<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 August 31, 1998.
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 October 2, 1998, there were 3,525,800 shares of the Registrant's
common stock, par value $.01, outstanding.
<PAGE> 2
EQUITRAC CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
as of August 31, 1998
and February 28, 1998 2
Condensed Statements of Income
for the three months and six months
ended August 31, 1998 and 1997 3
Condensed Statements of Stockholders'
Equity and Accumulated Other
Comprehensive Income for the six
months ended August 31, 1998 and 1997 4
Condensed Statements of Cash Flows
for the six months ended
August 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
</TABLE>
1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITRAC CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
AUGUST 31, FEBRUARY 28,
1998 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,473 $ 5,819
Short-term investment securities 6,121 5,208
Accounts receivable, net of allowances of $650 9,454 8,178
Inventories 3,940 2,465
Deferred income taxes 1,014 234
Other current assets 409 444
-------- --------
Total current assets 23,411 22,348
Investment securities 3,905 2,497
Property and equipment, net 7,306 6,418
Intangible assets, net 2,654 3,111
Deferred income taxes 623 556
Other assets 203 184
-------- --------
Total assets $ 38,102 $ 35,114
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,255 $ 1,720
Accrued expenses and other current liabilities 4,714 3,878
Unearned income 979 1,337
-------- --------
Total current liabilities 7,948 6,935
-------- --------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares authorized; 3,948,100 and
3,877,100 shares issued at August 31, and February 28, respectively 39 39
Additional paid-in capital 12,520 11,490
Retained earnings 20,921 18,830
Accumulated other comprehensive income (153) 7
Treasury stock, at cost (419,900 and 370,800 shares at
August 31, and February 28, respectively) (3,173) (2,187)
-------- --------
Total stockholders' equity 30,154 28,179
-------- --------
Total liabilities and stockholders' equity $ 38,102 $ 35,114
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF INCOME
(in thousands, except earnings per share)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 7,552 $ 5,728 $13,540 $10,968
Service and support 4,818 4,034 9,435 7,936
Rental 2,655 2,607 5,308 5,195
------- ------- ------- -------
Total revenues 15,025 12,369 28,283 24,099
------- ------- ------- -------
Costs and expenses:
Cost of revenues 6,796 5,103 12,083 9,842
Product development 711 708 1,473 1,481
Selling expenses 2,003 1,768 3,910 3,493
General and administrative 3,894 3,733 7,823 7,221
------- ------- ------- -------
Total costs and expenses 13,404 11,312 25,289 22,037
------- ------- ------- -------
Operating income 1,621 1,057 2,994 2,062
Interest income 190 136 378 270
------- ------- ------- -------
Income before income taxes 1,811 1,193 3,372 2,332
Income taxes 688 459 1,281 892
------- ------- ------- -------
Net income $ 1,123 $ 734 $ 2,091 $ 1,440
======= ======= ======= =======
Earnings per share:
Basic $ 0.32 $ 0.21 $ 0.59 $ 0.41
======= ======= ======= =======
Diluted $ 0.29 $ 0.20 $ 0.55 $ 0.40
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(in thousands, except number of shares)
(Unaudited)
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- --------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1998 3,877,100 $ 11,529 $ 18,830 $ 7 $ (2,187) $ 28,179
Net income for the six
months ended August 31, 1998 -- -- 2,091 -- -- 2,091
Accumulated other
comprehensive income
net of tax:
Unrealized loss on marketable
securities, net of tax -- -- -- (71) -- (71)
Translation adjustment -- -- -- (89) -- (89)
Total comprehensive income -- -- -- -- -- 1,931
Exercise of employee
stock options 71,000 617 -- -- -- 617
Tax benefit from stock plans -- 413 -- -- -- 413
Purchase of treasury stock
49,100 shares -- -- -- -- (986) (986)
--------- --------- --------- --------- --------- ---------
Balance, August 31, 1998 3,948,100 $ 12,559 $ 20,921 $ (153) $ (3,173) $ 30,154
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- --------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1997 3,800,300 $ 10,779 $ 15,672 $ (23) $ (1,653) $ 24,775
Net income for the six
months ended August 31, 1997 -- -- 1,440 -- -- 1,440
Accumulated other
comprehensive income,
net of tax:
Unrealized gain on marketable
securities, net of tax -- -- -- 6 -- 6
Translation adjustment -- -- -- (8) -- (8)
Total comprehensive income -- -- -- -- -- 1,438
Exercise of employee
stock options 48,300 291 -- -- -- 291
Purchase of treasury
stock 25,000 shares -- -- -- -- (294) (294)
--------- --------- --------- --------- --------- ---------
Balance, August 31, 1997 3,848,600 $ 11,070 $ 17,112 $ (25) $ (1,947) $ 26,210
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
SIX MONTHS ENDED
AUGUST 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,091 $ 1,440
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,333 1,431
Amortization 420 615
Provision for doubtful accounts -- 100
Deferred income taxes (859) --
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (1,276) (764)
Inventories (1,475) 335
Other current assets 35 62
Other assets (19) 1
Increase (decrease) in:
Accounts payable 535 (142)
Accrued expenses 1,249 (882)
Unearned income (358) 65
------- -------
Net cash provided by operating activities 1,676 2,261
------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,221) (1,393)
Acquisitions of product lines, principally intangible assets -- (1,053)
Sales and maturities of investment securities 2,755 1,892
Purchases of investment securities (5,098) (2,050)
------- -------
Net cash used in investing activities (4,564) (2,604)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 617 291
Purchase of treasury stock (986) (294)
------- -------
Net cash used in financing activities (369) (3)
------- -------
Exchange rate effect on cash (89) (8)
------- -------
Net decrease in cash and cash equivalents (3,346) (354)
Cash and cash equivalents, beginning of period 5,819 4,755
------- -------
Cash and cash equivalents, end of period $ 2,473 $ 4,401
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 1,340 $ 1,718
======= =======
</TABLE>
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 six months ended August 31, 1998 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 28, 1998,
filed with the Securities and Exchange Commission.
In March 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 Reporting Comprehensive Income ("SFAS 130"). The
calculation of comprehensive income is included in the accompanying
unaudited Condensed Statements of Stockholder's Equity and Accumulated
Other Comprehensive Income.
2. REVENUE RECOGNITION
Revenues from sales of company-manufactured products sold to end-users
are recognized upon installation and customers' acceptance, in accordance
with the provisions of SOP 97-2, Software Revenue Recognition. Revenues
from sales of company-manufactured products to independent dealers and
distributors are recognized upon shipment. Revenues from resale of products
by the Equitrac Computer Services ("ECS") division are recognized upon
shipment. Service and support revenues are recognized ratably over the
contractual period in which the service and support are provided or as the
services are provided. Amounts received in advance of services are
deferred. Rental contract revenues, 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.
3. 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 reported amounts in the financial statements
and accompanying notes. Actual results could differ from those estimates.
4. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less at the time of purchase to be cash
equivalents. Cash equivalents are carried at cost, which approximates fair
value.
6
<PAGE> 8
5. INVESTMENT SECURITIES
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value
with unrealized gains and losses included in stockholders' equity.
Interest and dividends on all securities are recognized when earned.
Both gross unrealized gains and losses as of August 31, 1998 and 1997,
and realized gains and losses on sales of each type of security for the
periods ended August 31, 1998 and 1997, were not material. For the purpose
of determining gross realized gains and losses, the cost of securities sold
is based upon specific identification.
6. INVENTORIES
Inventories, which consist primarily of system components, parts and
supplies, are stated at the lower of weighted average cost or market. The
weighted average cost of inventories approximates the "first in-first out"
("FIFO") method. Management performs periodic assessments to determine the
existence of obsolete, slow-moving and nonsalable inventories and records
necessary provisions to reduce such inventories to net realizable value.
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are provided on the straight-line method over the shorter of
the estimated useful lives of the assets or the applicable lease term for
leasehold improvements.
Maintenance and repairs are charged to expense when incurred;
betterments are capitalized. Upon retirement or sale, the cost and
accumulated depreciation are removed from the accounts and any gain or loss
is recognized currently.
8. PRODUCT DEVELOPMENT COSTS
The Company examines its product development costs after technological
feasibility has been established to determine the amount of capitalization
that is required. For all periods presented herein, product development
costs incurred subsequent to the establishment of technological feasibility
have not been material.
9. FOREIGN CURRENCY TRANSLATION
Translation of foreign currencies into U.S. dollars is computed for
revenue and expense accounts using average exchange rates during the year.
Net assets of the Company's Canadian operations, whose "functional
currency" is the Canadian dollar are translated at current rates of
exchange, with the resulting translation adjustment recorded directly into
a separate component of stockholders' equity. The functional currency for
the Company's other foreign operations is the U.S. dollar. Net assets of
these operations are translated at current rates of exchange, with the
resulting translation gains and losses included in the statement of income.
7
<PAGE> 9
10. EARNINGS PER SHARE
In fiscal 1998, the Company adopted SFAS No. 128, Earnings per Share
("EPS"). SFAS No. 128 requires the presentation of basic EPS and diluted
EPS. Basic EPS is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted EPS includes the dilutive effect of stock options. All prior year
EPS calculations have been restated in accordance with the provisions of
SFAS No. 128. Adoption of SFAS No. 128 did not have a material effect on
the Company's historically disclosed EPS.
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Per-Share
Net Income Shares Amount
---------- ------ --------
<S> <C> <C> <C>
Quarter ended August 31, 1998
Basic Earnings Per Share:
Income available to common stockholders $1,123 3,527 $ 0.32
--------
Options issued to employees 307
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $1,123 3,834 $ 0.29
====== ====== ========
Six months ended August 31, 1998
Basic Earnings Per Share:
Income available to common stockholders $2,091 3,519 $ 0.59
--------
Options issued to employees 304
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $2,091 3,823 $ 0.55
====== ====== ========
Quarter ended August 31, 1997
Basic Earnings Per Share:
Income available to common stockholders $ 734 3,482 $ 0.21
--------
Options issued to employees 265
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 734 3,747 $ 0.20
====== ====== ========
Six months ended August 31, 1997
Basic Earnings Per Share:
Income available to common stockholders $1,440 3,477 $ 0.41
--------
Options issued to employees 164
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $1,440 3,641 $ 0.40
====== ====== ========
</TABLE>
8
<PAGE> 10
11. CONTINGENCIES
The Company is involved from time to time in legal proceedings incident to
the normal course of its business. Management believes that the ultimate outcome
of any pending or threatened litigation would not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
In November, 1997, the Company filed a lawsuit in Canada against Promatek
Industries, Ltd., a Canadian company ("Promatek") for infringement of two
Canadian patents owned by the Company. In June 1998, Promatek filed a lawsuit in
the United States District Court for the Northern District of Illinois alleging,
among other things, violations by the Company of various U.S. antitrust and
trade practice laws and seeking injunctive relief and compensatory and punitive
damages against the Company. The Company believes that the U.S. lawsuit has been
brought by Promatek solely as a defensive measure to encourage the Company to
dismiss or settle its Canadian lawsuit. The Company believes that the claims
made by Promatek in the U.S. lawsuit are without merit and intends to vigorously
defend that action. The Company also intends to continue to pursue enforcement
of its patents against Promatek in the Canadian lawsuit.
9
<PAGE> 11
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 or software; (2) monthly
revenues from service and software support agreements and (3) monthly revenues
from leases of its systems. 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 service and
software support. The Company offers its purchase customers service and software
support agreements (the terms of which are typically for 36 months or longer).
Systems that are not purchased in conjunction with a service contract are
serviced by the Company on a time-and-materials basis. The Company's computer
service division offers its customers service agreements (the terms of which are
typically for 12 months) and also provides service on a time-and-materials
basis.
The following table sets forth, for the periods presented, selected items
from the Condensed Statements of Income as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES FOR
-------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Sales 50.3% 46.3% 47.9% 45.5%
Service and support 32.1 32.6 33.4 32.9
Rental 17.6 21.1 18.7 21.6
------- ------- ------- -------
Total revenues 100.0 100.0 100.0 100.0
------- ------- ------- -------
Costs and expenses:
Cost of revenues 45.2 41.3 42.7 40.8
Product development 4.7 5.7 5.2 6.2
Selling expenses 13.3 14.3 13.8 14.5
General and administrative 25.8 30.2 27.7 30.0
------- ------- ------- -------
Total costs and expenses 89.2 91.5 89.4 91.5
------- ------- ------- -------
Operating income 10.8 8.5 10.6 8.5
Interest income 1.3 1.1 1.3 1.1
------- ------- ------- -------
Income before income taxes 12.1 9.6 11.9 9.6
Income taxes 4.6 3.7 4.5 3.7
------- ------- ------- -------
Net income 7.5% 5.9% 7.4% 5.9%
======= ======= ======= =======
</TABLE>
10
<PAGE> 12
REVENUES
SALES REVENUES. Sales revenues for the quarter ended August 31, 1998
increased 32% to $7,552,000 from $5,728,000 in the same quarter last fiscal
year. Sales revenues for the six months ended August 31, 1998 increased 24% to
$13,540,000 from $10,968,000 in the same six month period last fiscal year. This
increase resulted from revenues derived from sales of new Business Technology
Division ("BTD") products including TelemeTrac and OEM sales of Pitney Bowes
AccuTrac Mail accounting systems and an increase in sales of cost recovery
systems to professional service firms. BTD sales revenues totaled $1,160,000 and
$2,010,000 for the quarter and six months ended August 31, 1998. Sales of cost
recovery systems increased 12% to $5,458,000 for the quarter ended August 31,
1998 from $4,886,000 in the same quarter last fiscal year.
SERVICE AND SUPPORT REVENUES. Service and support revenues for the quarter
ended August 31, 1998 increased 19% to $4,818,000 from $4,034,000 in the same
quarter last fiscal year. Service and support revenues for the six months ended
August 31, 1998 increased 19% to $9,435,000 from $7,936,000 in the same six
month period last fiscal year. This increase in service and support revenues
resulted from an increase in service contracts in the Company's cost recovery
divisions and an increase in service and support revenues generated by the ECS
division. Service and support revenues from the Company's cost recovery
divisions increased 12% and 13% for the quarter and six months ended August 31,
1998 compared to the same periods last fiscal year. Service and support revenues
for the quarter and six months ended August 31, 1998 included $847,000 and
$1,588,000 of revenues generated by the ECS division compared to $493,000 and
$1,020,000 for the same periods last fiscal year.
RENTAL REVENUE. Rental revenues increased to $2,655,000 for the quarter
ended August 31, 1998 from $2,607,000 in the same quarter last fiscal year.
Rental revenues for the six months ended August 31, 1998 increased to $5,308,000
from $5,195,000 in the same six month period last fiscal year. As a percentage
of total revenues, rental revenues were 18% for the quarter ended August 31,
1998 compared to 21% in the same quarter last fiscal year. Management
anticipates that rental revenues as a percentage of total revenues may continue
to decline in future periods.
EXPENSES
COST OF REVENUES. Cost of revenues is comprised primarily of (i) payroll
and other expenses related to customer support and service personnel, (ii) the
cost of hardware and system components associated with system sales and service,
and (iii) depreciation of rental and service units. Cost of revenues for the
quarter ended August 31, 1998 increased to $6,796,000, or 45.2% of total
revenues, from $5,103,000, or 41.3% of total revenues, in the same quarter last
fiscal year. Cost of revenues for the six months ended August 31, 1998 increased
to $12,083,000, or 42.7% of total revenues, from $9,842,000, or 40.8% of total
revenues in the same six month period last fiscal year. This increase in the
cost of revenues as a percentage of total revenues is attributable to the
increase in revenues from the Company's BTD division for the quarter and six
month period ended August 31, 1998. Management anticipates that the cost of
revenues as a percentage of total revenues may fluctuate in future periods,
depending upon the product mix and the concentration of revenues from the
Company's ECS and BTD divisions. The majority of sales revenues generated by the
ECS and BTD divisions have a higher cost of revenues expense as a percentage of
revenues compared to the Company's cost recovery divisions.
11
<PAGE> 13
PRODUCT DEVELOPMENT EXPENSES. Product development expenses for the quarter
ended August 31, 1998 totaled $711,000, or 4.7% of total revenues which was
consistent with $708,000, or 5.7% of total revenues, in the same quarter last
fiscal year. Product development expenses for the six months ended August 31,
1998 decreased slightly to $1,473,000, or 5.2% of total revenues, from
$1,481,000, or 6.2% of total revenues, in the same six month period last fiscal
year. Current development efforts were focused primarily on enhancing and
expanding the cost recovery product lines as well as developing several new
products. Products under development during these periods include (i)
TelemeTrac(TM), a product which collects and reports photocopier meter totals
remotely through cellular telephone networks, (ii) PrintLog(TM), a digital
output tracking application designed to track all pages printed from a
workstation to laser printers and network photocopiers and assign each
transaction to a client, project or department, (iii) new version of System
4(TM), a Windows (R) NT based cost recovery operating system and (iv)
enhancements to the Pitney Bowes OEM product line. 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 have
not been material. Management anticipates that product development costs may
increase during the remainder of fiscal 1999 as the Company invests in the
development and enhancements of existing products, as well as, new products.
SELLING EXPENSES. Selling expenses for the quarter ended August 31, 1998
increased to $2,003,000, or 13.3% of total revenues, from $1,768,000, or 14.3%
of total revenues, in the same quarter last fiscal year. Selling expenses for
the six months ended August 31, 1998 increased to $3,910,000, or 13.8% of total
revenues, from $3,493,000, or 14.5% of total revenues, in the same six month
period last fiscal year. These decreases in selling expenses as a percentage of
revenues resulted primarily from incremental revenues derived per sales
representative during the quarter and six months ended August 31, 1998 compared
to the same quarter and six month period last fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended August 31, 1998 increased to $3,894,000, or 25.8% of total
revenues, from $3,733,000, or 30.2% of total revenues, in the same quarter last
fiscal year. General and administrative expenses for the six months ended August
31, 1998 increased to $7,823,000, or 27.7% of total revenues, from $7,221,000,
or 30.0% of total revenues, in the same six month period last fiscal year. These
declines in general and administrative expenses as a percentage of revenues
resulted primarily from the Company's ability to increase revenues through
internal sales growth without adding a commensurate level of support and
administrative positions.
INTEREST INCOME. The Company's interest income increased to $190,000 during
the quarter ended August 31, 1998 from $136,000 during the same quarter last
fiscal year. Interest income for the six months ended August 31, 1998 increased
to $378,000 from $270,000 in the same six month period last fiscal year.
INCOME TAXES. The Company's effective income tax rate was 38% for the
quarter and six months ended August 31, 1998 and 1997.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations over the past several years
principally from cash flow from operations. The Company generated $1,676,000 and
$2,261,000 in cash flows from operating activities for the six months ended
August 31, 1998 and 1997, respectively. The Company's cash and cash equivalents
and investment securities decreased to $12,499,000 at August 31, 1998 from
$13,524,000 at February 28, 1998 primarily as a result of the Company purchasing
its own outstanding common stock and the purchase of additional inventory for
its BTD and ECS divisions.
The Board of Directors has authorized the Company to spend up to $4,500,000
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 August 31, 1998, the
Company repurchased 419,900 shares of common stock for an aggregate purchase
price of $3,173,000.
The Company has purchased and has begun implementing a new enterprise-wide
information system. The Company has budgeted and anticipates spending
approximately $1,000,000 over the remainder of the current fiscal year relating
to the purchase and implementation of this new Oracle information system. In
addition, the Company will be relocating its manufacturing facilities in
anticipation of future growth. The relocation is expected to take place during
the second half of fiscal 1999. The Company anticipates that its cash and cash
equivalents, investment securities and cash flows from operating activities will
be adequate to meet the Company's cash requirements for the foreseeable future.
YEAR 2000 CONSIDERATIONS
The Company has begun the implementation of a new enterprise wide
information system that correctly identifies the Year 2000. The Company is
currently implementing Oracle financial modules and expects to complete the
implementation before the fourth quarter of calendar year 1999. However, there
can be no assurance that this software implementation will be successfully
completed, or that the implementation will not have a material adverse impact on
the Company's financial position or results of operations. Although the Company
believes that the information systems of its major vendors (insofar as they
relate to the Company's business) comply with Year 2000 requirements, there can
be no assurance that the Year 2000 issue will not affect the information systems
of the Company's major vendors as they relate to the Company's business, or that
any such impact of a major vendor's information system would not have a material
adverse effect on the Company. The Company believes that all current versions of
its product lines are Year 2000 compliant.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements contained herein
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of the
Company to be materially different from any future results, performance or
achievements express or implied by such forward-looking statements. Such factors
include, but are not limited to the following: general economic and business
conditions; charges and costs related to acquisitions; and the ability of the
Company to develop and market products for the
13
<PAGE> 15
markets in which it operates, to successfully integrate its acquired products
and services, to adjust to changes in technology, customer preferences, enhanced
competition and new competitors in the markets in which it operates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statements of Financial Accounting No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"). The Company is required to adopt this statement during fiscal year 1999.
SFAS 131 establishes standards for reporting information about operating
segments. The Company is currently evaluating the impact of this standard on its
financial statement disclosures.
In March 1998, the ACSEC issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 establishes
criteria for determining which costs of developing or obtaining internal-use
computer software should be charged to expense and which should be capitalized.
SOP 98-1 is effective for all transactions entered into in fiscal years
beginning after December 15, 1998.
14
<PAGE> 16
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
None
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: October 14, 1998 By: /s/ George P. Wilson
--------------------------------
George P. Wilson
President and Chief
Executive Officer
Date: October 14, 1998 By: /s/ Scott J. Modist
--------------------------------
Scott J. Modist
Sr. Vice President, Treasurer
and Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF AUGUST 31, 1998 AND INCOME STATEMENT FOR THE SIX MONTHS ENDED AUGUST
31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 2,473,000
<SECURITIES> 6,121,000
<RECEIVABLES> 10,104,000
<ALLOWANCES> 650,000
<INVENTORY> 3,940,000
<CURRENT-ASSETS> 23,411,000
<PP&E> 15,353,000
<DEPRECIATION> 8,047,000
<TOTAL-ASSETS> 38,102,000
<CURRENT-LIABILITIES> 7,948,000
<BONDS> 0
0
0
<COMMON> 39,000
<OTHER-SE> 30,115,000
<TOTAL-LIABILITY-AND-EQUITY> 38,102,000
<SALES> 13,540,000
<TOTAL-REVENUES> 28,283,000
<CGS> 12,083,000
<TOTAL-COSTS> 3,910,000
<OTHER-EXPENSES> 9,296,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,372,000
<INCOME-TAX> 1,281,000
<INCOME-CONTINUING> 2,091,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,091,000
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.55
</TABLE>
