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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
Commission File Number: 000-24373
GLOBAL IMAGING SYSTEMS, INC.
-----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3247752
----------------------------- ----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3820 Northdale Boulevard, Suite 200A
Tampa, Florida 33624
- ------------------------------------- --------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 813-960-5508
-----------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The registrant had 19,023,671 Shares of Common Stock, $.01 par value,
outstanding as of August 13, 1999.
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<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (Unaudited)
and March 31, 1999 3
Consolidated Statements of Operations for the three months ended
June 30, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 1999 and 1998 (Unaudited) 5
Consolidated Statement of Stockholders' Equity for the three months
ended June 30, 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
ITEM 2 - Changes in Securities and Use of Proceeds 16
ITEM 6 - Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,510 $ 5,175
Accounts receivable, net of allowance for doubtful accounts ($1,604
and $1,353 at June 30, 1999 and March 31, 1999, respectively) 56,871 45,700
Inventories 38,469 36,793
Deferred income taxes 3,084 2,591
Prepaid expenses and other current assets 2,721 1,940
------------ ------------
Total current assets 112,655 92,199
Rental equipment, net 8,806 4,377
Property and equipment, net 7,604 6,409
Other assets 1,608 782
Related party notes receivable 47 47
Intangible assets, net:
Goodwill 241,227 201,307
Noncompete agreements 1,991 1,207
Financing fees 5,413 4,091
------------- ------------
Total assets $379,351 $310,419
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,816 $ 16,718
Accrued liabilities 7,088 6,709
Accrued compensation and benefits 6,618 5,221
Accrued interest 3,559 874
Current maturities of long-term debt 3,369 176
Deferred revenue 19,194 16,196
Income taxes payable 1,510 1,383
------------ ------------
Total current liabilities 64,154 47,277
Deferred income taxes 424 142
Long-term debt, less current maturities 211,840 168,101
------------ ------------
Total liabilities 276,418 215,520
Stockholders' equity:
Preferred stock, $.01 par value:
10,000,000 shares authorized: No shares issued. - -
Common stock, $.01 par value:
50,000,000 shares authorized: 19,016,140 and 18,727,436 shares
issued; and 19,014,545 and 18,725,841 shares outstanding at
June 30, 1999 and March 31, 1999, respectively 190 187
Common stock held in treasury, at cost (35) (35)
Additional paid-in capital 88,414 83,817
Retained earnings 14,364 10,930
------------ ------------
Total stockholders' equity 102,933 94,899
------------ ------------
Total liabilities and stockholders' equity $379,351 $310,419
============ ============
</TABLE>
See accompanying notes.
3
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GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Equipment and supplies sales $ 75,532 $43,334
Service and rentals 24,992 14,868
----------- -----------
Total revenues 100,524 58,202
Costs and operating expenses:
Cost of equipment and supplies sales 51,572 30,771
Service and rental costs 12,274 7,006
Selling, general and administrative expenses 23,403 13,405
Intangible asset amortization 1,744 901
----------- -----------
Total costs and operating expenses 88,993 52,083
----------- -----------
Income from operations 11,531 6,119
Interest expense 4,243 2,230
----------- -----------
Income before income taxes and extraordinary item 7,288 3,889
Income taxes 3,200 1,801
----------- -----------
Income before extraordinary item 4,088 2,088
Extraordinary charge for early retirement of debt, net of tax benefit
of $436 and $467 for 1999 and 1998, respectively (654) (684)
----------- -----------
Net income 3,434 1,404
Yield adjustment on Class A common stock and accretions - (901)
----------- -----------
Net income available to common stockholders $ 3,434 $ 503
=========== ===========
Basic earnings per share:
Income before extraordinary item, including yield
adjustment and accretions $ 0.22 $ 0.10
Extraordinary charge for early retirement of debt, net of tax benefit
of $436 and $467 for 1999 and 1998, respectively (0.04) (0.06)
----------- -----------
Net income per share $ 0.18 $ 0.04
=========== ===========
Diluted earnings per share:
Income before extraordinary item, including yield
adjustment and accretions $ 0.22 $ 0.09
Extraordinary charge for early retirement of debt, net of tax benefit
of $436 and $467 for 1999 and 1998, respectively (0.04) (0.05)
----------- -----------
Net income per share $ 0.18 $ 0.04
=========== ===========
Weighted average number of shares outstanding:
Basic 18,745 11,527
Diluted 18,911 12,511
</TABLE>
See accompanying notes.
4
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GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income $ 3,434 $ 1,404
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,603 1,065
Amortization 1,917 1,021
Extraordinary charge for early retirement of debt 654 684
Deferred income taxes 234 34
Changes in operating assets and liabilities, net of amounts acquired
in purchase business combinations:
Accounts receivable (4,260) (5,164)
Inventories 2,439 (1,412)
Prepaid expenses and other current assets (741) (337)
Other assets 326 2,594
Accounts payable 1,048 2,302
Accrued liabilities, compensation and benefits 1,477 (72)
Deferred revenue 300 709
Income taxes payable 1,074 1,203
---------- ----------
Net cash provided by operating activities 9,505 4,031
Investing activities:
Purchase of property, equipment and rental equipment (1,493) (1,416)
Payment for purchase of businesses, net of cash acquired (46,024) (254)
---------- ----------
Net cash used in investing activities (47,517) (1,670)
Financing activities:
Borrowings under line of credit 115,000 -
Payments under line of credit (68,000) (31,500)
Reduction of other debt (68) (58)
Financing fees (2,585) (262)
Cost of initial public offering - (912)
Common stock repurchased and retired - (35,411)
Common stock issued for cash - 64,401
---------- ----------
Net cash provided by (used in) financing activities 44,347 (3,742)
---------- ----------
Net increase (decrease) in cash and cash equivalents 6,335 (1,381)
Cash and cash equivalents, beginning of period 5,175 4,496
---------- ----------
Cash and cash equivalents, end of period $ 11,510 $ 3,115
========== ==========
</TABLE>
See accompanying notes.
5
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GLOBAL IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------------
Treasury Paid-in Retained
Shares Par Value Stock Capital Earnings Total
---------- ------------- ------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1999 18,725,841 $187 $(35) $83,817 $10,930 $ 94,899
Common stock issued in
conjunction with acquisitions 288,704 3 4,597 4,600
Net income 3,434 3,434
---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 1999 19,014,545 $190 $(35) $88,414 $14,364 $102,933
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
6
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GLOBAL IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 1999,
consolidated statements of operations for the three months ended June 30, 1999
and 1998, the consolidated statements of cash flows for the three months ended
June 30, 1999 and 1998, and the consolidated statement of stockholders' equity
for the three months ended June 30, 1999 are unaudited. In the opinion of
management, all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of operations for the interim periods
presented have been reflected herein. The results of operations for the interim
periods are not necessarily indicative of the results which may be expected for
the entire fiscal year. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in Global Imaging Systems, Inc. (together with its subsidiaries,
"Global" or the "Company") Annual Report for the year ended March 31, 1999.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution from the exercise of stock options or the
conversion of securities into stock.
The following table reconciles the numerators and denominators of the basic
and diluted EPS computations:
<TABLE>
<CAPTION>
For Three Months Ended
June 30, June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Numerator:
Income before extraordinary item $ 4,088 $ 2,088
Extraordinary charge for early retirement of debt, net of tax benefit (654) (684)
--------------- ----------------
Net income 3,434 1,404
Yield adjustment on Class A common stock and accretions - (901)
--------------- ----------------
Numerator for basic and diluted earnings per share -
income available to common stockholders $ 3,434 $ 503
=============== ================
Denominator:
Denominator for basic earnings per share 18,745 11,527
Effect of dilutive securities:
Contingent stock-redemption of A shares in June 1998 - 980
Employee stock options 166 4
--------------- ----------------
Dilutive potential common shares 166 984
--------------- ----------------
Denominator for diluted earnings per share-adjusted weighted
average shares and assumed conversions 18,911 12,511
=============== ================
</TABLE>
NOTE 3. ACQUISITIONS
During the three months ended June 30, 1999 the Company acquired one
business that provides office-imaging solutions and network integration
services. Aggregate consideration for this acquisition was approximately $55
million, including $50 million in cash, plus 288,704 shares of the Company's
stock and acquisition related expenses of $162. Liabilities totaling
approximately $9.9 million were assumed by the Company in connection with this
acquisition. Goodwill of approximately $42.2 million was recorded related to
this acquisition. The acquisition was accounted for by the purchase
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method of accounting and accordingly is included in the results of operations
from the date of acquisition.
Under the terms of its acquisition agreement, the Company is committed to
make contingent payments (the Earn-out) of up to $15 million in cash and up to
$5 million in stock to the former owners of the acquired company on or before
May 31, 2004. These contingent payments are based on the future profitability,
specifically earnings before interest and taxes, of the acquired company.
The unaudited pro forma results presented below include the effects of the
Company's acquisitions as if they had been consummated as of April 1, 1998. The
unaudited pro forma 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
Three Months ended June 30,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Revenues................................ $111,079 $103,477
Net income before extraordinary item.. 3,045 3,281
Less extraordinary item............... (654) (684)
-------- --------
Net income............................ $ 2,391 $ 2,597
======== ========
Basic earnings per share:
Income before extraordinary item,
including yield adjustment and
accretions........................... $ 0.16 $ 0.13
Net income per share.................. $ 0.13 $ 0.09
Diluted earnings per share:
Income before extraordinary item,
including yield adjustment and
accretions........................... $ 0.16 $ 0.12
Net income per share.................. $ 0.12 $ 0.09
</TABLE>
NOTE 4. RETIREMENT OF DEBT
In June 1999, the Company retired the balance of $62 million of long-term
debt outstanding under the previous First Union loan with proceeds from a
replacement credit agreement. The new credit agreement is with a syndicate of
banks and financial institutions with First Union as Administrative Agent (the
"Credit Agreement"). Recognition of deferred financing costs of $1.1 million
related to the debt repayment resulted in an extraordinary charge of $654 ($.04
per share), net of related income tax benefit of $436. The company's new Credit
Agreement consists of a $25 million five-year senior term loan, a $75 million
seven-year senior term loan and a $150 million five-year revolving line of
credit. The new revolving credit line of the senior credit facility and the $25
million senior term loan bear interest at rates ranging from 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 $75 million senior term loan
bears interest at a rate of 3.25% over LIBOR or 2.00% over a base rate related
to prime rate. Amounts borrowed under the revolving credit line of the new
senior credit facility may be repaid and borrowed over the life of the senior
credit facility, with a final maturity date of June 23, 2004. Under the Credit
Agreement, the Company has pledged substantially all of its assets, including
the capital stock of the Company's subsidiaries, to the lenders. Amounts
borrowed under the Credit Agreement may be used to fund working capital and
general corporate purposes, including acquisitions.
8
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NOTE 5. STOCK OPTION PLAN
The Board of Directors adopted a stock option plan, effective upon the
closing of the initial public offering in June 1998. Under the terms of the
stock option plan 1,820,000 shares of the company's common stock may be sold
pursuant to stock options or granted or sold as restricted stock to directors,
officers, employees, and consultants to the Company. Under the stock option plan
as of June 30, 1999, 1,369,400 options to purchase Company common stock were
outstanding. During the three months ended June 30, 1999, options to purchase an
aggregate of 15,000, 750,000 and 100,000 shares were granted at exercise prices
of $13.125, $15.25 and $18.125, respectively. In addition to options outstanding
under the plan, 10,000 shares of Global's common stock are issuable upon the
exercise of an option granted outside the plan. This option is exercisable at a
price of $12.00 per share.
ITEM 2. MANAGEMENT'S 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
10-Q and the annual report for the year ended March 31, 1999. 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 ("DIM")
systems. From its founding through June 30, 1999, Global has acquired thirteen
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 the acquired businesses 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 from sales of
equipment and supplies, as opposed to service and rentals, fluctuates depending
on whether the businesses acquired
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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, 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 with no
residual value.
Results of Operations
The following table sets forth selected consolidated financial information as
a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
June 30, June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues:
Equipment and supply sales............. 75.1% 74.5%
Service and rentals.................... 24.9 25.5
----- -----
Total revenues........................... 100.0 100.0
Costs and operating expenses:
Cost of equipment and supplies
sales................................. 51.3 52.9
Service and rental costs............... 12.2 12.0
Selling, general, and
administrative expenses............... 23.3 23.1
Intangible asset amortization.......... 1.7 1.5
----- -----
Total costs and operating expenses....... 88.5 89.5
----- -----
Income from operations................... 11.5 10.5
Interest expense......................... 4.2 3.8
----- -----
Income before income taxes and
extraordinary item..................... 7.3 6.7
Income taxes............................. 3.2 3.1
----- -----
Income before extraordinary item......... 4.1 3.6
Extraordinary charge for early
retirement of debt, net of tax benefit.. .7 1.2
----- -----
Net income............................... 3.4% 2.4%
===== =====
</TABLE>
10
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THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues
Total revenues for the three months ended June 30, 1999 increased to $100.5
million, 72.7% higher than total revenues of $58.2 million for the same period
in 1998. The majority of revenue growth was due to the acquisition of
businesses during 1998 and 1999, with the remainder coming from internal growth.
Sales of equipment and supplies for the three months ended June 30, 1999
increased to $75.5 million, 74.3% higher than sales of equipment and supplies of
$43.3 million for the same period in 1998.
Service and rental revenues for the three months ending June 30, 1999
increased to $25.0 million, 68.1% higher than service and rental revenues of
$14.9 million for the same period in 1998.
Gross Profit
Gross profit for the three months ending June 30, 1999 increased to $36.7
million, 79.6% higher than gross profit of $20.4 million for the same period in
1998. When viewed as a percent of total revenue, gross profit was 36.5% for the
three months ending June 30, 1999 versus 35.1% for the same period in 1998. The
change in total gross profit margins was due to the change in the revenue mix.
Office equipment dealers typically receive a higher percentage of total revenues
from service and rentals, while network integration, electronic presentation
systems and DIM systems dealers derive a higher percentage of total revenues
from sales of equipment and supplies. The automated office equipment component
of sales of the businesses acquired in 1998 and 1999 had higher equipment and
supplies gross margins than Global's existing businesses. Combined service and
rental gross profit margins were 50.9% for the three months ended June 30, 1999
and 52.9% for the same period the previous year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ending June
30, 1999 increased to $23.4 million, 74.6% higher than selling, general and
administrative expenses of $13.4 million for the same period in 1998. The
increase in expenses was mostly due to the acquisition of businesses in 1998 and
1999. The increase in expenses as a percentage of revenues was the result of
the number of automated office equipment companies acquired during the fiscal
year ended March 31, 1999.
Intangible Asset Amortization
Intangible asset amortization was $1.7 million for the three months ended
June 30, 1999. During the same period in 1998, asset amortization was $.9
million. Asset amortization includes the amortization of goodwill and non-
compete agreements from acquisitions.
Income From Operations
Income from operations for the three months ended June 30, 1999 was $11.5
million, 88.4% higher than $6.1 million from the same period in 1998.
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Interest Expense
Interest expense for the three months ended June 30, 1999 was $4.2 million,
90.3% higher than $2.2 million from the same period in 1998. The increase was
due to higher borrowing rates and a higher borrowing base.
Income Taxes
The provision for income taxes for the three months ended June 30, 1999 was
$3.2 million, 77.7% higher than $1.8 from the same period in 1998. The increase
in income taxes was primarily due to increased pre-tax income resulting from the
inclusion of businesses acquired during 1998 and 1999. The effective income tax
rate decreased from 46.3% for the three months ending June 30, 1998 to 43.9% for
the three months ended June 30, 1999. The effective income tax rate for 1998
and 1999 was higher than the federal statutory rate of 35.0% plus state and
local taxes, primarily due to non-deductible goodwill amortization relating to
the businesses acquired during those years.
Extraordinary Charges
During June 1999 the Company retired $62 million of long-term debt payable
under the First Union Credit Agreement due in 2003. Recognition of the deferred
financing costs of approximately $1.1 million related to the long-term debt
repayment resulted in an extraordinary charge of $654 ($.04 per share), net of
the related income tax benefit of $436.
During June 1998 the Company retired $31.5 million of long-term debt payable
to JNL due in 2004. Recognition of the prepayment penalty of $250 and deferred
financing costs of $901 related to the long-term debt repayment resulted in an
extraordinary charge of $684 ($.06 per share), net of the related income tax
benefit of $467.
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.
In June 1999, the Company repaid the balance of $62 million due under the
previous First Union loan with proceeds from a replacement credit agreement.
The new credit agreement is with a syndicate of banks and financial institutions
with First Union serving as Administrative Agent (the "Credit Agreement"). The
Company's new Credit Agreement consists of a $150 million five-year senior
secured revolving line of credit, a $25 million five-year senior term loan, and
a $75 million seven-year senior term loan. The new revolving credit line of the
senior credit facility and the $25 million senior term loan bear interest at
rates ranging from 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 $75 million senior term loan bears interest at a rate of
3.25% over LIBOR or 2.00% over a base rate related to prime rate. The senior
credit facilities provide for an unused commitment fee payable to the lenders
and certain other fees payable by Global and its Material Subsidiaries (the
"borrowers"). Amounts borrowed under the revolving credit line of the new senior
credit facility may be repaid and borrowed over the life of the senior credit
facility, with a final maturity date of June 23, 2004. The terms of the senior
credit facility require strict compliance with numerous affirmative, negative
and financial covenants. Amounts
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borrowed under the revolving line of credit may be used to fund working capital
and general corporate purposes, including acquisitions, subject to the lenders
approval in the case of acquisitions with a cash purchase price of over $25
million or an aggregate purchase price (cash, stock or other consideration) of
over $50 million.
Under the terms of three of its acquisition agreements, Global may be
required to make payments of up to $18.6 million in cash and up to $5 million in
stock over the next five years to certain former owners of the businesses it has
acquired based on the profitability of those businesses during such time period.
For the three months ended June 30, 1999 the net cash provided by operations
was $9.5 million and for the three months ended June 30, 1998 the net cash
provided by operations was $4.0 million. For the three months ended June 30,
1999 and for the three months ended June 30, 1998 Global's net cash used in
investing activities was $47.5 million and $1.7 million, respectively, primarily
for the purchase of businesses. For the three months ended June 30, 1999 and
the three months ended June 30, 1998, Global's net cash provided by (used in)
financing activities was $44.3 million and ($3.7) million, respectively. Net
cash provided by financing activities consists of equity capital provided by the
initial public offering in 1998 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
is 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.
13
<PAGE>
Global estimates that it has completed approximately 80% (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 September 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 October 1999.
Global began the testing phase of its year 2000 plan in January 1999 and expects
to complete testing of existing systems by November 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") 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 are year 2000
compliant. 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 has reviewed the responses
received to date. Global has assessed the impact of the year 2000 readiness of
Global's suppliers and customers and does not believe their year 2000 problems
(if any) will be material to the operations of Global.
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 14% of equipment purchases and Global's
top ten customers combined represent less than 8% of Global's total sales for
the twelve 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.
14
<PAGE>
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.
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 September 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 the end of September 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
15
<PAGE>
result in delayed or lost financial data. Global has evaluated 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 forming 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 handle 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to changes in interest rates, primarily from the
senior credit agreement with First Union. Interest rate cap agreements are used
to reduce certain exposures to interest rate fluctuations. The 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) On June 24, 1999, the Company issued 288,704 shares of Common Stock to
the stockholders of Lewan and Associates, Inc. ("Lewan") as payment for nine
percent of the outstanding stock of Lewan. The offer and sale of the Company's
Common Stock was made to accredited investors and was exempt from registration
under the Securities Act of 1933 as amended pursuant to Rule 506 thereunder.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Exhibit
------ -------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (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 Schedule of Supplemental Indentures adding additional subsidiary
guarantors. (Form of Supplemental Indenture is included in
Indenture filed as Exhibit 4.2.) (3)
4.4 Credit Agreement, dated as of June 23, 1999, by and among the
Company and certain of its subsidiaries, as Borrowers, the Lenders
referred to therein, First Union National Bank, as Administrative
Agent, Key Corporate Capital Inc., as Syndication Agent, and
ScotiaBanc, Inc., as Documentation Agent. (3)
10.1 Stock Purchase Agreement, dated as of June 24, 1999, by and among
Global as Buyer, Lewan and Associates, Inc., and the shareholders
thereof, as Sellers. (4)
11.1 Statement of Computation of Per Share Earnings (5)
27.1 Financial Data Schedule
___________________________
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 333-48103, which was declared effective by the Securities and
Exchange Commission on June 17, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 333-78093, as filed on May 7, 1999.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 333-78093, as filed on July 27, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the SEC on July 6, 1999.
(5) See Note 2 to the Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the three
months ended June 30, 1999.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Global Imaging Systems, Inc.
-----------------------------------------------
(Registrant)
August 13, 1999 /s/ Raymond Schilling
- ---------------------------- -----------------------------------------------
Date Raymond Schilling
Chief Financial Officer, Secretary, and
Treasurer (Duly Authorized Officer and
Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
-------------
(Pursuant to item 601 of Regulation S-K)
Number Exhibit
- ------ -------
3.1 Amended and Restated Certificate of Incorporation (1)
3.2 Amended and Restated Bylaws (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 Schedule of Supplemental Indentures adding additional subsidiary
guarantors. (Form of Supplemental Indenture is included in Indenture
filed as Exhibit 4.2.) (3)
4.4 Credit Agreement, dated as of June 23, 1999, by and among the Company
and certain of its subsidiaries, as Borrowers, the Lenders referred to
therein, First Union National Bank, as Administrative Agent, Key
Corporate Capital Inc., as Syndication Agent, and ScotiaBanc, Inc., as
Documentation Agent. (3)
10.1 Stock Purchase Agreement, dated as of June 24, 1999, by and among Global
as Buyer, Lewan and Associates, Inc., and the shareholders thereof, as
Sellers. (4)
11.1 Statement of Computation of Per Share Earnings (5)
27.1 Financial Data Schedule
______________________
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, No. 333-48103, which was declared effective by the Securities and
Exchange Commission on June 17, 1998.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 333-78093, as filed on May 7, 1999.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 333-78093, as filed on July 27, 1999.
(4) Incorporated by reference to the Company's Current Report on Form 8-K as
filed with the SEC on July 6, 1999.
(5) See Note 2 to the Notes to Consolidated Financial Statements.
19
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