<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO __________________
Commission File Number: 000-24373
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3247752
- ------------------------------------- ---------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
13902 North Dale Mabry Highway, Suite 300 33618
Tampa, Florida
- ----------------------------------------- ----------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPONE NUMBER, INCLUDING AREA CODE: 813-960-5508
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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 [_] No [X]
The registrant had 17,583,639 Shares of Common Stock, $.01 par value,
outstanding as of August 12, 1998.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ITEM 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1998 (Unaudited)
and March 31, 1998 3
Consolidated Statements of Operations for the three months ended
June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 1998 and 1997 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the three months
ended June 30, 1998 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 16
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 18
Signature 20
Exhibit Index 21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1998 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,115 $4,496
Accounts receivable, net of allowance for doubtful
accounts($895 and $871 at June 30, 1998
and March 31, 1998, respectively) 32,736 27,572
Inventories 20,473 19,061
Deferred income taxes 1,519 1,543
Prepaid expenses and other current assets 762 425
------------ -------------
Total current assets 58,605 53,097
Rental equipment, net 4,731 4,655
Property and equipment, net 4,695 4,419
Other assets 459 2,147
Deferred income taxes 561 571
Related party notes receivable 547 547
Intangible assets, net:
Goodwill 94,221 94,685
Noncompete agreements 1,153 1,336
Financing fees 1,882 2,885
------------ -------------
Total assets $166,854 $164,342
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $12,858 $10,556
Accrued liabilities 4,425 3,878
Accrued compensation and benefits 2,924 3,543
Current maturities of long-term debt 175 233
Deferred revenue 11,341 10,632
Income taxes payable 736 -
------------ -------------
Total current liabilities 32,459 28,842
Long-term debt, less current maturities 65,752 97,252
------------ -------------
Total liabilities 98,211 126,094
Stockholders equity:
Class A common stock, $.01 par value: - 3
400,000 shares authorized: 339,945
shares issued and outstanding at March 31, 1998
Class B common stock, $.01 par value: - 95
50,000,000 shares authorized: 9,521,058
shares issued and outstanding at March 31, 1998
Class C common stock, $.01 par value: - 9
905,000 shares authorized: 904,252
shares issued and outstanding at March 31, 1998
Common Stock, $.01 par value: 176 -
50,000,000 shares authorized: 17,583,639
shares issued and outstanding at June 30, 1998
Additional paid-in capital 67,662 33,618
Retained earnings 1,050 4,754
------------ -------------
68,888 38,479
Less stockholder receivables (245) (231)
------------ -------------
Total stockholders' equity 68,643 38,248
============ =============
Total liabilities and stockholders' equity $166,854 $164,342
============ =============
</TABLE>
See accompanying notes.
3
<PAGE>
GLOBAL IMAGING SYSTEMS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
------------ -------------
<S> <C> <C>
Revenues:
Equipment and supplies sales $43,334 $15,182
Service and rentals 14,868 6,730
------------ -------------
Total revenues 58,202 21,912
Costs and operating expenses:
Cost of equipment and supplies sales 30,887 10,273
Service and rental costs 7,006 3,304
Selling, general and administrative expenses 13,289 5,502
Intangible asset amortization 901 563
------------ -------------
Total costs and operating expenses 52,083 19,642
------------ -------------
Income from operations 6,119 2,270
Interest expense 2,230 938
------------ -------------
Income before income taxes and extraordinary item 3,889 1,332
Income taxes 1,801 661
------------ -------------
Income before extraordinary item 2,088 671
Extraordinary charge for early retirement of debt,
net of tax benefit of $467 (684) -
------------ -------------
Net income 1,404 671
Yield adjustment on Class A common stock and accretions (901) (382)
------------ -------------
Net Income available to common stockholders $503 $289
============ =============
Basic earnings per share:
Income before extraordinary item, including
yield adjustment and accretions $0.10 $0.03
Extraordinary charge for early retirement of debt,
net of tax benefit of $467 (0.06) -
------------ -------------
Net income per share $0.04 $0.03
============ =============
Diluted earnings per share:
Income before extraordinary item, including
yield adjustment and accretions $0.09 $0.03
Extraordinary charge for early retirement of debt,
net of tax benefit of $467 (0.05) -
------------ -------------
Net income per share $0.04 $0.03
============ =============
Weighted average number of shares outstanding (in thousands):
Basic 11,527 9,315
Diluted 12,511 9,315
See accompanying notes
4
</TABLE>
<PAGE>
GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net Income $1,404 $671
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 1,065 669
Amortization 2,172 656
Deferred income taxes 34 -
Changes in operating assets and liabilities, net of amounts acquired in purchase
business combinations:
Accounts receivable (5,164) (298)
Inventory (1,412) (744)
Prepaid expenses and other current assets (337) (144)
Other assets 2,594 (158)
Accounts payable 2,302 (504)
Accrued liabilities (72) (116)
Deferred revenue 709 387
Income taxes 736 686
-------- --------
Net cash provided by operating activities 4,031 1,105
Investing activities
Related party notes receivable - (500)
Purchase of property, equipment and rental equipment (1,416) (641)
Payment for purchase of businesses, net of cash acquired (254) (123)
-------- --------
Net cash used in investing activities (1,670) (1,264)
Financing activities
Net draws (payments) under line of credit (31,558) 216
Financing fees (262) (1)
Deferred cost of initial public offering (912) -
Common stock redemption and retirement (35,411) -
Common stock issued for cash 64,401 220
-------- --------
Net cash (used in) provided by financing activities (3,742) 435
-------- --------
Net increase (decrease) in cash and cash equivalents (1,381) 276
Cash and cash equivalents, beginning of period 4,496 961
-------- --------
Cash and cash equivalents, end of period $3,115 $1,237
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
Class A Class B Class C
Common Stock Common Stock Common Stock
------------------------------------------------------------------
Shares Par Shares Par Shares Par
Value Value Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1998 339,945 $3 9,521,101 $95 904,252 $ 9
Common stock issued in
Initial Public Offering
Common stock retired (339,945) (3)
Dividend -
Class A common
stock
Common stock converted (9,521,101) (95) (904,252) (9)
Costs of Initial
Public Offering
Net income
-------------------------------------------------------------------
Balances at June 30, 1998 --- --- --- --- --- ---
<CAPTION>
Common Stock Additional
---------------------- Paid-in Stockholder Retained
Shares Par Capital Receivables Earnings Total
Value
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1998 $ $ $ 33,618 $ (231) $ 4,754 $ 38,248
Common stock issued in
Initial Public Offering 6,000,000 60 66,900 66,960
Common stock retired (30,459) (14) (133) (30,609)
Dividend -
Class A common (4,975) (4,975)
stock
Common stock converted 11,583,639 116 (12) -
Costs of Initial (2,385)
Public Offering (2,385)
Net income 1,404 1,404
-------------------------------------------------------------------------
Balances at June 30, 1998 17,583,639 $ 176 $ 67,662 $ (245) $ 1,050 $ 68,643
=========== ======= ======== ========== ======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
GLOBAL IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 1998, consolidated
statements of operations for the three months ended June 30, 1998 and June 30,
1997, the consolidated statements of cash flows for the three months ended June
30, 1998 and June 30, 1997, and the consolidated statement of stockholders'
equity for the three months ended June 30, 1998 are unaudited. In the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for the interim
periods are not necessarily indicative of the results which may be expected for
the entire fiscal year. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Registration Statement on Form S-1, File No. 333-48103, filed by
Global Imaging Systems, Inc. (together with its subsidiaries, "Global" or the
"Company") and declared effective by the Securities and Exchange Commission on
June 17, 1998.
NOTE 2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which is effective for annual and interim periods
ending after December 15, 1997. Statement No. 128 requires the dual presentation
of basic and diluted earnings per share ("EPS") for complex capital structures
on the consolidated statement of operations. Basic EPS is computed by dividing
net income by the weighted average number of shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise of stock options
or the conversion of securities into stock. Global has implemented Statement No.
128 for the three months ended June 30, 1998 and June 30, 1997.
The following table reconciles the numerators and denominators of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
For Three Months Ended
(In thousands except per share amounts) June 30, 1998 June 30, 1997
------------------ ------------------
<S> <C> <C>
Numerator:
Income before extraordinary item $2,088 $671
Extraordinary charge for early retirement of debt, net
of tax benefit of $467 684
------------------ ------------------
Net Income 1,404 671
Yield adjustment on Class A common stock
and accretions 901 382
================== ==================
Numerator for basic and diluted earnings per share -
income available to common stockholders $503 $289
================== ==================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Denominator:
Denominator for basic earnings per share 11,527 9,315
Effect of dilutive securities:
Contingent stock-redemption of A shares in June 1998 980
Employee stock options 4
------------------ ------------------
Dilutive potential common shares 984 0
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 12,511 9,315
================== ==================
Basic earnings per share:
Earnings per share before extraordinary item, including
yield adjustments and accretions $.10 $.03
Extraordinary charge for early retirement of debt,
net of tax benefit (.06) -----
================== ==================
Net income per share $.04 $.03
================== ==================
Diluted earnings per share:
Earnings per share before extraordinary item, including
yield adjustments and accretions $.09 $.03
Extraordinary charge for early retirement of debt,
net of tax benefit (.05) -----
================== ==================
Net income per share $.04 $.03
================== ==================
</TABLE>
NOTE 3. INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
In April 1998, the Board of Directors approved a change in the Company's capital
stock structure, authorizing 10,000,000 shares of $.01 par value preferred
stock, 50,000,000 shares of $.01 par value Class B common stock and 905,000
shares of $.01 par value Class C common stock. The Board also authorized a
132-for-1 stock split for holders of its Class B and Class C common stock;
provided for the automatic conversion into one share of Class B common stock of
each share of its Class C common stock upon the consummation of the initial
public offering; the redemption of each share of Class A common stock for $90
plus 8% per annum from the time of its purchase through May 31, 1998 and
approximately 3.41 shares of Class B common stock upon the consummation of the
initial public offering; and renamed its class B common stock (Common Stock).
In June 1998, the Company sold 6,000,000 shares of the Company's Common Stock,
par value $.01, in an initial public offering. The aggregate offering price of
the 6,000,000 shares was $72,000,000. After deducting expenses, the Company
received approximately $64,401,000 in proceeds from the initial public offering.
Of the $64,401,000 in estimated net proceeds to the Company, $28,831,000 was
used to repay amounts due Jackson National Life Insurance Company (JNL). The
remaining approximately $35,570,000 in proceeds was used to pay the cash portion
of the redemption price of the Company's Class A Common Stock, redeemed upon the
closing of the initial public offering.
8
<PAGE>
NOTE 4. RETIREMENT OF DEBT
In June 1998, the Company repaid $31.5 million of long-term debt outstanding to
JNL, principally with proceeds from the initial public offering. Recognition of
a prepayment penalty of $250,000 and deferred financing costs of $901,000
related to the JNL debt repayment resulted in an extraordinary charge of
$684,000 ($.06 per share), net of related income tax benefit of $467,000. In
July the Company repaid the remaining $65.8 million balance of the JNL loan with
proceeds from a replacement credit agreement with First Union National Bank
("First Union"), and recognized the remaining pro rata deferred financing costs
of $1,881,000 from the JNL loan. The Credit Agreement with First Union consists
of a $5.0 million swingline line of credit and a $170.0 million revolving line
of credit. The Credit Agreement bears interest at rates ranging from 0.75% to
1.5% over LIBOR or, at the Company's option, ranging from 0.0% to 0.5% over a
base rate related to prime rate, and varies according to the Company's ratio of
its total funded debt to earnings before interest, taxes, depreciation, and
amortization. Amounts borrowed under the Credit Agreement may be repaid and
reborrowed over the life of the Credit Agreement, with a final maturity date of
July 31, 2003. Under the Credit Agreement, the Company has pledged substantially
all of its assets, including the capital stock of the Company's subsidiaries, to
First Union. Amounts borrowed under the Credit Agreement may be used to fund
working capital and general corporate purposes, including acquisitions.
NOTE 5. STOCK OPTION PLAN
The Board of Directors adopted a stock option plan, effective upon the closing
of the initial public offering. Under the terms of the stock option plan
1,820,000 shares of the Company's common stock may be sold pursuant to stock
options or granted or sold as restricted stock to directors, officers,
employees, and consultants to the Company. Under the stock option plan, as of
June 30, 1998 the Board had granted options to purchase a total of 519,750
shares of common stock of the Company at an exercise price of $12, equal to the
offering price per share, effective as of the closing of the Company's initial
public offering. All of these options are subject to vesting requirements based
on length of service.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion below contains forward-looking statements which involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company or its industry to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others: the Company's need for substantial additional funding to continue
to implement its acquisition strategy, the Company's dependence on its
suppliers, the ability of the Company and various third parties to make the
Company's software Year 2000 compliant at projected costs and on anticipated
9
<PAGE>
timetables, the pace and effects of technological developments in the Company's
industry and other risk factors discussed in the Company's Registration
Statement on Form S-1, File No. 333-48103, declared effective on June 17, 1998.
Overview
The Company was founded in June 1994 with the goal of becoming a leading
consolidator in the highly fragmented office imaging solutions industry. The
Company is a rapidly growing provider of an array of office imaging solutions,
which encompasses the sale and service of automated office equipment (copiers,
facsimile machines, printers, and duplicators), electronic presentation
equipment and document imaging management (DIM) systems as well as network
integration and management services. Since its founding, the Company has
acquired nine core companies primarily in the Northeast, Southeast, and Pacific
Northwest, and 15 additional satellite companies that have been integrated into
the core companies. The first acquisition was completed in August 1994.
The Company derives its revenues from two sources: (i) sales of equipment
and supplies and (ii) sales of complementary services and equipment rentals. The
growth of equipment revenues and the complementary supplies, parts and service
revenues is dependent on several factors, including the demand for equipment,
the Company's reputation for providing timely and reliable service, and general
economic conditions. Revenues generated from the sale of equipment and
complementary supplies, parts and service revenues are impacted by price,
general economic conditions, service reputation, and competitors' actions in the
marketplace. Revenues from the sale of complementary supplies, parts and
services are also affected by equipment sales and rental volumes.
As the Company acquires businesses, the percentage of its revenues derived
from sales of equipment and supplies, as opposed to service and rentals,
fluctuates according to whether the businesses acquired are automated office
equipment dealers (which typically derive a higher percentage of revenues from
service and rentals) or are network integrators or electronic presentation
systems or document imaging systems ("DIM systems") dealers (which typically
derive a higher percentage of revenues from sales of equipment and supplies).
Generally, sales of equipment and supplies have lower gross profit margins than
sales of service and rentals. The Company expects that, over time, it will
increasingly become engaged in the network integration, electronic presentation
systems and DIM systems markets and, accordingly, a larger percentage of its
revenues and gross profits will be derived from the sale of equipment and
supplies.
Cost of goods sold consists primarily of the cost of new equipment, cost
of supplies and parts, labor costs to provide services, rental equipment
depreciation and other direct operating costs. The Company depreciates its
rental equipment primarily over a three-year period on a straight-line basis
with no residual value.
10
<PAGE>
Gross profit as a percentage of revenues varies from period to period
depending upon numerous variables, including the mix of revenues from equipment,
supplies, service and rentals; the mix of revenues among the markets served by
the Company; and the mix of revenues of the businesses acquired.
Results of Operations
The following table sets forth selected consolidated financial information
as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
June 30, June 30,
1998 1997
--------------------- --------------------
<S> <C> <C>
Revenues:
Equipment and supply sales................................ 74.5% 69.3%
Service and rentals....................................... 25.5 30.7
-------- --------
Total revenues................................................ 100.0 100.0
Costs and operating expenses:
Cost of equipment and supplies
sales................................................... 53.1 46.9
Service and rental costs.................................. 12.1 15.1
Selling, general, and
administrative expenses................................. 22.8 25.1
Intangible asset amortization............................. 1.5 2.5
-------- --------
Total costs and operating expenses............................ 89.5 89.6
-------- --------
Income from operations........................................ 10.5 10.4
Interest expense.............................................. 3.8 4.3
-------- --------
Income before income taxes and
extraordinary item........................................ 6.7 6.1
Income taxes.................................................. 3.1 3.0
-------- --------
Income before extraordinary item.............................. 3.6 3.1
Extraordinary charge for early
retirement of debt, net of tax
benefit..................................................... 1.2 --
-------- --------
Net Income.................................................... 2.4% 3.1%
======== ========
</TABLE>
11
<PAGE>
Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997
Revenues
Total revenues increased 165.6% from $21.9 million for the three months
ended June 30, 1997 to $58.2 million for the three months ended June 30, 1998.
The majority of the revenue growth was attributable to the acquisition of
businesses during 1997 and 1998, with the remainder coming from internal growth.
Equipment and supplies sales increased 185.4% from $15.2 million, or 69.3%
of total revenues, for the three months ended June 30, 1997 to $43.3 million, or
74.5% of total revenues, for the three months ended June 30, 1998. The equipment
component of sales of the businesses acquired during 1997 and 1998 was a larger
portion of total revenues than for the Company's existing businesses.
Service and rental revenues increased 120.9%, from $6.7 million, or 30.7%
of total revenues for the three months ended June 30, 1997 to $14.9 million, or
25.5% of total revenues, for the three months ended June 30, 1998. The change in
the percentage of total revenues attributable to service and rental revenues is
consistent with the change in the revenue mix described above.
Gross Profit
Total gross profit increased 143.7% from $8.3 million, or 38.0% of total
revenues, for the three months ended June 30, 1997 to $20.3 million, or 34.9% of
total revenues, for the three months ended June 30, 1998. The change in total
gross profit margins from year to year was due to the change in the revenue mix.
Office equipment dealers typically derive a higher percentage of total revenues
from service and rentals, while network integration, electronic presentation
systems and DIM systems dealers derive a higher percentage of total revenues
from sales of equipment and supplies. The equipment component of sales of the
businesses acquired in 1997 and 1998 accounted for a larger portion of total
revenues than the Company's existing businesses. Sales of equipment and supplies
generally generate lower gross profit margins than service and rental revenues.
Combined service and rental gross profit margins were 50.9% for the three months
ended June 30, 1997 and 52.9% for the three months ended June 30, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 141.5% from $5.5
million, or 25.1% of revenues, for the three months ended June 30, 1997 to $13.3
million, or 22.8% of revenues, for the three months ended June 30, 1998. The
increase in expenses was primarily due to the acquisition of
12
<PAGE>
businesses in 1997 and 1998. The decline in expenses as a percentage of revenues
was the result of the acquisition of profitable businesses, the change in the
composition of the Company's businesses, and revenues increasing by 165.6%
without a proportionate increase in selling, general, and administrative
expenses.
Intangible Asset Amortization
For the three months ended June 30, 1997 and 1998, asset amortization was
$.6 million and $.9 million, respectively. Asset amortization includes the
amortization of goodwill and non-compete agreements from acquisitions.
Income From Operations
Income from operations increased 169.6% from $2.3 million, or 10.4% of
total revenues, for the three months ended June 30, 1997 to $6.1 million, or
10.5% of total revenues, for the three months ended June 30, 1998.
Interest Expense
Interest expense increased 137.7%, from $.9 million for the three months
ended June 30, 1997 to $2.2 million for the three months ended June 30, 1998.
The increase was primarily due to the increase in the Company's borrowings. The
proceeds from the additional borrowings were used to fund the cost of the
businesses acquired in 1997 and 1998. Interest expense includes the amortization
of financing fees incurred in connection with the Company's credit facility from
JNL.
Income Taxes
The provision for income taxes was $.7 million for the three months ended
June 30, 1997 and $1.8 million for the three months ended June 30, 1998. The
increase in income taxes was primarily due to increased pre-tax income resulting
from the inclusion of businesses acquired during 1997 and 1998. The effective
income tax rate decreased slightly from 49.6% for the three months ended June
30, 1997 to 46.3% for the three months ended June 30, 1998. The effective income
tax rate for 1997 and 1998 was higher than the federal statutory rate of 34.0%
plus state and local taxes, primarily due to non-deductible goodwill
amortization relating to the businesses acquired.
13
<PAGE>
Extraordinary Charge
During June 1998 the company retired $31.5 million of long-term debt
payable to JNL due in 2004. Recognition of the prepayment penalty of $250,000
and deferred financing costs of $901,000 related to the long-term debt repayment
resulted in an extraordinary charge of $684,000 ($.06 per share), net of related
income tax benefit of $467,000. The remaining pro rata deferred financing costs
of $1,881,000 were recognized in July 1998 when the remaining $65.8 million
balance of the long-term debt was retired.
Liquidity and Capital Resources
The Company has financed its operations primarily through internal cash
flow, sales of stock and bank financing, including the Company's financing
facilities described below. These sources of funds have been used to fund the
Company's growth both internally and through acquisitions. The Company is
pursuing an acquisition strategy and therefore expects to acquire more
businesses.
In June 1998, the Company repaid $31.5 million of long-term debt
outstanding to JNL principally with proceeds from the Company's initial public
offering. In July, the Company repaid the remaining $65.8 million balance of the
JNL loan with proceeds from a replacement credit agreement with First Union. The
Company's credit agreement with First Union (the "Credit Agreement") consists of
a $5.0 million swingline line of credit and a $170.0 million revolving line of
credit for acquisitions and for working capital purposes. The Credit Agreement
bears interest at rates ranging from 0.75% to 1.5% over LIBOR or, at the
Company's option, ranging from 0.0% to 0.5% over a base rate related to prime
rate, and varies according to the Company's ratio of its total funded debt to
earnings before interest, taxes, depreciation, and amortization. Amounts
borrowed under the Credit Agreement may be repaid and reborrowed over the life
of the Credit Agreement, with a final maturity date of July 31, 2003. Under the
Credit Agreement, the Company has pledged substantially all of its assets,
including the capital stock of the Company's subsidiaries, to First Union. The
terms of the Credit Agreement require strict compliance with numerous
affirmative, negative and financial covenants that restrict, among other things,
amendments to the Company's Certificate of Incorporation or Bylaws, dividend
payments, sales of stock or assets or the incurrence of additional debt by the
Company or its subsidiaries. Amounts borrowed under the Credit Agreement may be
used to fund working capital and general corporate purposes, including
acquisitions, subject to prior lender approval in the case of acquisitions with
a cash purchase price of over $15 million or an aggregate price (cash, stock or
other consideration) of over $40 million.
For the three months ended June 30, 1998 the net cash provided by
operations was $4.0 million and for the three months ended June 30, 1997 the net
cash provided by operations was $1.1 million. For the three months ended June
30, 1998 and for the three months ended June 30, 1997 the Company's net cash
used in investing activities was $1.7 million and $1.3 million, respectively,
14
<PAGE>
primarily for the purchase of property and equipment and rental equipment. For
the three months ended June 30, 1998 and the three months ended June 30, 1997,
the Company's net cash (used in) provided by financing activities was ($3.7)
million and $.4 million, respectively. Net cash provided by financing activities
consists of equity capital provided by Golder, Thoma, Cressey, Rauner Fund IV
Limited Partnership, JNL, and certain members of management of the Company and
Acquired Businesses, net borrowings under the Credit Agreement and for the three
months ended June 30, 1998 the net proceeds to the Company of the Initial Public
Offering.
The Company believes that the Credit Agreement, together with the cash on
hand and funds generated by the Company's operations, will provide the Company
with sufficient liquidity and capital resources to pursue its business strategy
at least through March 1999, including the funding of working capital,
acquisitions, capital expenditures and other needs.
Year 2000 Software Issue
The Company uses a number of computer software programs and operating
systems in its operations. To the extent that the software applications used in
such functions and communications are unable to recognize the year 2000, the
Company may incur expenses in connection with the need to remediate such
software and also may incur the risk and potential expense of disruptions that
may be caused by the software's impaired functioning as the year 2000
approaches.
Almost all of the Company's subsidiaries and operating units utilize the
OMD software system ("OMD"). According to the OMD Corporation, many of the
changes for Year 2000 compliance have already been implemented. The Company has
been informed by the OMD Corporation that the areas of OMD that have already
been updated for Year 2000 are those used in invoicing, payables, financials,
inventory and service management. The final changes for Year 2000 compliance
from OMD are expected to be available no later than March 31, 1999. If OMD does
not provide Year 2000 software in accordance with anticipated timetables, the
Company would have to handle any processing areas that are not Year 2000
compliant manually, or obtain software that is Year 2000 compliant from a third
party to cover such areas.
In addition to the OMD software, the operating systems at the Company and
its subsidiaries are being analyzed for Year 2000 compliance. As of this date,
80% of the Company's subsidiaries are currently using operating systems for
their UNIX servers (on which the OMD system is run) which the Company believes
are Year 2000 compliant. Operating systems and bios software levels at the
server/workstation level are being analyzed. In the event that new PC based
operating systems or patches are required, the Company expects to be able to
update such systems or patches no later than the second quarter of 1999. If
workstation patches or hardware replacements are required, the Company expects
to be able to update such systems or patches no later than the third quarter of
1999.
15
<PAGE>
In addition, the Company communicates electronically with a number of its
suppliers and customers with respect to a variety of functions, including
ordering, billing and payroll. Any failure of the software of the Company's
suppliers or customers to address the Year 2000 issue could impair the Company's
ability to perform such functions. The Company is analyzing the potential impact
of the Year 2000 issue on the Company's interactions with its suppliers and
customers.
The Company believes that other electronic systems such as security,
environment controls and telephone systems are being analyzed for Year 2000
compliance by the Company's various vendors of this equipment. The Company
anticipates that all of these systems will be Year 2000 compliant in advance of
the actual Year 2000 date.
There can be no assurance that the Company's software will be made Year
2000 compliant prior to any disruption caused by the Year 2000 date. Any such
disruption may have an adverse, material effect on the Company's business,
financial condition or results of operations. In addition, the Company is in the
process of analyzing the effect of Year 2000 noncompliance in the software used
by its vendors, customers, employees and other third parties to determine what
effects, if any, such noncompliance may have on the Company.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(d) On June 17, 1998, the Company's Registration Statement on Form S-1
(No. 333-48103), registering the initial public offering by the Company of
6,000,000 shares of the Company's Common Stock, par value $.01, plus an
additional 900,000 shares to be sold by selling stockholders in the event that
the underwriters exercised over-allotment options granted by such selling
stockholders, became effective. The aggregate offering price of the 6,000,000
shares registered on behalf of the Company was $72,000,000, all of which was
sold upon the closing of the initial public offering on June 22, 1998. The
aggregate offering price of the 900,000 shares registered on behalf of the
selling stockholders was $10,800,000. On July 14, 1998, the over-allotment
options were exercised with respect to 300,000 shares of Common Stock, for an
aggregate offering price of $3,600,000. The Company's initial public offering
terminated upon the expiration of the remainder of the over-allotment options.
Prudential Securities Incorporated, Salomon Smith Barney Inc., William Blair &
Company, L.L.C. and Raymond James & Associates acted as managing underwriters
for the Company's initial public offering.
Underwriting discounts and commissions for the shares sold by the Company
in the initial public offering totaled $5,040,000. In addition, in connection
with the initial public offering the Company paid approximately $14,000 in
underwriters' expenses and an estimated $2,545,000 in additional expenses,
resulting in total estimated expenses of approximately $7,599,000. None of the
Company's expenses in connection with the offering were paid directly or
indirectly to directors or officers of the
16
<PAGE>
Company or their associates, or to persons owning 10% or more of the Company's
Common Stock or other affiliates of the Company. After deducting expenses, the
Company received approximately $64,401,000 in proceeds from the initial public
offering.
Of the $64,401,000 in estimated net proceeds to the Company, $28,831,000
was used to repay amounts due to JNL which holds in excess of 5% of the
Company's outstanding Common Stock and is affiliated with Bruce Gorchow, one of
the directors of the Company, in connection with the Company's credit facility
from JNL. The remaining approximately $35,570,000 in proceeds was deposited upon
the closing of the offering into a trust account to be used to pay the cash
portion of the redemption price of the Company's Class A Common Stock, which was
redeemed upon the closing of the initial public offering. Upon the redemption of
the Company's Class A Common Stock, Golder, Thoma, Cressey, Rauner Fund IV
Limited Partnership, which holds 39% of the Company's Common Stock and is
affiliated with two of the Company's directors, Carl Thoma and William
Kessinger, and JNL became entitled to receive payments of approximately
$23,191,000 and $3,833,000, respectively, and Thomas Johnson, the Company's
President, Chief Executive Officer and a director of the Company, Neal Berney, a
director of the Company, and Raymond Schilling, Michael Mueller and Alfred
Vieira, executive officers of the Company, became entitled to receive
approximately $572,000, $225,000, $12,000, $23,000 and $12,000, respectively.
The remaining Class A redemption payments were made to persons who are not
directors or officers of the Company or their associates, or 10% stockholders or
other affiliates of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
As of May 11, 1998, stockholders holding at least 99% of the Company's
Common Stock then outstanding, 99% of the Company's Class A Common Stock then
outstanding and 100% of the Company's Class C Common Stock then outstanding had
consented in writing to the following actions:
1. The re-election of the Company's Board of Directors in its
entirety;
2. the amendment of the Company's Certificate of Incorporation (the
"Pre-IPO Amendment") to (a) effect a 132-for-1 stock split of outstanding shares
of the Company's Class B Common Stock and Class C Common Stock; (b) increase the
number of shares of Class B Common Stock and Class C Common Stock the Company
was authorized to issue; (c) redesignate the Company's Class B Common Stock as
"Common Stock"; (d) provide for the redemption of outstanding shares of the
Company's Class A Common Stock upon the closing of the Company's initial public
offering in accordance with certain agreements entered into by the Company and
its stockholders; (e) provide for the automatic conversion of outstanding shares
of the Company's Class C Common Stock into shares of Common Stock upon the
Closing of the Company's initial public offering; (f) authorize shares of blank
check preferred stock; and (g) otherwise amend and clarify the
17
<PAGE>
rights, preferences and privileges of shares of the Company's Class A Common
Stock, Common Stock and Class C Common Stock;
3. the amendment of the Company's Amended and Restated Certificate of
Incorporation to be effective upon the closing of the Company's initial public
offering;
4. the amendment of the Company's Bylaws to be effective upon the
closing of the Company's initial public offering; and
5. the approval of the Company's 1998 Stock Option and Incentive Plan.
On May 27, 1998, stockholders holding at least 68% of the Company's
Common Stock then outstanding, 77% of the Company's Class A Common Stock then
outstanding and 100% of the Company's Class C Common Stock then outstanding
consented in writing to an additional amendment to the Pre-IPO Amendment
authorizing a greater number of shares of Class C Common Stock than was
originally authorized in the Pre-IPO Amendment.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Exhibit
------ -------
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Amended and Restated Bylaws
*4.1 Specimen Common Stock Certificate
*10.1 Termination Agreement, dated as of May 27, 1998, by and among
the Company and the stockholders identified therein.
*10.2 Third Amendment to Amended and Restated Credit Agreement and
Loan Documents, dated as of May 8, 1998, by and among Jackson
National Life Insurance Company, PPM America, Inc., the
Company and its subsidiaries.
*10.3 1998 Stock Option and Incentive Plan.+
18
<PAGE>
Number Exhibit
------ -------
*10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.+
*10.5 Letter Agreement dated April 22, 1998, by and among Global, First
Union National Bank and First Union Capital Markets Group.++
**11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 333-48103, which was declared effective by the Securities and
Exchange Commission on June 17, 1998.
** See Note 2 to the Notes to Consolidated Financial Statements
+ Management contract or compensatory plan, contract or arrangement.
++ Confidential treatment has been granted to certain portions of this
exhibit.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
19
<PAGE>
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.
Global Imaging Systems, Inc.
-------------------------------------
(Registrant)
August 13, 1998 /s/ Raymond Schilling
----------------------------------- -------------------------------------
Date
Raymond Schilling
Chief Financial Officer, Secretary,
and Treasurer, (Duly Authorized
Officer and Principal Financial and
Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
-------------
(Pursuant to item 601 of Regulation S-K)
Number Exhibit
------ -------
*3.1 Amended and Restated Certificate of Incorporation
*3.2 Amended and Restated Bylaws
*4.1 Specimen Common Stock Certificate
*10.1 Termination Agreement, dated as of May 27, 1998, by and among
the Company and the stockholders identified therein.
*10.2 Third Amendment to Amended and Restated Credit Agreement and
Loan Documents, dated as of May 8, 1998, by and among Jackson
National Life Insurance Company, PPM America, Inc., the
Company and its subsidiaries.
*10.3 1998 Stock Option and Incentive Plan.+
*10.4 Form of Indemnification Agreement between the Company and its
directors and executive officers.+
*10.5 Letter Agreement dated April 22, 1998, by and among Global,
First Union National Bank and First Union Capital Markets
Group.++
**11.1 Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, No. 333-48103, which was declared effective by the Securities
and Exchange Commission on June 17, 1998.
** See Note 2 to the Notes to Consolidated Financial Statements.
+
+ Management contract or compensatory plan, contract or arrangement.
++ Confidential treatment has been granted to certain portions of this
exhibit.
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,115
<SECURITIES> 0
<RECEIVABLES> 33,631
<ALLOWANCES> 895
<INVENTORY> 20,473
<CURRENT-ASSETS> 2,281
<PP&E> 25,908
<DEPRECIATION> 16,482
<TOTAL-ASSETS> 166,854
<CURRENT-LIABILITIES> 32,549
<BONDS> 0
0
0
<COMMON> 67,838
<OTHER-SE> 1,050
<TOTAL-LIABILITY-AND-EQUITY> 166,854
<SALES> 58,202
<TOTAL-REVENUES> 58,202
<CGS> 37,893
<TOTAL-COSTS> 51,182
<OTHER-EXPENSES> 901
<LOSS-PROVISION> 51
<INTEREST-EXPENSE> 2,230
<INCOME-PRETAX> 3,889
<INCOME-TAX> 1,801
<INCOME-CONTINUING> 2,088
<DISCONTINUED> 0
<EXTRAORDINARY> (684)
<CHANGES> 0
<NET-INCOME> 1,404
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
