to the Distribution.
It is not possible to predict the maximum potential future payments under
these agreements. As of March 31, 2005, the Company has not paid any material
amounts pursuant to the above indemnifications other than expenses incurred in
connection with the defense and settlement of assumed claims asserted in
connection with the operation of the Company in the ordinary course of business.
The Company believes that if it were to incur a loss in any of these matters,
such loss would not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
16
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Legal matters
In connection with the Distribution, the Company agreed to assume all
liabilities associated with its business, and to indemnify Pitney Bowes for all
claims relating to its business. In the normal course of business, the Company
has been party to occasional lawsuits relating to the Company's business. These
may involve litigation or other claims by or against Pitney Bowes or the Company
relating to, among other things, contractual rights under vendor, insurance or
other contracts, trademark, patent and other intellectual property rights,
equipment, service or payment disputes with customers and disputes with
employees.
In connection with the Distribution, liabilities were transferred to the
Company for matters where Pitney Bowes was a plaintiff or a defendant in
lawsuits, relating to the business or products of the Company. The Company has
not recorded liabilities for loss contingencies related to these and other
subsequent proceedings since the ultimate resolutions of the legal matters
cannot be determined and a minimum cost or amount of loss cannot be reasonably
estimated. In the opinion of the Company's management, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on the Company's financial position, results of operations or cash flows.
10. Distribution Agreements
The Company and Pitney Bowes entered into a transition services agreement
that provided for Pitney Bowes to provide certain services to the Company for a
limited time following the Distribution. These services were provided at cost
and included information technology, computing, telecommunications, certain
accounting, field service of equipment and dispatch call center services. The
Company and Pitney Bowes had agreed to an extension until December 31, 2003, of
the transition services agreement as it related to information technology and
related services. Services provided under this extension were at negotiated
market rates. Except for field service of equipment, all of the services
provided by Pitney Bowes under these agreements have ceased in accordance with
the terms of the agreements.
The Company and Pitney Bowes entered into a one-year service agreement on
an arms-length basis relating to field service of equipment in certain remote
geographic locations not covered by the Company's direct service organization.
This agreement, the initial term of which expired on July 1, 2004, had been
extended under the same terms and conditions, through September 30, 2004.
Effective October 1, 2004, the Company and Pitney Bowes entered into a
three-year service agreement under similar terms and conditions. This agreement
expires on September 30, 2007. Services provided under this agreement are at
negotiated prices.
The Company paid Pitney Bowes $1.3 million for both the three months ended
March 31, 2005 and 2004, in connection with field service of equipment.
The Company also entered into certain other agreements covering
intellectual property, commercial relationships and leases and licensing
arrangements. The pricing terms of the products and services covered by the
other commercial agreements reflect negotiated prices.
The Company and Pitney Bowes entered into a tax separation agreement,
which governs the Company's and Pitney Bowes' respective rights,
responsibilities and obligations after the Distribution with respect to taxes
for the periods ending on or before the Distribution. In addition, the tax
separation agreement generally obligated the Company not to enter into any
transaction that would adversely affect the tax-free nature of the Distribution
for the two-year period following the Distribution, and obligates the Company to
indemnify Pitney Bowes and affiliates to the extent that any action the Company
takes or fails to take gives rise to a tax liability with respect to the
Distribution.
11. Acquisitions
Effective August 30, 2004, the Company acquired all of the stock and
business of an independent dealer of copier and multifunctional equipment and
related support services in Canada, to continue to expand the Company's
geographic sales and service capabilities. The aggregate purchase price was $2.4
million, of which $0.4 million was allocated to the net liabilities assumed at
the date of acquisition and $2.8 million was allocated to goodwill.
Effective June 15, 2004, the Company acquired substantially all of the
assets and business of an independent dealer of copier and multifunctional
equipment and related support services in the United States, to expand the
Company's geographic sales and service capabilities. The aggregate purchase
price was $7.4 million, consisting of $6.0 million cash paid at closing, $0.3
million payable 120 days from closing and four equal annual installments of $0.3
million payable June 15, 2005 through June 15, 2008. Of the aggregate purchase
price, $2.3 million was allocated to the assets acquired and liabilities assumed
at the date of acquisition and $5.1 million was allocated to intangible and
other assets, of which $3.8 million was allocated to goodwill.
17
IMAGISTICS INTERNATIONAL INC.
Notes to Consolidated Financial Statements - (continued)
Effective March 16, 2004, the Company acquired substantially all of the
assets and business of an independent dealer of copier and multifunctional
equipment and related support services in Canada, to continue to expand the
Company's geographic sales and service capabilities. The aggregate purchase
price was $4.4 million, consisting of $3.8 million cash paid at closing, $0.3
million payable 120 days from closing and $0.3 million payable 24 months after
closing. Of the aggregate purchase price, $0.6 million was allocated to the
assets acquired and liabilities assumed at the date of acquisition and $3.8
million was allocated to intangible and other assets, of which $3.5 million was
allocated to goodwill.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of the acquired businesses have been
included in the Company's consolidated financial statements from the respective
dates of acquisition. There were no acquisitions during the three months ended
March 31, 2005.
18
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, 2004 filed with the
United States Securities and Exchange Commission on March 10, 2005, as well as
the unaudited consolidated financial statements and notes thereto included
elsewhere in this Quarterly Report on Form 10-Q/A (Amendment No. 1). This
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors That Could Cause Results To Vary" and
"Special Note About Forward-Looking Statements" for a discussion of the
uncertainties, risks and assumptions associated with these forward-looking
statements. Our actual results could differ materially from those
forward-looking statements discussed in this section. For the purposes of the
following discussion, unless the context otherwise requires, "Imagistics
International Inc.," "Imagistics," "We" and "Our," refers to Imagistics
International Inc. and subsidiaries.
RESTATEMENT OF QUARTERLY FINANCIAL STATEMENTS
Subsequent to the issuance of our March 31, 2005 financial statements, we
discovered an error in the calculation of share-based compensation expense in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment,"
related to the recognition of share-based compensation expense for awards
subject to acceleration of vesting for retirement eligible employees. Prior to
the adoption of SFAS No. 123(R) on January 1, 2005, we accounted for share-based
compensation expense under the recognition and measurement provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and followed the accepted practice of recognizing share-based
compensation expense over the explicit vesting period. SFAS No. 123(R) requires
the immediate recognition at the grant date of the full share-based compensation
expense for grants to retirement eligible employees, as the explicit vesting
period is non-substantive. Upon adoption of SFAS No. 123(R) on January 1, 2005,
we continued to follow the practice of recognizing share-based compensation
expense over the explicit service period in error. The error resulted in a $1.1
million understatement of share-based compensation expense in the quarterly
period ended March 31, 2005. The effect of this restatement is to accelerate the
non-cash share-based compensation expense of grants to retirement eligible
employees in January 2005 to the first quarter of 2005 rather than recognizing
the share-based compensation expense over the explicit three-year vesting
period. As a result, income before income taxes was reduced by $1.1 million, net
income was reduced by $0.6 million and both basic and diluted earnings per share
were reduced by $0.04 for the quarterly period ended March 31, 2005. See Note 2
of the "Notes to Consolidated Financial Statements" included in Part 1, Item 1.
All applicable amounts in the Management's Discussion and Analysis of Financial
Condition and Results of Operations have been restated.
OVERVIEW
Imagistics International Inc. ("Imagistics" or the "Company") is an
independent direct sales, service and marketing organization offering business
document imaging and management solutions, including copiers, multifunctional
products, often referred to as MFPs, and facsimile machines, in the United
States, Canada and the United Kingdom. Our primary customers include large
corporate customers known as national accounts, government entities and mid-size
and regional businesses known as commercial accounts. MFPs offer the multiple
functionality of copying, printing, faxing, emailing and scanning in a single
unit. In addition, we offer a range of document imaging options including
digital, black and white, color and/or networked products, systems and
solutions.
Our strategic vision is to become the leading independent direct provider
of enterprise office imaging and document solutions by providing world-class
products and services with unparalleled customer support and satisfaction with a
focus on multiple location customers, thus building value for our shareholders,
customers and employees. Our strategic initiatives include:
o Maintaining and further strengthening major account relationships,
o Expanding our product offerings through our sourcing and
distribution relationships,
o Increasing outreach of our direct sales and service force to the
copier/MFP market,
o Focusing on customer needs and
o Pursuing opportunistic expansion and investments.
Our revenue is generated from three lines of business: copier/MFP,
facsimile and sales to Pitney Bowes of Canada. We report sales to Pitney Bowes
of Canada separately as it operates under a separate reseller agreement. The
principal evolution in our industry and business has been the transition to
networked digital copiers/MFPs, away from single-function stand-alone facsimile
machines and analog copiers. This transition has resulted in decreased demand
for and usage of single function facsimile equipment in the marketplace. In
addition, the industry is now migrating towards color and color-enabled
products. We have
19
responded to this market development by focusing our efforts on the growth
opportunities existing in our digital copier/MFP and color-enabled product line.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Revenue recognition
Revenue on equipment and supplies sales is recognized when contractual
obligations have been satisfied, title and risk of loss have been transferred to
the customer and collection of the resulting receivable is reasonably assured.
For copier/MFP equipment, the satisfaction of contractual obligations and the
passing of title and risk of loss to the customer occur upon the installation of
the equipment at the customer location. For facsimile equipment and facsimile
supplies, the satisfaction of contractual obligations and the passing of title
and risk of loss to the customer occur upon the delivery of the facsimile
equipment and the facsimile supplies to the customer location. We record a
provision for estimated sales returns and other allowances based upon historical
experience.
Rental contracts, which often include supplies, are generally for an
initial term of three years with automatic renewals unless we receive prior
notice of cancellation. Under the terms of rental contracts, we bill our
customers a flat periodic charge and/or a usage-based fee. Revenues related to
these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. We record a provision
for estimated usage adjustments on rental contracts based upon historical
experience.
Support services contracts, which often include supplies, are generally
for an initial term of one year with automatic renewals unless we receive prior
notice of cancellation. Under the terms of support services contracts, we bill
our customers either a flat periodic charge or a usage-based fee. Revenues
related to these contracts are recognized each month as earned, either using the
straight-line method or based upon usage, as applicable. We record a provision
for estimated usage adjustments on service contracts based upon historical
experience.
Certain rental and support services contracts provide for invoicing in
advance, generally quarterly. Revenue on contracts billed in advance is deferred
and recognized as earned revenue over the billed period. Certain rental and
support services contracts provide for invoicing in arrears, generally
quarterly. Revenue on contracts billed in arrears is accrued and recognized in
the period in which it is earned.
We enter into arrangements that include multiple deliverables, which
typically consist of the sale of equipment with a support services contract. We
account for each element within an arrangement with multiple deliverables as
separate units of accounting. Revenue is allocated to each unit of accounting
based on the residual method, which requires the allocation of the revenue based
on the fair value of the undelivered items. Fair value of support services is
primarily determined by reference to renewal pricing of support services
contracts when sold on a stand-alone basis.
Accounts receivable
Accounts receivable are stated at net realizable value by recording
allowances for those accounts receivable amounts that we believe are
uncollectible. Our estimate of losses is based on prior product returns and
invoice adjustment experience as well as prior collection experience and
includes evaluating the credit worthiness of our customers, analyzing historical
bad debt write-offs and reviewing the aging of the receivables. Our allowance
for doubtful accounts includes amounts for specific accounts that we believe are
uncollectible, as well as amounts that have been computed by applying certain
percentages based on historic loss trends, to certain accounts receivable aging
categories and estimated amounts relating to delinquencies associated with the
changes in our billing policies and invoice format resulting from the
implementation of our enterprise resource planning ("ERP") system.
Inventory valuation
Inventories are valued at the lower of cost or market. Provisions, when
required, are made to reduce excess and obsolete inventories to their estimated
net realizable values. Inventory provisions are calculated using management's
best estimates of inventory value based on the age of the inventory, quantities
on hand compared with historical and projected usage and current and anticipated
demands.
Rental equipment
Rental equipment is comprised of equipment on rent to customers and is
depreciated on the straight-line method over the estimated useful life of the
equipment. Copier/MFP equipment is depreciated over three years and facsimile
equipment placed in service prior to October 1, 2003 is depreciated over five
years. Facsimile equipment placed in service on or after October 1, 2003 is
depreciated over three years.
20
Share-based employee compensation
We adopted SFAS No. 123(R), "Share-Based Payment" on January 1, 2005. SFAS
No. 123(R) establishes the accounting for share-based compensation and requires
companies to measure and recognize compensation expense for all share-based
payments at fair value. Accordingly, share-based compensation cost is measured
at grant date, based on the fair value of the award, and is recognized as
expense over the requisite service period. We elected to adopt the modified
retrospective application method as provided by SFAS No. 123(R) and financial
statement amounts for all prior years for which SFAS No. 123, "Accounting for
Stock-Based Compensation" was effective have been restated to give effect to the
fair value-based method of accounting under SFAS No. 123(R).
Revenue
(Dollars in thousands)
The following table shows our revenue sources by segment for the periods
indicated.
For the three months ended
March 31,
------------------------------
2005 2004
------------ ------------
North America $ 136,526 $ 152,633
United Kingdom 5,595 5,689
------------ ------------
Total revenue $ 142,121 $ 158,322
============ ============
Our revenue is generated from three lines of business: copier/MFP,
facsimile and sales to Pitney Bowes of Canada. The following table shows our
revenue and growth rates versus the prior year by revenue type for our three
business lines, for the periods indicated. Sales to Pitney Bowes of Canada are
presented separately as it operates under a separate reseller agreement. There
is no rental or support service revenue associated with Pitney Bowes of Canada.
For the three months ended
March 31,
-----------------------------------------------
2005 2004
--------------------- ---------------------
Growth Growth
Revenue Rate Revenue Rate
---------- ------ ---------- -------
Sales
Copier/MFP products $ 56,287 8.1% $ 52,058 15.8%
Facsimile products 14,488 (28.8%) 20,354 (6.4%)
Pitney Bowes of Canada 2,085 (79.4%) 10,143 59.3%
---------- ----------
Total sales 72,860 (11.7%) 82,555 13.0%
Rentals
Copier/MFP products 27,569 5.4% 26,149 6.1%
Facsimile products 20,016 (29.2%) 28,262 (12.8%)
---------- ----------
Total rentals 47,585 (12.5%) 54,411 4.7%
Support services
Copier/MFP products 19,954 2.2% 19,523 5.8%
Facsimile products 1,722 (6.1%) 1,833 (21.8%)
---------- ----------
Total support services 21,676 1.5% 21,356 2.7%
---------- ----------
Total revenue $ 142,121 (10.2%) $ 158,322 4.9%
========== ==========
21
The following table shows our revenue and growth rates versus the prior
year for our three business lines, for the periods indicated. Sales to Pitney
Bowes of Canada are presented separately as it operates under a separate
reseller agreement.
For the three months ended
March 31,
------------------------------------------------
2005 2004
--------------------- ----------------------
Growth Growth
Revenue Rate Revenue Rate
---------- ------- ---------- --------
Revenue
Copier/MFP products $ 103,810 6.2% $ 97,730 11.0%
Facsimile products 36,226 (28.2%) 50,449 (10.7%)
---------- ----------
Revenue excluding
Pitney Bowes of Canada 140,036 (5.5%) 148,179 2.5%
Pitney Bowes of Canada 2,085 (79.4%) 10,143 59.3%
---------- ----------
Total revenue $ 142,121 (10.2%) $ 158,322 4.9%
========== ==========
Sales to Pitney Bowes of Canada are pursuant to a reseller agreement and
are at margins significantly below the typical margins on sales to our direct
customers. We expect to maintain a reseller agreement with Pitney Bowes of
Canada, however, we are unable to predict the future level of sales to Pitney
Bowes of Canada. Although revenue, excluding sales to Pitney Bowes of Canada
represents a non-GAAP financial measure, we believe it is useful to analyze
revenue excluding sales to Pitney Bowes of Canada in order to better evaluate
the effectiveness of our direct sales and marketing initiatives, including the
transition of our business from facsimile to copier/MFP products, and our
pricing policies.
Results of Operations
The following table shows our statement of income data, expressed as a
percentage of total revenue, for the periods indicated. The table also shows
cost of sales as a percentage of sales revenue, cost of rentals as a percentage
of rental revenue and our effective tax rate:
As a % of total revenue, except as noted
For the three months ended
March 31,
----------------------------------------
(Restated)
2005 2004
----------- -----------
Equipment sales 28% 28%
Supplies sales 23% 24%
----------- -----------
Total sales 51% 52%
Equipment rentals 34% 34%
Support services 15% 14%
----------- -----------
Total revenue 100% 100%
Cost of sales 29% 31%
Cost of rentals 10% 10%
Selling, service and administrative expenses 58% 53%
----------- -----------
Operating income 3% 6%
Interest expense 1% 1%
----------- -----------
Income before income taxes 2% 5%
Provision for income taxes 1% 2%
----------- -----------
Net income 1% 3%
=========== ===========
Cost of sales as a percentage of sales revenue 58.1% 59.3%
=========== ===========
Cost of rentals as a percentage of rental revenue 29.9% 29.0%
=========== ===========
Effective tax rate 41.9% 43.0%
=========== ===========
22
Three months ended March 31, 2005 and March 31, 2004
Revenue. For the three months ended March 31, 2005, total revenue of
$142.1 million declined 10.2% versus revenue of $158.3 million for the three
months ended March 31, 2004 reflecting lower facsimile revenue and lower sales
to Pitney Bowes of Canada. Excluding the impact of revenue attributable to sales
to Pitney Bowes of Canada, which operates under a reseller agreement, total
revenue for the first quarter declined 5.5% versus the prior year.
Equipment and supplies sales revenue of $72.9 million decreased 11.7% for
the three months ended March 31, 2005 from $82.6 million for the three months
ended March 31, 2004, reflecting lower sales to Pitney Bowes of Canada and lower
facsimile sales. Excluding the impact of sales to Pitney Bowes of Canada, total
sales revenue decreased 2.3% compared with the prior year. Copier/MFP sales
increased 8.1% primarily due to growth in low end digital and color
multifunctional product segments. Facsimile equipment and supplies sales
declined 28.8% compared with the prior year reflecting lower equipment and
supplies sales due to the acceleration in the continuing expected industry-wide
reduction in facsimile usage, and exacerbated by a large sale of facsimile
equipment in the first quarter of 2004.
Equipment rental revenue of $47.6 million for the three months ended March
31, 2005 declined 12.5% versus equipment rental revenue of $54.4 million for the
three months ended March 31, 2004, reflecting acceleration in the continued
expected decline in facsimile rental revenues, partially offset by an increase
in copier/MFP rental revenues resulting from our continuing copier/MFP marketing
focus. Rental revenue derived from our copier/MFP product line increased 5.4%
reflecting growth in the overall installed rental population and increased page
volumes. The growth in copier/MFP rentals in the first quarter of 2005 continued
to be impacted by the expiration of certain Federal government contracts not
renewed, as our current product offerings are manufactured in China and are not
authorized under applicable U.S. government purchase regulations. Rental revenue
from our facsimile product line declined 29.2% versus the prior year reflecting
acceleration of the expected decline in the rental installed base due in part to
the impact of rental to sale conversions coupled with lower per unit pricing.
Support services revenue for the three months ended March 31, 2005 of
$21.6 million, primarily derived from stand-alone service contracts, increased
1.5% versus support services revenue of $21.4 million for the three months ended
March 31, 2004, reflecting higher copier/MFP service revenue due to increased
page volumes and copier/MFP equipment sales growth, partially offset by lower
facsimile service revenue.
Cost of sales. Cost of sales was $42.3 million for the three months ended
March 31, 2005 compared with $48.9 million for the same period in 2004 and cost
of sales as a percentage of sales revenue decreased to 58.1% for the three
months ended March 31, 2005 from 59.3% for the three months ended March 31,
2004. The decrease in cost of sales was primarily due to a lower proportion of
sales to Pitney Bowes of Canada, which are at substantially lower gross margins
than direct sales, lower inventory obsolescence charges and lower copier/MFP
product cost, partially offset by the continuing shift in product mix toward
copier/MFP products, which have a higher cost as a percentage of sales revenue
than the facsimile product line. The decrease in cost of sales for the three
months ended March 31, 2005 was substantially offset by restructuring inventory
charges as a result of the closing of our National Remanufacturing Center (see
"Restructuring Charges" below), which increased cost of sales by $1.1 million or
1.6%.
Cost of rentals. Cost of rentals was $14.2 million for the three months
ended March 31, 2005 compared with $15.8 million for the three months ended
March 31, 2004 and cost of rentals as a percentage of rental revenue increased
0.9 percentage points to 29.9% for the three months ended March 31, 2005 from
29.0% for the three months ended March 31, 2004. This slight increase was due to
the continuing shift in product revenue mix from facsimile to copier/MFP product
rentals, which have a higher cost as a percentage of rental revenue than
facsimile machines.
Selling, service and administrative expenses. Selling, service and
administrative expenses of $81.9 million were 57.6% of total revenue for the
three months ended March 31, 2005 compared with $83.6 million, or 52.8% of total
revenue for the three months ended March 31, 2004. Selling, service and
administrative expenses decreased versus the prior year primarily resulting from
lower ERP-implementation and related administrative support costs and lower
compensation and benefit expenses relating to reduced headcount. This was
partially offset by higher operating expenses associated with direct
distribution expansion and a higher proportion of ERP costs expensed versus the
prior year. In addition, selling, service and administrative expenses for the
three months ended March 31, 2005 included $0.7 million in restructuring charges
as a result of the closing of our National Remanufacturing Center (see
"Restructuring Charges" below) and $1.8 million in severance charges resulting
from cost reduction actions due to a reduction in staff of approximately 100
employees in the first quarter of 2005, which increased selling, service and
administrative expenses by 3.3%.
Field sales and service operating expenses are included in selling,
service and administrative expenses because no meaningful allocation of these
expenses to cost of sales, cost of rentals or cost of support services is
practicable.
Interest expense. Interest expense increased to $1.1 million for the three
months ended March 31, 2005 compared with $0.9 million for the three months
ended March 31, 2004 resulting from higher debt levels and higher interest
rates. The weighted
23
average interest rate for the three months ended March 31, 2005 was 4.0%
compared with 3.1% for the three months ended March 31, 2004.
Effective tax rate. Our effective tax rate was 41.9% for the three months
ended March 31, 2005 compared with 43.0% for the three months ended March 31,
2004 due to a decrease in state and local income taxes and lower tax reserves.
Restructuring Charges
On March 31, 2005, we announced the closing of our centralized National
Remanufacturing Center in Milford, Connecticut to our employees and discontinued
our remanufactured copier product line. The restructuring plan was a result of
the industry shift to digital technology, which resulted in a decrease in
customer demand for remanufactured product. Our analysis of the marketplace
confirmed that the customer demand for remanufactured copiers was in a steady
state of decline. We will continue to recondition and refurbish digital products
at our regional distribution centers. Total restructuring charges as a result of
this activity amounted to $1.8 million, which included $1.1 million in inventory
write-offs, $0.4 million in asset impairment charges, $0.2 million in severance
charges representing termination benefits for the staff reduction of nineteen
employees and $0.1 million in fixed asset disposals. The inventory write-off
charges amounting to $1.1 million have been classified in cost of sales and the
remaining charges amounting to $0.7 million have been classified in selling,
service and administrative expenses in the Income Statement set forth in the
"Notes to Consolidated Financial Statements" included in Part I, Item 1 herein.
We anticipate that we will complete the closing of the remanufacturing center in
the second quarter of 2005. The restructuring activity is attributable to our
North America geographic segment.
Liquidity and Capital Resources
We are party to a Credit Agreement with a group of lenders (the "Credit
Agreement") that provided for secured borrowings or the issuance of letters of
credit in an aggregate amount not to exceed $195.0 million, comprised of a $95.0
million Revolving Credit Facility (the "Revolving Credit Facility") and a $100.0
million Term Loan (the "Term Loan").
We have pledged substantially all of our assets plus 65% of the stock of
our direct, wholly-owned subsidiaries as security for our obligations under the
Credit Agreement. Available borrowings and letter of credit issuance under the
Revolving Credit Facility are determined by a borrowing base consisting of a
percentage of our eligible accounts receivable, inventory, rental assets and
accrued and advance billings, less outstanding borrowings under the Term Loan.
The Credit Agreement contains financial covenants that require the
maintenance of minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") and a maximum leverage ratio (total debt to EBITDA), as
well as other covenants, which, among other things, place limits on dividend
payments and capital expenditures.
During 2004, the Credit Agreement was amended (the "Fifth Amendment") to
increase the amount of our stock permitted to be repurchased from $78.0 million
to $108.0 million, to increase the aggregate amount of acquisition consideration
payable for acquisitions from $30.0 million to $60.0 million and to remove the
requirement for annual borrowing base audits so long as $50.0 million or more of
borrowings are available under the Credit Agreement and the fixed charge ratio,
as defined in the Fifth Amendment, is 2.0 or higher. In addition, during 2004,
the Credit Agreement was amended to reduce and fix the Term Loan interest rate
to LIBOR plus a margin of 1.25% or to the Bank of America base lending rate plus
a margin of 0.25%. At March 31, 2005, the Revolving Credit Facility interest
rate was LIBOR plus a margin of 1.25% or the Bank of America base lending rate
plus a margin of 0.25%. At March 31, 2005, we were in compliance with all of the
financial covenants.
At March 31, 2005, $79.8 million of borrowings were outstanding under the
Credit Agreement, consisting of $27.0 million of borrowings under the Revolving
Credit Facility and $52.8 million of borrowings under the Term Loan, and the
borrowing base amounted to approximately $111.1 million. At March 31, 2005, the
weighted average interest rate was 4.27% on borrowings under the Revolving
Credit Facility and the interest rate was 3.82% on borrowings under the Term
Loan. Approximately $66.6 million of the Revolving Credit Facility was available
for borrowing at March 31, 2005. The Term Loan is payable in 7 consecutive equal
quarterly installments of $0.1 million due June 30, 2005 through December 31,
2006, three consecutive equal quarterly installments of $12.9 million due March
31, 2007 through September 30, 2007 and a final payment of $12.9 million due at
maturity.
At March 31, 2005 and December 31, 2004, one irrevocable standby letter of
credit in the amount of $1.4 million was outstanding as security for our
casualty insurance program.
The ratio of current assets to current liabilities increased to 3.7 to 1
at March 31, 2005 compared to 2.9 to 1 at December 31, 2004 due to a decrease in
accounts payable and accrued liabilities, partially offset by decreases in
inventories and accounts receivable. At March 31, 2005, our total debt as a
percentage of total capitalization increased to 22.0% from 20.0% at December 31,
2004 due to an increase in our debt and stock repurchases under our stock
buyback program.
24
In October 2003, we implemented Phase II of our ERP system, consisting of
order management, order fulfillment, billing, cash collection, service
management and sales compensation. During the initial stages of the
implementation and throughout our subsequent stabilization efforts, we
experienced certain processing inefficiencies affecting billings, which impacted
accounts receivable levels. We have provided for collection losses on the
increase in accounts receivable at rates higher than our historical experience.
However, if collection losses related to accounts receivable are higher than the
amounts provided, we would recognize an additional increase in our provision for
bad debt.
We began implementing Phase III of our ERP system during the fourth
quarter of 2004, primarily comprised of certain automated tools to assist in
invoice dispute resolution and collection activities. While we encountered
performance issues in the implementation of these automated tools, these issues
have been substantially remedied and these automated tools have begun to assist
in our progress in collecting our accounts receivable. During 2005, we expect to
complete the implementation of Phase III of our ERP implementation, which will
further enhance our efficiencies with respect to our collection activities.
Our cash flows from operations, together with borrowings under the Credit
Agreement, are expected to adequately finance our ordinary operating cash
requirements and capital expenditures for the foreseeable future. We expect to
fund further expansion and long-term growth primarily with cash flows from
operations, together with borrowings under the Credit Agreement and possible
future sales of additional equity or debt securities.
Net cash provided by operating activities was $6.0 million for the three
months ended March 31, 2005 compared with net cash used in operating activities
of $4.4 million for the three months ended March 31, 2004. Net income was $1.5
million and $5.2 million for the three months ended March 31, 2005 and 2004,
respectively. Non-cash charges for depreciation and amortization, provisions for
bad debt and inventory obsolescence in the aggregate provided cash of $19.5
million and $20.8 million for the three months ended March 31, 2005 and 2004,
respectively. Changes in the principal components of working capital required
$16.4 million and $28.9 million of cash in the three months ended March 31, 2005
and 2004, respectively. Of the $16.4 million increase in our working capital
requirements in the three months ended March 31, 2005, $24.2 million resulted
from a decrease in accounts payable and accrued liabilities consisting of $16.6
million related to timing of payments for inventory shipped from Asia in late
2004, $5.0 million of incentive compensation payments and $2.6 related to timing
of other payments, and $1.8 million resulted from an increase in accrued
billings related to timing of invoicing to customers. This was partially offset
by a decrease in inventories of $5.6 million due to reduced inventory levels and
a decrease in accounts receivable of $4.0 million resulting from improved
collection activity. Of the $28.9 million increase in our working capital
requirements in the three months ended March 31, 2004, $13.7 million resulted
from an increase in accounts receivable due to delays in collections resulting
from customer inquiries related to changes to the Company's billing policies and
invoice format associated with the implementation of our ERP system, $13.1
million resulted from a decrease in accounts payable and accrued liabilities
consisting of $6.9 million related to timing of payments for inventory shipped
from Asia in late 2003, $4.9 million of incentive compensation payments and $2.4
million related to timing of insurance payments.
Net cash used in investing activities was $11.5 million and $16.4 million
for the three months ended March 31, 2005 and 2004, respectively. Investment in
rental equipment assets totaled $9.4 million and $9.8 million for the three
months ended March 31, 2005 and 2004, respectively. The reduced level of rental
asset expenditures resulted primarily from lower facsimile placements. Capital
expenditures for property, plant and equipment were $2.1 million and $2.8
million for the three months ended March 31, 2005 and 2004, respectively, of
which the investment in our ERP system accounted for $1.3 million and $1.7
million, respectively.
Cash provided by financing activities was $6.3 million for the three
months ended March 31, 2005 compared with $10.2 million for the three months
ended March 31, 2004. Net borrowings under the Revolving Credit Facility were
$9.0 million for the three months ended March 31, 2005 compared with $15.0
million for the three months ended March 31, 2004. For the three months ended
March 31, 2005 and 2004, cash was used to repurchase 143,364 shares of our stock
at a cost of $4.7 million and 148,900 shares at a cost of $6.3 million,
respectively.
During the three month period ended March 31, 2005, we had no material
changes in our contractual obligations and commitments. We had no material
commitments other than supply agreements with vendors that extend only to
equipment supplies and parts ordered under purchase orders; there are no
long-term purchase requirements. We will continue to make additional investments
in facilities, rental equipment, computer equipment and systems and our
distribution network as required to support our operations. We anticipate
investments in rental equipment assets for new and replacement programs in
amounts consistent with the recent past. We estimate that we will spend
approximately $2.7 million over the remainder of 2005 to continue to enhance our
information systems infrastructure and implement our ERP system.
25
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 or networked, digital and color
technology in a multifuncitonal office environment. Our continued success will
depend to a great extent on our ability to respond to this changing environment
by developing new options and document imaging solutions for our customers.
The proliferation of e-mail, multifunctional products and other
technologies in the workplace has led to a reduction in the use of traditional
copiers and facsimile machines. We must be able to continue to obtain products
with the appropriate technological advancements in order to remain successful.
We cannot anticipate whether other technological advancements will substantially
minimize the need for our products in the future.
The document imaging solutions industry is very competitive; we may be
unable to compete favorably, causing us to lose sales to our competitors, many
of whom are substantially larger and possess greater financial resources. Our
future success depends, in part, on our ability to deliver enhanced products,
service packages and business processes such as e-commerce capabilities, while
also offering competitive price levels.
In order to be successful, we must retain and motivate executives and
other key employees, including those in managerial, financial, technical, sales,
marketing and IT support positions. The loss of key employees could have an
adverse effect on our operations.
Our ability to achieve and maintain a consistent trend of revenue growth
and earnings is dependent upon new equipment placements, as well as sales of
services and supplies occurring after the initial equipment placements of our
copier/MFP products. The inability to place new equipment and capture the
aftermarket supplies and service revenue would have an adverse affect on our
results of operations and financial condition.
An acceleration in the decline in facsimile revenues would have an adverse
effect on our results of operations and financial condition.
We rely on outside suppliers to manufacture the products that we
distribute, many of whom are located in the Far East. In addition, our primary
suppliers sell products in competition with us, either directly or through
dealer channels. Four manufacturers supply a significant portion of our new
copier and multifunctional equipment. If these manufacturers discontinue their
products or are unable to deliver us products in the future or if political
changes, economic disruptions or natural disasters occur where their production
facilities are located, we will be forced to identify an alternative supplier or
suppliers for the affected product. In addition, although we have worked with
our suppliers and freight forwarders to mitigate the potential impacts of an
outbreak of infectious disease affecting our supply chain, should our
manufacturers become affected by epidemics of infectious diseases, we could be
forced to identify an alternative supplier or suppliers for the affected
product. Although we are confident that we can identify alternate sources of
supply, we may not be successful in doing so. Even if we are successful, the
replacement product may be more expensive or may lack certain features of the
discontinued product and we may experience some delay in obtaining the product.
Other events that disrupt the shipment to or receipt of ocean freight at U.S.
ports, such as labor unrest, war or terrorist activity could delay, prevent or
add substantial cost to our receipt of such products. Any of these events would
cause disruption to our customers and could have an adverse effect on our
business.
We have a geographic dispersion of business and assets located across
North America comprised of our sales, service and distribution facilities.
Changes in international, national or political conditions, including terrorist
attacks could impact the sales, service and distribution of our products to our
customers and could have an adverse effect on our business.
A portion of our international business is transacted in local currency.
Currently, approximately 10% of our total product purchases, based on costs, are
denominated in yen. The majority of our remaining product purchases are
denominated in U.S. dollars and are produced by Japanese suppliers in
manufacturing facilities located in China. Currently, the exchange rate of the
Chinese renminbi and the U.S. dollar is fixed. If the Chinese government was to
revalue the Chinese renminbi and the nominal value of the renminbi rises, the
resultant impact on the exchange rate of the Chinese renminbi and the U.S.
dollar could have a negative impact on our product cost. We do not currently
utilize any form of derivative financial instruments to manage our exchange rate
risk. We manage our foreign exchange risk by attempting to pass through to our
customers any cost increases related to foreign currency exchange. However, no
assurance can be given that we will be successful in passing cost increases
through to our customers in the future.
Pitney Bowes has been and is expected to continue to be a significant
customer. For the three months ended March 31, 2005 and 2004, revenues from
Pitney Bowes, exclusive of equipment sales to PBCC for lease to the end user,
accounted for
26
approximately 4% and 10%, respectively, of our total revenue. However, no
assurance can be given that Pitney Bowes will continue to purchase our products
and services.
In connection with the Distribution, Imagistics and Pitney Bowes entered
into a non-exclusive intellectual property agreement that allowed us to operate
under the "Pitney Bowes" brand name for a term of up to two years after the
Distribution. In 2002, we began introducing new products under the "Imagistics"
brand name and we initiated a major brand awareness advertising campaign to
establish our new brand name. Effective December 2003, we no longer use the
Pitney Bowes brand name and all new products are introduced under the Imagistics
brand name. Brand name recognition is an important part of our overall business
strategy and we cannot assure you that customers will maintain the same level of
interest in our products now that we can no longer use the Pitney Bowes brand
name.
Risk factors relating to our ERP system implementation
In October 2003, we implemented Phase II of our ERP system, consisting of
order management, order fulfillment, billing, cash collection, service
management and sales compensation. During the initial stages of the
implementation and throughout our subsequent stabilization efforts, we
experienced certain processing inefficiencies affecting billings, which impacted
accounts receivable levels. We have provided for collection losses on the
increase in accounts receivable at rates higher than our historical experience.
However, if collection losses related to accounts receivable are higher than the
amounts provided, we would recognize an additional increase in our provision for
bad debt.
We began implementing Phase III of our ERP system during the fourth
quarter of 2004, primarily comprised of certain automated tools to assist in
invoice dispute resolution and collection activities. While we encountered
performance issues in the implementation of these automated tools, these issues
have been substantially remedied and these automated tools have begun to assist
in our progress in collecting our accounts receivable. During 2005, we expect to
complete the implementation of Phase III of our ERP implementation, which will
further enhance our efficiencies with respect to our collection activities.
With respect to the calculation of sales compensation, we continue to work
through certain of the processing inefficiencies resulting in data inaccuracies
and potential inaccuracies in calculated sales compensation. Due to these
issues, we have continued to apply alternate methodologies to calculate and pay
sales compensation. We implemented a new sales compensation program and
initially planned to begin paying based on the ERP calculation in the first
quarter of 2005. We delayed this implementation to complete additional
validation and data verification and plan to begin paying based on the ERP
calculation in the third quarter of 2005. We will continue to implement this
program and anticipate that we will pay all sales compensation based on the ERP
calculation in 2005.
We remain engaged in a period of stabilization, as is typical of a large
ERP system implementation. We anticipate that we will resolve the issues related
to our ERP system implementation that are impacting our customer billings,
accounts receivable and sales compensation. However, if we are unable to do so
in a reasonable time frame, these issues could have a negative impact on
customer and employee satisfaction and retention, which could result in a
potential loss of business. Although no assurance can be given that these
efforts related to customer billings, accounts receivable and sales compensation
will be successful in the time periods expected, other than the temporary
increase in working capital requirements, we do not anticipate that these issues
will have a material adverse effect on our financial position, results of
operations or future cash flows.
Special Note About Forward-Looking Statements
Statements contained in this discussion and elsewhere in this report that
are not purely historical are forward-looking statements, within the meaning of
the Private Securities Litigation Reform Act of 1995, and are based on
management's beliefs, certain assumptions and current expectations. These
statements may be identified by their use of forward-looking terminology such as
the words "expects", "projects", "anticipates", "intends" and other similar
words. Such forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. The
forward-looking statements contained herein are made as of the date hereof and
we do not undertake any obligation to update any forward-looking statements,
whether as a result of future events, new information or otherwise.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have certain limited exposures to market risk related to changes in
interest rates and foreign currency exchange rates. Currently, we do not utilize
any form of derivative financial instruments to manage our interest rate risk or
our exchange rate risk. We manage our foreign exchange risk by attempting to
pass through to our customers any cost increases related to foreign currency
exchange. In addition, we are exposed to foreign exchange rate fluctuations with
respect to the British Pound and the Canadian Dollar as the financial results of
our U.K. subsidiary and Canadian subsidiaries are translated into U.S. dollars
for consolidation. The effect of foreign exchange rate fluctuation for the
quarter ended March 31, 2005 was not material.
ITEM 4. CONTROLS AND PROCEDURES
Restatement of Quarterly Financial Statements
Subsequent to the issuance of our March 31, 2005 financial statements, we
discovered an error in the calculation of share-based compensation expense in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment,"
related to the recognition of share-based compensation expense for awards
subject to acceleration of vesting for retirement eligible employees. Prior to
the adoption of SFAS No. 123(R) on January 1, 2005, we accounted for share-based
compensation expense under the recognition and measurement provisions of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and followed the accepted practice of recognizing share-based
compensation expense over the explicit vesting period. SFAS No. 123(R) requires
the immediate recognition at the grant date of the full share-based compensation
expense for grants to retirement eligible employees, as the explicit vesting
period is non-substantive. Upon adoption of SFAS No. 123(R) on January 1, 2005,
we continued to follow the practice of recognizing share-based compensation
expense over the explicit service period in error. The error resulted in a $1.1
million understatement of share-based compensation expense in the quarterly
period ended March 31, 2005 (see Note 2 of the "Notes to Consolidated Financial
Statements"). The restatement reflects adjustments, which are corrections of
errors in the application of U.S. generally accepted accounting principles
(GAAP) related to our early adoption of SFAS No. 123(R) for the non-substantive
vesting period conditions for retirement eligible employees.
Disclosure controls and procedures
We are responsible for maintaining disclosure controls and procedures, as
defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
(the "Exchange Act") as amended, that are designed to ensure that information
required to be disclosed in the Company's filings under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to management, including the Company's Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely
decisions regarding required disclosure.
Because of the inherent limitations in all control systems, internal
control over financial reporting may not prevent or detect misstatements. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In connection with the restatement described above, under the direction of
our CEO and CFO, we reevaluated our disclosure controls and procedures and
identified a material weakness in our internal control over financial reporting
with respect the accounting for share-based compensation expense for the
non-substantive vesting period conditions under SFAS No. 123(R).
As a result of this material weakness, we concluded that our disclosure
controls and procedures were not effective as of March 31, 2005.
Changes in internal control / remediation of material weakness in internal
control
We are confident that, as of the date of this filing, we have fully
remediated the material weakness in our internal control over financial
reporting with respect to accounting for share-based compensation expense under
SFAS No. 123(R). The remediation actions included enhancing the process used to
prepare and review the calculation of share-based compensation expense under the
provisions of SFAS No. 123(R) and strengthening our internal process to analyze
and interpret new accounting pronouncements and related interpretations.
28
In connection with this amended Form 10-Q/A, under the direction of our
CEO and CFO, we have evaluated our disclosure controls and procedures as
currently in effect, including the remedial action discussed above, and we have
concluded that, as of this date, our disclosure controls and procedures are
effective.
During our evaluation of the effectiveness of the design and operation of
internal control over financial reporting as of December 31, 2004, management
identified certain significant deficiencies, as defined in Public Company
Accounting Oversight Board ("PCAOB") Auditing Standard No. 2, "An Audit of
Internal Control Over Financial Reporting Performed in Conjunction With an Audit
of Financial Statements." Two significant deficiencies related to the
maintenance of documentation and the validation of the accuracy of certain
components of our sales compensation program. Management is implementing
enhancements to its sales compensation processes and we anticipate that these
deficiencies will be remediated in the third quarter of 2005. Two significant
deficiencies related to the timing of certain billing and invoice adjustment
activities. Management is implementing procedures to refine its processes
surrounding these items. One significant deficiency related to an immaterial
unreconciled difference in accounts receivable arising during the transition to
our ERP system, which will be remediated in the second quarter of 2005.
We implemented an ERP system in the fourth quarter of 2003 and as a
result, we remain in a period of stabilization and clean up. During this period,
we are refining our procedures surrounding order management and fulfillment,
billing, cash application, service management, sales compensation and
collections, and the controls surrounding processing in these areas have been
adjusted accordingly. For additional details, see Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Risk
Factors that Could Cause Results to Vary."
Other than the subsequent remedial action described above, there have been
no changes in the company's internal control over financial reporting that
occurred during the quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, the company's internal control
over financial reporting.
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the Distribution, we agreed to assume all liabilities
associated with our business, and to indemnify Pitney Bowes for all claims
relating to our business. In the normal course of business, we have been party
to occasional lawsuits relating to our business. These may involve litigation or
other claims by or against Pitney Bowes or Imagistics relating to, among other
things, contractual rights under vendor, insurance or other contracts,
trademark, patent and other intellectual property matters, equipment, service or
payment disputes with customers, bankruptcy preference claims and disputes with
employees.
We have not recorded liabilities for loss contingencies since the ultimate
resolutions of the legal matters cannot be determined and a minimum cost or
amount of loss cannot be reasonably estimated. In our opinion, none of these
proceedings, individually or in the aggregate, should have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to the purchase of
shares of our common stock under the stock buyback program during each month in
the first quarter of 2005, which includes shares repurchased in connection with
tax withholdings on restricted stock:
(Dollars in thousands, except per share data)
Total number of Approximate dollar
Total number shares purchased value of shares that
of shares Average price as part of publicly may yet be purchased
Period purchased paid per share announced plan under the plan
------------------------------------ ------------ -------------- ------------------- --------------------
January 1, 2005 - January 31, 2005 124,364 $ 32.40 124,364 $15,188
February 1, 2005 - February 28, 2005 -- $ -- -- $15,188
March 1, 2005 - March 31, 2005 19,000 $ 34.47 19,000 $14,533
--------- ----------
Total 143,364 $ 32.67 143,364
========= ==========
In March 2002, the Board of Directors approved a $30.0 million stock
buyback program. In October 2002, the Board of Directors authorized the
repurchase of an additional $28.0 million of our stock, raising the total
authorization to $58.0 million. In July 2003, the Board of Directors authorized
the repurchase of an additional $20.0 million of our stock, raising the total
authorization to $78.0 million. In May 2004, the Board of Directors authorized
the repurchase of an additional $30.0 million of our stock, raising the total
authorization to $108.0 million and, as of March 31, 2005, we have accumulated
approximately 4.0 million shares of treasury stock at a cost of approximately
$93.5 million. The stock buyback program has no fixed termination date.
ITEM 6. EXHIBITS
The following documents are filed as exhibits hereto:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Amended and Restated Certificate of Incorporation (3)
3.2 Amended and Restated Bylaws (1)
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock, dated August 1, 2002 (6)
4.1 Form of Imagistics International Inc. Common Stock Certificate (1)
10.1 Tax Separation Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.2 Transition Services Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (3)
10.3 Distribution Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (3)
10.4 Intellectual Property Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (3)
10.5 Reseller Agreement between Pitney Bowes Management Services and
Imagistics International Inc. (3)
10.6 Reseller Agreement between Pitney Bowes of Canada and Imagistics
International Inc. (3)
10.7 Vendor Financing Agreement between Pitney Bowes Credit Corporation
and Imagistics International Inc. (3)
10.8 Form of Sublease Agreement between Pitney Bowes Inc. and Imagistics
International Inc. (2)
30
10.9 Form of Sublease and License Agreement between Pitney Bowes Inc. and
Imagistics International Inc. (2)
10.10 Form of Assignment and Novation Agreement between Pitney Bowes Inc.
and Imagistics International Inc. (2)
10.11 Imagistics International Inc. 2001 Stock Plan (1)
10.12 Imagistics International Inc. Key Employees' Incentive Plan (3)
10.13 Imagistics International Inc. Non-Employee Directors' Stock Plan (1)
10.14 Letter Agreement between Pitney Bowes Inc. and Marc C. Breslawsky
(1)
10.15 Letter Agreement between Pitney Bowes Inc. and Joseph D. Skrzypczak
(1)
10.16 Letter Agreement between Pitney Bowes Inc. and Mark S. Flynn (1)
10.17 Credit Agreement between Imagistics International Inc. and Merrill
Lynch & Co., Merrill Lynch, Pierce Fenner & Smith Incorporated, as
Syndication Agent, Fleet Capital Corporation, as Administrative
Agent (3)
10.18 Rights Agreement between Imagistics International Inc. and EquiServe
Trust Company, N.A. (3)
10.19 Employment Agreement between Imagistics International Inc. and Marc
C. Breslawsky (3)
10.20 Employment Agreement between Imagistics International Inc. and
Joseph D. Skrzypczak (3)
10.21 Employment Agreement between Imagistics International Inc. and
Christine B. Allen (3)
10.22 Employment Agreement between Imagistics International Inc. and John
C. Chillock (3)
10.23 Employment Agreement between Imagistics International Inc. and Chris
C. Dewart (3)
10.24 Employment Agreement between Imagistics International Inc. and Mark
S. Flynn (3)
10.25 Employment Agreement between Imagistics International Inc. and
Nathaniel M. Gifford (3)
10.26 Employment Agreement between Imagistics International Inc. and
Joseph W. Higgins (3)
10.27 Amendment No. 1 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (4)
10.28 Amendment No. 2 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (5)
10.29 First Amendment to Imagistics International Inc. 2001 Stock Plan (6)
10.30 First Amendment to Rights Agreement between Imagistics International
Inc. and EquiServe Trust Company, N.A. (6)
10.31 Amendment No. 3 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (7)
10.32 Amendment No. 1 to Transition Services Agreement between Pitney
Bowes Inc. and Imagistics International Inc. (8)
10.33 Amendment No. 4 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (9)
10.34 Reseller Agreement between Pitney Bowes of Canada Ltd. and
Imagistics International Inc. (10)
10.35 Amendment No. 5 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (11)
10.36 Amendment No. 6 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Fleet Capital Corporation, as
Administrative Agent, and the Lenders identified therein (12)
10.37 Second Amendment to the Imagistics International Inc. Employee Stock
Purchase Plan (13)
10.38 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Marc C. Breslawsky (14)
10.39 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Joseph D. Skrzypczak (14)
10.40 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Christine B. Allen (14)
10.41 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and John C. Chillock (14)
10.42 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and George E. Clark (14)
10.43 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Timothy E. Coyne (14)
10.44 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Chris C. Dewart (14)
10.45 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Mark S. Flynn (14)
10.46 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and Nathaniel M. Gifford (14)
10.47 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and William H. Midgley (14)
10.47 Employment Agreement dated as of January 8, 2005 between Imagistics
International Inc. and John R. Reilly (14)
10.48 Form of Non-Qualified Stock Option Award Agreement to 2001 Stock
Plan (14)
10.49 Form of Restricted Stock Award Agreement to 2001 Stock Plan (14)
10.50 Amendment to the Imagistics International Inc. Non-Employee
Directors' Stock Plan (15)
10.51 Form of Non-Employee Directors' Stock Plan Agreement to 2001 Stock
Plan (15)
10.52 Amendment No. 7 to Credit Agreement between Imagistics International
Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, as Syndication Agent, Bank of America, as
Administrative Agent, and the Lenders identified therein
31
31.1 Certification of the Chief Executive Officer Pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer Pursuant to Securities
Exchange Act Rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
----------
(1) Incorporated by reference to Amendment No. 1 to the Registrant's Form 10
filed July 13, 2001.
(2) Incorporated by reference to Amendment No. 2 to the Registrant's Form 10
filed August 13, 2001.
(3) Incorporated by reference to the Registrant's Form 10-K filed March 28,
2002.
(4) Incorporated by reference to the Registrant's Form 10-Q filed May 14,
2002.
(5) Incorporated by reference to the Registrant's Form 8-K filed July 23,
2002.
(6) Incorporated by reference to the Registrant's Form 10-Q filed August 14,
2002.
(7) Incorporated by reference to the Registrant's Form 8-K filed March 7,
2003.
(8) Incorporated by reference to the Registrant's Form 10-K filed March 28,
2003.
(9) Incorporated by reference to the Registrant's Form 8-K filed May 21, 2003.
(10) Incorporated by reference to the Registrant's Form 10-K filed March 12,
2004.
(11) Incorporated by reference to the Registrant's Form 10-Q filed May 10,
2004.
(12) Incorporated by reference to the Registrant's Form 10-Q filed August 3,
2004.
(13) Incorporated by reference to the Registrant's Form 10-Q filed November 9,
2004.
(14) Incorporated by reference to the Registrant's Form 8-K filed January 13,
2005.
(15) Incorporated by reference to the Registrant's Form 10-K filed March 10,
2005.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 17, 2005 Imagistics International Inc.
-------------------------------
(Registrant)
By /s/ Timothy E. Coyne
-------------------------------
Name: Timothy E. Coyne
Title: Chief Financial Officer
and Authorized Signatory
33