<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1999
OR
[_]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 000-24373
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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
incorporate or organization) Identification No.)
3820 Northdale Boulevard, Suite 200A 33624
Tampa, Florida (Zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (813) 960-5508
----------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
<S> <C>
</TABLE>
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
----------------
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 periods that the
registrant was required to file such report(s)) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10-K. [_]
As of June 17, 1999, the aggregate market value of the 8,707,531 shares of
Common Stock held by non-affiliates of the registrant was $145,851,144 based on
the closing sale price ($16.75) of the registrant's Common Stock as reported on
the Nasdaq National Market on such date. (For this computation, the registrant
has excluded the market value of all shares of its Common Stock reported as
beneficially owned by executive officers and directors of the registrant and
certain other stockholders; such exclusion shall not be deemed to constitute an
admission that any such person is an "affiliate" of the registrant.) As of June
17, 1999, there were outstanding 18,725,841 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to stockholders for the year ended March 31,
1999, are incorporated by reference into Part II of this annual report.
Portions of the proxy statement for the annual stockholders meeting to be held
in August 1999 are incorporated by reference into Part III of this annual
report.
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<PAGE>
GLOBAL IMAGING SYSTEMS, INC.
Annual Report on Form 10-K
March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I................................................................... 1
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 9
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............. 9
Executive Officers of Global............................................. 9
Risk Factors............................................................. 10
PART II.................................................................. 15
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................................. 15
Item 6. Selected Financial Data.......................................... 15
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 15
Item 8. Financial Statements and Supplementary Data...................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 16
PART III................................................................. 16
Item 10. Directors and Executive Officers of the Registrant.............. 16
Item 11. Executive Compensation.......................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 16
Item 13. Certain Transactions with Related Parties....................... 16
PART IV.................................................................. 16
Item 14. Exhibits, Financial Statements, Schedules and Reports and Form
8-K..................................................................... 16
SIGNATURES............................................................... 20
</TABLE>
<PAGE>
PART I
Item 1. Business
Unless the context otherwise requires, as used in this Form 10-K, the terms
"Global," "Company," "our," or "we" refer to Global Imaging Systems, Inc. and
its subsidiaries.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-K and the information incorporated into this Form 10-K contain
forward-looking statements, including statements about our acquisition and
business strategy, our expected financial position and operating results, the
projected size of our markets and our financing plans and similar matters. We
have based these forward-looking statements largely on our current expectations
and projections about future events and financial trends affecting the
financial condition of our business. These forward-looking statements are
subject to risks, uncertainties and assumptions about Global, including, among
other things:
. General economic and business conditions, both nationally and in our
markets.
. Our acquisition opportunities.
. Our expectations and estimates concerning future financial performance,
financing plans and the impact of competition.
. Anticipated trends in our business, including those described in the
information incorporated into Item 7.
. Existing and future regulations affecting our business.
. Other risk factors set forth in "Risk Factors."
In addition, in those and other portions of this annual report, the words
"believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect" "project" and similar expressions, as they relate to Global, its
management, and its industry are intended to identify forward-looking
statements. All forward-looking statements attributable to us or to persons
acting on our behalf are expressly qualified in their entirety by this
cautionary statement.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this Form 10-K might not transpire.
Global Imaging Systems
Global Imaging Systems is a consolidator in the highly fragmented office
imaging solutions industry. Global provides a broad line of office imaging
solutions, including the sale and service of automated office equipment,
network integration services, electronic presentation systems and document
imaging management systems. Since its founding in June 1994, Global has
acquired 32 businesses in the United States. Twelve of these businesses are
"core" companies, where Global concentrates administrative functions within a
region. The remaining 20 acquired businesses are "satellite" companies, which
means their administrative functions have been transferred to, and their
operations have been integrated into, a core company. Global's operating
philosophy is to "think globally, act locally." Under its decentralized
management system, Global typically continues to operate its acquired companies
under their pre-acquisition names and management in order to preserve client
relationships and motivate management.
Global believes its emphasis on superior customer service and the
contractual nature of its service business can generate significant recurring
revenue. Senior management largely attributes Global's solid historical
operating performance to: (1) employing a strict performance-based benchmarking
model, (2) pursuing a
1
<PAGE>
disciplined acquisition strategy and (3) integrating acquisitions as they are
made. For the year ended March 31, 1999, Global had pro forma revenues of $357
million.
Global seeks to become the provider of choice for all of its customers'
office imaging needs by offering a full range of products and services and
superior customer service. While Global's clientele includes large, Fortune 500
companies, its growth has been, and is expected to be, largely driven by
serving middle market businesses. Global sells and services a variety of office
imaging solutions, including copiers, facsimile machines, printers, LCD
projectors, overhead projectors, video teleconferencing equipment, optical
scanning equipment, micrographics equipment, and the design and installation of
equipment related to computer networks. In addition, Global offers a variety of
ongoing services, including supply and service contracts, network management
contracts, technical support and training.
Global's strategic objective is to continue to grow profitably in existing
markets and new markets through internal growth and by acquiring additional
businesses. Global's strategy for stimulating internal growth is to offer new
products and services, to take advantage of cross-selling opportunities, and to
market aggressively to existing and new customers. Global enters new geographic
markets by acquiring additional core companies and expanding its core markets
through acquisitions of additional satellite companies.
Currently, Global's twelve core companies operate in 70 locations in 18
states, plus the District of Columbia. Global targets for acquisition as core
companies businesses that are leading competitors in the markets they serve.
Global's goal is to acquire core and satellite companies throughout the United
States and Canada.
Certain information regarding Global's core and satellite companies,
including pro forma revenues for the fiscal year ended March 31, 1999, is
summarized in the following table. The pro forma revenues in this table and the
pro forma information presented elsewhere in this annual report give effect to
acquisitions made during the fiscal year ended March 31, 1999 as if such
acquisitions had occurred on April 1, 1998.
<TABLE>
<CAPTION>
Pro Forma No. of Years in Date
Core Company Region Revenues Satellites Business Acquired
(in millions)
<S> <C> <C> <C> <C> <C>
Felco Office Systems Texas $34.7 2 14 Jul. 1994
Conway Office Products Northeast 45.2 4 22 Jan. 1995
Berney Southeast 16.3 3 34 Feb. 1995
Amcom Office Systems Western Pennsylvania 14.0 2 21 Feb. 1996
Copy Service & Supply Southeast 7.6 -- 15 Jul. 1996
Southern Business
Communications Southeast 48.2 3 18 Nov. 1996
Electronic Systems Mid-Atlantic 76.9 2 18 Jul. 1997
Quality Business Systems Pacific Northwest 22.6 3 13 Sep. 1997
Connecticut Business
Systems Northeast 22.4 1 10 Jan. 1998
Carr Business Systems Northeast 21.3 -- 52 Sep. 1998
Distinctive Business
Products Chicago Metro Area 18.0 -- 22 Dec. 1998
Capitol Office Solutions Mid-Atlantic 29.3 -- 17 Dec. 1998
</TABLE>
Recent Developments
In March 1999 Global signed a non-binding letter of intent to acquire a
company with a total of approximately $70 million in annual revenues that would
serve as a core company for Global in the Front Range of the Rocky Mountains.
This proposed acquisition has not been included in any pro forma financial
information contained in this annual report. Global is also continually
evaluating and having discussions with other acquisition candidates as part of
its growth strategy.
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The Industry
The office imaging solutions industry is highly fragmented. Global estimates
that there are approximately 3,700 dealer and distributor outlets in the United
States primarily engaged in the sale of copiers and other automated office
equipment and related service, parts, and supplies, and that approximately
3,100 of these dealer outlets are unaffiliated. Global believes the current and
projected sizes of the office imaging markets Global serves are as set forth in
the following table:
<TABLE>
<CAPTION>
Domestic Sales
-----------------------
1997 2002
Market (estimated) (projected)
- ------ ----------- -----------
(in billions)
<S> <C> <C>
Analog black and white copier and related service and
supplies............................................. $21.1 $17.1
Digital black and white copier and related service and
supplies............................................. 3.4 16.7
Digital color copier and related service and
supplies............................................. 1.9 5.9
Network consulting and integration services........... 6.5 13.9
Network management services........................... 1.8 4.2
Electronic presentation systems....................... 1.0 1.8
Document technology systems........................... 6.4 18.6
----- -----
Total............................................... $42.1 $78.2
===== =====
</TABLE>
Consolidation
Independent distributors and service providers are consolidating throughout
the office imaging solutions industry. A number of factors are driving this
consolidation, including the following:
Technological Change. The technology of office imaging solutions is changing
rapidly. Digital technology, which allows images to be captured, transmitted,
reproduced and stored over wide geographic areas through networks of personal
computers, has in recent years been incorporated into copiers, electronic
presentation equipment and document imaging management ("DIM") technology. As a
result, copiers, facsimile machines and printers are gradually converging in
function and computers and networks are becoming an increasingly important
component of office imaging systems. This has led larger companies to demand
more centralized network integration services over a broader geographic area.
The rapid pace of technological change, including the resulting expansion of
product offerings and increase in product support costs, have outpaced the
technical, managerial and financial resources of many smaller distributors and
service providers, causing them to seek larger partners. Further, the blurring
of the distinction among office imaging technologies and the increased role for
computers has led dealers without network integration expertise to partner with
companies that have such expertise.
Dealer Consolidation by Suppliers. The cost of new product development and
fierce competition among equipment manufacturers have led manufacturers to seek
efficiencies. As a result, manufacturers are consolidating their dealer
networks, concentrating their business with a smaller number of dealers that
possess leading service capabilities, wide geographic coverage and sufficient
financial resources.
Distribution Channel Changes. Changes in distribution channels are also
leading to consolidation in the automated office equipment market. Office
superstores and consumer electronics chains now sell lower-end office products
at prices that are forcing smaller dealers out of the market. Smaller dealers
also face difficulty competing in the market for mid- and high-range office
equipment, because they are not well equipped to provide the sophisticated
support services required by businesses that purchase these products.
Typically, office superstores and consumer electronics chains also do not offer
the support services required by purchasers of mid- and high-range office
equipment.
3
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Office Imaging Products and Services
Automated Office Equipment. Dealers in the automated office equipment market
sell and service some or all of the following: black and white copiers (digital
and analog), color copiers, duplicators, facsimile equipment, printers and
multi-function equipment.
Network Integration Services. With the rise of digital technology, customers
increasingly need network integration services as part of their office imaging
solutions. Network integrators provide outsourced management and support to
organizations' computer network infrastructures. As organizations seek to take
advantage of productivity-enhancing computer network technology, they face
complex and costly issues relating to network design, selection, implementation
and management. Among other challenges, organizations must (1) select from an
expanding number of product options with shortening life cycles, (2) integrate
diverse and often incompatible hardware and software environments and (3) deal
with a shortage of qualified information technology service personnel. As a
result, many smaller businesses seek to outsource installation, upgrade and
support and many large organizations seek to outsource network improvement
functions and the evaluation of new products.
Electronic Presentation Systems. Dealers in the electronic presentation
systems market sell and service LCD projectors and panels, smartboards,
overhead projectors and video conferencing equipment. As in the automated
office equipment market, products in this market increasingly use digital
technology, and many customers for these products have designated a single
buyer to address their needs in both markets. Competition among manufacturers
in this market is strong, leading manufacturers to introduce new products
frequently.
DIM Systems. Like automated office equipment and electronic presentation
systems, DIM systems also involve digital technology and are ultimately used by
the same end-users as other types of office imaging equipment. Dealers in this
market sell and service optical disk storage equipment, write once read many
("WORM") disks and CD-ROM optical storage products, as well as micrographic
equipment (microfilm and microfiche). DIM systems capture and store large
volumes of visual data. Key customers for these products include banks,
educational institutions, government institutions, libraries and insurance
companies.
Growth Strategy
Global believes it is well positioned to benefit from industry trends and
continued consolidation in the office imaging solutions industry. Global's goal
is to become the provider of choice for all of its customers' office imaging
needs by offering a full range of products and services and superior customer
service. The key elements of Global's strategy include:
Serve as a Single Source Provider of Office Imaging Solutions. Global
believes that offering a full spectrum of products and services will give it a
competitive advantage and enable it to capitalize on its customer relationships
by cross-selling products and services. As the technology that drives copiers,
facsimiles, printers, electronic presentation equipment and DIM equipment
converges, customers increasingly need computers and networks to use these
products. Accordingly, customers are demanding more integrated office imaging
solutions. Global plans to expand its product lines so that, within each
geographic region it serves, Global can offer automated office equipment,
network integration services, electronic presentation systems and DIM systems.
As Global's operations in these last three markets expand, Global expects an
increasing percentage of its revenues and gross profits will be generated by
sales of equipment and supplies, which typically have lower gross profit
margins than sales of service and rentals. Global is also considering
leveraging its infrastructure, customer base, and expertise by offering
outsourced facilities management services.
Provide Timely and Reliable Service. Global seeks to achieve the highest
level of service. Effective and responsive service is essential to obtaining
repeat business and developing market recognition. Providing timely and high
quality service also allows Global to maintain its profit margins, engage in
cross-selling, and enjoy a source of recurring revenue.
4
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Make Strategic Acquisitions. Global plans to continue acquiring core
companies in targeted geographic markets and to expand these core acquisitions
through internal growth and satellite acquisitions. Global looks for core
acquisition candidates that are led by an experienced management team that will
continue to manage the company after Global acquires it, that have a strong
regional market share, and that can grow internally and through the acquisition
of satellite companies. Global's senior management team has substantial
experience in making acquisitions. Since its founding in June 1994, Global has
acquired twelve core companies in the United States, and an additional 20
satellite companies which have been integrated into the core companies.
Global's goal is to acquire core and satellite companies throughout the United
States and Canada.
A key component of Global's growth strategy is to acquire satellite
companies in or near its core companies' markets. Core company management
frequently identifies appropriate satellite acquisition candidates. In
evaluating potential satellite acquisitions Global considers, among other
factors, the potential satellite's proximity to a core company, the fit between
its product lines and those of the nearby core company, and the potential
satellite's management, employee base and service base under contract.
Stimulate Internal Growth. Global's strategy for stimulating internal growth
in its core companies is to increase sales force productivity through
performance benchmarks; expand product and service offerings; increase sales
force size; and aggressively cross-sell products and services.
Optimize Profitability Using Global's Benchmark Model. Global's senior
management has developed an industry management model composed of a
comprehensive set of performance benchmarks. These benchmarks, which are the
focus of internal reporting from the core companies to headquarters, allow
Global's senior and local management to monitor and improve the operations of
each core company. Using these criteria, Global trains its core and satellite
company managers to optimize their business mix and improve performance.
Global strives to reduce costs by consolidating the back-office functions of
its satellite acquisitions into core operations, enabling its core companies to
decrease technician driving time and increase the productivity of sales
personnel and administrators. Global also works to reduce costs by
standardizing financial reporting, cash and inventory management, payroll,
billing, collections, insurance and employee benefit programs, and by
negotiating advantageous relationships with equipment manufacturers, other
suppliers and lessors.
Operate with a Decentralized Management Structure. Global believes that its
core companies' experienced local management possess valuable understanding of
their markets and customers. Therefore, Global gives its core company managers
responsibility for day-to-day operating decisions. Core companies and, in some
cases, satellite companies retain their local name and management after Global
acquires them. This decentralized approach permits local management to maintain
focus and motivation and optimizes customer relationships. Local management is
supported by a senior management team that focuses on Global's growth strategy
as well as corporate planning and financial reporting and analysis.
5
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Products and Services
Global currently sells and services the following: (1) automated office
equipment, (2) network integration services, (3) electronic presentation
systems and (4) document imaging management systems ("DIM" systems). In each of
these markets, Global provides a number of office imaging solutions, including
the following:
Automated Office Network Electronic DIM Systems
Equipment Integration Presentation
Services Systems
. Microfiche and
microfilm
equipment
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. Network design . LCD projectors
. Black and white and and panels,
copiers installation, smartboards and
(digital and and related overhead
analog) software and projectors
hardware
. CD-ROM optical
storage
products
. Color copiers
(digital)
. Video . Write once read
. Technical conferencing many ("WORM")
support equipment disks and
contracts related
equipment
. Duplicators
(digital and
analog)
. Color printers
. Network
maintenance
contracts
. Audio visual . Related
. Facsimile equipment supplies
machines
. Training and . Related . Related service
. Printers support supplies contracts
(including
color)
. Internet . Related service. Training and
services contracts support
. Multi-function
equipment
. Training and
support
. Related supply
and service
contracts
Set forth below are Global's pro forma revenues from each of these markets
as a percentage of total pro forma revenues for the fiscal year ended March 31,
1999.
<TABLE>
<CAPTION>
Fiscal
Year Ended
March 31,
Markets Served 1999
-------------- ----------
<S> <C>
Automated Office Equipment..................................... 66%
Network Integration Services................................... 21%
Electronic Presentation Systems................................ 12%
DIM Systems.................................................... 1%
</TABLE>
Taking advantage of the "after market" opportunities generated by its sales
of office imaging equipment, Global derives a substantial amount of its
revenues from service activities. Service activities generally provide Global
with a recurring source of revenue. Global's copier service and supply
contracts, for example, provide it with a predictable source of revenue, since
payment is typically based on the number of copies customers make. In the
network integration market, Global focuses on contracts to provide ongoing
maintenance and technical support, since these types of contracts generate a
more steady revenue stream than project-based contracts.
Global believes effective and responsive service is essential for it to
obtain repeat business and to develop the market recognition it needs in order
to grow. Most of Global's copier sales, on a pro forma basis and as measured by
revenue generated, are accompanied by service and supply contracts. These
generally continue for a one year term but, in some cases, continue from month
to month. As part of Global's commitment to quality customer service, Global
works to provide its customers with speedy, reliable service. For example,
Global tries to respond to service calls from its automated office equipment
customers within two to four hours if the call comes in during business hours.
For network integration customers, Global offers a 24 hour technical assistance
"hotline." In addition, Global's service technicians are generally
manufacturer- or vendor-certified to service the equipment Global sells.
Customers, Sales and Marketing
Global believes its customers decide to purchase products and services from
Global based on a variety of factors, the most important of which are the
strength of the relationship with Global, quality of service provided, and
price.
6
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Global's growth has been largely driven by serving middle market businesses.
Global also serves a number of large Fortune 500 companies as well as
educational institutions, government entities and other not-for-profit groups.
Global estimates that over 60,000 customers purchased equipment or services
from Global in the past twelve months, on a pro forma basis. During the fiscal
year ended March 31, 1999, on a pro forma basis, none of Global's customers
accounted for more than 3% of total revenues and its top five customers
collectively accounted for less than 5% of total revenues.
Because the management teams at Global's core companies understand their
markets and customer relationships, Global's core company managers make local
marketing decisions, including decisions regarding product offering mix,
promotional programs, advertising, and trade show attendance. Global employs
approximately 620 people in sales and marketing. All of Global's sales
personnel are compensated at least partly on a commission basis, with local
management determining the structure of sales compensation and commissions
within the parameters of Global's industry management model. Global generates
sales from within its existing customer base by tracking lease expirations,
cross-selling its products and services, and giving incentives to service
personnel for creating sales leads. Each of Global's core companies also
generates sales leads through telemarketing and door-to-door marketing.
Training
Global provides its sales and service employees extensive, ongoing training.
Each core company has its own technical trainer and training is scheduled on a
regular basis. Core company technical trainers are typically certified by
Global's suppliers, which makes Global's service technicians manufacturer- or
vendor-certified technicians. Global also provides formalized product and
general sales training to its sales and marketing personnel.
Suppliers
The following table lists the products Global sells and their manufacturers
in each of the office imaging markets Global serves:
<TABLE>
<C> <S>
Automated Office Equipment
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Copiers: Canon Inc., Konica, Mita Copystar
America, Ricoh Corporation, Savin
Corporation, Sharp, Toshiba America, Inc.
Facsimile machines: Muratec America, Inc., Panasonic
Communications and
Systems Company, Savin, Toshiba
Duplicators: Riso, Inc.
Printers: Hewlett-Packard Company, Tektronix, Inc.
Network Integration Services
- -------------------------------------------------------------------------------
Personal and laptop computers: AST Research, Inc., Compaq Computer
Corporation, Dell Computer Corporation,
IBM, Intel Corporation, NEC America,
Inc., Toshiba
Networking software: Banyan Systems Incorporated, Microsoft
Corporation, Novell, Inc., Raptor
Systems, Inc.
Electronic Presentation Systems
- -------------------------------------------------------------------------------
Overhead projectors: Apollo International of Delaware, Inc.,
DuKane Corporation, 3M
LCD projectors: Epson America, Inc., In Focus Systems,
Inc., Lightware, Inc., Proxima
Corporation, Sharp, Sony Electronics Inc.
Video conferencing equipment: Intel
Smart Boards: Smart Technologies, Inc.
DIM Systems
- -------------------------------------------------------------------------------
Microfilm and microfiche equipment: Canon
Optical data storage equipment: Canon, Compaq
Document management software: Westbrook Technologies, Inc.
</TABLE>
7
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During the fiscal year ended March 31, 1999, on a pro forma basis, Global
purchased 14% of its equipment, parts and supplies from Konica and 10% from
Sharp. No other supplier represented in excess of 7% of such purchases, on a
pro forma basis.
Global's agreements with suppliers generally permit Global to sell
particular products on a nonexclusive basis in particular geographic areas. In
most cases, Global's agreements extend for one-year renewable terms, which the
supplier can choose not to renew with 30 days' notice. In addition, Global's
suppliers can terminate Global's agreements upon notice (1) if Global does not
meet minimum purchase quotas or other requirements or (2) under certain other
conditions, including a change in Global's ownership.
Leasing and Rentals
A majority of the copiers Global sells are financed by third-party leasing
companies. Under Global's "Preferred Vendor Leasing Program," Global has
granted three nationwide equipment lease vendors--General Electric Capital
Corporation, Copelco Capital, Inc., and De Lage Landen Financial Services,
Inc.--preferential rights to lease copiers to Global's customers in exchange
for their agreement to (1) offer Global's customers better leasing rates and
terms than are generally available through individual copier dealers, (2)
provide Global with control over what happens to leased equipment at the end of
the lease term and (3) use a standardized leasing application. Under these
arrangements, Global has the option to purchase the leased equipment, under
already negotiated terms, at the end of the lease term. This gives Global the
flexibility to sell the equipment to its customers at the end of the lease term
or to provide for such a sale at the time of original purchase. Global plans to
increase the use of third party leases in the electronic presentation and DIM
systems markets where, Global believes, high equipment costs make leasing an
attractive financing alternative for many customers.
In some cases, Global's automated office equipment dealers also rent
equipment. Rental arrangements provide Global with a steady, monthly revenue
stream and, like its leasing arrangements, give Global control over disposition
of the equipment at the end of the rental term.
Competition
Global operates in highly competitive markets, which forces it to compete
for customers and sometimes for acquisition candidates. Competitors in the
automated office equipment market, the electronic presentation systems market
and the DIM systems market include large dealers, including Danka, IKON and
independent dealers, as well as manufacturers' sales and service divisions,
including those of Canon, Eastman Kodak Company, Konica, Minolta Co., Ltd.,
Pitney Bowes, Inc., Wang Laboratories, Inc. and Xerox. Global also competes
with office superstores and consumer electronics chains in these markets.
Principal areas of competition in these markets include price and product
capabilities; quality and speed of post-sales service support; availability of
equipment, parts and supplies; speed of delivery; financing terms and
availability of financing, leasing, or rental programs.
Competition from large, nationwide competitors is likely to increase as
Global seeks to attract additional customers, expand its markets geographically
and broaden its product and service offerings. Competition from large,
nationwide competitors will also increase if Global's industry continues to
consolidate. Finally, as digital and other new technologies develop, Global may
face competition from new distribution channels, including computer
distributors and value added resellers, for products containing new technology.
Some competitors have greater financial and personnel resources than Global.
In the network integration services market Global competes with the large
providers, including GE Capital Information Technology Solutions, Inacom Corp.
and Vanstar Corporation; smaller competitors with regional or local operations;
and the in-house capabilities of its customers. Principal areas of competition
in this market include reputation, quality and speed of support, and price.
Global also faces competition for core and satellite acquisitions from
consolidators such as IKON, Danka, and a number of other independent dealers.
8
<PAGE>
Employees
Global employs approximately 1,750 people, most of whom work at Global's
core companies. Of these, approximately 620 employees work in sales and
marketing, 750 in service, and 350 in operations and administration. Twenty-
nine employees work at Global's corporate headquarters in Tampa, Florida. None
of Global's employees is covered by collective bargaining agreements. Global
believes it has good relations with its employees.
Government and Environmental Regulation
Global is subject to regulation under various federal, state and local laws
relating to employee safety and health and environmental protection. Global is
not aware of any material non-compliance with any of these laws.
Item 2. Properties
None of the physical properties Global uses in its business are materially
important to Global.
Item 3. Legal Proceedings
Global is not currently involved in any legal proceeding or investigation
that it expects to have a material adverse effect on it.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Global's stockholders during the
three months ended March 31, 1999.
Executive Officers of Global
The executive officers of Global are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas S. Johnson....... 53 Director, President and Chief Executive Officer
Raymond Schilling....... 44 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
Michael Mueller......... 47 Senior Vice President, Chief Operating Officer
Alfred N. Vieira........ 51 Vice President--Service
Todd S. Johnson......... 32 Vice President--Acquisitions
</TABLE>
Thomas S. Johnson has served as a director and as President and Chief
Executive Officer since Global's founding in June 1994. From 1991 to 1994, Mr.
Johnson was an office imaging industry consultant. From 1989 to 1990, Mr.
Johnson served as Chief Operating Officer for Danka. From 1975 to 1989, Mr.
Johnson worked at IKON (formerly known as Alco Standard Corporation) in various
staff and operating roles. When he left there in 1989, he was Vice President--
Operations of the Office Products group and was responsible for acquisitions
and turning around under-performing operations. Mr. Johnson has been involved
in the acquisition of over 60 office equipment dealers since 1985, and has over
23 years of experience in acquiring and integrating businesses. Mr. Johnson
graduated with a B.S. degree from the University of Florida in 1972, and
received his MBA from Harvard Business School in 1976.
Raymond Schilling has served as Senior Vice President of Global since April
1999 and as Vice President, Chief Financial Officer, Secretary and Treasurer of
Global since its inception in June 1994. From 1988 to 1994, Mr. Schilling was
Vice President--Finance of the California/Nevada region of McCaw Communications
and responsible for all of its finance and administrative functions. From 1980
to 1988, Mr. Schilling worked with
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Mr. Johnson at IKON in various accounting and financial reporting functions,
including as controller of Alco Office Products, where his responsibilities
included acquisitions and evaluation, integration, development and installation
of financial systems. From 1986 to 1988, Mr. Schilling also was Vice President
of Finance and Administration of San Sierra Business Systems (an Alco Office
Products dealer). From 1976 to 1980, Mr. Schilling was employed by Price
Waterhouse as a CPA. In total, Mr. Schilling has been involved in the
acquisition of over 35 businesses and has over 16 years of experience in
acquiring and integrating businesses. Mr. Schilling graduated with a B.A. in
Economics and Accounting from Muhlenberg College in 1976.
Michael Mueller has served as Senior Vice President of Global since April
1999 and as Vice President and Chief Operating Officer of Global since January
1, 1995. From 1986 to December 1994, Mr. Mueller was employed as Vice President
by Global Services Inc., a copier and office product sales and service company
in Houston, Texas, and served as its Chief Financial Officer from 1988 to 1994.
Mr. Mueller obtained his B.B.A. from the University of Houston in 1974.
Alfred N. Vieira has served as a Vice President--Service of Global since
March 1997. From May 1996 to March 1997, Mr. Vieira served as Vice President
and General Manager of Felco Office Systems, Inc.'s four branch locations in
South Texas. From 1979 to May 1996, Mr. Vieira was employed by Global Services
Inc., and served as its Vice President of Operations from May 1988 to May 1996.
Mr. Vieira studied electrical engineering at City University of New York.
Todd S. Johnson has served as Vice President--Acquisitions since May 1999
and has been employed by Global since July 1994 in various roles, including as
Acquisition Team Manager. From 1993 to 1994, Mr. Johnson was employed as an
office imaging industry consultant. From 1989 to 1993, Mr. Johnson was an
officer in the United States Marine Corps. Mr. Johnson graduated from the
Pennsylvania State University with a B.S. in business management in 1989.
Risk Factors
Set forth below are the risks that we believe are material to investors who
purchase or own our common stock or our senior subordinated notes.
Our Indebtedness Results in Significant Debt Service Obligations and
Limitations. Because we financed our acquisitions primarily with debt, we
incurred substantial debt and, as a result, we have significant debt service
obligations. As of March 31, 1999, our total indebtedness was $168.3 million,
which represented 63.9% of our total capitalization. We also had $107.0 million
of additional borrowing availability under our senior credit facility. In
addition, our senior credit facilities and the indenture governing our senior
subordinated notes (the "notes") allow us to incur additional indebtedness
under certain circumstances. Our indebtedness poses important consequences to
investors, including the risks that:
. we will use a substantial portion of our cash flow from operations to
pay principal and interest on our debt, thereby reducing the funds
available for acquisitions, working capital, capital expenditures and
other general corporate purposes;
. we may be unable to obtain additional financing on satisfactory terms or
to otherwise fund working capital, capital expenditures, acquisitions,
and other general corporate requirements;
. our borrowings under our senior credit facility will bear interest at
variable rates, which would create higher debt service requirements if
market interest rates increase; and
. our degree of leverage may hinder our ability to adjust rapidly to
changing market conditions and could make us more vulnerable to
downturns in the economy generally or in our industry.
If we cannot generate sufficient cash flow from operations to meet our
obligations, we may be forced to reduce or delay acquisitions and other capital
expenditures, sell assets, restructure or refinance our debt, or seek
additional equity capital. We cannot assure that these remedies would be
available or satisfactory. In addition,
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our ability to pay principal and interest on the notes and to satisfy our other
debt obligations will depend on our future operating performance. Our operating
performance will be affected by prevailing economic conditions and financial,
business and other factors which may be beyond our control.
We May Be Unable to Integrate Our Acquired Businesses into Our Operations
Profitably. Integrating our acquired businesses may involve unanticipated
delays, costs or other operational or financial problems. Successful
integration of the businesses we acquire depends on a number of factors,
including our ability to transition acquired companies to our management
information systems and the ability of our core businesses to integrate
acquired satellites into their operations. In integrating our acquired
businesses, we may not achieve expected economies of scale or profitability or
realize sufficient revenues to justify our investment. For example, if we are
unable to increase the sales force productivity at our acquired businesses as
quickly as we expect, our revenues may not justify our investment. We also face
the risk that an unexpected problem at one of our acquired companies will
require substantial time and attention from senior management, distracting
management's attention away from other aspects of our business. We cannot be
certain that our management and financial reporting systems, procedures and
controls will be able to support us as we grow.
We Need Substantial Additional Funds to Finance Our Acquisitions. We intend
to finance our future acquisitions primarily by incurring additional
indebtedness, which will be substantial in relation to our equity capital. We
cannot be certain that we will be able to borrow money for future acquisitions
on favorable terms. Also, the restrictions imposed on us under our senior
credit facilities and the indenture governing the notes may limit our ability
to borrow additional funds to purchase acquisitions. We may also pay some of
the price of future acquisitions by issuing common stock or other equity
securities to the sellers of the businesses we acquire or in public or private
offerings. Depending on the market value of our common stock, either we or the
sellers of the businesses we acquire may not be willing to use common stock for
part of the consideration we pay. To the extent we do not have access to
additional debt and do not issue equity to pay for future acquisitions, we
would need to use more of our cash resources to continue our acquisition
program. We cannot be certain that we will be able to obtain debt or equity
financing or that we will have enough cash resources available to pay for
future acquisitions.
Our Combined Operating History is Limited. Although a number of the
companies we have acquired have been in operation for some time, Global itself
has a limited history of operations and profitability. Consequently, the
financial information in this annual report may not be indicative of our
financial condition and future performance. See the information incorporated
into Item 7.
We Have Limited Operating Experience in Some of Our Target Markets. A key
element of our expansion strategy is to acquire companies in each of our
geographic markets that sell and service electronic presentation systems or
document imaging management systems or that provide network integration or
facilities management services. Our limited experience in offering these
products and services may impair our ability to identify, acquire and integrate
appropriate companies. In addition, we may not be able to cross-sell these
products and services to our different customer bases. These markets also
present us with new challenges. For example, none of our companies currently
operates in the facilities management market. Success in this market would
require that we adapt our operations expertise to running labor-intensive
businesses.
We Depend on Our Chief Executive Officer. Our success substantially depends
on the efforts and ability of Thomas S. Johnson, Global's President and Chief
Executive Officer. Mr. Johnson has developed and implemented Global's industry
management model, and has many years of experience in the office imaging
industry and in the acquisition and integration of office imaging solutions
dealers. Mr. Johnson is currently employed under an executive agreement that
renews automatically each July for a one-year period unless otherwise
terminated by either party upon 30 days notice. The loss or interruption of his
services could have an adverse effect on Global.
We Need to Attract and Retain Skilled Employees. Many of our markets are
experiencing low levels of unemployment. As a result, we must compete to
attract, motivate and retain skilled employees, particularly
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systems integrators, service technicians, sales personnel and managers. We need
qualified service technicians to fulfill our service contracts and enter into
new ones. We need talented sales personnel to generate both sales and service
revenues. We need effective managers to integrate and operate our acquired
businesses profitably. As a result, if we cannot hire and keep skilled
employees, our business could be adversely affected.
Technological Developments Will Affect Our Business. The office imaging
solutions industry is moving toward digital technology in a multi-functional
office environment. We must be able to respond to this rapidly changing
environment. Our business will be adversely affected if (1) we or our suppliers
fail to anticipate which products or technologies will gain market acceptance
or (2) we cannot sell these products at competitive prices. We cannot be
certain that manufacturers of popular products will permit us to market their
newly developed equipment. In addition, new products containing new technology
may be sold through other channels of distribution. Technological advancements
may result in lowered per unit costs that may reduce our sales revenues and
reliability improvements that may reduce our service revenues. We will also
incur increased expenses to train our sales and service personnel on any new
technologies.
We Depend on Our Suppliers. A majority of our revenues come from the sale of
equipment and from service and supply contracts for this equipment. As a
result, our success depends on our access to reliable sources of equipment,
parts and supplies at competitive prices. During the fiscal year ended March
31, 1999, on a pro forma basis, Global purchased 14% of its equipment, parts
and supplies from Konica Business Technologies, Inc. and 10% from Sharp
Electronics Corporation. No other supplier represented in excess of 7% of such
purchases, on a pro forma basis. There is no guarantee that Konica, Sharp or
any of our other suppliers will continue to sell their products to us, or that
they will do so at competitive prices. Finally, other factors, including
reduced access to credit resulting from economic conditions in Asia, may impair
our suppliers' ability to provide products in a timely manner or at competitive
prices.
Our Markets are Highly Competitive. We operate in highly competitive
markets, which forces us to compete for customers and sometimes for acquisition
candidates. Competitors in the automated office equipment market, the
electronic presentation systems market and the DIM systems market include Xerox
Corporation, Danka Business Systems PLC, IKON Office Solutions, Inc. and other
large, independent dealers, as well as manufacturers' sales and service
divisions, office superstores and consumer electronics chains. In the network
integration services market we compete with large providers, smaller
competitors with regional or local operations, and the in-house capabilities of
our customers.
Some competitors have greater financial and personnel resources than we do.
Competition from large, nationwide competitors is likely to increase as we seek
to attract additional customers, expand our markets geographically and broaden
our product and service offerings. Competition from large, nationwide
competitors will also increase if our industry continues to consolidate.
Finally, as digital and other new technologies develop, we may face competition
from new distribution channels, including computer distributors and value added
resellers, for products containing new technology.
Year 2000 Issues May Affect Our Operations. The year 2000 issue exists
because many computer systems and applications use two-digit fields to
designate a year. Date-sensitive computer systems and programs may fail to
recognize or correctly process the year 2000 as the century date change
approaches or occurs. This inability to properly recognize or treat the year
2000 may cause systems errors or failures that could seriously disrupt or
prevent our normal business operations or could result in liability or
unanticipated costs as a result of disruptions in our customers' business
operations. The full extent of any adverse impact is impossible to determine.
We are evaluating all of our internal computers, computer equipment and
other equipment with embedded technology against year 2000 concerns. We have
identified five mission-critical aspects of our business: sales, billing,
service, delivery and accounting information systems. Should any of these
functions fail due to year 2000 issues, a material disruption in our business
could result. All of these systems except for sales may depend on the year 2000
readiness of software we purchase from the OMD Corporation. If this software is
not
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year 2000 ready on time, multiple mission-critical aspects of our business
could be disrupted. Our operations may also be negatively affected by the
inability of third parties with whom we deal to manage this problem in a timely
manner. In particular, if our equipment vendors' products are not year 2000
ready or if year 2000 problems impair our suppliers' ability to provide
products timely and at competitive prices, we could be adversely affected.
Finally, we may also face risks relating to potential costs or liability
resulting from the year 2000 issue. Given the breadth of different products and
services we offer, we could face expenses or claims arising from the effect of
the year 2000 issue on the products we sell and service. The year 2000
readiness of these products depends on the efforts of our suppliers. See "Year
2000 Issues" in the information incorporated into Item 7.
Covenants in Our Debt Instruments Restrict Our Capacity to Borrow and
Invest, Which Could Impair Our Ability to Expand or Finance Our Operations. The
indenture governing the terms of our notes imposes operating and financial
restrictions that limit our discretion on some business matters, which could
make it more difficult for us to expand, finance our operations or engage in
other business activities that may be in our interest. These restrictions limit
or prohibit our ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. undergo a change of control
. pledge or mortgage assets
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt could
become immediately due and payable.
Fluctuations in the Market Price of Our Common Stock May Make it More
Difficult for Us to Raise Capital. The market price of our common stock is
extremely volatile and has fluctuated over a wide range. These fluctuations may
impair our ability to raise capital by offering equity securities. The market
price may continue to fluctuate significantly in response to various factors,
including:
. general trends in the office imaging solutions industry
. announcements and actions by competitors
. fluctuations in competitor's stock prices
. low trading volume
. quarterly variations in operating results
. changes in estimates by securities analysts
. our liquidity or ability to raise funds
. general economic conditions
Our Directors, Officers and Significant Stockholders May Control Global. Our
executive officers and directors and their affiliates beneficially own 53.5% of
our common stock, and Golder, Thoma, Cressey, Rauner Inc., through its
affiliation with Golder, Thoma, Cressey, Rauner Fund IV L.P., owns 39.5% of our
common stock. Accordingly, our executive officers and directors and their
affiliates, particularly Golder,
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Thoma, Cressey, Rauner, Inc., have significant influence over the election of
directors and corporate actions requiring stockholder approval. In some cases,
Golder, Thoma, Cressey, Rauner, Inc.'s interests as a stockholder could
conflict with the interests of our noteholders or other stockholders. The
concentration of ownership of our common stock could limit the price that
certain investors might be willing to pay in the future for shares of common
stock, and could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire,
control of Global.
We Are Prohibited from Paying Dividends. We do not anticipate paying any
dividends for the foreseeable future. The indenture governing our debt
prohibits us from paying cash dividends. Investors should therefore not expect
to receive dividends on shares of our common stock.
Our Quarterly Operating Results May Fluctuate Significantly. We may
experience significant quarter to quarter fluctuations in our results of
operations as a result of a variety of factors including the timing of the
acquisition and integration of acquired companies, the demand for our products
and services, the timing and introduction of new products and services by us or
our suppliers or competitors, the market acceptance of new products and
services, competitive conditions in the office imaging solutions industry and
general economic conditions. As a result, we believe that period to period
comparisons of our results of operations are not necessarily meaningful or
indicative of the results that we may achieve in any subsequent quarter or full
year. Such quarterly fluctuations may result in volatility in the market price
of our common stock, and in future quarters our results of operations could be
below the expectations of the public market. Such an event could have a
material adverse effect on the market price of our common stock.
Our Charter and Bylaws May Delay or Prevent a Takeover of Global. Our
certificate of incorporation and bylaws, as well as Delaware corporate law,
contain certain provisions that could delay, defer or prevent a change in
control of Global. These provisions could limit the price that certain
investors might be willing to pay for our common stock. Some of these
provisions allow us to issue, without stockholder approval, preferred stock
that has rights senior to our common stock. Other provisions impose various
procedural and other requirements that could make it difficult for stockholders
to effect certain corporate actions.
The Notes and Guarantees Are Unsecured and Subordinated to Our Senior
Debt. The notes are unsecured, which means that investors in the notes have no
recourse to specific assets of Global or Global's subsidiaries if a default
occurs under the notes and indenture. In addition, before we can pay principal
and interest on the notes, we must first make payments on any of our existing
and future senior debt that is in default, including all senior debt of our
subsidiaries, if any, and all outstanding amounts under our senior credit
facility.
As of March 31, 1999, we had $68.0 million of senior indebtedness
outstanding. Substantially all of our real and personal property used in our
business operations secures our obligations under our senior credit facilities.
If we default on any payments required under any of our senior debt, or if we
fail to comply with other provisions governing our senior debt such as meeting
required financial ratios, the senior lenders could declare all amounts
outstanding, together with accrued and unpaid interest, immediately due and
payable. If we are unable to repay amounts due, the lenders could proceed
against the collateral securing the debt. If the lenders proceed against any of
the collateral, we may not have enough assets left to pay our noteholders.
Moreover, if we become bankrupt or similarly reorganize, we may not be able to
use our assets to pay our noteholders until after we pay all of our senior
debt. In addition, the senior credit facility may prohibit us from paying
amounts due on the notes, or from purchasing, redeeming or otherwise acquiring
the notes if a default exists under our senior debt.
We May Not Have Sufficient Funds to Repay the Notes Upon a Change of
Control. If we experience certain changes of control, our noteholders will have
the right to require us to purchase the notes at a purchase price equal to 101%
of the principal amount of the notes plus accrued and unpaid interest. In such
circumstances, we may also be required to (1) repay our outstanding senior debt
or (2) obtain our lenders' consent to our purchase of the notes. If we cannot
repay our debt or cannot obtain the needed consents, we may
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be unable to purchase the notes. Upon a change of control, we cannot guarantee
that we will have sufficient funds to make any debt payment, including
purchases of the notes. The failure to purchase the notes would be an event of
default under the indenture governing the notes. To avoid default, we may try
to refinance our debt. We cannot guarantee, however, that such refinancing
would be available or would be on favorable terms.
The events that qualify as a change of control under the indenture may also
be events of default under the senior credit facility or other indebtedness.
An event of default under the senior credit facility would permit our lenders
to accelerate our indebtedness. If we cannot repay such borrowings when due,
the lenders could proceed against the collateral securing the debt.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Except for the information regarding recent sales of unregistered
securities set forth below, the information required by this item is set forth
in the "quarterly financial data" appearing on page 40 of Global's 1999 Annual
Report to Stockholders and is incorporated herein by reference. Portions of
Global's 1999 Annual Report to Stockholders that are incorporated herein are
filed as Exhibit 13.1 hereto.
Recent Sales of Unregistered Securities
Between April 1, 1998 and March 31, 1999 Global sold and issued the
following unregistered securities:
(a) Between August 1998 and February 1999, Global sold a total of 1,143,797
shares of common stock to owners of seven businesses it acquired in exchange
for ownership interests in those businesses valued at $16.4 million. These
sales and issuances of securities were exempt from registration under the
Securities Act by virtue of Section 4(2) or Regulation D promulgated
thereunder. Appropriate legends are affixed to the stock certificates issued
in these transactions. All recipients received adequate information about
Global or had access, through employment or other relationships, to such
information.
(b) On March 8, 1999, Global sold $100 million in 10 3/4% senior
subordinated notes to qualified institutional buyers, as defined in Rule 144A
under the Securities Act, in a private placement exempt from registration
under the Securities Act by virtue of Section 4(2) or Rule 144A or Regulation
S thereunder. The initial purchasers of the notes were First Union Capital
Markets, Prudential Securities, Raymond James & Associates, Inc. and Scotia
Capital Markets. The notes were sold for an aggregate price of $100 million.
The initial purchasers' discount was $2.5 million.
Item 6. Selected Financial Data
The presentation of selected financial data as of and for the five years
ended March 31, 1999 is included in the "selected financial data" section
appearing on page 12 of Global's 1999 Annual Report to Stockholders and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The information required by this item is set forth in the "management's
discussion and analysis" appearing on pages 13 through 21 of Global's 1999
Annual Report to Stockholders, and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates, primarily from its
long-term revolving credit agreement. Interest rate cap agreements are used to
reduce certain exposures to interest rate fluctuations. The
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Company also has long term debt that bears a fixed rate. There is a risk that
market rates will decline and the required payments will exceed those based on
current market rates on the long term debt.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary financial information are set
forth in pages 22 through 39 of Global's 1999 Annual Report to Stockholders and
are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of Global, see
"Executive Officers of Global" at the end of Part I of this report. For
information with respect to the directors of Global, see "Nomination and
Election of Directors" in the proxy statement for the annual meeting of
stockholders to be held in August 1999, which is incorporated herein by
reference. Information required by Item 405 of Regulation S-K is included under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in
Global's proxy statement for the annual meeting of stockholders to be held in
August 1999 and is incorporated herein by reference.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated herein by
reference to the information under the captions "Compensation of Directors" and
"Executive Compensation" in Global's proxy statement for the annual meeting of
stockholders to be held in August 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to security ownership of certain beneficial owners
and management of Global is incorporated herein by reference to the information
under the caption "Voting Securities and Principal Holders Thereof" in Global's
proxy statement for the annual meeting of stockholders to be held in August
1999.
Item 13. Certain Transactions with Related Parties
Information with respect to certain relationships and transactions is
incorporated herein by reference to the information under the caption "Certain
Relationships and Transactions" in Global's proxy statement for the annual
meeting of stockholders to be held in August 1999.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports and Form 8-K
(a) 1. Financial Statements
The consolidated financial statements as of March 31, 1999 and 1998 and for
each of the three years in the period ended March 31, 1999, together with the
report thereon of Ernst & Young LLP dated May 12, 1999, appearing on pages 22
through 39 of Global's 1999 Annual Report to Stockholders are incorporated by
reference into Part II, Item 8 of this annual report. With the exception of the
aforementioned information and the information incorporated by reference in
Part II, Items 5, 6, 7 and 8 of this annual report, Global's 1999 Annual Report
to Stockholders is not to be deemed filed as part of this report.
Consolidated statements of operations for the years ended March 31, 1999,
1998 and 1997
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Consolidated balance sheets as of March 31, 1999 and 1998
Consolidated statements of cash flows for the years ended March 31, 1999,
1998 and 1997
Consolidated statements of stockholders' equity for the years ended March
31, 1999, 1998 and 1997
Notes to consolidated financial statements.
Report of Independent Auditors.
(a) 2. Financial Statement Schedules Required by Items 8 and 14(d)
Included in this annual report is the following additional financial data
which should be read in conjunction with the consolidated financial statements
in Global's 1999 Annual Report to Stockholders:
Report of Independent Auditors
Schedule II--Valuation and Qualifying Accounts for each of the three years
in the period ended March 31, 1999
Supplemental schedules not included with the additional financial data have
been omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
(a) 3. Exhibits
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Global Imaging
Systems, Inc. (1)
3.2 Amended and Restated Bylaws of Global Imaging Systems, Inc. (1)
4.1 Specimen common stock certificate. (1)
4.2 Indenture dated as of March 8, 1999 between Global, the subsidiary
guarantors and United States Trust Company of New York, as Trustee,
relating to the 10 3/4% Senior Subordinated Notes Due 2007. (2)
4.3 Form of Exchange Note. (2)
4.4 Credit Agreement, dated as of July 31, 1998, by and among the Company
and its subsidiaries, as Borrowers, the Lenders referred to therein,
First Union National Bank, as Administrative Agent, and ScotiaBanc,
Inc., as Documentation Agent. (3)
10.1 Registration Agreement, dated as of June 9, 1994, as amended, by and
among Global and the stockholders identified therein. (Incorporated by
reference to Global's Registration Statement on Form S-1, No. 333-48103,
as filed on March 17, 1998.)
10.2 Termination Agreement, dated as of May 27, 1998, by and among Global;
FUND IV; Golder, Thoma, Cressey, Rauner, Inc. and the stockholders
identified therein. (4)
10.3 Executive Agreement, dated as of June 9, 1994, as amended, by and among
Global, Thomas S. Johnson and FUND IV. (4)*
10.4 Executive Agreement, dated as of June 9, 1994, as amended, by and among
Global, Raymond Schilling and FUND IV. (4)*
10.5 Executive Agreement, dated as of January 1, 1995, as amended, by and
among Global, H. Michael Mueller and FUND IV. (4)*
10.6 Executive Agreement, dated as of March 31, 1997, by and among Global,
Alfred N. Vieira and FUND IV. (4)*
10.7 1998 Stock Option and Incentive Plan. (4)*
10.7a Form of Incentive Stock Option Agreement. (4)*
10.7b Form of Non-Qualified Stock Option Agreement. (4)*
10.7c Form of Director's Stock Option Agreement. (4)*
10.7d Director Non-Incentive Stock Option Agreement. (5)*
10.7e Amendments to Global Imaging Systems, Inc. 1998 Stock Option and
Incentive Plan and forms of stock option agreements. (5)*
</TABLE>
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<TABLE>
<C> <S>
10.8 Form of Supply Agreement between the Company and Konica. (6)**
10.9 Non-Exclusive Third Party Lessor Agreement, dated July 16, 1996, as
amended, by and between Global and General Electric Capital Corporation.
(6)**
10.10 License Agreement, dated as of July 31, 1996, as amended, between Global
and Copelco Capital, Inc. (6)**
10.11 Non-Exclusive Third Party Lessor Agreement, dated July 26, 1996, as
amended, by and between Global and Tokai Financial Services, Inc. (6)**
10.12 Stock Purchase Agreement, dated as of June 27, 1996 by and among Global
as Buyer, Copy Service & Supply, Inc., Office Furniture Concepts, Inc.,
CSS Leasing, LLC and Terry K. Smith and Crystal E. Smith as Sellers. (4)
10.13 Stock Purchase Agreement, dated as of November 13, 1996 by and among
Global as Buyer and Southern Business Communications, Inc. and Mark M.
Lloyd and Arthur E. Kreps as Sellers. (4)**
10.14 Asset Purchase Agreement, dated as of November 13, 1996 by and among
ATS-Atlanta One, LLC as Seller, ATS-Atlanta One, Inc. as Purchaser, and
ATS-Atlanta, Inc., Mark M. Lloyd and Arthur E. Kreps. (4)
10.15 Stock Purchase Agreement, dated as of August 7, 1997 by and among
Global, ESI Acquisition Corporation as Buyer, Electronic Systems, Inc.
("ESI") and the Shareholders of ESI as Sellers. (4)**
10.16 Stock Purchase Agreement, dated as of August 29, 1997 by and among
Global, Conway Office Products as Buyer, Eastern Copy Products, Inc. and
Michael E. Kleinhans as Seller. (4)
10.17 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Duplicating Specialties, Inc. (d/b/a Copytronix) and
Dean Groves as Seller. (4)**
10.18 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Quality Business Systems, Inc. and Gary Stevens as
Seller. (4)**
10.19 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Cascade Office Systems, Inc. and Fred Woodard as
Seller. (4)**
10.20 Stock Purchase Agreement, dated as of December 23, 1997 by and among
Global, ESI as Buyer, Electronic Systems of Richmond, Inc. ("ESRI") and
the Shareholders of ESRI as Seller. (4)**
10.21 Stock Purchase Agreement, dated as of December 31, 1997, as assigned, by
and among Global, Connecticut Business Systems, Inc. as Buyer, and the
Company, Michael E. Shea, Jr. and Peter Wenzke as Sellers. (4)**
10.22 Asset Purchase Agreement, dated as of February 26, 1998 by and among
Connecticut Systems, Inc., Bloom's Business Systems, a division of
Bloom's Incorporated, the Assets and Bloom's Incorporated as Seller.
(4)**
10.23 Stock Purchase Agreement, dated as of November 13, 1996, by and among
Global as Buyer, Southern Business Communications of D.C., Inc., and
George Gough, Mark M. Lloyd, and Arthur E. Kreps as Sellers. (4)
10.24 Equity Subscription Agreement, dated as of March 27, 1998, by and among
Global, FUND IV, JNL and Thomas S. Johnson. (4)
10.25 Form of Indemnification Agreement between Global and its directors and
executive officers. (1)*
10.26 Stock Purchase Agreement, dated as of August 31, 1998, by and among
Global and Southern Business Communications, Inc. ("SBC") as Buyer,
Centre Business Products, Inc., and the shareholders thereof, as
Sellers. (3)
10.27 Stock Purchase Agreement, dated as of September 16, 1998, by and among
Global, Carr Acquisition Corporation, as buyer, Carr Business Machines
of Great Neck Inc. (d/b/a Carr Business Systems) and its Shareholders,
as Sellers. (Incorporated by reference to Global's Current Report on
Form 8-K, as filed with the SEC on September 29, 1998.)
10.28 Stock Purchase Agreement, dated as of September 28, 1998, by and among
Global and SBC as Buyer, ProView, Inc., and the Shareholders thereof, as
Sellers. (3)
10.29 Stock Purchase Agreement, dated as of November 19, 1998, by and among
Global as Buyer, Capitol Office Solutions, Inc., FUND IV, Armen
Manoogian, and the other persons named therein as Sellers. (Incorporated
by reference to Global's Current Report on Form 8-K, as filed with the
SEC on January 5, 1998.)
</TABLE>
18
<PAGE>
<TABLE>
<C> <S>
10.30 Stock Purchase Agreement, dated as of December 22, 1998, by and among
Global as Buyer, Distinctive Business Products, Inc., and the
shareholders thereof, as Sellers. (Incorporated by reference to Global's
Quarterly Report on Form 10-Q filed with the SEC on February 16, 1999.)
10.31 Merger Agreement and Plan of Merger, dated as of February 26, 1999, by
and among Global, Dahill Acquisition, Inc., Dahill Industries, Inc. and
Randall E. Davidson. (2)
10.32 Registration Rights Agreement, dated March 8, 1999, by and among Global,
the subsidiary guarantors, First Union Capital Markets Corp., Prudential
Securities Incorporated, Raymond James & Associates, Inc. and Scotia
Capital Markets (USA) Inc. (2)
11.1 Statement regarding computation of per share earnings (See Consolidated
Statements of Operations for the years ended March 31, 1999, 1998 and
1997 incorporated herein and Note 7 to the Notes to Consolidated
Financial Statements for the same period).
13.1 Incorporated portions of Annual Report to Stockholders for the Year
Ended March 31, 1999.
21.1 Subsidiaries of Global.
23.1 The consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on May 8, 1998.
(2) Incorporated by reference to Global's Registration Statement on Form S-4,
No. 333-78093, as filed with the SEC on May 7, 1999.
(3) Incorporated by reference to Global's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(4) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on June 11, 1998.
(5) Incorporated by reference to Global's Registration Statement on Form S-8,
No. 333-80801, as filed with the SEC on June 16, 1999.
(6) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on March 27, 1998.
* Management contract or compensatory plan, contract or arrangement.
** Confidential treatment has been granted for portions of this exhibit.
(b) Reports on Form 8-K
The Company filed three reports on Form 8-K during the last quarter of the
fiscal year ended March 31, 1999.
The Company's Current Report on Form 8-K filed January 5, 1999, as amended
on February 9, 1999, reported the acquisition of a business and contained
financial statements relating to the acquisition.
The Company's Current Report on Form 8-K filed on February 25, 1999 reported
the Company's announcement of plans to offer senior subordinated notes. The
Company's Current Report on Form 8-K filed on March 16, 1999 reported the
Company's announcement of its sale of $100 million in aggregate principal
amount of 10 3/4% Senior Subordinated Notes due 2007.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Global Imaging Systems, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Global Imaging Systems, Inc.
/s/ Thomas S. Johnson
By: _________________________________
Thomas S. Johnson
President and Chief Executive
Officer
Date: June 23, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of June 23, 1999.
<TABLE>
<CAPTION>
Name Title
---- -----
<C> <S>
/s/ Thomas S. Johnson President, Chief Executive
___________________________________ Officer and Director (Principal Executive
Thomas S. Johnson Officer)
Senior Vice President, Chief Financial
/s/ Raymond Schilling Officer,
___________________________________ Secretary and Treasurer (Principal
Raymond Schilling Financial and Accounting Officer)
/s/ Carl D. Thoma Chairman of the Board
___________________________________
Carl D. Thoma
/s/ L. Neal Berney Director
___________________________________
L. Neal Berney
/s/ Bruce D. Gorchow Director
___________________________________
Bruce D. Gorchow
/s/ William C. Kessinger Director
___________________________________
William C. Kessinger
/s/ Edward N. Patrone Director
___________________________________
Edward N. Patrone
</TABLE>
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Global Imaging Systems, Inc.
We have audited the consolidated financial statements of Global Imaging
Systems, Inc. as of March 31, 1999 and 1998, and for each of the three years in
the period ended March 31, 1999, and have issued our report thereon dated May
12, 1999. Our audits also included the financial statement schedule listed in
Item 14(a) of the Annual Report (Form 10-K). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida,
May 12, 1999
21
<PAGE>
GLOBAL IMAGING SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Reserve for returns and allowances and bad debts:
<TABLE>
<CAPTION>
Additions
----------------------
Balance at the Charged to Charged to Balance at the
Beginning of Costs and Other End of
the period Expenses Accounts(1) Deductions the period
-------------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended:
March 31, 1997......... $ 200,000 $ 30,824 $ 147,005 $ 68,785 $ 309,044
March 31, 1998......... $ 309,044 $289,879 $ 532,689 $ 261,068 $ 870,544
March 31, 1999......... $ 870,544 $345,993 $ 472,583 $ 335,888 $1,353,232
Reserve for excess and slow-moving inventory:
<CAPTION>
Additions
----------------------
Balance at the Charged to Charged to Balance at the
Beginning of Costs and Other End of
the period Expenses Accounts(1) Deductions the period
-------------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended:
March 31, 1997......... $ 133,026 $256,280 $ 340,000 $ 403,207 $ 326,099
March 31, 1998......... $ 326,099 $888,802 $ 686,877 $ 606,758 $1,295,020
March 31, 1999......... $1,295,020 $759,721 $1,160,660 $1,004,646 $2,210,755
</TABLE>
- --------
(1) These amounts primarily represent reserve balances acquired in connection
with business combinations.
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of Global Imaging
Systems, Inc. (1)
3.2 Amended and Restated Bylaws of Global Imaging Systems, Inc. (1)
4.1 Specimen common stock certificate. (1)
4.2 Indenture dated as of March 8, 1999 between Global, the subsidiary
guarantors and United States Trust Company of New York, as Trustee,
relating to the 10 3/4% Senior Subordinated Notes Due 2007. (2)
4.3 Form of Exchange Note. (2)
4.4 Credit Agreement, dated as of July 31, 1998, by and among the Company
and its subsidiaries, as Borrowers, the Lenders referred to therein,
First Union National Bank, as Administrative Agent, and ScotiaBanc,
Inc., as Documentation Agent. (3)
10.1 Registration Agreement, dated as of June 9, 1994, as amended, by and
among Global and the stockholders identified therein. (Incorporated by
reference to Global's Registration Statement on Form S-1, No. 333-
48103, as filed on March 17, 1998.)
10.2 Termination Agreement, dated as of May 27, 1998, by and among Global;
FUND IV; Golder, Thoma, Cressey, Rauner, Inc. and the stockholders
identified therein. (4)
10.3 Executive Agreement, dated as of June 9, 1994, as amended, by and
among Global, Thomas S. Johnson and FUND IV. (4)*
10.4 Executive Agreement, dated as of June 9, 1994, as amended, by and
among Global, Raymond Schilling and FUND IV. (4)*
10.5 Executive Agreement, dated as of January 1, 1995, as amended, by and
among Global, H. Michael Mueller and FUND IV. (4)*
10.6 Executive Agreement, dated as of March 31, 1997, by and among Global,
Alfred N. Vieira and FUND IV. (4)*
10.7 1998 Stock Option and Incentive Plan. (4)*
10.7a Form of Incentive Stock Option Agreement. (4)*
10.7b Form of Non-Qualified Stock Option Agreement. (4)*
10.7c Form of Director's Stock Option Agreement. (4)*
10.7d Director Non-Incentive Stock Option Agreement. (5)*
10.7e Amendments to Global Imaging Systems, Inc. 1998 Stock Option and
Incentive Plan and forms of stock option agreements. (5)*
10.8 Form of Supply Agreement between the Company and Konica. (6)**
10.9 Non-Exclusive Third Party Lessor Agreement, dated July 16, 1996, as
amended, by and between Global and General Electric Capital
Corporation. (6)**
10.10 License Agreement, dated as of July 31, 1996, as amended, between
Global and Copelco Capital, Inc. (6)**
10.11 Non-Exclusive Third Party Lessor Agreement, dated July 26, 1996, as
amended, by and between Global and Tokai Financial Services, Inc.
(6)**
10.12 Stock Purchase Agreement, dated as of June 27, 1996 by and among
Global as Buyer, Copy Service & Supply, Inc., Office Furniture
Concepts, Inc., CSS Leasing, LLC and Terry K. Smith and Crystal E.
Smith as Sellers. (4)
10.13 Stock Purchase Agreement, dated as of November 13, 1996 by and among
Global as Buyer and Southern Business Communications, Inc. and Mark M.
Lloyd and Arthur E. Kreps as Sellers. (4)**
10.14 Asset Purchase Agreement, dated as of November 13, 1996 by and among
ATS-Atlanta One, LLC as Seller, ATS-Atlanta One, Inc. as Purchaser,
and ATS-Atlanta, Inc., Mark M. Lloyd and Arthur E. Kreps. (4)
10.15 Stock Purchase Agreement, dated as of August 7, 1997 by and among
Global, ESI Acquisition Corporation as Buyer, Electronic Systems, Inc.
("ESI") and the Shareholders of ESI as Sellers. (4)**
10.16 Stock Purchase Agreement, dated as of August 29, 1997 by and among
Global, Conway Office Products as Buyer, Eastern Copy Products, Inc.
and Michael E. Kleinhans as Seller. (4)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.17 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Duplicating Specialties, Inc. (d/b/a Copytronix) and
Dean Groves as Seller. (4)**
10.18 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Quality Business Systems, Inc. and Gary Stevens as
Seller. (4)**
10.19 Stock Purchase Agreement, dated as of September 30, 1997 by and among
Global as Buyer, Cascade Office Systems, Inc. and Fred Woodard as
Seller. (4)**
10.20 Stock Purchase Agreement, dated as of December 23, 1997 by and among
Global, ESI as Buyer, Electronic Systems of Richmond, Inc. ("ESRI")
and the Shareholders of ESRI as Seller. (4)**
10.21 Stock Purchase Agreement, dated as of December 31, 1997, as assigned,
by and among Global, Connecticut Business Systems, Inc. as Buyer, and
the Company, Michael E. Shea, Jr. and Peter Wenzke as Sellers. (4)**
10.22 Asset Purchase Agreement, dated as of February 26, 1998 by and among
Connecticut Systems, Inc., Bloom's Business Systems, a division of
Bloom's Incorporated, the Assets and Bloom's Incorporated as Seller.
(4)**
10.23 Stock Purchase Agreement, dated as of November 13, 1996, by and among
Global as Buyer, Southern Business Communications of D.C., Inc., and
George Gough, Mark M. Lloyd, and Arthur E. Kreps as Sellers. (4)
10.24 Equity Subscription Agreement, dated as of March 27, 1998, by and
among Global, FUND IV, JNL and Thomas S. Johnson. (4)
10.25 Form of Indemnification Agreement between Global and its directors and
executive officers. (1)*
10.26 Stock Purchase Agreement, dated as of August 31, 1998, by and among
Global and Southern Business Communications, Inc. ("SBC") as Buyer,
Centre Business Products, Inc., and the shareholders thereof, as
Sellers. (3)
10.27 Stock Purchase Agreement, dated as of September 16, 1998, by and among
Global, Carr Acquisition Corporation, as buyer, Carr Business Machines
of Great Neck Inc. (d/b/a Carr Business Systems) and its Shareholders,
as Sellers. (Incorporated by reference to Global's Current Report on
Form 8-K, as filed with the SEC on September 29, 1998.)
10.28 Stock Purchase Agreement, dated as of September 28, 1998, by and among
Global and SBC as Buyer, ProView, Inc., and the Shareholders thereof,
as Sellers. (3)
10.29 Stock Purchase Agreement, dated as of November 19, 1998, by and among
Global as Buyer, Capitol Office Solutions, Inc., FUND IV, Armen
Manoogian, and the other persons named therein as Sellers.
(Incorporated by reference to Global's Current Report on Form 8-K, as
filed with the SEC on January 5, 1998.)
10.30 Stock Purchase Agreement, dated as of December 22, 1998, by and among
Global as Buyer, Distinctive Business Products, Inc., and the
shareholders thereof, as Sellers. (Incorporated by reference to
Global's Quarterly Report on Form 10-Q filed with the SEC on February
16, 1999.)
10.31 Merger Agreement and Plan of Merger, dated as of February 26, 1999, by
and among Global, Dahill Acquisition, Inc., Dahill Industries, Inc.
and Randall E. Davidson. (2)
10.32 Registration Rights Agreement, dated March 8, 1999, by and among
Global, the subsidiary guarantors, First Union Capital Markets Corp.,
Prudential Securities Incorporated, Raymond James & Associates, Inc.
and Scotia Capital Markets (USA) Inc. (2)
11.1 Statement regarding computation of per share earnings (See
Consolidated Statements of Operations for the years ended March 31,
1999, 1998 and 1997 incorporated herein and Note 7 to the Notes to
Consolidated Financial Statements for the same period).
13.1 Incorporated portions of Annual Report to Stockholders for the Year
Ended March 31, 1999.
21.1 Subsidiaries of Global.
23.1 The consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on May 8, 1998.
(2) Incorporated by reference to Global's Registration Statement on Form S-4,
No. 333-78093, as filed with the SEC on May 7, 1999.
24
<PAGE>
(3) Incorporated by reference to Global's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
(4) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on June 11, 1998.
(5) Incorporated by reference to Global's Registration Statement on Form S-8,
No. 333-80801, as filed with the SEC on June 16, 1999.
(6) Incorporated by reference to Global's Registration Statement on Form S-1,
No. 333-48103, as filed with the SEC on March 27, 1998.
* Management contract or compensatory plan, contract or arrangement.
** Confidential treatment has been granted for portions of this exhibit.
25
<PAGE>
EXHIBIT 13.1
Excerpts from 1999 Annual Report to Stockholders
selected [LOGO APPEARS HERE]
financial
data
- --------------------------------------------------------------------------------
The selected financial data as of and for the indicated periods ended March 31,
1995 through March 31, 1999 are derived from our audited consolidated financial
statements. Since the information presented below is only a summary and does not
provide all of the information in our financial statements, including the
related notes, you should read "management's discussion and analysis" and our
financial statements.
<TABLE>
<CAPTION>
Inception
June 3, 1994
Fiscal Year Ended March 31, to March 31,
-------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Equipment and supplies sales $ 218,653 $ 121,316 $ 41,200 $ 20,561 $ 6,541
Service and rentals 69,542 43,059 22,893 16,405 3,735
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 288,195 164,375 64,093 36,966 10,276
Costs and operating expenses:
Cost of equipment and supplies sales 154,083 85,972 27,087 13,456 4,193
Service and rental costs 34,434 21,594 11,467 8,303 1,885
Selling, general, and administrative expenses 63,133 38,619 18,280 11,687 4,123
Intangible asset amortization 4,627 3,076 1,939 1,396 329
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 256,277 149,261 58,773 34,842 10,530
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 31,918 15,114 5,320 2,124 (254)
Interest expense 8,427 6,713 3,190 2,041 375
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extra-
ordinary charge 23,491 8,401 2,130 83 (629)
Income taxes 10,390 3,948 1,007 275 --
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary charge 13,101 4,453 1,123 (192) (629)
Extraordinary charge for early retirement of debt (1,817) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 11,284 4,453 1,123 (192) (629)
Yield adjustment on Class A common stock(1) (901) (2,442) (1,402) (1,023) (190)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to holders of
common stock $ 10,383 $ 2,011 $ (279) $ (1,215) $ (819)
====================================================================================================================================
Basic earnings (loss) per share $ .63 $ .21 $ (.03) $ (.15) $ (.15)
====================================================================================================================================
Diluted earnings (loss) per share $ .62 $ .21 $ (.03) $ (.15) $ (.15)
====================================================================================================================================
Basic weighted average shares outstanding(2) 16,478 9,805 8,729 8,018 5,331
====================================================================================================================================
Diluted weighted average shares outstanding(2) 16,811 9,805 8,729 8,018 5,331
====================================================================================================================================
Cash dividends per common share -- -- -- -- --
====================================================================================================================================
Balance Sheet Data (at period end):
Working capital $ 44,922 $ 24,255 $ 9,655 $ 5,038 $ 2,901
Total assets 310,419 164,342 68,990 43,675 32,229
Total debt 168,277 97,485 36,873 21,831 22,836
Total stockholders' equity 94,899 38,248 19,796 15,232 4,344
</TABLE>
(1)Reflects adjustments for amounts payable to holders of Global's Class A
common stock upon a sale of Global or its initial public offering. These amounts
equal an 8.0% annual yield on the original cost per share of $90.00 and, for
1998, the accretion of the difference between the redemption value of the Class
A common stock and the value allocated to the stock, accreted from January 1998
to June 1998.
(2)Assumes, for periods prior to the initial public offering, the conversion of
outstanding shares of Class C common stock into common stock.
1
<PAGE>
management's [LOGO]
discussion
and analysis OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
The following discussion and analysis should be read in conjunction with the
accompanying financial statements and related notes included elsewhere in this
annual report. Much of the discussion in this section involves forward-looking
information. Global's actual results may differ significantly from the results
suggested by these forward-looking statements.
Overview
Global was founded in June 1994 with the goal of becoming a leading consolidator
in the highly fragmented office imaging solutions industry. Global is a rapidly
growing provider of a number of office imaging solutions. This includes the sale
and service of automated office equipment such as copiers, facsimile machines,
printers and duplicators, network integration services, electronic presentation
equipment and document imaging management systems ("DIM systems"). From its
founding through March 31, 1999, Global acquired 12 core companies in the United
States, and 20 additional satellite companies that have been integrated into the
core companies. The first acquisition was completed in August 1994. Management
believes that the businesses that have been acquired by Global and other
businesses that Global plans to acquire will benefit from various Global
programs and operating strategies. These benefits include increased operating
efficiencies, the support of experienced and professional senior management,
expansion of the types of office imaging products and services offered,
increased access to capital, and increased emphasis on financial management.
Global's revenues come from two sources: (1) sales of equipment and supplies and
(2) sales of complementary services and equipment rentals. The growth of
equipment revenues and the complementary supplies, parts and service revenues
depends on several factors, including the demand for equipment, Global's
reputation for providing timely and reliable service, and general economic
conditions. Revenues generated from the sale of equipment and complementary
supplies, parts and services are affected 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.
Gross profit as a percentage of revenues varies from period to period depending
on a number of variables. Those variables include the mix of revenues from
equipment, supplies, service and rentals; the mix of revenues among the markets
served by Global; and the mix of revenues of the businesses acquired. As Global
acquires businesses, the percentage of its revenues that come from sales of
equipment and supplies, as opposed to service and rentals, fluctuates according
to whether the businesses acquired are automated office equipment dealers or are
network integrators or electronic presentation systems or DIM systems dealers.
Automated office equipment dealers typically derive a higher percentage of their
revenues from service and rentals, and a lower percentage from sales of
equipment and supplies, than do network integrators, electronic presentation or
DIM systems dealers. Generally, sales of equipment and supplies have lower gross
profit margins than sales of service and rentals. In addition, equipment sales
in the automated office equipment market generally have higher gross profit
margins than equipment sales in the network integration, electronic presentation
systems or DIM systems markets. Management expects that over time, Global will
become more involved in the network integration, electronic presentation systems
and DIM systems markets, as these markets are growing faster than the automated
office equipment market. Therefore, over time a larger percentage of Global's
revenues and gross profits may be derived from sales that have lower gross
profit margins than Global's current gross profit margins.
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. Global depreciates its rental
equipment primarily over a three-year period on a straight-line basis.
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the consolidated statements of operations of Global expressed as a
percentage of total revenues.
2
<PAGE>
management's discussion and analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
---------------------------
1999 1998 1997
---------------------------
<S> <C> <C> <C>
Revenues:
Equipment and supplies sales 75.9% 73.8% 64.3%
Service and rentals 24.1 26.2 35.7
---------------------------
Total revenues 100.0 100.0 100.0
Cost of goods sold 65.4 65.4 60.2
---------------------------
Gross profit 34.6 34.6 39.8
Selling, general, and admin-
istrative expenses 21.9 23.5 28.5
Intangible asset amortization 1.6 1.9 3.0
---------------------------
Income from operations 11.1 9.2 8.3
Interest expense 3.0 4.1 5.0
---------------------------
Income before income taxes
and extraordinary charge 8.1 5.1 3.3
Income taxes 3.6 2.4 1.5
---------------------------
Income before extraordinary
charge 4.5 2.7 1.8
Extraordinary charge for early
retirement of debt (.6) -- --
---------------------------
Net income 3.9% 2.7% 1.8%
===========================
</TABLE>
Fiscal Year Ended March 31, 1999 Compared to Fiscal Year Ended March 31, 1998
Revenues
Total revenues for the fiscal year ended March 31, 1999, were $288,195, an
increase of 75.3% over the same period in 1998. The majority of the revenue
growth was due to the acquisition of businesses during 1999 and 1998, with the
remainder coming from internal growth.
Sales of equipment and supplies increased to $218,653 in fiscal year 1999, an
increase of 80.2% over 1998. This represented 75.9% of total revenues compared
to 73.8% for the prior year. Throughout 1999 and 1998, Global acquired
businesses that added proportionately more equipment sales than Global had in
its existing businesses.
Service and rental revenues for the fiscal year ended March 31, 1999 increased
to $69,542, an increase of 61.5% from the same period the prior year. This
represented 24.1% of total revenues for the fiscal year ended 1999 compared to
26.2% for the same period in 1998.
Gross Profit
Gross profit of $99,678 for the fiscal year ended March 31, 1999 reflected a
75.5% increase over the same period in 1998. Expressed as a percent of total
revenue, gross profit was 34.6% for fiscal year 1999 compared to 34.6% for
fiscal year 1998. Office equipment dealers typically derive a higher percentage
of total revenues from service and rentals, while network integration and
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 1999 and 1998 accounted for a
larger portion of total revenues than Global'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 50.5% for the fiscal year ended March 31, 1999 and 49.9% for the fiscal
year ended March 31, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 63.5% to $63,133 for the
fiscal year ended March 31, 1999. This amount was 21.9% of total revenues
compared to 23.5% of total revenues for the same period in 1998. These expenses
increased principally due to the acquisitions Global made in 1999 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 Global's
businesses, and revenues increasing by 75.3% without a proportionate increase in
selling, general, and administrative expenses.
Intangible Asset Amortization
Intangible asset amortization was $4,627 for the fiscal year ended March 31,
1999 compared to $3,076 for the same period the prior year. Intangible asset
amortization includes the amortization of goodwill and noncompete agreements
from acquisitions.
3
<PAGE>
[LOGO]
- --------------------------------------------------------------------------------
Income From Operations
Income from operations was $31,918, or 11.1% of total revenues for the fiscal
year ended March 31, 1999, which was a 111.2% increase over the same period in
1998.
Interest Expense
Interest expense was $8,427 for the fiscal year ended March 31, 1999, an
increase of 25.5% from the same period in 1998. The increase was primarily due
to the increase in Global's borrowings. The proceeds from the additional
borrowings were used to fund the cost of the businesses acquired in 1999 and
1998. Interest expense includes the amortization of financing fees incurred in
connection with Global's current credit facility with First Union and the prior
credit facility with Jackson National Life Insurance Company.
Income Taxes
The provision for income taxes was $10,390 for the fiscal year ended March 31,
1999 compared to $3,948 for the same period in 1998. The increase in income
taxes was primarily due to increased pre-tax income because of businesses Global
acquired during 1999 and 1998. The effective income tax rate decreased from
47.0% for the fiscal year ended March 31, 1998 to 44.2% for the same period in
1999. The effective income tax rate for 1999 and 1998 was higher than the
federal statutory rates of 35.0% and 34.0%, respectively, plus state and local
taxes, primarily due to non-deductible goodwill amortization relating to the
businesses acquired during the fiscal year ended March 31, 1999 and March 31,
1998.
Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997
Revenues
Total revenues for the fiscal year ended March 31, 1998, were $164,375, an
increase of 156.5% over the same period in 1997. The majority of the revenue
growth was due to the acquisition of businesses during 1998 and 1997, with the
remainder coming from internal growth.
Sales of equipment and supplies increased to $121,316 in fiscal year 1998, an
increase of 194.5% over 1997. This represented 73.8% of total revenues compared
to 64.3% for the prior year. Throughout 1998 and 1997, Global acquired
businesses that added more equipment sales than Global had in its existing
businesses.
Service and rental revenues for the fiscal year ended March 31, 1998 increased
to $43,059, an increase of 88.1% from the same period the prior year. This
represented 26.2% of total revenues for the fiscal year ended 1998 compared to
35.7% for the same period in 1997.
Gross Profit
Gross profit of $56,809 for the fiscal year ended March 31, 1998 reflected a
122.4% increase over the same period in 1997. Expressed as a percent of total
revenue, gross profit was 34.6% for fiscal year 1998 compared to 39.8% for
fiscal year 1997. Office equipment dealers typically receive a higher percentage
of total revenues from service and rentals, while network integration and
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 1998 and 1997 accounted for a
larger portion of total revenues than Global'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 49.9% for the fiscal year ended March 31, 1998 and for the fiscal year
ended March 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 111.3% to $38,619 million
for the fiscal year ended March 31, 1998. This amount was 23.5% of total
revenues compared to 28.5% of total revenues for the same period in 1997. These
expenses increased principally due to the acquisitions Global made in 1998 and
1997. The decline in expenses as a percentage of revenues was the result of the
acquisition of profitable businesses, the change in the composition of Global's
businesses, and revenues increasing by 156.5% without a proportionate increase
in selling, general, and administrative expenses.
4
<PAGE>
management's discussion and analysis
- --------------------------------------------------------------------------------
Intangible Asset Amortization
Intangible asset amortization was $3,076 for the fiscal year ended March 31,
1998 compared to $1,939 for the same period the prior year. Intangible asset
amortization includes the amortization of goodwill and non-compete agreements
from acquisitions.
Income From Operations
Income from operations was $15,114, or 9.2% of total revenues for the fiscal
year ended March 31, 1998, which was a 184.1% increase over the same period in
1997.
Interest Expense
Interest expense was $6,713 for the fiscal year ended March 31, 1998, an
increase of 110.4% from the same period in 1997. The increase was primarily due
to the increase in Global's borrowings. The proceeds from the additional
borrowings were used to fund the cost of the businesses acquired in 1998 and
1997. Interest expense includes the amortization of financing fees incurred in
connection with Global's current credit facility with First Union and the prior
credit facility with Jackson National Life Insurance Company.
Income Taxes
The provision for income taxes was $3,948 for the fiscal year ended March 31,
1998 compared to $1,007 for the same period in 1997. The increase in income
taxes was primarily due to increased pre-tax income because of businesses Global
acquired during 1998 and 1997. The effective income tax rate decreased from
47.3% for the fiscal year ended March 31, 1997 to 47.0% for the same period in
1998. The effective income tax rate for 1998 and 1997 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 during
the fiscal year ended March 31, 1998 and March 31, 1997.
Quarterly Results of Operations
The following table presents selected consolidated financial information for
each of Global's last six fiscal quarters. The information has been derived from
unaudited consolidated financial statements that in the opinion of management
reflect all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of such quarterly information.
<TABLE>
<CAPTION>
Quarters Ended
- ------------------------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1999 1998 1998 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment and supplies sales $ 65,333 $ 58,028 $ 51,958 $ 43,334 $ 40,801 $ 34,790
Service and rentals 22,001 17,625 15,048 14,868 13,544 11,925
- ------------------------------------------------------------------------------------------------------------------
Total revenues 87,334 75,653 67,006 58,202 54,345 46,715
Costs and operating expenses:
Cost of equipment and supplies sales 44,658 40,616 37,922 30,887 28,485 24,851
Service and rental costs 10,939 8,940 7,549 7,006 7,101 5,973
Selling, general, and administrative expenses 19,472 16,368 14,004 13,289 12,802 10,856
Intangible asset amortization 1,588 1,195 943 901 917 843
- ------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 76,657 67,119 60,418 52,083 49,305 42,523
- ------------------------------------------------------------------------------------------------------------------
Income from operations 10,677 8,534 6,588 6,119 5,040 4,192
Interest expense 2,984 1,757 1,456 2,230 2,178 1,980
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 7,693 6,777 5,132 3,889 2,862 2,212
Income taxes 3,346 2,948 2,295 1,801 1,198 1,099
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 4,347 3,829 2,837 2,088 1,664 1,113
Extraordinary charge for early retirement of debt - - (1,133) (684) - -
- ------------------------------------------------------------------------------------------------------------------
Net income $ 4,347 $ 3,829 $ 1,704 $ 1,404 $ 1,664 $ 1,113
==================================================================================================================
</TABLE>
5
<PAGE>
[LOGO APPEARS HERE]
<TABLE>
<CAPTION>
=================================================================================================================
Quarters Ended
- -----------------------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1999 1998 1998 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 4,347 $ 3,829 $ 1,704 $ 1,404 $ 1,664 $ 1,113
Yield adjustment to Class A common stock(1) - - - (901) (1,093) (533)
- -----------------------------------------------------------------------------------------------------------------
Net income available to holders of comon stock $ 4,347 $ 3,829 $ 1,704 $ 503 $ 571 $ 580
=================================================================================================================
Basic earnings per share $ 0.23 $ 0.21 $ 0.10 $ 0.04 $ 0.06 $ 0.06
=================================================================================================================
Diluted earnings per share $ 0.23 $ 0.21 $ 0.10 $ 0.04 $ 0.06 $ 0.06
=================================================================================================================
Basic weighted average number of shares 18,682 18,054 17,642 11,527 10,404 9,959
=================================================================================================================
Diluted weighted average number of shares 18,851 18,176 17,700 12,511 10,404 9,959
=================================================================================================================
</TABLE>
- -----------
(1) Reflects adjustments for amounts payable upon a sale of the Company or an
initial public offering to holders of Class A Common Stock equivalent to an
8.0% annual yield on the original per share amount of $90, and for 1998,
the accretion of the difference between the redemption value of the Class A
Common Stock and the value allocated to the stock, accreted from January
1998 to the date of the initial public offering.
The following table sets forth selected consolidated financial information as a
percentage of total revenues for each of Global's last six fiscal quarters.
<TABLE>
<CAPTION>
Quarters Ended
- -----------------------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31,
1999 1998 1998 1998 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment and supplies sales 74.8% 76.7% 77.5% 74.5% 75.1% 74.5%
Service and rentals 25.2 23.3 22.5 25.5 24.9 25.5
- -----------------------------------------------------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0
=================================================================================================================
Costs and operating expenses:
Cost of equipment and supplies sales 51.2 53.7 56.6 53.1 52.4 53.2
Service and rental costs 12.5 11.8 11.3 12.1 13.1 12.8
Selling, general, and administrative expenses 22.3 21.6 20.9 22.8 23.5 23.2
Intangible asset amortization 1.8 1.6 1.4 1.5 1.7 1.8
- -----------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 87.8 88.7 90.2 89.5 90.7 91.0
=================================================================================================================
Income from operations 12.2 11.3 9.8 10.5 9.3 9.0
Interest expense 3.4 2.3 2.2 3.8 4.0 4.2
- -----------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 8.8 9.0 7.6 6.7 5.3 4.8
Income taxes 3.8 3.9 3.4 3.1 2.2 2.4
- -----------------------------------------------------------------------------------------------------------------
Income before extraordinary charge 5.0 5.1 4.2 3.6 3.1 2.4
Extraordinary charge for early retirement of debt - - (1.7) (1.2) - -
- -----------------------------------------------------------------------------------------------------------------
Net income 5.0% 5.1% 2.5% 2.4% 3.1% 2.4%
=================================================================================================================
</TABLE>
Liquidity and Capital Resources
Historically, Global has financed its operations primarily through internal cash
flow, sales of stock and bank financing, including the financing facilities
described below. These sources of funds have been used to fund Global's growth
both internally and through acquisitions. Global is pursuing an acquisition
strategy and expects to acquire more businesses. As Global continues to acquire
more businesses it is likely that Global will incur additional debt and seek
additional equity capital.
Global's senior credit facility with First Union National Bank consists of a
$175,000 senior secured revolving line of credit, including access to a $5,000
swingline of credit. The senior credit facility is available for
acquisitions and for working capital purposes. At March 31,
6
<PAGE>
management's
discussion
and analysis
- --------------------------------------------------------------------------------
1999, $68,000 was outstanding under the senior credit facility. The senior
credit facility bears interest at rates ranging from 0.75% to 1.5% over LIBOR or
from 0.0% to 0.5% over a base rate related to prime rate, and varies according
to Global's ratio of its total funded debt to earnings before interest, taxes,
depreciation and amortization. Amounts borrowed under the senior credit facility
may be repaid and reborrowed over the life of the senior credit facility, with a
final maturity date of July 31, 2003. The terms of the senior credit facility
require strict compliance with numerous affirmative, negative and financial
covenants. Amounts borrowed under the revolving line of credit may be used to
fund working capital and general corporate purposes, including acquisitions,
subject to First Union National Bank's approval in the case of acquisitions with
a cash purchase price of over $15,000 or an aggregate price (cash, stock or
other consideration) of over $40,000.
In March 1999, the Company issued $100,000 in senior Subordinated Notes due
March 8, 2007. The net proceeds of approximately $96,000 were used to reduce
First Union's revolving credit facility. The notes bear interest at 10.75%,
payable semi-annually. The notes may be redeemed at the option of the Company
beginning on February 15, 2003 at the following redemption prices, expressed as
percentages of the principal amount:
Year Percentage
2003 105.375%
2004 102.688%
2005 and thereafter 100.000%
At any time on or prior to February 15, 2002, the Company may, at its option,
use the net cash proceeds from a public equity offering to redeem in the
aggregate up to 35% of the aggregate principal amount of the notes at a
redemption price equal to 110.75% of the principal amount, provided that at
least 65% of the aggregate principal amount of the notes originally issued
remain outstanding, and the redemption occurs within 60 days after the
consummation of the public equity offering. The Notes are guaranteed by the
current subsidiaries of the Company, other than certain future financing
subsidiaries, on an unsecured senior subordinated basis. The covenants of the
notes require strict compliance with certain affirmative, negative and financial
covenants. Under the terms of the Senior Subordinated Notes, the company is
prohibited from paying cash dividends.
On May 7, 1999, the Company filed a registration statement with the Securities
and Exchange Commission to exchange the notes for exchange notes with identical
terms, except the exchange notes will not contain transfer restrictions.
The Company has signed a commitment letter with First Union for a $250,000
credit facility. The letter was signed in April 1999. The new credit facility is
expected to replace the existing senior credit facility and is expected to
consist of a $150,000 five-year senior secured revolving line of credit, a
$25,000 five-year senior term loan, and a $75,000 seven-year senior term loan.
The new revolving credit line of the senior credit facility is expected to bear
interest at rates ranging from a 2.00% to 3.00% over LIBOR or from .75% to 1.75%
over a base rate related to prime rate, and is expected to vary according to
Global's ratio of its total funded debt to earnings before interest, taxes,
depreciation and amortization. The term loans are expected to bear interest at a
rate 3.25% over LIBOR or 2.00% over a base rate related to prime rate. The terms
of the new senior credit facility are expected to require strict compliance with
numerous affirmative, negative and financial covenants. Amounts borrowed under
the senior credit facility may be used to fund working capital and general
corporate purposes, including acquisitions, subject to First Union's approval in
the case of certain acquisitions.
Under the terms of two of its purchase agreements, Global may be required to
make payments of up to $3,600 over the next one to three years to certain former
owners of the businesses it has acquired based on the profitability of those
businesses during such time period.
For the fiscal year ended March 31, 1999 the net cash provided by operations was
$12,499 and for the fiscal year ended March 31, 1998 the net cash provided by
operations was $5,803. For the fiscal years ended March 31, 1999 and 1998,
Global's net cash used in investing activities was $108,472 and $71,899, respec-
7
<PAGE>
[LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
tively, primarily for the purchase of businesses. For the fiscal years ended
March 31, 1999 and 1998, Global's net cash provided by financing activities was
$96,652 and $69,631, respectively. Net cash provided by financing activities
consists of equity capital provided by the initial public offering, Golder,
Thoma, Cressey, Rauner Fund IV, L.P., Jackson National Life Insurance Company,
and certain members of management of Global and its acquired businesses, and net
borrowings.
Year 2000 Issues
With the exception of historical information such as Global's costs and efforts
to date relating to year 2000 issues, the discussion in this section consists of
forward-looking statements that involve risks and uncertainties. Global's
success in addressing year 2000 issues, and the impact of year 2000 issues on
Global's business, results of operations or financial condition, could differ
materially from the description that follows. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below.
In 1998, Global began formulating a plan to address the risks associated with
the "year 2000 issue," which relates to the possible inability of computer
systems and equipment to function properly as a result of their inability to
recognize or process dates occurring after 1999. Global's year 2000 plan
addresses the following areas: (1) information technology systems, or IT
systems, used in Global's internal operations, including accounting, data
processing and telephone systems; (2) non-IT systems used in Global's internal
operations, including alarm systems and fax machines; (3) the state and impact
of year 2000 readiness of products sold by Global (which Global primarily
purchases from third party vendors); and certain operational systems of Global's
critical suppliers and customers that may affect Global. As discussed below,
Global's year 2000 plan involves identifying and assessing the potential year
2000 risks faced by Global, remediating any year 2000 noncompliance identified
by Global's assessment; testing the year 2000 readiness of Global's systems; and
planning for year 2000 contingencies.
State of Year 2000 Readiness
Global is reviewing its overall exposure to year 2000 risks. Global's plan to
address the impact of the year 2000 issue on Global's IT and non-IT systems
involves (1) making an inventory of potentially date sensitive devices and
software, (2) assessing the systems affected by these devices and software, (3)
remediating or replacing these systems as necessary and (4) testing its systems
to confirm year 2000 readiness. Both IT and non-IT systems contain embedded
technology, which complicates Global's year 2000 assessment and remediation
efforts.
Global estimates that it has completed approximately 94% (in terms of time
spent) of the inventory and assessment phases of this process for its existing
companies. Global expects to complete these phases for its existing companies by
the end of July 1999. Due to Global's acquisition activity, Global expects to be
continually modifying its year 2000 remediation efforts to address the year 2000
readiness of businesses Global may acquire throughout the coming year and beyond
January 1, 2000. Although Global has a preliminary indication of the scale of
affected systems and software in its existing companies, future acquisitions
could present additional year 2000 problems. Global began remediating its
systems in November 1998 and expects to complete this phase by July 1999. Global
began the testing phase of its year 2000 plan in January 1999 and expects to
complete testing of existing systems by September 1999. The expected timing of
these phases is based on management's best estimates, which were derived using
numerous assumptions regarding future events, including the results of Global's
year 2000 assessment, the continued availability of certain resources and the
implementation and success of third party remediation plans. There can be no
assurance that these estimates will prove to be accurate, and actual results
could differ materially as a result of many factors, including Global's ability
to identify, assess, remediate and test all relevant systems and technology
embedded in those systems.
To the extent that Global has completed its year 2000 assessment of its IT
systems, Global's assessment has not revealed substantial year 2000
noncompliance. Specifically, for most of Global's functions, Global utilizes
Optimizing Management Decisions ("OMD")
8
<PAGE>
management's
discussion
and analysis
- --------------------------------------------------------------------------------
software. The OMD Corporation has released its year 2000 compliant software and
Global began testing it in April 1999. Global uses nationally known software
providers for both its general accounting and industry-specific systems and has
been assured by the manufacturers or vendors of such products that these
applications will be year 2000 compliant by July 1999. Global's assessment of
its non-IT systems is still at a preliminary stage.
The risk to Global's business, results of operations or financial condition that
third parties and their products will not be year 2000 ready is difficult to
quantify, but could potentially be significant. Global has analyzed its existing
product lines and identified potential year 2000 issues with the products Global
sells (which are, for the most part, manufactured by third parties), as well as
risks associated with year 2000 unreadiness of its critical suppliers and
customers. Global is not aware of any potentially major disruptions in
connection with the equipment and services currently or previously sold. Global
has sent questionnaires to its critical suppliers and customers to determine
their year 2000 readiness, and is reviewing responses received to date to assess
the impact of the year 2000 readiness of Global's suppliers and customers.
Global derives a majority of its revenues from the sale of equipment and from
service and supply contracts for such equipment. Accordingly, Global's success
depends on its access to reliable sources of equipment, parts and supplies at
competitive prices. If year 2000 issues impair the ability of Global's suppliers
to provide products timely and at competitive prices, Global's business, results
of operations and financial condition could be materially and adversely
affected. Global does not rely upon any one customer for the majority of its
sales, or one product vendor for the bulk of its purchases. No individual
supplier represents more than 15% of equipment purchases and Global's top 10
customers combined represent less than 8% of Global's total sales for the 12
month period ended March 31, 1999, giving effect to Global's acquisitions during
the period as if they had occurred on April 1, 1998. Global believes that its
large customer base will minimize the effect on Global of any year 2000 business
disruption experienced by any of its customers.
Costs to Address Year 2000 Issue
Global has not incurred material historical costs associated with year 2000
remediation. Global operates most of its systems on third party software that it
believes or has been informed is already year 2000 compliant. Global estimates
its costs of remediation will be approximately $500,000 (not including costs to
remediate systems of businesses that may be acquired in the future) and does not
expect these costs to be material in any year to Global's consolidated financial
condition, results of operations or cash flows. All modification costs relating
to the year 2000 issue are expensed as incurred and are expected to be paid for
out of internally generated funds.
Global's estimate of remediation costs is based on numerous assumptions
regarding future events, including the results of Global's year 2000 assessment,
continued availability of certain resources and the implementation and success
of third party remediation plans. There can be no assurance that this estimate
will prove to be accurate, and actual costs could differ materially as a result
of many factors, including those discussed in this section.
Risks Related to the Year 2000 Issue
In evaluating year 2000 risks to Global, Global has identified and evaluated
five mission-critical aspects of the business: sales, billing, service, delivery
and accounting information systems. Should any of these functions fail due to
Year 2000 issues, a material disruption in business could result.
Sales: Should Global's telecommunications system fail as a result of Year 2000
issues, Global's sales could be adversely affected. Global is currently in the
process of confirming year 2000 compliance by its third party telecommunications
providers. Global believes its sales division could remain fully operational if
it experienced a disruption in telecommunications service. Although Global
expects confirmation of year 2000 compliance from its third party
telecommunications providers, Global is preparing a contingency plan to continue
sales operations without telecommunication support.
9
<PAGE>
[LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
Billing: Global is dependent upon computerized billing systems. A breakdown in
IT billing systems could result in delayed or missed customer payments. By the
end of June 1999, Global expects to have completed the inventory and assessment
of all potentially affected IT systems. Based upon the level of impairment,
duplicate manual billing systems will be set in place to facilitate
uninterrupted service where Global anticipates a possible problem.
Service: Global utilizes a combination of manual and computerized service
dispatch systems. A disruption in Global's computerized dispatch system could
result in delayed customer service. By July 1999, Global will have completed the
inventory and assessment of all potentially affected existing IT systems. Based
upon the level of impairments, duplicate dispatch systems will be set in place
to facilitate uninterrupted service with regard to the uncertain systems.
Delivery: Global is heavily dependent upon timely delivery of products from its
product vendors as well as delivery to its customers. Any disruption in product
supply could result in low customer service and ultimately lost sales. Global is
making every effort to ensure its suppliers and delivery channels are adequately
prepared to transition to the year 2000. If Global determines there is a likely
possibility of untimely deliveries by its suppliers, it will take appropriate
steps to increase inventory of the affected products.
Accounting Information Systems: The majority of Global's accounting information
systems are computerized and susceptible to Year 2000 problems. Failure to
convert all affected systems could result in delayed or lost financial data.
Global is evaluating these systems and expects to make remediations to affected
systems by the second fiscal quarter of 1999.
Liability or Litigation Relating to Year 2000 Issues
In addition to the risk of failure of a function critical to Global's
operations, Global faces risks that are difficult to quantify relating to
potential liability resulting from the year 2000 issue. The breadth of different
products and services offered by Global and the uncertainty relating to the
meaning of the term "year 2000 compliant" could result in Global facing claims
arising from the effect of the year 2000 issue on the products it sells and
services. The year 2000 readiness of the products Global sells depends on the
implementation and success of efforts by the suppliers from whom Global
purchases these products in making them year 2000 compliant. Global cannot
currently estimate the risks it faces from such potential liability or
litigation.
Although Global's year 2000 efforts and the contingency plans described above
are intended to minimize the adverse effects of the year 2000 issue on Global's
business and operations, the actual effects of the issue and the success or
failure of Global's efforts described above cannot be known until the year 2000.
Failure by Global, major suppliers of computer systems and equipment used in
Global's operations, and major vendors and customers of products or services
sold by Global to address adequately their respective year 2000 issues in a
timely manner could have a material adverse effect on Global's business, results
of operations and financial condition.
Contingency Plans
Global is in the process of formulating contingency plans to address the year
2000 issue, and expects this planning stage to continue to be an active process
through 1999. As Global's identification and evaluation of the risks it faces
progresses, Global will develop plans to address these scenarios. Global expects
to continually revise its contingency planning as it receives information
regarding third party year 2000 readiness, and as it integrates future
acquisitions.
10
<PAGE>
consolidated
balance
sheets
================================================================================
(In thousands, except share amounts)
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------
Assets 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,175 $ 4,496
Accounts receivable, net of allowance for doubtful accounts
($1,353 and $871 at March 31, 1999 and 1998, respectively) 45,700 27,572
Inventories 36,793 19,061
Deferred income taxes 2,591 1,543
Prepaid expenses and other current assets 1,940 425
- --------------------------------------------------------------------------------
Total current assets 92,199 53,097
Rental equipment, net 4,377 4,655
Property and equipment, net 6,409 4,419
Other assets 782 2,147
Deferred income taxes - 571
Related party notes receivable 47 547
Intangible assets, net:
Goodwill 201,307 94,685
Noncompete agreements 1,207 1,336
Financing fees 4,091 2,885
- --------------------------------------------------------------------------------
Total assets $ 310,419 $164,342
================================================================================
</TABLE>
See Accompanying Notes
11
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
MARCH 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31,
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 16,718 $ 10,556
Accrued liabilities 7,583 3,878
Accrued compensation and benefits 5,221 3,543
Current maturities of long-term debt 176 233
Deferred revenue 16,196 10,632
Income taxes payable 1,383 -
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 47,277 28,842
Deferred income taxes 142 -
Long-term debt, less current maturities 168,101 97,252
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 215,520 126,094
Stockholders' equity:
Preferred stock, $.01 par value: 10,000,000 shares authorized:
no shares issued - -
Class A common stock, $.01 par value: 0 shares authorized, issued
and outstanding at March 31, 1999; 400,000 shares authorized and
339,945 shares issued and outstanding at March 31, 1998 - 3
Class B common stock, $.01 par value: 0 shares authorized, issued
and outstanding at March 31, 1999; 50,000,000 shares authorized:
9,521,058 shares issued and outstanding at March 31, 1998 - 95
Class C common stock, $.01 par value: 0 shares authorized, issued
and outstanding at March 31, 1999; 905,000 shares authorized and
904,252 shares issued and outstanding at March 31, 1998 - 9
Common stock, $.01 par value: 50,000,000 shares authorized:
18,727,436 shares issued and 18,725,841 shares outstanding at
March 31, 1999 187 -
Common stock held in treasury, at cost (35) -
Additional paid-in capital 83,817 33,618
Retained earnings 10,930 4,754
- -----------------------------------------------------------------------------------------------------------------------
94,899 38,479
Less stockholder receivables - (231)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 94,899 38,248
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 310,419 $ 164,342
=======================================================================================================================
</TABLE>
See Accompanying Notes
12
<PAGE>
consolidated [LOGO APPEARS HERE]
statements GLOBAL IMAGING SYSTEMS, INC.
of operations FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Equipment and supplies sales $ 218,653 $ 121,316 $ 41,200
Service and rentals 69,542 43,059 22,893
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 288,195 164,375 64,093
Costs and operating expenses:
Cost of equipment and supplies sales 154,083 85,972 27,087
Service and rental costs 34,434 21,594 11,467
Selling, general and administrative expenses 63,133 38,619 18,280
Intangible asset amortization 4,627 3,076 1,939
- ------------------------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 256,277 149,261 58,773
- ------------------------------------------------------------------------------------------------------------------------------------
Income from operations 31,918 15,114 5,320
Interest expense 8,427 6,713 3,190
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 23,491 8,401 2,130
Income taxes 10,390 3,948 1,007
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 13,101 4,453 1,123
Extraordinary charge for early retirement of debt,
net of tax benefit of $1,241 (1,817) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 11,284 4,453 1,123
- ------------------------------------------------------------------------------------------------------------------------------------
Yield adjustment on Class A common stock and
accretions (901) (2,442) (1,402)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders $ 10,383 $ 2,011 $ (279)
====================================================================================================================================
Basic earnings per share:
Income (loss) before extraordinary item, including
yield adjustment and accretions $ .74 $ .21 $ (.03)
Extraordinary charge for early retirement of debt,
net of tax benefit of $1,241 (.11) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ .63 $ .21 $ (.03)
====================================================================================================================================
Diluted earnings per share:
Income (loss) before extraordinary item, including
yield adjustment and accretions $ .73 $ .21 $ (.03)
Extraordinary charge for early retirement of debt,
net of tax benefit of $1,241 (.11) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share $ .62 $ .21 $ (.03)
====================================================================================================================================
Weighted average number of shares outstanding:
Basic 16,478 9,805 8,729
Diluted 16,811 9,805 8,729
====================================================================================================================================
</TABLE>
See Accompanying Notes
13
<PAGE>
CONSOLIDATED [STAMP OF GLOBAL IMAGING SYSTEMS INC APPEARS HERE]
STATEMENTS OF GLOBAL IMAGING SYSTEMS, INC.
CASH FLOWS FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
Year Ended March 31,
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 11,284 $ 4,453 $ 1,123
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,593 3,593 2,534
Amortization 4,954 3,630 2,576
Extraordinary charge for early retirement of debt 1,817 - -
Deferred income taxes 519 278 (528)
Changes in operating assets and liabilities, net of
amounts acquired in purchase business combinations:
Accounts receivable (7,329) (2,341) (2,106)
Inventories (5,511) (1,034) (1,279)
Prepaid expenses and other current assets (1,337) 48 131
Other assets (41) (202) 72
Accounts payable 2,014 (1,565) 616
Accrued liabilities, compensation and benefits 1,100 (545) 1,011
Deferred revenue (483) (72) 269
Income taxes payable 919 (440) (105)
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,499 5,803 4,314
Investing activities:
Related party notes receivable 500 (500) (47)
Purchase of property, equipment and rental equipment (5,208) (3,424) (2,940)
Payment for purchase of businesses, net of cash
acquired (103,764) (67,975) (16,008)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (108,472) (71,899) (18,995)
Financing activities:
Net draws under line of credit 70,610 60,560 14,565
Financing fees (4,584) (884) (2,762)
Cost of initial public offering (960) (1,647) -
Common stock retired and repurchased (35,374) - -
Common stock issued for cash 66,960 11,602 3,441
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 96,652 69,631 15,244
- ------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 679 3,535 563
Cash and cash equivalents, beginning of year 4,496 961 398
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 5,175 $ 4,496 $ 961
======================================================================================================
</TABLE>
See Accompanying Notes
14
<PAGE>
[LOGO APPEARS HERE]
consolidated GLOBAL IMAGING SYSTEMS, INC.
statements FOR THE YEARS ENDED MARCH 31,
of stockholders' equity 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except share amounts)
Common Stock* Additional
------------
Shares Par Paid-in Treasury Stockholder Retained
Value Capital Stock Receivables Earnings Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1996 8,287,353 $ 83 $ 15,971 $ (822) $ 15,232
Common stock issued 1,120,434 11 3,529 $ (100) 3,440
Net income 1,123 1,123
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 9,407,787 94 19,500 (100) 301 19,795
Common stock issued 1,357,468 13 14,118 (131) 14,000
Net income 4,453 4,453
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 10,765,255 107 33,618 (231) 4,754 38,248
Common stock issued in
initial public offering 6,000,000 60 66,900 66,960
Common stock issued in con-
junction with acquisitions 1,143,797 11 16,377 16,388
Common stock retired (339,945) (3) (30,459) 231 (133) (30,364)
Stock repurchased - Treasury (1,595) $ (35) (35)
Dividend - Class A
common stock (4,975) (4,975)
Common stock reclassified 1,158,329 12 (12)
Cost of initial public offering (2,607) (2,607)
Net income 11,284 11,284
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31,1999 18,725,841 $ 187 $ 83,817 $ (35) $ -- $ 10,930 $ 94,899
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
* COMMON STOCK Class A Class B Class C Total
ROLL FORWARD Common Stock Common Stock Common Stock Common Stock Common Stock
--------------- ----------------- ----------------- --------------- ----------------
Shares Par Shares Par Shares Par Shares Par Shares Par
Value Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,1996 172,917 $ 2 8,114,436 $ 81 8,287,353 $ 83
Common stock issued 38,229 - 448,272 5 633,933 $ 6 1,120,434 11
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 211,146 2 8,562,708 86 633,933 6 9,407,787 94
Common stock issued 128,799 1 958,350 9 270,319 3 1,357,468 13
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 339,945 3 9,521,058 95 904,252 9 10,765,255 107
Common stock issued in
initial public offering 6,000,000 $ 60 6,000,000 60
Common stock issued in
conjunction with
acquisitions 1,143,797 11 1,143,797 11
Common stock retired (339,945) (3) (339,945) (3)
Stock repurchased -
Treasury (1,595) (1,595)
Common stock reclassified (9,521,058) (95) (904,252) (9) 11,583,639 116 1,158,329 12
- --------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 - $ - - $ - - $ - 18,725,841 $ 187 18,725,841 $ 187
================================================================================================================================
</TABLE>
See Accompanying Notes
15
<PAGE>
Notes To [LOGO APPEARS HERE]
Consolidated
Financial Statements
(In thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
Global Imaging Systems, Inc. was formed on June 3, 1994. The Company's principal
operating subsidiaries are located in the United States and are in the business
of supplying photocopiers, facsimile equipment, automated office equipment,
network integration services, electronic presentation and document imaging
equipment, and related service, parts, and supplies. The consolidated financial
statements include the financial statements of Global Imaging Systems, Inc. and
its subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized as follows:
Supplies sales to customers are recognized at the time of shipment. Equipment
sales are recognized at the time of customer acceptance, or in the case of
equipment sales financed by third-party leasing companies, at the time of
acceptance by the leasing company and the customer.
Maintenance contract service revenues are recognized ratably over the term of
the underlying maintenance contract. Other service revenues are recognized as
earned. Deferred revenue consists of unearned maintenance contract revenue that
is recognized over the life of the related contract, generally 12 months. Rental
equipment revenue is recognized ratably over the lives of the underlying
cancelable operating leases, principally one to three years.
Financial Instruments
The Company's financial instruments include cash, accounts receivable, accounts
payable, and long-term debt. The carrying amount of these financial instruments
approximate their fair market value.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when acquired to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents, and trade
receivables. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different industries and geographical areas. As
of March 31, 1999, the Company had no significant concentrations of credit risk.
Inventories
Inventories consist of photocopiers, facsimile equipment, automated office
equipment, electronic presentation equipment, document imaging equipment,
computers and related soft-
16
<PAGE>
notes (continued)
- --------------------------------------------------------------------------------
ware, and related parts and supplies and are valued at the lower of cost
(specific identification and/or average cost for equipment and average cost for
related parts and supplies) or market value. Inventories are stated net of
reserves of $2,211 and $1,295 at March 31, 1999 and 1998, respectively, for
excess and slow-moving inventories.
Long-Lived Assets
The recoverability of long-lived assets (including related intangibles) is
evaluated at the operating unit level by an analysis of operating results and
consideration of other significant events or changes in the business
environment. If an operating unit has current operating losses and there is a
likelihood that such operating losses will continue, the Company will determine
if impairment exists based on the undiscounted expected future cash flows from
operations before interest. Impairment losses would be measured based on the
amount by which the carrying amount exceeds the fair value.
Rental Equipment
Rental equipment is stated at cost less accumulated depreciation. Depreciation
is provided using the straight-line method over the assets' estimated economic
lives, principally three years.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are principally provided using the
straight-line method over the assets' estimated economic lives, which range from
three to 10 years.
Intangibles
Goodwill (excess of purchase price over fair value of net assets acquired)
recognized in business combinations accounted for as purchases is amortized over
periods of between 20 and 40 years on the straight-line basis. Accumulated
amortization was approximately $7,100 and $3,200 at March 31, 1999 and 1998,
respectively.
Noncompete agreements are amortized over the lives of the agreements, which
range from two to four years, using the straight-line basis. Accumulated
amortization was approximately $4,300 and $3,500 at March 31, 1999 and 1998,
respectively.
Financing fees are amortized over the terms of the underlying debt agreements
using the straight-line method, which approximates the effective interest rate
method. Accumulated amortization at March 31, 1999 and 1998 was approximately
$206 and $760, respectively. In July 1998, the Company refinanced its existing
lines of credit. Unamortized financing fees of $3,058 that related to the
existing lines of credit were charged to operations as an extraordinary item.
2. ACQUISITIONS
During the year ended March 31, 1999, the Company acquired eight businesses that
provide office imaging solutions and related services for an aggregate purchase
price of approximately $124,800, primarily for cash, including direct costs of
acquisitions of approximately $1,000. Liabilities assumed in connection with
these acquisitions totaled approximately $14,800. The Company also sold stock at
its fair market value of approximately $16,400 in connection with these
acquisitions.
Significant acquisitions during the year ended March 31, 1999, include Carr
Business Systems (CAR), Capitol Office Solutions, Inc. (COS), Distinctive
Business Products, Inc. (DBP) and Dahill Industries, Inc. (DAH).
17
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
The following summarizes these acquisitions:
<TABLE>
<CAPTION>
Acquisition Total Assets Goodwill
Acquired Company Date Acquired Acquired
- ------------------------------------------------------------
<S> <C> <C> <C>
CAR September 1998 $ 19,100 $ 15,300
COS December 1998 60,000 54,100
DBP December 1998 21,200 17,200
DAH February 1999 28,400 17,100
- ------------------------------------------------------------
$ 128,700 $ 103,700
============================================================
</TABLE>
Total assets related to the remaining four acquisitions were approximately
$10,900, including goodwill of approximately $6,100.
During the year ended March 31, 1998, the Company acquired 12 businesses that
provide office imaging solutions and related services for an aggregate purchase
price of approximately $72,300 primarily for cash, including the direct costs of
acquisitions of approximately $600. Liabilities assumed in connection with these
acquisitions totaled approximately $21,400. The Company also sold stock in
connection with these acquisitions. The Class B common stock was valued from
$3.30 to $8.20 per share and the Class A common stock from $65.00 to $80.00 per
share. Stock valued at approximately $6,100 was sold in connection with these
acquisitions. The excess of the fair value of the stock over the sales price was
approximately $2,400 and has been considered additional purchase price.
Significant acquisitions during the year ended March 31, 1998, include
Electronic Systems, Inc. (ESI), Eastern Copy Products, Inc. (ECP), Electronic
Systems of Richmond, Inc. (ESR), and Connecticut Business Systems, Inc. (CBS).
The following summarizes these acquisitions:
<TABLE>
<CAPTION>
Acquisition Total Assets Goodwill
Acquired Company Date Acquired Acquired
- ------------------------------------------------------------
<S> <C> <C> <C>
ESI July 1997 $ 34,700 $ 24,800
ECP August 1997 9,100 5,300
ESR December 1997 15,700 8,600
CBS December 1997 12,800 9,300
- ------------------------------------------------------------
$ 72,300 $ 48,000
============================================================
</TABLE>
Total assets related to the remaining eight acquisitions were $19,700, including
goodwill of approximately $11,300.
During the year ended March 31, 1997, the Company acquired four businesses that
provide office imaging solutions and related services for an aggregate purchase
price of approximately $17,000 primarily for cash, including the direct costs of
acquisitions of approximately $500. The Company assumed approximately $4,100 in
liabilities in connection with these acquisitions. The Company also sold stock
at its fair market value of approximately $900 in connection with these
acquisitions. Total assets related to these four acquisitions were approximately
$21,100, including goodwill of approximately $12,000.
All acquisitions have been accounted for as purchases and accordingly are
included in the results of operations from their dates of acquisitions. In
connection with the allocation of purchase price, there were no significant
adjustments to fair value.
18
<PAGE>
notes (continued)
- --------------------------------------------------------------------------------
Under the terms of two of its purchase agreements, the Company is committed to
make contingent payments ("the Earn-outs") of up to $3,600 to the former owners
of the acquired companies on or before June 30, 2002. The contingent payments
are based on the future profitability, specifically earnings before interest and
taxes, of the acquired companies. The former owners may receive a portion of the
Earn-outs equal to $250 for the fiscal year ending March 31, 1999, and $350 for
the fiscal years ending March 31, 2000 and 2001. The former owners shall be
entitled to receive, on or before June 30, 2002, the balance of the Earn-outs if
applicable, minus any portion of the Earn-outs previously paid. The Earn-outs,
if paid, will be recorded as goodwill related to the acquired companies. The
Company has accrued $250 at March 31, 1999 related to the Earn-outs.
The unaudited pro forma results presented below include the effects of the
acquisitions as if they had been consummated at the beginning of the year prior
to acquisition. The unaudited proforma financial information below is not
necessarily indicative of either future results of operations or results that
might have been achieved had the acquisitions been consummated at the beginning
of the year prior to acquisition.
<TABLE>
<CAPTION>
Unaudited Pro Forma
Year ended March 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 356,526 $ 313,963 $ 196,843
Net income (loss) before extraordinary item 14,756 4,628 (90)
Less extraordinary item (1,817) - -
- --------------------------------------------------------------------------------
Net income (loss) 12,939 4,628 (90)
Net income (loss) available to common
stockholders 12,038 1,689 (2,535)
Basic earnings (loss) per share .64 .09 (.22)
Diluted earnings (loss) per share .63 .09 (.22)
</TABLE>
3. RENTAL EQUIPMENT
The Company's rental equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
- -----------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Rental equipment on operating leases $ 14,204 $ 11,594
Less accumulated depreciation (9,827) (6,939)
- -----------------------------------------------------------------
Rental equipment, net $ 4,377 $ 4,655
=================================================================
</TABLE>
4. PROPERTY AND EQUIPMENT
The Company's property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Office furniture, equipment and leasehold improvements $ 9,984 $ 6,289
Less accumulated depreciation and amortization (3,575) (1,870)
- ------------------------------------------------------------------------------
Property and equipment, net $ 6,409 $ 4,419
==============================================================================
</TABLE>
19
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31,
- -----------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Term and revolving loans $ 68,000 $ 97,252
Senior Subordinated Notes, 10 3/4% due 2007 100,000 --
Various notes payable 277 233
- -----------------------------------------------------------------------
168,277 97,485
Less current maturities (176) (233)
- -----------------------------------------------------------------------
Total $ 168,101 $ 97,252
=======================================================================
</TABLE>
In June 1998, the Company repaid $31,500 of long-term debt outstanding to
Jackson National Life Insurance Company ("JNL"), principally with proceeds from
the initial public offering. Recognition of a prepayment penalty of $250 and
deferred financing costs of $901 related to the JNL debt repayment resulted in
an extraordinary charge of $684 ($.06 per share), net of the related income tax
benefit of $467. In July 1998, the Company repaid the remaining $65,800 balance
of the JNL loan with proceeds from a replacement credit agreement ("The Credit
Agreement") with First Union National Bank ("First Union"). The Company
recognized the remaining prorata deferred financing costs of $1,907 from the JNL
loan, resulting in an extraordinary charge of $1,133 ($.06 per share), net of
the related income tax benefit of $774.
The Credit Agreement with First Union consists of a $5,000 swingline of credit
and a $170,000 revolving line of credit. As of March 31, 1999 the Company had no
amounts outstanding on the swingline of credit and $68,000 on the revolving line
of credit. The Credit Agreement bears interest at rates ranging from 0.75% to
1.5% over LIBOR (6.19% at March 31, 1999) 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. The terms of the credit facility
require strict compliance with numerous affirmative, negative and financial
covenants. 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.
In March 1999, the Company issued $100,000 Senior Subordinated Notes ("the
Notes") due March 8, 2007. The net proceeds of approximately $96,000 were used
to reduce First Union's revolving credit facility. The Notes bear interest at
10.75%, payable semi-annually. The Notes may be redeemed at the option of the
Company beginning on February 15, 2003 at the following redemption prices,
expressed as percentages of the principal amount:
Year Percentage
2003 105.375%
2004 102.688%
2005 and thereafter 100.000%
20
<PAGE>
notes (continued)
- --------------------------------------------------------------------------------
At any time on or prior to February 15, 2002, the Company may, at its option,
use the net cash proceeds from certain public equity offerings to redeem in the
aggregate up to 35% of the aggregate principal amount of the Notes at a
redemption price equal to 110.75% of the principal amount, provided that at
least 65% of the aggregate principal amount of the Notes originally issued
remain outstanding, and the redemption occurs within 60 days after the
consummation of the public equity offering. The Notes are guaranteed by all
current subsidiaries of the Company, and must be guaranteed by all future
subsidiaries of the Company, other than certain future financing subsidiaries,
on an unsecured senior subordinated basis. Upon the occurrence of future change
of control of the Company, the holders of the Notes have the right to require
that the Company purchase all or a portion of the Notes at a price equal to 101%
of the principal amount. The covenants of the Notes require strict compliance
with certain affirmative, negative and financial covenants.
On May 7, 1999, the Company filed a registration statement with the Securities
and Exchange Commission to register its offer to exchange the Notes for exchange
notes with identical terms, except the exchange notes will not contain transfer
restrictions.
In September 1996, the Company purchased an interest rate cap from a bank on
$23,500 of the term loan debt outstanding. In January 1998, the Company
purchased an additional rate cap on an additional $26,475 of the term loan. The
interest rate caps are for three-year terms and provide for the Company to be
reimbursed by the bank if the annual average of the LIBOR rate exceeds 8%. The
cost of the interest rate caps ($150) is amortized over the three-year term of
the agreement and is included in interest expense.
Aggregate annual maturities of long-term debt at March 31, 1999 are as follows:
2000 $ 176
2001 34
2002 32
2003 35
2004 68,000
Thereafter 100,000
---------
Total $ 168,277
=========
Interest paid was approximately $7,000, $6,000 and $2,700 for the years ended
March 31, 1999, 1998 and 1997, respectively.
6. STOCKHOLDERS' EQUITY
During the year ended March 31, 1999, the Company issued stock in connection
with business combinations totaling 1,143,797 shares. The Company received 1,595
shares in settlement of an escrow claim in January 1999.
Under the terms of the Senior Subordinated Notes, the Company is restricted from
paying any cash dividends.
21
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
Effective May 28, 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 retirement 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 reclassified 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. After deducting expenses, the Company received
$64,400 in proceeds from the initial public offering. Of the approximately
$64,400 in net proceeds to the Company, approximately $28,800 was used to repay
amounts due Jackson National Life Insurance Company. The remaining approximately
$35,600 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.
In fiscal 1997, the Company sold 633,933 shares of Class C common stock and
37,083 shares of Class A common stock at their fair value for an aggregate
amount of $2,500 to its lender. During the year ended March 31, 1998, the
Company sold 270,319 shares of Class C common stock and 11,136 shares of Class A
common stock in connection with certain antidilution provisions. Of such shares
of Class C common stock, 260,600 shares were sold at the same per share price as
the fiscal 1997 shares were sold to the Company's lender, and 9,656 shares were
sold at a par share price of $.07, resulting in aggregate proceeds of $1,030 to
the Company. Upon consummation of the Company's initial public offering, each
share of Class C common stock converted into a share of common stock, and each
share of Class A common stock converted into approximately 3.41 shares of common
stock and $90 plus a cash yield equal to 8% per annum from the time of purchase
through May 31, 1998. Additionally, in 1997, the Company paid a financing fee of
2% to the lender to increase the JNL loan by $40,000 to $120,000.
7. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution from the
exercise of stock options or the conversion of securities into stock.
The following table reconciles the numerators and denominators of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
Year ended March 31,
================================================================================================
1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Income before extraordinary item $ 13,101 $ 4,453 $ 1,123
Extraordinary charge for early retirement
of debt, net of tax benefit of $1,241 (1,817) -- --
- ------------------------------------------------------------------------------------------------
Net income 11,284 4,453 1,123
Yield adjustment on Class A common
stock and accretions (901) (2,442) (1,402)
- ------------------------------------------------------------------------------------------------
Numerator for basic/diluted earnings per share -
net income (loss) available to common stockholders $ 10,383 $ 2,011 $ (279)
================================================================================================
</TABLE>
22
<PAGE>
notes (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended March 31,
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share: 16,478 9,805 8,729
Effect of dilutive securities:
Contingent stock-redemption of A shares
in June 1998 88 - -
Employee stock options 245 - -
- ------------------------------------------------------------------------------
Dilutive potential common shares 333 - -
- ------------------------------------------------------------------------------
Denominator for diluted earnings per share 16,811 9,805 8,729
==============================================================================
</TABLE>
8. INCOME TAXES
Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
Year ended March 31,
- ---------------------------------------------------
1999 1998 1997
- ---------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 8,420 $ 2,807 $ 1,160
State 1,451 863 375
- ---------------------------------------------------
9,871 3,670 1,535
Deferred:
Federal 454 213 (449)
State 65 65 (79)
- ---------------------------------------------------
519 278 (528)
- ---------------------------------------------------
$10,390 $ 3,948 $ 1,007
===================================================
</TABLE>
A reconciliation of the differences between the effective income tax rate and
the statutory federal tax rate are as follows:
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate (35%) $ 8,222 $ 2,856 $ 724
State taxes, net of federal benefit 1,322 616 187
Goodwill amortization 529 289 216
Valuation allowance - - (175)
Other permanent differences 317 187 55
- -------------------------------------------------------------
$10,390 $ 3,948 $1,007
=============================================================
</TABLE>
23
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------
1999 1998
- -------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Noncompete agreements $ 1,271 $ 1,091
Inventory related 1,529 688
Various accrued expenses 524 239
Deferred revenue 213 403
Depreciation 260 199
Accounts receivable related 325 213
Other items 126 --
- -------------------------------------------------------------
Gross deferred tax asset 4,248 2,833
Deferred tax liabilities:
Goodwill 1,799 654
Other items -- 65
- -------------------------------------------------------------
Net deferred tax asset $ 2,449 $ 2,114
- -------------------------------------------------------------
Classified as follows:
Current asset 2,591 1,543
Noncurrent asset -- 571
Noncurrent liability (142) --
- -------------------------------------------------------------
$ 2,449 $ 2,114
=============================================================
</TABLE>
A valuation allowance is required to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. A portion of the
reduction of the valuation allowance during the year ended March 31, 1997 was
credited to goodwill since it related to basis differences from previous
business combinations not previously recognized. After consideration of all the
evidence, both positive and negative, management has determined that a valuation
allowance is not necessary as of March 31, 1999. Cash paid for income taxes was
$6,948, $3,468 and $1,581 for the years ended March 31, 1999, 1998 and 1997,
respectively.
9. EMPLOYEE BENEFIT PLANS
The majority of the employees of the Company are eligible to participate in
defined contribution plans (the Plans) established under Section 401(k) of the
U.S. Internal Revenue Code. Employees are generally eligible to contribute
voluntarily to the Plans after one year of service. The Company may contribute a
discretionary amount of the employee contribution up to specified limits.
Employees are always vested in their contributed balance and generally become
fully vested in the Company's contributions after seven years of service. The
expense related to the Company's contributions to the Plans for the years ended
March 31, 1999, 1998 and 1997 was approximately $1,117, $519 and $302,
respectively.
10. STOCK OPTION PLAN
In 1998, the Board of Directors adopted a stock option plan and approved a
number of stock option grants to be 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 pur-
24
<PAGE>
notes (continued)
- --------------------------------------------------------------------------------
suant to stock options or granted or sold as restricted stock to directors,
officers, employees, and consultants to the Company. As of March 31, 1999 the
Board had granted options to purchase a total of 549,750 shares of common stock
of the Company under the stock option plan and an option to purchase 10,000
shares of common stock of the Company outside of the stock option plan. These
options have an exercise price of $12 per share, except for 30,000 shares with
an exercise price of $12.875. All of these options are subject to vesting
requirements based on length of service.
The following table summarizes the stock option activity for the year ended
March 31, 1999:
<TABLE>
<CAPTION>
Number of Per Share
Shares Option Price
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1998 - -
Granted 559,750 $12.00 - 12.88
Exercised - -
Canceled (33,650) $12.00 - 12.00
- --------------------------------------------------------------------------------
Outstanding at March 31, 1999 526,100 $12.00 - 12.88
================================================================================
Exercisable at March 31, 1999 1,000 $12.00 - 12.00
================================================================================
</TABLE>
Pro forma information regarding net income and earnings per share is required by
SFAS 123, "Accounting for Stock-Based Compensation", which also requires that
the information be determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999
- ----------------------------------------------------------------------------------------
<S> <C>
Risk-free interest rate 5.0%
Volatility factor of the expected market price of the Company's common stock 75.0%
Dividend yield -
Weighted average expected life of options (in years) 5.0
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1999
- --------------------------------------------------------------------------------
<S> <C>
Pro forma net income available to common stockholders $9,925
Pro forma earnings per share:
Basic 0.60
Diluted 0.59
</TABLE>
25
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
The following table summarizes the weighted average exercise prices of option
activity for the year ended:
<TABLE>
<CAPTION>
1999
- ------------------------------------------------------------------------
<S> <C>
Balance at beginning of period $ -
Granted 12.05
Exercised -
Canceled 12.00
Balance at end of period 12.05
</TABLE>
As of March 31, 1999, the weighted average exercise price of exercisable options
was $12.00. Outstanding options as of March 31, 1999 had a weighted average
remaining contractual life of 9.2 years. The per share weighted average fair
value of options granted during the year ended March 31, 1999 was $8.19.
11. LEASES
The Company is obligated under various noncancelable operating leases for its
office facilities, office equipment and vehicles. Certain of the leases for its
office facilities are with various employee stockholders. Future noncancelable
lease commitments as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Related-Party Other
Leases Leases Total
- ------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 1,254 $ 3,125 $ 4,379
2001 1,165 2,878 4,043
2002 1,011 2,184 3,195
2003 739 1,707 2,446
2004 606 1,271 1,877
Thereafter - 1,216 1,216
- ------------------------------------------------------------------
Total $ 4,775 $ 12,381 $ 17,156
==================================================================
</TABLE>
Rental expense related to the above leases was as follows:
<TABLE>
<CAPTION>
Related-Party Other
Lease Expense Leases Total
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended March 31, 1999 $ 1,042 $ 2,487 $ 3,529
Year ended March 31, 1998 862 1,236 2,098
Year ended March 31, 1997 530 262 792
</TABLE>
12. RELATED-PARTY TRANSACTIONS
During 1994, the Company entered into a seven-year consulting agreement with its
majority stockholder, Golder, Thoma, Cressey, Rauner, Inc. ("the Majority
Stockholder"). Under the terms of this agreement, the Company was obligated to
pay the Majority Stockholder an annual management fee of $200. The Company was
also obligated to pay a 1% placement fee to the Majority Stockholder for all
debt and equity raised by the Company during the term of the agreement. The
agreement terminated upon the closing of the initial public offering ("IPO") of
the Company's common stock in June 1998.
The Majority Stockholder agreed to waive their 1% placement fee related to debt
refinancing completed in August 1996, because the majority of the work to obtain
the financing was performed by another related party, Green, Manning & Bunch,
which charged a 1% fee.
Golder, Thoma, Cressey, Rauner, Inc. management fees were waived in 1999 due to
the completion of the IPO in June, 1998. In connection with the aforementioned
agreements, the
26
<PAGE>
notes (continued)
- -------------------------------------------------------------------------------
Company incurred management fees and placement fees. The following shows the
fees paid in each period:
<TABLE>
Year ended March 31,
- -------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees $ - $ 200 $ 200
Placement fees - 800 -
</TABLE>
The Company entered into a consulting agreement with Capitol Office Solutions
("Capitol") in July 1997, whereby the Company provided certain human resources,
administration, financial, accounting, and consulting services to Capitol for an
annual fee of $150. Additionally, the Company received a one-time fee of $270
from Capitol related to assisting Capitol in obtaining financing. The consulting
agreement ended in November 1998 with the purchase of Capitol in December 1998.
The majority stockholders of the Company also owned the majority of the
outstanding stock of Capitol.
Related party notes receivable at March 31, 1998 primarily related to amounts
loaned to officers of the Company to purchase stock in Capitol. These notes,
which bore interest of 8% per annum, were due and payable, with interest, on
June 30, 2000, and were collateralized by the shares purchased with the proceeds
of the notes. The notes were paid off in December 1998, concurrently with the
purchase of Capitol by the Company.
13. SEGMENTS
In fiscal 1999, the Company adopted the provisions of Statement of Financial
Accounting Standards 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS No. 131). This statement establishes new standards
for reporting information about operating segments and related disclosures.
As an integrated office imaging solutions provider, the Company is organized
into 12 geographical operating segments (core dealers). These individual
segments have been aggregated into one reportable segment given the similarities
of economic characteristics between the operations represented by the core
dealers and the common nature of the products and services, classes of customers
and distribution channels.
The revenues of these aggregated segments are derived from the two principal
categories of revenues as reported in the Company's consolidated statements of
operations. Substantially all of the Company's revenue is attributable to
customers in the United States. Additionally, all of the Company's assets are
located in the United States.
14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company has issued $100,000 of 10-3/4% Senior Subordinated Notes (the
Notes), that are fully and unconditionally guaranteed on a joint and several
basis by all the Company's existing subsidiaries (the Guarantors), each of which
is wholly owned, directly or indirectly, by the Company. All of the operations
of the Company are conducted by the Guarantors and the Company has no operations
or assets separate from its investment in its subsidiaries. The aggregate
assets, liabilities, earnings and equity of the Guarantors are substantially
equivalent to the aggregate assets, liabilities, earnings and equity of the
Company, on a consolidated basis. Therefore, separate financial statements of
the Guarantors have not been presented. Separate financial statements and other
disclosures concerning the Guarantors and the Parent are not present because
management believes that such information would not be material to investors.
27
<PAGE>
[LOGO APPEARS HERE]
GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
15. SUBSEQUENT EVENT (Unaudited)
The Company has signed a commitment letter with First Union for a $250,000
credit facility. The letter was signed in April 1999. The new credit facility is
expected to replace the current senior credit facility and is expected to
consist of a $150,000 five-year senior secured revolving line of credit, a
$25,000 five-year senior term loan, and a $75,000 seven-year senior term loan.
The new revolving credit line of the senior credit facility is expected to bear
interest at rates ranging from a 2.00% to 3.00% over LIBOR or from .75% to 1.75%
over a base rate related to prime rate, and will vary according to Global's
ratio of its total funded debt to earnings before interest, taxes, depreciation
and amortization. The term loans are expected to bear interest at a rate 3.25%
over LIBOR or 2.00% over a base rate related to prime rate. The terms of the new
senior credit facility are expected to require strict compliance with numerous
affirmative, negative and financial covenants.
Amounts borrowed under the senior credit facility may be used to fund working
capital and general corporate purposes, including acquisitions, subject to First
Union's approval in the case of certain acquisitions.
In March 1999, the Company signed a non-binding letter of intent to acquire a
company with total annual revenues of approximately $70 million. If acquired,
the company will serve as a core company for the Company in the Front Range of
the Rocky Mountains.
- --------------------------------------------------------------------------------
report of independent auditors
Board of Directors
Global Imaging Systems, Inc.
We have audited the accompanying consolidated balance sheets of Global Imaging
Systems, Inc. as of March 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Global
Imaging Systems, Inc. at March 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
Tampa, Florida /s/ Ernst & Young LLP
May 12, 1999
28
<PAGE>
quarterly
financial [LOGO APPEARS HERE]
data GLOBAL IMAGING SYSTEMS, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
Net Inc. Diluted
Before Earnings Dividends
Net Gross Extraord. Per Stock Price (1) Paid Per
Revenues Margin Item Share High Low Share(2)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
First quarter $ 58,202 $ 20,309 $ 2,088 $ .04 $ 15.250 $ 11.250 $ -
Second quarter 67,006 21,535 2,837 .10 17.438 9.688 -
Third quarter 75,653 26,097 3,829 .21 26.250 6.875 -
Fourth quarter 87,334 31,737 4,347 .23 24.875 10.750 -
-----------------------------------------------------------------------------------------------------------------
Year $ 288,195 $ 99,678 $ 13,101 $ .62 $ 26.250 $ 6.875 $ -
=================================================================================================================
1998
First quarter $ 21,912 $ 8,335 $ 671 $ .03 $ - $ - $ -
Second quarter 41,403 13,824 1,005 .06 - - -
Third quarter 46,715 15,891 1,113 .06 - - -
Fourth quarter 54,345 18,759 1,664 .06 - - -
-----------------------------------------------------------------------------------------------------------------
Year $ 164,375 $ 56,809 $ 4,453 $ .21 $ - $ - $ -
=================================================================================================================
</TABLE>
(1) Global Imaging Systems, Inc. common stock is traded on the Nasdaq
National Market under the symbol "GISX". Because Global's initial public
offering occurred in June 1998, no stock prices are presented for prior
periods. Stock quotations were obtained from the National Association of
Securities Dealers. On June 17, 1999, Global had 144 stockholders of record
plus approximately 4,300 beneficial owners holding Global common stock in
broker name.
(2) Global is prohibited from paying cash dividends under the terms of the
agreement governing its senior credit facility and the indenture governing
its 10-3/4% Senior Subordinated Notes due 2007.
29
<PAGE>
EXHIBIT 21.1
GLOBAL IMAGING SYSTEMS, INC.
Direct and Indirect Subsidiaries
<TABLE>
<CAPTION>
ADDITIONAL NAME(S) UNDER WHICH
SUBSIDIARY JURISDICTION OF
NAME DOES BUSINESS ORGANIZATION
----- ------------- ------------
<S> <C> <C>
American Photocopy Equipment Company of Pittsburgh AMCOM Office Systems Delaware
Berney, Inc. and its subsidiary: Alabama
Southern Copy Systems, Inc. Alabama
Capitol Office Solutions, Inc. and its subsidiaries: Delaware
Capitol Copy Products, Inc. Delaware
COS Financial, Inc. Maryland
Carr Business Machines of Great Neck Inc. Carr Business Systems New York
Connecticut Business Systems, Inc. Connecticut
Conway Office Products, Inc. and its subsidiaries: New Hampshire
Business Equipment Unlimited Maine
Cameron Office Products, Inc. Massachusetts
Eastern Copy Products, Inc. New York
Copy Service and Supply, Inc. North Carolina
Distinctive Business Products, Inc. Illinois
Duplicating Specialties, Inc. Copytronix Oregon
Henderson's Office Systems
Electronic Systems, Inc. and its subsidiary: Virginia
Electronic Systems of Richmond, Inc. Virginia
Felco Office Systems, Inc. Dahill Industries, Inc. Texas
Global Imaging Finance Company Delaware
Global Imaging Operations, Inc. Delaware
(a subsidiary of Global, American Photocopy Equipment
Company of Pittsburgh, Berney, Conway, Felco and
Southern Business Communications)
Lewan Acquisition, Inc.* Colorado
Quality Business Systems, Inc. Washington
Southern Business Communications, Inc. and its subsidiaries: Georgia
ProView, Inc. North Carolina
Centre Business Products, Inc. Pennsylvania
</TABLE>
_______________________________________________
*Expected to become a subsidiary on or about June 23, 1999.
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-62765) pertaining to the Global Imaging Systems, Inc. 401(K)
Retirement Plan, and (Form S-8 No. 333-80801) pertaining to Global Imaging
Systems, Inc. 1998 Stock Option and Incentive Plan and the Director
Non-Incentive Stock Option of our reports dated May 12, 1999, with respect to
the consolidated financial statements of Global Imaging Systems, Inc.
incorporated by reference in the Annual Report (Form 10-K) for the year ended
March 31, 1999, and the related financial statement schedule included therein,
filed with Securities and Exchange Commission.
/s/ Ernst & Young LLP
Tampa, Florida
June 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 5,175
<SECURITIES> 0
<RECEIVABLES> 47,053
<ALLOWANCES> 1,353
<INVENTORY> 36,793
<CURRENT-ASSETS> 4,531
<PP&E> 32,098
<DEPRECIATION> 21,312
<TOTAL-ASSETS> 310,419
<CURRENT-LIABILITIES> 47,277
<BONDS> 0
0
0
<COMMON> 83,969
<OTHER-SE> 10,930
<TOTAL-LIABILITY-AND-EQUITY> 310,419
<SALES> 288,198
<TOTAL-REVENUES> 288,198
<CGS> 188,517
<TOTAL-COSTS> 251,650
<OTHER-EXPENSES> 4,627
<LOSS-PROVISION> 324
<INTEREST-EXPENSE> 8,427
<INCOME-PRETAX> 23,491
<INCOME-TAX> 10,390
<INCOME-CONTINUING> 13,101
<DISCONTINUED> 0
<EXTRAORDINARY> (1,817)
<CHANGES> 0
<NET-INCOME> 11,284
<EPS-BASIC> .63
<EPS-DILUTED> .62
</TABLE>
