<PAGE> 1
-----------------------------------------------------
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 May 31, 1996.
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 NO. 0-20189
EQUITRAC CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 59-1797862
(State or other jurisdiction of (IRS Employee
incorporation or organization) Identification Number)
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
(305) 442-2060
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
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 the
filing requirements for at least the past 90 days. Yes X No
--- ---.
As of July 8, 1996, there were 3,400,200 shares of the Registrant's common
stock, par value $.01, outstanding.
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<PAGE> 2
EQUITRAC CORPORATION
INDEX
Page
----
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
as of May 31, 1996
and February 29, 1996 2
Condensed Statements of Income
for the three months ended
May 31, 1996 and 1995 3
Condensed Statement of
Stockholders' Equity for the
three months ended May 31, 1996 4
Condensed Statements of Cash Flows
for the three months ended
May 31, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITRAC CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 29,
ASSETS 1996 1996
------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,119 $ 3,581
Restricted cash - 1,450
Investment securities 4,299 4,031
Accounts receivable, net of allowance of $350 5,834 4,330
Inventories 2,452 1,780
Deferred income taxes 506 499
Other current assets 415 366
------- -------
Total current assets 15,625 16,037
Investment securities 1,274 1,361
Property and equipment, net 6,121 6,034
Intangible assets, net 3,852 2,067
Other assets 157 147
------- -------
Total assets $27,029 $25,646
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 753 $ 622
Accrued expenses 2,781 2,965
Unearned income and other current liabilities 966 84
-------- -------
Total current liabilities 4,500 3,671
Deferred income taxes 139 151
-------- -------
Total liabilities 4,639 3,822
-------- -------
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized, 3,726,500 and 3,717,750 shares issued
at May 31, and February 29, 1996, respectively 37 37
Additional paid-in capital 10,405 10,390
Retained earnings 13,632 13,058
Cumulative translation adjustment (21) (25)
Unrealized (loss) gain on investment securities, net of tax (10) 17
Treasury stock, at cost (330,800 shares at May 31, and
February 29, 1996) (1,653) (1,653)
------- -------
Total stockholders' equity 22,390 21,824
------- -------
Total liabilities and stockholders' equity $27,029 $25,646
======= =======
</TABLE>
See accompanying notes.
2
<PAGE> 4
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Sales $3,965 $3,462
Service and support 3,110 2,432
Rental 2,588 2,490
------ ------
Total revenues 9,663 8,384
------ ------
Expenses:
Cost of revenues 3,554 3,039
Product development 432 259
Selling expenses 1,568 1,410
General and administrative 3,297 3,031
------ ------
Total expenses 8,851 7,739
------ ------
Operating income 812 645
Interest income 126 67
------ ------
Income before income taxes 938 712
Income taxes 364 263
------ ------
Net income $ 574 $ 449
====== ======
Earnings per share $ 0.16 $ 0.12
====== ======
Weighted average common and common equivalent
shares used in per share calculation 3,516 3,763
====== ======
</TABLE>
See accompanying notes.
3
<PAGE> 5
EQUITRAC CORPORATION
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK ADDITIONAL CUMULATIVE INVESTMENT
--------------------- PAID-IN RETAINED TRANSLATION SECURITIES, TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT NET OF TAX STOCK EQUITY
------ ------ --------- -------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 29, 1996 3,717,750 $37 $10,390 $13,058 $(25) $ 17 $(1,653) $21,824
Unrealized loss on marketable
securities, net of tax - - - - - (27) - (27)
Translation Adjustment - - - - 4 - - 4
Exercise of employee
stock options 8,750 - 15 - - - - 15
Net income for the three months
ended May 31, 1996 - - - 574 - - - 574
--------- --- ------- ------- ---- ---- ------- -------
Balance, May 31, 1996 3,726,500 $37 $10,405 $13,632 $(21) $(10) $(1,653) $22,390
========= === ======= ======= ==== ==== ======= =======
</TABLE>
See accompanying notes.
4
<PAGE> 6
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 574 $ 449
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 628 575
Amortization 276 213
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,504) 349
Inventories (315) (679)
Other current assets (49) 52
Other assets (10) (9)
Increase (decrease) in:
Accounts payable and accrued expenses (53) (462)
Unearned income 271 (77)
------- ------
Net cash (used in) provided by operating activities (182) 411
------- ------
Cash flows from investing activities:
Purchases of property and equipment (688) (495)
Acquisition of product line, principally intangible assets (1,834) (130)
Sales and maturities of investment securities 544 -
Purchases of investment securities (771) (25)
Restricted cash 1,450 -
------- ------
Net cash used in investing activities (1,299) (650)
------- ------
Cash flows from financing activities:
Repayment of acquisition obligations - (25)
Proceeds from issuance of common stock 15 11
------- ------
Net cash provided by (used in) financing activities 15 (14)
------- ------
Exchange rate effect on cash 4 12
------- ------
Net decrease in cash and cash equivalents (1,462) (241)
Cash and cash equivalents at beginning of period 3,581 2,187
------- ------
Cash and cash equivalents at end of period $ 2,119 $1,946
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 550 $ 53
</TABLE>
Non-cash investing and financing activities during the three months ended May
31, 1996 included the assumption of a $611,000 liability to fulfill service
contracts in connection with the Infortext Acquisition.
See accompanying notes.
5
<PAGE> 7
EQUITRAC CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the accompanying
financial statements include all adjustments (of a normal recurring nature)
which are necessary to state fairly the results for the interim periods
presented. The results for the three months ended May 31, 1996 are not
necessarily indicative of the results to be expected for the full fiscal
year. These unaudited condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report on Form 10-K for the fiscal year ended February 29, 1996,
filed with the Securities and Exchange Commission.
2. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
3. REVENUE RECOGNITION
Sales revenue is recognized upon installation and customers'
acceptance. Service and support revenues are recognized ratably over the
period in which the service and support are provided. Rental contract
revenue, which includes service and support on the underlying rental
equipment and software, is recognized ratably over the term of the
respective lease. Rental contracts are accounted for as operating leases.
4. CASH AND CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with maturities
of three months or less when purchased. The Company maintains cash and cash
equivalent balances with high quality financial institutions. The Company
periodically evaluates the relative credit risk of these financial
institutions.
5. INVESTMENT SECURITIES
Investment securities generally consist of municipal bonds, U.S.
Treasury obligations and investment grade corporate bonds with maturities
generally ranging from one to twenty-one years.
6
<PAGE> 8
6. PROPERTY AND EQUIPMENT
Property and equipment consist primarily of system equipment rented to
customers and are carried at cost less accumulated depreciation. Rental
equipment is depreciated on a straight line basis over five years.
7. INVENTORIES
Inventories comprised primarily of system components, parts and
supplies are carried at the lower of weighted-average cost or market. The
weighted average cost of inventories approximates the "first in-first out"
("FIFO") method.
8. PRODUCT DEVELOPMENT COSTS
Product development costs are expensed as incurred.
9. EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares during the period.
Dilutive outstanding stock options are considered common stock equivalents
and are included in the calculation using the treasury stock method.
10. ACQUISITIONS
On March 1, 1996, the Company acquired the cost recovery customer base
of ISI Infortext, Inc. ("ISI"), a distributor of cost recovery and
telemanagement products. The transaction was financed by $1,834,000,
including $1,450,000 of cash restricted for that purpose as of February 29,
1996, and the assumption of a liability of $611,000 to fulfill service
contracts. Additional consideration is contingent upon the results of the
acquisition during fiscal 1997.
Intangible assets recorded in connection with this and previous
acquisitions represent costs allocated to specifically identifiable assets
and the excess of cost over the fair market value of tangible and
identifiable intangible assets arising from these acquisitions ("goodwill").
The costs of all identifiable intangible assets are being amortized on a
straight line basis over their respective estimated useful lives, ranging
from three to ten years. Goodwill is amortized over ten years. Amortization
expense on the intangible assets for the three months ended May 31, 1996 and
1995 was $276,000 and $213,000, respectively.
7
<PAGE> 9
11. CONTINGENCIES
The Company is involved from time to time in legal proceedings incident
to the normal course of its business. Management believes that adverse
decisions in any pending or threatened proceedings would not have a material
adverse effect on the Company's financial positions or results of
operations.
Certain aspects of the Company's fiscal 1992, 1993 and 1994 federal
income tax returns are currently under examination by the Internal Revenue
Service ("IRS"). The IRS is reviewing the characterization and useful lives
of certain intangible assets of the Company. A report previously issued by
the IRS assessing additional taxes, penalties and interest for the 1992
fiscal year has been rejected by the IRS appeals division and the case has
been returned to the initial examiner. A revised report has not been
received regarding the Company's 1992 tax return and no report has been
received regarding the Company's 1993 and 1994 tax returns. If the IRS
prevails, the Company may be required to make payments relating to the
timing of tax deductions taken on these federal income tax returns. The
Company may also be assessed interest and penalties. Although management
and its tax advisors believe that the Company has a meritorious position,
the ultimate outcome of this matter cannot presently be determined and,
therefore, no liability has been recorded at this time. The Company intends
to vigorously defend its position.
12. RECLASSIFICATIONS
Certain interim statement of income items have been reclassified to
conform with the fiscal year 1997 presentation.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues are derived from three principal sources: (1) sales
of new systems, upgrades and add-ons of equipment and software; (2) maintenance
service and software support agreements and (3) leases of its system equipment
and software. The Company offers its customers the option of purchasing a
system or leasing a system pursuant to an operating lease (the term of which is
typically 36 months or longer), which includes all maintenance and software
support services. The Company offers its purchase customers maintenance and
software support agreements (the terms of which are typically for 36 months or
longer). Systems that are neither leased nor purchased in conjunction with a
maintenance agreement are serviced by the Company on a time-and-materials
basis. The Company's computer service division offers its customers
maintenance agreements (the terms of which are typically for 12 months) and
also provides maintenance on a time-and-materials basis.
The following table sets forth selected items in the Condensed Statements
of Income as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FOR THE THREE MONTHS ENDED
MAY 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Sales 41.0% 41.3%
Service and support 32.2 29.0
Rental 26.8 29.7
----- -----
Total revenues 100.0 100.0
----- -----
Expenses:
Cost of revenues 36.8 36.2
Product development 4.5 3.1
Selling expenses 16.2 16.8
General and administrative 34.1 36.2
----- -----
Total expenses 91.6 92.3
----- -----
Operating income 8.4 7.7
Interest income 1.3 0.8
----- -----
Income before income taxes 9.7 8.5
Income taxes 3.8 3.1
----- -----
Net income 5.9% 5.4%
===== =====
</TABLE>
9
<PAGE> 11
REVENUES
Total revenues for the quarter ended May 31, 1996 increased 15% to
$9,663,000 from $8,384,000 in the same quarter last fiscal year. The Company's
total revenues increased primarily as a result of increases in sales revenues
and service and support revenues. System sales revenues were comprised
primarily of revenues from sales of new systems to existing and acquired
customers and, to a lesser extent, from sales of new systems to new customers
and from sales of add-on equipment to existing customers. Service and support
revenues and rental revenues were comprised primarily of recurring revenues
from existing and acquired maintenance and lease agreements.
Sales revenues. Sales revenues for the quarter ended May 31, 1996
increased 15% to $3,965,000 from $3,462,000 in the same quarter last fiscal
year. This increase resulted primarily from $357,000 of sales to customers
acquired through the Infortext acquisition.
Service and support revenues. Service and support revenues for the
quarter ended May 31, 1996 increased 28% to $3,110,000 from $2,432,000 in the
same quarter last fiscal year. This increase resulted primarily from revenues
derived from customers acquired through the Infortext acquisition and increased
revenues in the Company's computer services division. Service and support
revenues derived from customers acquired through the Infortext acquisition were
$388,000 during the quarter ended May 31, 1996. Service and support revenues
generated by the Company's computer service division during the quarter ended
May 31, 1996 increased to $148,000 from $57,000 in the same quarter last fiscal
year.
Rental Revenue. Rental revenues for the quarter ended May 31, 1996
increased to $2,588,000 from $2,490,000 in the same quarter last fiscal year.
EXPENSES
Cost of revenues. Cost of revenues is comprised primarily of (i) the cost
of hardware and other system components associated with system sales and
service, (ii) payroll and other expenses related to the Company's manufacturing,
customer support and service personnel and (iii) depreciation of system rental
units. Cost of revenues for the quarter ended May 31, 1996 increased to
$3,554,000 from $3,039,000 in the same quarter last fiscal year, primarily as a
result of increased revenues. Cost of revenues as a percentage of total
revenues was 36.8% for the quarter ended May 31, 1996 compared to 36.2% in the
same quarter last fiscal year.
Product development expenses. Product development expenses for the
quarter ended May 31, 1996 increased to $432,000 from $259,000 in the same
quarter last fiscal year. Product development expenses as a percentage of total
revenues was 4.5% for the quarter ended May 31, 1996 compared to 3.1% for the
same quarter last fiscal year. Current development efforts are focused on
enhancements to existing Equitrac and Infortext cost recovery products as well
as several new products. New development efforts include a joint development
agreement between Xerox Corporation and Equitrac for the Xerox Document Centre
series of digital office systems. Other new products under development include
the Equitrac Professional Internet Client ("E.P.I.C."), a full-featured
Internet browser designed to control Internet access and track on-line research
and e-mail for billing and management purposes. The Company does not
capitalize any of its product development costs since development costs
incurred subsequent to attainment of technological feasibility of a new product
line are not deemed to be significant; accordingly research and development
expenses for each period include all hardware and software development costs
incurred.
10
<PAGE> 12
Selling expenses. Selling expenses for the quarter ended May 31, 1996
increased 11% to $1,568,000 from $1,410,000 last fiscal year, primarily as a
result of increased revenues. Selling expenses as a percentage of total
revenues was 16.2% for the quarter ended May 31, 1996 compared to 16.8% for the
same quarter last fiscal year.
General and administrative expenses. General and administrative expenses
for the quarter ended May 31, 1996 increased 9% to $3,297,000, or 34% of total
revenues, from $3,031,000, or 36% of total revenues, in the same quarter last
fiscal year. Increases in general and administrative expenses during the
quarter ended May 31, 1996 resulted primarily from $344,000 of amortization and
other general and administrative expenses for the Infortext Group division.
This increase was partially offset by decreases in other general and
administrative expenses.
Interest income. The Company's interest income increased to $126,000
during the quarter ended May 31, 1996 from $67,000 during the same quarter last
fiscal year. This increase in net interest income resulted primarily from
higher interest rates earned on invested cash as the Company reallocated a
portion of its investment portfolio out of municipal bonds into higher yielding
investment grade securities.
Income taxes. The Company's effective income tax rate was 39% for the
quarter ended May 31, 1996 compared to 37% in the same quarter last fiscal
year. This increase in the Company's effective tax rate resulted primarily
from a reduction in tax exempt municipal bond interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations over the past several years
principally from cash flow from operations. The Company's cash and cash
equivalents and investment securities decreased to $7,692,000 at May 31, 1996
from $10,423,000 at February 29, 1996. This decrease in cash and cash
equivalents and investment securities resulted primarily from the Infortext
acquisition. This acquisition was financed by $1,450,000 of cash restricted
for that purpose as of February 29, 1996, and the assumption of a liability of
$611,000 to fulfill service contracts. Additional consideration is contingent
upon the results of the acquisition during fiscal 1997. The other significant
uses of cash included the purchase of $672,000 of inventory and the acquisition
of $715,000 of property and equipment, primarily system rental units which are
leased to customers.
The Board of Directors has authorized the Company to spend up to
$2,000,000 to repurchase shares of the Company's issued and outstanding common
stock, based upon consideration of the Company's current cash position,
management's expectations of future cash flows from operating activities and
the level of cash required to fund future growth opportunities. Through May
31, 1996, the Company repurchased 330,800 shares of its outstanding common
stock at an aggregate purchase price of $1,653,000. Future purchases will be
made from time to time subject to prevailing market conditions in open market
or privately negotiated transactions.
The Company anticipates that its cash and cash equivalents and marketable
securities and cash flow from operating activities will be adequate to meet the
Company's cash requirements for the foreseeable future.
11
<PAGE> 13
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
11. Statement of Computation of Earnings per Share
27. Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf thereunto
duly authorized.
EQUITRAC CORPORATION
Date: July 12, 1996 By: /s/ George P. Wilson
---------------------------
George P. Wilson
President and Chief
Executive Officer
Date: July 12, 1996 By: /s/ Scott J. Modist
---------------------------
Scott J. Modist
Vice President - Finance,
Treasurer and Chief
Financial Officer
12
<PAGE> 1
EXHIBIT 11
EQUITRAC CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Weighted average number of common
shares outstanding 3,391 3,699
Common share equivalents arising
from dilutive options 125 64
------ ------
3,516 3,763
====== ======
Earnings per share $ 0.16 $ 0.12
====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 2,119
<SECURITIES> 4,299
<RECEIVABLES> 6,184
<ALLOWANCES> 350
<INVENTORY> 2,452
<CURRENT-ASSETS> 15,625
<PP&E> 12,058
<DEPRECIATION> 5,937
<TOTAL-ASSETS> 27,029
<CURRENT-LIABILITIES> 4,500
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 22,353
<TOTAL-LIABILITY-AND-EQUITY> 22,390
<SALES> 3,965
<TOTAL-REVENUES> 9,663
<CGS> 3,554
<TOTAL-COSTS> 1,568
<OTHER-EXPENSES> 3,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 938
<INCOME-TAX> 364
<INCOME-CONTINUING> 574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
