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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-20189
EQUITRAC CORPORATION(R)
(Exact name of registrant as specified in its charter.)
FLORIDA 59-1797862
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
836 PONCE DE LEON BOULEVARD, CORAL GABLES, FLORIDA 33134
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (305) 442-2060
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.01 PAR VALUE, NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed under 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 [ ]
Indicate by check mark if disclosure of the registrant's delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
At May 1, 1999, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was $43,009,143, based on the closing
sales price of the common stock on the Nasdaq National Market System on such
date.
The number of shares of the registrant's Common Stock, par value $.01
outstanding, as of May 1, 1999 was 3,539,600.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed in connection with
the registrant's annual stockholders' meeting are incorporated by reference into
Part III of this report.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
ITEM 6. SELECTED FINANCIAL DATA 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 40
ITEM 11. EXECUTIVE COMPENSATION 40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K 41
SIGNATURES 44
</TABLE>
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PART I
ITEM 1. BUSINESS
Equitrac Corporation ("Equitrac" or the "Company") is a leading provider of
computer system solutions to manage office equipment resources. The Company's
products are designed to allow users to automatically track, record and report
usage of office equipment. Equitrac's cost recovery and expense management
systems allow users to bill or allocate incurred costs, maximize office
equipment efficiency and contain overhead costs.
Equitrac's wireless meter reading products provide an automated system for
copier dealers and manufacturers to collect meter readings for photocopier lease
and maintenance programs based on cost-per-copy contracts. This system reduces
the administrative costs associated with collecting meter counts while improving
customer service.
More recently, the Company has focused on developing and marketing products
to leading office equipment manufacturers such as Pitney Bowes Inc. and Xerox
Corporation.
RECENT DEVELOPMENTS
SALE OF ECS. On November 30, 1998, the Company sold the Equitrac Computer
Services ("ECS") division which provided maintenance services on computer
equipment manufactured by third parties. ECS revenues for the nine months ended
November 30, 1998 were $4,056,000. The ECS division recorded an operating loss
of $217,000 for the nine months ended November 30, 1998.
PROPOSED RECAPITALIZATION AND MERGER. On February 17, 1999, the Company and
Cornerstone Equity Investors, LLC ("Cornerstone") entered into a
recapitalization agreement and plan of merger (the "Merger Agreement"), pursuant
to which Cornerstone would acquire all of the outstanding shares of common stock
of the Company, other than certain shares held by John Kane, George Wilson and
certain other members of senior management, for $25.25 per share in cash.
On April 12, 1999, the Company received notice from Cornerstone that
Cornerstone believed that, based upon certain financial information provided by
the Company, the Company had suffered an "adverse change" under the Merger
Agreement. Cornerstone advised representatives of the Company that it wanted to
proceed with the recapitalization and merger transaction but on revised terms.
At that time, Cornerstone had not proposed to the Company the revised terms and
conditions of a transaction, but had preliminarily indicated that such revised
terms would result in the Company's shareholders receiving between $19.00 to
$20.00 per share in cash.
On April 21, 1999, Cornerstone advised the Company that it would be willing
to proceed with the recapitalization and merger on substantially the same terms
under the Merger Agreement but at a revised price of $21.00 per share in cash.
The Company's Board of Directors authorized the Company to proceed with the
transactions at $21.00 per share, but conditioned its authorization upon its
approval of definitive documentation and receipt of a fairness opinion.
Since then, Cornerstone has conducted further due diligence on the
Company's business and operations, and representatives of the Company and
Cornerstone have had discussions with regard to revising the Merger Agreement.
As of the date hereof, no agreement has been reached between the parties and
there is no assurance that the transaction will proceed.
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COST RECOVERY MARKET OVERVIEW
Equitrac's primary market focus for its cost recovery systems is law,
engineering, architectural, accounting, advertising and other professional
service firms that bill their clients for office-related expenses in order to
recover incurred costs. Billable office-related costs generally represent an
important source of revenue to professional service firms. Office equipment
expenditures and service costs represent a significant portion of a professional
service firm's overhead expenses. As a result, professional service firms
require sophisticated technology as a means of tracking and recovering office
overhead costs from their clients. Equitrac's systems provide professional
service firms with a highly automated means of tracking and accounting for a
wide variety of office equipment and services at a cost that can be recovered in
a relatively short period of time.
COST RECOVERY PRODUCTS AND TECHNOLOGY
Equitrac's cost recovery systems, which are comprised of server software,
control terminals and application software, are designed to allow customers
flexibility in configuring a system to match their own particular needs.
Continued product development efforts have resulted in advanced terminal designs
and system software, data security features, advanced communication technology
and computer networking capabilities.
The Company has recognized the trend of customers transitioning away from
traditional analog duplicating into new technologies such as digital printing,
networked equipment and multifunctional products. As a result, the Company has
focused a significant portion of its product development efforts on the
development of tracking products to be integrated into this new office
technology.
TRANSACTION SERVER SOFTWARE
Equitrac's server software is designed primarily to support a network of
cost recovery control terminals for applications such as photocopy control,
facsimile control and telephone call accounting. System software is used for
terminal communications, database maintenance, report generation, host system
communications, remote system polling and transaction costing. Equitrac develops
multiple levels of system software that vary by operating system platform. Each
software configuration contains unique feature sets and is designed to match
specific customer sizes and requirements. Equitrac's current system software is
as follows:
System 4(TM) - A Windows(R)NT based multi-tasking transaction server with
an SQL and ODBC compliant database designed for medium to large multi-site
firms.
System 3(TM) - A DOS based system software that can be easily customized
for specific applications designed for a wide range of firm sizes.
DisburseMate(TM) - Created specifically for small firms with fewer than ten
(10) professionals offering simple reporting and data exporting features.
PartnerServer - A 32-bit cost recovery system based on client/server
architecture specifically designed to integrate with the Partner series of copy
and fax terminals.
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CONTROL TERMINALS
Equitrac's control terminals are data entry devices used to accurately
track the use of photocopy machines, facsimile machines, postage meters, other
office equipment and miscellaneous disbursements. Equitrac develops a number of
terminal variations that contain unique feature sets and are designed to match
specific customer sizes and requirements. Equitrac's current control terminals
are as follows:
AlphaCopy(TM) and AlphaFax(TM) - Advanced control terminals with large data
storage capacity, Ethernet connectivity, advanced user interface and multiple
device support.
Distributed Control Terminals ("DCT's") and Fax Control Terminals ("FCT's")
- - Small footprint copy and fax control devices that can be custom configured for
a wide range of professional and commercial applications.
DisburseMate(TM) - Created specifically for small firms, DisburseMate copy
and fax terminals do not require dedicated wiring or include advanced feature
support or large data storage capacities.
Partner - Copy, fax and disbursement terminals designed specifically to
work with PartnerServer software. Includes an extensive feature set with search
and query capabilities.
DIGITAL PRINT TRACKING SOFTWARE
Equitrac has invested in the development of new digital print tracking
software in response to the proliferation of new digital output devices, such as
networked photocopiers, color laser printers and multifunctional devices.
Professional service firms that replace traditional walk-up analog copiers with
these new digital products can use these products to track usage of such devices
and recover the costs of such investments.
PrintLog(TM) is a digital output tracking solution designed to track all
printing activity from the workstation. Designed to work in the Windows(R)3.1,
Windows(R)95/98 and Windows(R)NT environments, PrintLog counts all pages printed
to laser printers and network photocopiers and assigns each transaction to a
client, project or department. PrintLog complements the Company's walk-up copy
control terminals by providing seamless integration into an existing cost
recovery system.
PartnerJET is a print tracking software application designed to manage,
track and control printing activity from the workstation. Designed to work in
the Windows(R)3.1, Windows(R)95/98 and Windows(R)NT environments, PartnerJET is
a client/server application that allows for the central administration of
validation tables, transaction collection and configuration. PartnerJET offers
the flexibility of tracking any combination of printers and applications,
operates invisibly to the user and pops up only when a tracked application sends
a document to the printer.
TELEMANAGEMENT AND CALL ACCOUNTING SOFTWARE
Equitrac's telemanagement and call accounting software monitors telephone
call usage and automatically records and prices all local, long distance and
international calls based on carrier charges or customer-created pricing tables.
The software generates comprehensive reports identifying calls made by account
number and extension and validates account codes against stored validation
tables to ensure the accuracy of call records before posting to the customer's
accounting system. Equitrac markets Windows(R)95 and Windows(R)NT based versions
of its telemanagement and call accounting software that can be purchased
modularly depending on customer size and
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feature requirements. Applications range from basic call accounting to advanced
telemanagement including fraud detection, traffic and facilities management
modules. Equitrac markets the following telemanagement products:
TeleTrac 4 - Windows(R)NT based call accounting and telemanagement software
created for integration with System 4 or available as a stand-alone product for
both professional and commercial applications.
PartnerServer Call Accounting - Call accounting and telemanagement software
which provides seamless integration to PartnerServer systems.
BUSINESS TECHNOLOGY PRODUCTS
The Company has historically focused on cost recovery products to serve the
professional service firm market. The core tracking technology of the Company's
cost recovery systems has led to the development of new tracking products to
serve the needs of diverse markets and applications. Equitrac's Business
Technology Division ("BTD") was established to market these new products to the
copier industry, corporations and government entities. BTD also focuses on
expanding the Company's distribution channels through the development of a
reseller network and OEM relationships.
STRATEGIC PARTNERSHIPS
The Company actively pursues opportunities for strategic partnerships that
capitalize on the its market position, technologies and infrastructure. The
Company resells some product lines developed and manufactured by others, such as
the Partner product line, debit card applications and telemanagement and call
accounting software products.
Under an exclusive OEM supply agreement and strategic alliance, Equitrac
manufactures the Pitney Bowes AccuTrac (TM) Mail Accounting System. This system
interfaces with Pitney Bowes electronic scales and mailing systems and
eliminates the time-consuming manual processes previously used for tracking
postage and carrier expenditures. By automating data capture, the AccuTrac
system improves a company's ability to manage and report on mail center
activity.
During Fiscal 1999, the Company signed a worldwide agreement with Xerox
under which Xerox will market Equitrac's entire line of cost recovery and
expense management products through its direct sales force and through its other
channels. The integration of Xerox's line of digital products with Equitrac's
office equipment management systems will allow Xerox to offer a complete
document expense management solution to its customers.
TELEMETRAC(TM)
TelemeTrac is a wireless copier meter reading system that allows copier
dealers and manufacturers to automatically collect meter-billing information
from their copier fleets. Based on the Company's core tracking and cellular
control channel technologies, TelemeTrac is a low-cost method for copier dealers
and manufacturers to collect meter readings to bill for cost-per-copy leases and
maintenance contracts.
TelemeTrac represents a significant shift in technology and business
process for an industry that has relied for years on customers and service
technicians to collect and report these meter readings in
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a manual fashion. TelemeTrac eliminates the need for manual meter reading,
reduces administrative costs and improves cash flow.
EXPENSE MANAGEMENT SYSTEMS
As with professional service firms, corporations and government entities
incur significant capital outlays acquiring and servicing photocopiers,
facsimile machines and other office equipment. The needs of such organizations
focus on the ability to track, report and manage office equipment usage, as
opposed to recovering their costs, as is common in the professional service firm
market. BTD offers a complete commercial product line solution for controlling
and reducing office expenses and allocating departmental costs. The Company
markets the following expense management products:
OfficeTrac(TM) - An advanced allocation and resource management software
solution that provides extensive analysis tools to allocate expenses and manage
business technology resources in conjunction with copier and fax control
terminals.
CopyLog(TM) and FaxLog(TM) - Copy and fax control devices that are
configured with OfficeTrac for commercial applications.
OneTrac(TM) - Stand-alone copy and fax control devices targeted at low-end
commercial copy and fax control applications needed for basic expense management
purposes.
SALES AND MARKETING
Equitrac currently markets its cost recovery systems and services through
its own sales personnel and, to a lesser extent, through independent dealers. As
of February 28, 1999, the Company's direct sales force in the United States
totaled 43 sales representatives in 36 locations in or near major metropolitan
areas. The Company's sales offices are staffed with customer service personnel
who provide technical assistance to the Company's sales staff and customers. The
Company's sales representatives are responsible for an assigned geographical
territory. Equitrac also markets its systems domestically through facilities
management organizations, which contract with businesses to manage specific
office equipment such as photocopiers, facsimile machines and postage meters.
These organizations market the Company's products with their own products and
services.
Equitrac's cost recovery systems are marketed and serviced internationally
through independent dealers and through its own sales personnel. In the United
Kingdom, the Company has a direct sales office and employs two sales
representatives, and in Canada, the Company has three direct sales offices and
employs four sales representatives. Independent dealers currently represent the
Company in Europe, the Far East, Australia, South America and Central America.
International revenues (including export sales) accounted for approximately
9.9%, 12.1%, 11.5% of the Company's total revenues in fiscal 1999, 1998 and
1997, respectively.
The Company's believes that it has the largest market share of installed
cost recovery systems within the legal industry. Future sales of the Company's
cost recovery products to the legal industry are expected to result primarily
from sales of upgraded products to existing and acquired customers.
The Company markets its BTD products through its existing cost recovery
sales personnel and five sales representatives dedicated to BTD product sales.
The division also plans to expand distribution through the addition of sales
personnel, the development of additional sales channels, such as independent
dealers, and product licensing through OEM opportunities.
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The Company's Marketing Department is responsible for new product planning
and specifications and coordination of product development in conjunction with
the Product Development Department. Equitrac continually solicits information
and input with respect to new product ideas and enhancements from its customers
and sales personnel.
LEASE AND SERVICE AGREEMENTS
Equitrac's customers may purchase a system or the Company will lease a
system pursuant to an operating lease (the term of which is typically for 36
months or longer) which includes all service and software support. The Company
enters into separate lease agreements for add-ons and upgrades. The Company's
system leases and service agreements generally contain clauses that
automatically extend the lease term unless the customer chooses to terminate the
lease by providing the Company at least 60 days' notice prior to the expiration
of the lease term. In the Company's experience, a substantial portion of its
customers either renew their leases, enter into new leases with the Company or
purchase a new system from the Company at the end of their initial lease terms.
The Company offers its purchase customers service agreements (the terms of which
are typically for 36 months or longer) which provide for service and software
support during the term of the agreement. Systems that are not purchased in
conjunction with a service or software support agreement are serviced by the
Company on a time-and-materials basis.
At February 28, 1999, the minimum future payments due to the Company during
the next four fiscal years under its existing non-cancelable lease and
maintenance agreements aggregated approximately $52.5 million, compared to
approximately $45.5 million at February 28, 1998.
BACKLOG
The Company historically has not had a large backlog of system sales orders
since customer orders are generally shipped and installed within a short period
of time after an order is received. Consequently, order backlog represents only
a limited percentage of the system sales anticipated by the Company in any given
fiscal period and is not indicative of the Company's actual sales for any future
fiscal period. Manufacturing plans and expenditure levels are based primarily on
sales forecasts. This absence of significant scheduled backlog could lead to
fluctuations in quarterly operating results. The Company's backlog of system
sales as of February 28, 1999, was approximately $1.5 million.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
Equitrac believes that the quality and reliability of its systems and its
on-going support of such systems are important elements in its business
strategy. Equitrac provides most of its product service and support through its
own extensive network of service personnel. The Company maintains service
technicians in every major metropolitan area in which the Company's systems are
installed, providing the Company with the ability to offer service in such areas
generally within two to four hours' response time. Equitrac generally provides a
90-day warranty on its systems, and maintains and services its systems on a
contractual basis after the initial warranty period.
PRODUCT DEVELOPMENT
Equitrac works closely with its customers and its sales and marketing
personnel to develop new systems and enhancements to existing systems. Constant
changes in technology, including ongoing developments in computer operating
systems, networks and communications protocols, require the Company to engage in
an ongoing program of product development.
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Substantially all product development is performed internally. As of
February 28, 1999, 38 employees of the Company were engaged in product
development. From time to time, the Company also employs independent contractors
for specific development products. Equitrac expensed $3,044,000, $2,982,000, and
$2,113,000 in fiscal 1999, 1998 and 1997, respectively, for product development.
MANUFACTURING AND QUALITY ASSURANCE
Equitrac assembles substantially all of the hardware and internally
develops substantially all software for its systems. Equitrac's assembly and
manufacturing operations consist primarily of procurement, assembly, testing and
quality control of components and assembled products. The Company generally uses
standard parts and components which are available from multiple sources;
however, certain components, such as terminal cases, displays, keypads and power
supplies, are purchased from limited sources due to price, quality, availability
and other considerations. To date, the Company has not experienced any
significant problems obtaining timely deliveries from its suppliers. The Company
maintains significant additional quantities of certain key components and
continually evaluates alternative sources of supply. The Company purchases
directly all of the components utilized to assemble circuit boards for its
control terminals and packages such components in complete kits for insertion by
circuit board assembly subcontractors. The Company's quality control program
includes inspecting all incoming parts, inspecting assembled parts and final
testing under simulated operating conditions of all systems prior to shipping.
COMPETITION
The market for cost recovery and expense management products is
competitive. Equitrac believes that it has the largest market share of installed
cost recovery systems within the legal industry. Equitrac and its competitors
also compete in the sale of cost recovery systems to other professional service
firms, facilities management organizations and manufacturers of equipment
controlled by cost recovery and expense management systems. Future competitors
in the Company's existing and potential markets might include manufacturers of
equipment controlled by cost recovery and expense management systems, software
development companies and facilities management organizations.
Competition in the Company's markets is based on a number of factors,
including price, service and support, system software capability, product
quality, reliability and compatibility. Equitrac believes that it is competitive
with respect to each of these factors and that its principal competitive
advantages are its extensive customer service and support infrastructure, its
product quality, its system compatibility, which allows the Company's systems to
integrate easily into a customer's existing computer system, and its continued
development efforts on product enhancements and new systems.
The Company anticipates that the markets for its recently developed
products will be very competitive and there is no guarantee that these products
will gain market acceptance. The Company does not anticipate achieving the same
market share with these products as it has achieved in its cost recovery
business.
PROPRIETARY RIGHTS
The Company has historically relied upon a combination of contractual
rights, trademarks, trade secrets, and copyright laws to establish and protect
its proprietary rights in its systems and related technologies. Furthermore, the
Company's license agreements restrict a customer's use of the Company's software
and prohibits disclosure to third parties. Due to the Company's strategic move
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from proprietary systems to industry-standard applications, the Company is
taking actions to further protect its proprietary rights through patents. In
connection with the Company's March 1, 1997 acquisition of Professional Systems
Group, the Company acquired two Canadian patents. The Company has been awarded a
patent on TelemeTrac.
EMPLOYEES
At February 28, 1999, Equitrac had a total of 430 full-time employees, of
which 52 were engaged in manufacturing and product operations, 38 were engaged
in product development, 54 were engaged in sales and marketing, 205 were engaged
in customer service and support and 81 were engaged in administrative and
finance positions. None of the Company's employees are represented by a labor
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
Equitrac's corporate headquarters are located in approximately 23,000
square feet of leased office space in Coral Gables, Florida. The Company leases
approximately 18,000 square feet of such space from related parties. These
leases expire on September 30, 2000. See Note 8 to the Company's Financial
Statements, included in Part II, Item 8 hereof. The Company's manufacturing and
distribution operations are located in approximately 16,000 square feet of
leased space in Miami, Florida. The Company's product development activities are
located in approximately 9,000 square feet of leased space in Orlando, Florida.
The Company's sales and support staff operate in leased space in 32 locations in
the United States, two locations in the United Kingdom and three locations in
Canada. The Company believes these existing facilities are adequate to meet its
current and anticipated requirements.
ITEM 3. LEGAL PROCEEDINGS
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
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EXECUTIVE OFFICERS OF THE REGISTRANT
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Name Age Position(s)
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<S> <C> <C>
John T. Kane 55 Chairman of the Board of Directors
George P. Wilson 55 President, Chief Executive Officer and Director
Christopher Rickborn 35 Sr. Vice President - Marketing and Technology
Scott J. Modist 38 Sr. Vice President, Treasurer and Chief Financial Officer
Cid Yousefi 42 Vice President - Product Development and Information Systems
Patrick J. Raftery 49 Vice President - Sales, U.S. Sales Division
John P. Jones 57 Vice President - Sales, International
</TABLE>
JOHN T. KANE is the founder of the Company, has served as the Company's
Chairman of the Board since its inception in January 1978 and was President of
the Company from its inception until October 1989.
GEORGE P. WILSON has been the President and Chief Executive Officer and a
Director of the Company since October 1989. Mr. Wilson served as Executive Vice
President of the Company from 1978 through October 1989.
CHRISTOPHER RICKBORN was named Senior Vice President - Marketing and
Technology in January 1998. Mr. Rickborn served as Vice President - Marketing
and Product Planning from April 1996 to January 1998, as Director of Marketing
from January 1995 to April 1996 and as a Product Manager prior to being named as
Director of Marketing.
SCOTT J. MODIST, a certified public accountant, was named Senior Vice
President and Chief Financial Officer in May 1998. Mr. Modist served as Vice
President -Finance, Treasurer and Chief Financial Officer of the Company since
April 1992. From November 1983 through April 1992, Mr. Modist was employed by
KPMG Peat Marwick L.L.P., and was a senior manager from July 1989 to April 1992.
CID YOUSEFI has been Vice President - Product Development and Information
Services since May 1993. Mr. Yousefi has served the Company in various data
processing and management information capacities since 1982. Mr. Yousefi was the
Company's Director of Data Processing from 1987 through April 1992, at which
time he was appointed Vice President - Software Development and Management
Information Services.
PATRICK J. RAFTERY has been Vice President - Sales, U.S. Sales Division
since September 1993. Mr. Raftery joined the Company in July 1989 as the
Company's Vice President - Sales, Eastern Division.
JOHN P. JONES has served as the Company's Vice President - Sales,
International Division since November 1990. Mr. Jones served as the Company's
Director of Dealer and National Account Sales from June 1987 to November 1990
and as a Regional Sales Manager from July 1982 to June 1987.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq National Market System under the symbol ETRC. The following table sets
forth, for the periods indicated, the range of high and low closing sale prices
for the Common Stock, as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
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Fiscal year ended February 28, 1999
Fourth Quarter 23 3/4 16 3/4
Third Quarter 20 17
Second Quarter 20 1/4 18 3/8
First Quarter 22 17
Fiscal year ended February 28, 1998
Fourth Quarter 19 5/8 16 5/8
Third Quarter 17 3/4 14 3/8
Second Quarter 16 1/2 12 7/8
First Quarter 14 5/8 11 1/2
</TABLE>
On May 15, 1999, there were approximately 637 holders of record, including
security position listings, of the Company's Common Stock.
The Company has never declared nor paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
its operations and the expansion of its business. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will
be dependent upon the Company's earnings, capital requirements, financial
condition and other factors deemed relevant to the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from the
historical financial statements of the Company. The selected financial data
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and related notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED
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FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 1998 1997 1996 1995
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(in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C>
Total revenues $55,690 $49,784 $41,901 $33,718 $31,224
Operating income 6,284 4,487 3,729 2,805 1,754
Net income 4,913 3,158 2,614 1,882 1,287
Earnings per common share:
Basic $ 1.39 $ 0.91 $ 0.77 $ 0.54 $ 0.35
Diluted $ 1.29 $ 0.85 $ 0.73 $ 0.53 $ 0.34
Number of shares used in per
share computations:
Basic 3,531 3,485 3,412 3,481 3,694
Diluted 3,798 3,730 3,583 3,549 3,777
BALANCE SHEET DATA (END OF YEAR):
Cash, cash equivalents and investments $11,119 $13,524 $10,902 $10,423 $ 7,383
Working capital 17,792 15,413 13,159 12,366 12,343
Total assets 39,743 35,114 30,682 25,646 25,436
Total current liabilities 6,682 6,935 5,907 3,671 3,535
Long-term debt, net of current portion -- -- -- -- --
Total stockholders' equity $33,061 $28,179 $24,775 $21,824 $21,491
</TABLE>
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's revenues are derived from three principal sources: (i) sales
of new systems, upgrades and add-ons of equipment or software; (ii) monthly
revenues from service and software support agreements and (iii) 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 agreement are
serviced by the Company on a time-and-materials basis.
On November 30, 1998, the Company sold the ECS division which provided
maintenance services on computer equipment manufactured by third parties. ECS
revenues for Fiscal 1999 amounted to $4,056,000 compared to $5,407,000 in the
previous fiscal year. The cash proceeds from the sale were $2,127,000 and the
Company recorded a gain on sale of assets in the amount of $830,000. The ECS
division recorded operating losses of $217,000 and $787,000 for the fiscal years
ended February 28, 1999 and 1998, respectively.
On February 17, 1999, the Company and Cornerstone entered into the Merger
Agreement, pursuant to which Cornerstone would acquire all of the outstanding
shares of common stock of the Company, other than certain shares held by John
Kane, George Wilson and certain other members of senior management, for $25.25
per share in cash.
On April 12, 1999, the Company received notice from Cornerstone that
Cornerstone believed that, based upon certain financial information provided by
the Company, the Company had suffered an "adverse change" under the Merger
Agreement. Cornerstone advised representatives of the Company that it wanted to
proceed with the recapitalization and merger transaction but on revised terms.
At that time, Cornerstone had not proposed to the Company the revised terms and
conditions of a transaction, but had preliminarily indicated that such revised
terms would result in the Company's shareholders receiving between $19.00 to
$20.00 per share in cash.
On April 21, 1999, Cornerstone advised the Company that it would be willing
to proceed with the recapitalization and merger on substantially the same terms
under the Merger Agreement but at a revised price of $21.00 per share in cash.
The Company's Board of Directors authorized the Company to proceed with the
transactions at $21.00 per share, but conditioned its authorization upon its
approval of definitive documentation and receipt of a fairness opinion.
Since then, Cornerstone has conducted further due diligence on the
Company's business and operations, and representatives of the Company and
Cornerstone have had discussions with regard to revising the Merger Agreement.
As of the date hereof, no agreement has been reached between the parties and
there is no assurance that the transaction will proceed.
The Company's total revenues, system rental, service and support revenues
have increased every year since the Company's inception in 1978. Historically,
system rental, service and support revenues have accounted for a majority of the
Company's revenues. At February 28, 1999, the minimum future payments due to the
Company under its existing non-cancelable lease and service and support
agreements aggregated approximately $52.5 million over the next four fiscal
years.
13
<PAGE> 15
The table below sets forth for the periods indicated: (1) line items from
the Company's statements of operations expressed as a percentage of revenues,
and (2) the percentage changes in these line items from the prior period.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL REVENUES INCREASE (DECREASE)
FOR FISCAL YEARS FROM PRIOR YEAR
------------------------------------ ---------------------
1999 1998 1997 1999 1998
---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales 48.0% 45.3% 43.3% 18.6% 24.3%
Service and support 32.9 33.7 32.0 9.2 25.2
Rental 19.1 21.0 24.7 1.6 1.0
---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 11.9 18.8
--------- --------- ----------
Costs and expenses:
Cost of system sales 17.0 16.0 13.6 18.9 39.9
Cost of system rental, service and
support 25.3 25.2 25.1 11.9 19.7
Product development 5.5 6.0 5.0 2.1 41.1
Selling expenses 13.5 14.4 15.6 5.1 9.4
General and administrative 27.5 29.4 31.8 4.6 9.7
---------- ---------- ----------
Total costs and expenses 88.8 91.0 91.1 9.1 18.7
---------- ---------- ----------
Operating income 11.2 9.0 8.9 40.0 20.3
Gain on sale of assets 1.5 -- - 100.0 -
Interest income 1.4 1.2 1.2 23.6 25.8
---------- ---------- ----------
Income before income taxes 14.1 10.2 10.1 54.3 21.0
Income taxes 5.3 3.9 3.9 52.3 21.2
---------- ---------- ----------
Net income 8.8% 6.3% 6.2% 55.6 20.8
========== ========== ==========
</TABLE>
14
<PAGE> 16
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS 1999, 1998 AND 1997
SALES REVENUES. Sales revenues increased 19% to $26,718,000 in fiscal 1999
from $22,528,000 in fiscal 1998. This increase resulted primarily from an
increase in sales of cost recovery systems by the cost recovery divisions and an
increase in sales of business technology products by BTD. These increases were
partially offset by a decrease in computer equipment resale revenue by the ECS
division. Sales by the Company's cost recovery divisions increased 13% to
$21,633,000 in fiscal 1999 from $19,158,000 in fiscal 1998. This increase
resulted primarily from sales of new systems to existing customers as part of a
trend for professional service firms to upgrade their office equipment
technology on a firm-wide basis. Sales by the Company's BTD were $3,415,000 in
fiscal 1999 compared to $478,000 in fiscal 1998. This increase in BTD sales
resulted primarily from OEM sales of AccuTrac Mail Accounting Systems to Pitney
Bowes and sales of TelemeTrac products. ECS computer equipment resale revenues
decreased $1,221,000 to $1,671,000 in fiscal 1999 from $2,892,000 in fiscal
1998.
Sales revenues increased 24% in fiscal 1998 from fiscal 1997. This increase
resulted primarily from an increase in sales of cost recovery systems and an
increase in computer equipment resale revenues from the ECS division. Sales
revenues of cost recovery systems by the Company's cost recovery divisions
increased 13% to $19,158,000 in fiscal 1998 from $16,959,000 in fiscal 1997.
This increase resulted primarily from sales of new systems to existing customers
as part of a trend for professional service firms to upgrade their office
equipment technology on a firm-wide basis. ECS computer equipment resale
revenues increased to $2,892,000 in fiscal 1998 from $1,167,000 in fiscal 1997,
primarily as a result of expanded geographical sales territory and increased
market presence.
SERVICE AND SUPPORT REVENUES. Service and support revenues increased 9% to
$18,332,000 in fiscal 1999 from $16,785,000 in fiscal 1998. This increase in
service and support revenues resulted from an increased level of service
contracts in the Company's cost recovery divisions offset somewhat by a decrease
in service and support revenues from the ECS divisions. The increase in service
and support revenues by the cost recovery divisions were derived from
maintenance contracts relating to sales of upgraded systems to existing
customers, new system sales and from customers who previously leased systems
from the Company but have chosen to purchase a new system as their leases
expired. Service and support revenues in fiscal 1999 included $2,412,000 of
revenues generated by the ECS division, compared to $2,515,000 in fiscal 1998.
Service and support revenues increased 25% in fiscal 1998 from fiscal 1997.
This increase in service and support revenues resulted primarily 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 14% to
$14,270,000 in fiscal 1998 from $12,491,000 in fiscal 1997. Service and support
revenues in fiscal 1998 included $2,515,000 of revenues generated by the ECS
division, compared to $920,000 in fiscal 1997.
RENTAL REVENUES. Rental revenues increased to $10,640,000 in fiscal 1999
from $10,471,000 in fiscal 1998 and $10,364,000 in fiscal 1997. Management
anticipates that rental revenues may decline in future periods as the Company
continues to be affected by a trend of rental customers purchasing new systems
and related service contracts as their rental contracts expire.
COST OF SYSTEM SALES. Cost of system sales relating to the Company's cost
recovery divisions and BTD division is comprised of the cost of hardware and
system components and payroll and other expenses related to system assembly and
testing. Cost of system sales relating to the ECS division is comprised of the
cost of computer equipment purchased for resale. Cost of system sales as a
percentage of sales revenues increased to 36% in fiscal 1999 compared to 35% in
fiscal 1998 and 32% in 1997. The increase in the cost of system sales as a
percentage of sales in fiscal 1999 is primarily attributable to higher cost of
system sales as a percentage of sales revenues for the Company's BTD products
and, to a lesser extent, due to an increase in the sales of products not
manufactured by the Company. The increase in cost of system sales as a
percentage of sales in fiscal 1998 compared to fiscal 1997 is primarily
attributable to much higher cost of sales as a percentage of related revenues
in the Company's ECS division than in the Company's cost recovery divisions. As
ECS sales peaked in fiscal 1998, cost of sales for the ECS division increased to
$2,445,000 in fiscal 1998 from $871,000 in fiscal 1997.
15
<PAGE> 17
COST OF SYSTEM RENTAL, SERVICE AND SUPPORT. Cost of system rental, service
and support is comprised primarily of (i) payroll and other expenses related to
customer service and support personnel, (ii) depreciation of rental and service
equipment and (iii) the cost of hardware and system components used for repairs.
Cost of system rental, service and support as a percentage of total rental,
service and support revenues was 49% in fiscal 1999 compared to 46% in fiscal
1998 and 44% in fiscal 1997. This increase in cost of rental, service and
support in fiscal 1999 over fiscal 1998 and 1997 was due primarily to customer
service and support initiatives taken by the Company and, to a lesser extent, an
increase in depreciation expense relating to rental and service equipment.
During fiscal 1999 the Company increased its branch service staff and national
support staff in order to enhance customer service and ensure year 2000
compliance of installed systems. Depreciation of rental and service equipment
increased to $2,181,000 in fiscal 1999 from $1,876,000 in fiscal 1998 from
$1,729,000 in fiscal 1997. Management anticipates that the cost of system
rental, service and support as a percentage of total rental, service and support
revenues will increase in fiscal 2000 due to increased personnel and
depreciation costs.
PRODUCT DEVELOPMENT EXPENSES. Product development expenses increased
slightly to $3,044,000 in fiscal 1999 from $2,982,000 in fiscal 1998, which
represented a 41% increase over fiscal 1997 product development expenses of
$2,113,000. Product development expenses were 5.5% of total revenues in fiscal
1999 compared to 6.0% in fiscal 1998 and 5.0% in fiscal 1997. Fiscal 1999
development efforts were focused primarily on enhancing and expanding the cost
recovery product lines as well as developing new BTD and OEM 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), the Company's 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 fiscal 2000 as the Company
evaluates market opportunities and invests in the development of additional
products.
SELLING EXPENSES. Selling expenses increased 5% to $7,520,000 in fiscal
1999 from $7,153,000 in fiscal 1998, which represented a 9% increase over fiscal
1997 selling expenses of $6,541,000. Selling expenses as a percentage of total
revenues were 13.5% in fiscal 1999 compared to 14.4% and 15.6% in fiscal 1998
and 1997, respectively. The decrease in selling expenses as a percentage of
revenues in each year was due to the Company's ability to leverage its sales
infrastructure in order to increase revenues without a commensurate increase in
selling expenses. In addition, the increase in BTD revenue contributed larger
sales transactions involving proportionately fewer sales related personnel and
expenses.
16
<PAGE> 18
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
5% to $15,288,000 in fiscal 1999 from $14,609,000 in fiscal 1998, which
represented a 10% increase over fiscal 1997 general and administrative expenses
of $13,312,000. General and administrative expenses as a percentage of total
revenues were 27% in fiscal 1999 compared to 29% and 32% in fiscal 1998 and
1997, respectively.
General and administrative expenses decreased as a percentage of total
revenues during fiscal 1999 and 1998 as a result of increases in total revenues
without corresponding increases in corporate overhead expenses. These decreases
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 administrative and other support
positions.
Management anticipates that general and administrative expenses will
increase as a percentage of total revenues in fiscal 2000 due to increased
personnel and benefit costs.
INTEREST INCOME. The Company earned interest income of $760,000 in fiscal
1999 compared to $615,000 in fiscal 1998 and $489,000 in fiscal 1997. These
increases in interest income resulted from higher interest-earning asset
balances with the additional investments allocated to high-yielding investment
grade securities.
INCOME TAXES. The Company's effective income tax rate was 38% for fiscal
1999, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations over the past several years
principally from cash flows from operations. The Company generated $2,065,000,
$6,464,000, and $4,698,000 in cash flows from operating activities in fiscal
1999, 1998 and 1997, respectively. The decrease in cash flows from operating
activities resulted from an increase in working capital needs as the Company
expanded its product lines, resulting in an increase in inventory and accounts
receivables. Cash flows used in investing activities included the acquisition of
property and equipment of $6,114,000, $2,782,000, and $2,580,000 in fiscal 1999,
1998 and 1997, respectively. These amounts are primarily related to system
rental equipment which is leased to customers and system service equipment which
is used to fulfill service contract commitments to customers with service
contracts. Also included in purchases of property and equipment during fiscal
1999 was approximately $1,600,000 relating to the implementation of a new
enterprise-wide Oracle information system and other new information technology
and $300,000 of equipment, furniture and leasehold improvements for a new
manufacturing and product operations facility. The Company anticipates spending
an additional $600,000 to complete the upgrade of its information technology
systems in fiscal 2000. In addition, cash flows used in investing activities in
fiscal 1998 included additional purchase price consideration of $625,000 that
was paid to ISI pursuant to the acquisition of The Infortext Group.
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. A principal source of
cash flow from operations will be payments received under the Company's lease
and service agreements. At February 28, 1999, the future minimum payments due to
the Company under its existing non-cancelable lease and service agreements
aggregated approximately $52.5 million, of which $21.4 million is due in fiscal
2000.
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
expectation of future cash flows from operating activities and the level of cash
required to fund future growth opportunities. Through February 28,
17
<PAGE> 19
1999, the Company repurchased 430,900 shares of common stock for an aggregate
purchase price of $3,377,000.
SEASONALITY AND INFLATION
Historically, the Company's business has not been seasonal. However,
although the Company's rental, service and support revenues from installed
systems do not fluctuate greatly from quarter to quarter, fluctuations in the
amount of system sales may result in quarterly variations in the Company's total
revenues and net income. Accordingly, interim results of operations may not be
an accurate measure of the annual performance of the Company. The Company
believes that inflation has not had a material impact on the results of
operations.
FOREIGN OPERATIONS
In fiscal 1999, revenues from foreign operations (including export sales)
decreased 8% to $5,531,000 from $6,003,000 in fiscal 1998. The decrease was
caused primarily by a decrease in sales in the Far East and Canada due to weaker
economic and foreign currency conditions. In addition, revenues derived from
rental contracts obtained in the settlement of litigation decreased by
approximately $200,000 in fiscal 1999 as these rental contracts expired during
fiscal 1999.
Fiscal 1998 revenues from foreign operations increased 25% over revenues
from foreign operations of $4,808,000 in fiscal 1997. The increase in revenues
from foreign operations (including export sales) in fiscal 1998 from fiscal 1997
resulted primarily from the sales of new systems to existing customers and
increased presence in foreign countries. As a percentage of total revenues,
revenues from foreign operations (including export sales) was 9.9% in fiscal
1999 compared to 12.1% and 11.5% in fiscal 1998 and 1997, respectively.
Equitrac's foreign revenue is subject to the normal risks of foreign
operations, such as protective tariffs, export and import controls and
transportation delays and interruptions. The Company's direct international
sales are billed in foreign currencies and are subject to currency exchange
fluctuations.
Since Equitrac's systems are manufactured in the United States, the
Company's foreign operations could be affected by fluctuations in the relative
value of the U.S. dollar to foreign currencies. In fiscal years 1999, 1998 and
1997, the effect of foreign currency exchange fluctuations was not significant
to the Company.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-K, 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; competitive pressures in the cost recovery, expense management and
wireless copier meter reading industries; and the ability of the Company to
develop, deploy and market new products 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.
18
<PAGE> 20
YEAR 2000 READINESS DISCLOSURE
Like other businesses dependent upon computerized information processing,
the Company must consider "Year 2000" issues. Many computer programs were
previously written using two digits rather than four digits to define the
applicable year in the twentieth century. Such software may recognize a date
using "00" as the year 1900 rather than the year 2000. The consequences of this
issue may include information systems failures and business process interruption
to the extent companies fail to upgrade, replace or otherwise address Year 2000
problems. As a result, significant uncertainty exists in the software industry
concerning the potential impact of the year 2000 problem. The Year 2000 problem
may also result in additional business opportunities and competitive
differentiation.
The Company believes that it has three general areas to address with
respect to the Year 2000 situation (i) the systems and product lines
manufactured and marketed by the Company; (ii) the Company's internal
information systems and related computer hardware used to operate the business;
and (iii) the effects of third party compliance efforts.
The Company believes that all current versions of its product lines are
Year 2000 compliant. Customers can obtain current information about the Year
2000 compliance of the Company's products from the Company's web site.
Information on the Company's web site is provided to customers for the sole
purpose of assisting in their planning for the year 2000.
Some of the Company's older product lines require certain software or
hardware upgrades to be made Year 2000 compliant. The Company has notified its
customers who may have non-compliant products. The Company is currently in the
process of providing its non-Year 2000 compliant customers with the necessary
hardware or software upgrade. The Company has assembled a team of 15 dedicated
technicians to perform these upgrades. The Company is monitoring and tracking
the progress of such upgrades on a weekly basis. The Company believes that it
will complete this upgrade program by November 30, 1999. The Company estimates
that it will cost an additional $500,000 during the fiscal year ending February
29, 2000 to complete these Year 2000 upgrades. This amount consists primarily of
salaries, benefits and travel costs associated with the 15 dedicated
technicians.
With respect to internal information systems and technology, the Company
has replaced, or is in the process of replacing, its non-Year 2000 compliant
systems and technology. The Company is in the process of implementing a new
enterprise wide Oracle information system. The Company is currently implementing
financial and product operations modules and expects to complete this phase of
the implementation by August 31, 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. The Company has tested and believes
that its internal technology systems including phone systems, computer networks,
servers, E-mail, personal computers, customer support systems and other software
and hardware products used to operate the business are Year 2000 compliant at
February 28, 1999.
The third aspect of the Company's Year 2000 analysis involves evaluating
the Year 2000 efforts of third parties, including critical suppliers and other
partners with whom the Company has strategic relationships. The Company is in
the process of contacting such critical suppliers and business partners. If the
Company determines, that the Year 2000 exposure of any critical supplier or
other strategic relationships could result in material disruptions of business,
the Company would develop appropriate contingency plans. If certain critical
third party suppliers experience difficulties resulting in a material
interruption of service to the Company, such interruption could result in a
material adverse effect on the Company's financial position and results of
operations.
19
<PAGE> 21
RECENT ACCOUNTING STATEMENTS
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. Management does not expect the adoption of
this standard to have a material effect on the Company's financial statements
and believes its current accounting for software obtained for internal use
complies with SOP 98-1.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133") was issued in June 1998 and is effective for the
Company's fiscal year ending February 28, 2001. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or a liability measured at its fair value. The
Company believes that the adoption of SFAS 133 will have no material impact on
its financial statements as it has entered into no derivative contracts and has
no current plans to do so in the foreseeable future.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Equitrac Corporation:
We have audited the accompanying balance sheets of Equitrac Corporation (a
Florida corporation) as of February 28, 1999 and 1998, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Equitrac Corporation as of
February 28, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
May 10, 1999.
21
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Equitrac Corporation:
We have audited the accompanying statements of income, stockholders' equity
and cash flows for the year ended February 28, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations of Equitrac Corporation and
of its cash flows for the year ended February 28, 1997 in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida,
April 14, 1997.
22
<PAGE> 24
EQUITRAC CORPORATION
BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
February 28, February 28,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 964 $ 5,819
Short-term investment securities 7,383 5,208
Accounts receivable, net of allowances of $900
and $650 in 1999 and 1998, respectively 10,600 8,178
Inventories 3,946 2,465
Deferred income taxes 1,166 234
Other current assets 415 444
-------- --------
Total current assets 24,474 22,348
Investment securities 2,772 2,497
Property and equipment, net 9,302 6,418
Intangible assets, net 2,312 3,111
Deferred income taxes 562 556
Other assets 321 184
-------- --------
Total assets $ 39,743 $ 35,114
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,084 $ 1,720
Accrued expenses and other current liabilities 3,673 3,878
Unearned income 925 1,337
-------- --------
Total current liabilities 6,682 6,935
-------- --------
Commitments and contingencies (note 8)
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,970,500 and 3,877,100 shares issued
in 1999 and 1998, respectively 40 39
Additional paid-in capital 12,746 11,490
Retained earnings 23,743 18,830
Accumulated other comprehensive income (91) 7
Treasury stock, at cost (430,900 and 370,800 shares in
1999 and 1998, respectively) (3,377) (2,187)
-------- --------
Total stockholders' equity 33,061 28,179
-------- --------
Total liabilities and stockholders' equity $ 39,743 $ 35,114
======== ========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE> 25
EQUITRAC CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
February 28, February 28, February 28,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $26,718 $22,528 $18,126
Service and support 18,332 16,785 13,411
Rental 10,640 10,471 10,364
------- ------- -------
Total revenues 55,690 49,784 41,901
------- ------- -------
Costs and expenses:
Cost of system sales 9,492 7,986 5,710
Cost of system rental, service and support 14,062 12,567 10,496
Product development 3,044 2,982 2,113
Selling expenses 7,520 7,153 6,541
General and administrative 15,288 14,609 13,312
------- ------- -------
Total costs and expenses 49,406 45,297 38,172
------- ------- -------
Operating income 6,284 4,487 3,729
Gain on sale of assets 830 -- --
Interest income 760 615 489
------- ------- -------
Income before income taxes 7,874 5,102 4,218
Income taxes 2,961 1,944 1,604
------- ------- -------
Net income $ 4,913 $ 3,158 $ 2,614
======= ======= =======
Earnings per share:
Basic $ 1.39 $ 0.91 $ 0.77
======= ======= =======
Diluted $ 1.29 $ 0.85 $ 0.73
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
24
<PAGE> 26
EQUITRAC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAIN COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- ---------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 29, 1996 3,717,750 $ 10,427 $ 13,058 $ (8) $ (1,653) $ 21,824
Net income for the year
ended February 28, 1997 -- -- 2,614 -- -- 2,614
Accumulated other
comprehensive income
net of tax:
Unrealized loss on marketable
securities, net of tax -- -- -- (17) -- (17)
Translation adjustment -- -- -- 2 -- 2
Total comprehensive income -- -- -- -- -- 2,599
Exercise of stock options 82,550 352 -- -- -- 352
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1997 3,800,300 10,779 15,672 (23) (1,653) 24,775
Net income for the year
ended February 28, 1998 -- -- 3,158 -- -- 3,158
Accumulated other
comprehensive income
net of tax:
Unrealized gain on marketable
securities, net of tax -- -- -- 52 -- 52
Translation adjustment -- -- -- (22) -- (22)
Total comprehensive income -- -- -- -- -- 3,188
Exercise of stock options 76,800 750 -- -- -- 750
Purchase of treasury
stock 40,000 shares -- -- -- -- (534) (534)
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1998 3,877,100 11,529 18,830 7 (2,187) 28,179
Net income for the year ended
February 28, 1999 -- -- 4,913 -- -- 4,913
Accumulated other
comprehensive income,
net of tax:
Unrealized loss on marketable
securities, net of tax -- -- -- (60) -- (60)
Translation adjustment -- -- -- (38) -- (38)
Total comprehensive income -- -- -- -- -- 4,815
Exercise of stock options 93,400 783 -- -- -- 783
Tax benefit from stock plans -- 474 -- -- -- 474
Purchase of treasury
stock 60,100 shares -- -- -- -- (1,190) (1,190)
--------- --------- --------- --------- --------- ---------
Balance, February 28, 1999 3,970,500 $ 12,786 $ 23,743 $ (91) $ (3,377) $ 33,061
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
25
<PAGE> 27
EQUITRAC CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,913 $ 3,158 $ 2,614
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,063 2,688 2,321
Amortization 755 1,160 1,090
Provision for doubtful accounts 250 100 200
Deferred income taxes (936) 157 (618)
Gain on sale of assets (830) -- --
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,047) (1,800) (1,987)
Inventories (1,932) 42 (343)
Other current assets 29 (103) 53
Other assets (137) 10 (47)
Increase (decrease) in:
Accounts payable 364 453 473
Accrued expenses (103) 262 715
Unearned income (324) 337 227
---------- ---------- ----------
Net cash provided by operating activities 2,065 6,464 4,698
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (6,114) (2,782) (2,580)
Acquisitions of product lines, principally
intangible assets -- (1,023) (1,934)
Cash proceeds from sale of assets 2,127 -- --
Sales and maturities of investment securities 6,066 3,739 2,338
Purchases of investment securities (8,554) (5,214) (3,122)
Decrease in restricted cash -- -- 1,450
---------- ---------- ----------
Net cash used in investing activities (6,475) (5,280) (3,848)
---------- ---------- ----------
Cash flows from financing activities:
Repayment of acquisition obligations -- -- (30)
Proceeds from issuance of common stock 783 436 352
Purchase of treasury stock (1,190) (534) --
---------- ---------- ----------
Net cash (used in) provided by financing activities (407) (98) 322
---------- ---------- ----------
Exchange rate effect on cash (38) (22) 2
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (4,855) 1,064 1,174
Cash and cash equivalents, beginning of year 5,819 4,755 3,581
---------- ---------- ----------
Cash and cash equivalents, end of year $ 964 $ 5,819 $ 4,755
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 3,247 $ 2,144 $ 1,502
</TABLE>
See accompanying notes to financial statements.
26
<PAGE> 28
EQUITRAC CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Equitrac Corporation ("Equitrac" or the "Company") is a leading
provider of computer system solutions to manage office equipment resources. The
Company's products are designed to allow users to automatically track, record
and report usage of office equipment. Equitrac's cost recovery and expense
management systems allow users to bill or allocate incurred costs, maximize
office equipment efficiency and contain overhead costs. Equitrac's wireless
meter reading products provide an automated system for copier dealers and
manufacturers to collect meter readings for photocopier lease and maintenance
programs based on cost-per-copy contracts. The Company offers its systems by
sale or lease in the United States, the United Kingdom and Canada through direct
sales offices. The Company's systems are also available through independent
dealers.
Through November 30, 1998, the Company provided maintenance services on
third party computer equipment manufactured by others through its Equitrac
Computer Services ("ECS") division. This multi-vendor support included
installation, preventive maintenance and on-site repair service. On November 30,
1998, the Company sold the ECS division. The cash proceeds from the sale were
$2,127,000 and the Company recorded a gain on sale of assets in the amount of
$830,000.
REVENUE RECOGNITION
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4) SOFTWARE
REVENUE RECOGNITION.
Revenues from sales of company-manufactured products sold to end-users are
recognized upon installation and customers' acceptance. Revenues from sales of
company-manufactured products to independent dealers and distributors are
recognized upon shipment. Revenues from resale of products by the 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.
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.
FINANCIAL INSTRUMENTS AND CREDIT RISK
The carrying amounts of cash and cash equivalents, investment securities,
accounts receivable and accounts payable reflected in the financial statements
approximate fair value.
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash equivalents, investment
securities and accounts receivable. The Company performs ongoing credit
evaluations of its customers' financial condition, and generally requires no
collateral from its customers. The allowance for doubtful accounts receivable is
based upon the expected
27
<PAGE> 29
collectibility of all accounts receivable. The Company places its cash
equivalents and investment securities in investment-grade debt instruments and
preferred stock and limits the amount of credit exposure to any one commercial
issuer.
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.
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.
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.
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.
INTANGIBLE ASSETS
Intangible assets arise from certain purchase transactions and are
amortized on a straight-line basis over the respective estimated useful lives,
ranging from three to seven years. The Company periodically reviews intangible
assets to determine if any impairment exists. As of February 28, 1999, in the
opinion of management, there has been no such impairment. The Company removes
the cost and accumulated amortization of individual intangible assets once fully
amortized.
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.
28
<PAGE> 30
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 shown in the "Accumulated Other Comprehensive Income"
caption in the stockholders' equity section of the accompanying balance sheets.
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
statements of income.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information,"("SFAS 131") effective December 31, 1998. SFAS 131 establishes
standards for the way that public companies report selected information about
operating segments in annual interim financial reports to shareholders. It also
establishes standards for related disclosures about an enterprise's business
segments, products, services, geographic areas and major customers. SFAS 131,
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers, requires that a public company report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. SFAS 131 requires that a public company report a measure of segment
profit or loss, certain specific revenue and expense items and segment assets.
The Company operates its business as a single segment. As a result, no
additional disclosure was required.
COMPREHENSIVE INFORMATION
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes rules for the reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income consists of net income, changes in the value of
available-for-sale securities, and the gains and losses resulting from foreign
currency translation and is presented in the "Accumulated Other Comprehensive
Income" section of the statements of stockholders' equity.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants 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. Management does not expect the adoption
of this standard to have a material effect on the Company's financial statements
and believes its current accounting for software obtained for internal use
complies with SOP 98-1.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133") was issued in June 1998 and is effective for the
Company's fiscal year ending February 28, 2001. SFAS 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or a liability measured at its fair value. The
Company believes that the
29
<PAGE> 31
adoption of SFAS 133 will have no material impact on its financial statements as
it has entered into no derivative contracts and has no current plans to do so in
the foreseeable future.
2. INVESTMENT SECURITIES:
Available-for-sale investment securities consist of the following (in
thousands):
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
--------------- ----------------
<S> <C> <C>
Estimated fair value:
Corporate bonds $ 2,753 $ 3,413
Municipal bonds 2,525 2,095
U.S. Government obligations 3,963 1,397
Preferred stock 814 800
Common stock 100 --
----------- -----------
$ 10,155 $ 7,705
=========== ===========
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Useful February 28, February 28,
Lives 1999 1998
--------- --------------- ----------------
<S> <C> <C> <C>
System rental and service equipment 5 years $ 11,058 $ 9,614
Furniture, fixtures and equipment 3-5 years 4,084 3,032
Leasehold improvements 3-16 years 763 1,078
----------- -----------
15,905 13,724
Accumulated depreciation and amortization (6,603) (7,306)
----------- -----------
$ 9,302 $ 6,418
=========== ===========
</TABLE>
4. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
-------------- ---------------
<S> <C> <C>
Covenants not to compete $ -- $ 1,900
Service contracts 3,083 3,103
Customer lists 470 915
Other 744 760
----------- -----------
4,297 6,678
Accumulated amortization (1,985) (3,567)
----------- -----------
$ 2,312 $ 3,111
=========== ===========
</TABLE>
30
<PAGE> 32
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
-------------- --------------
<S> <C> <C>
Compensation and benefits $ 2,933 $ 2,280
Federal, state and local taxes 196 111
Other 544 1,487
----------- -----------
$ 3,673 $ 3,878
=========== ===========
</TABLE>
6. LEASING TRANSACTIONS AND SERVICE AGREEMENTS:
The Company leases systems under operating lease agreements generally for
terms of 36 months or longer. The Company's existing leases generally expire
over the next four years and include all service and system support. The lessee
is responsible for risk of loss, theft or damage to the equipment. The majority
of the lessees pay the lease amount in monthly installments and are liable for
the full contractual obligation upon cancellation.
Customers who purchase a system may obtain a separate service agreement.
Future minimum lease payments to be received under non-cancelable operating
lease and service agreements as of February 28, 1999 are as follows (in
thousands):
Fiscal Year
-----------
2000 $21,358
2001 14,682
2002 9,552
2003 6,914
--------
$ 52,506
========
7. RETIREMENT PLAN:
The Company has a 401(k) plan covering all eligible employees. Subject to
certain dollar limits, eligible employees may contribute up to 15% of their
salaries to the plan. The Company matches 100% of the employee contributions up
to 5% of their gross pay and may make discretionary contributions in amounts
determined by the Board of Directors. Company matching contributions charged to
income were approximately $607,000, $648,000 and $514,000, for fiscal years
1999, 1998 and 1997, respectively.
8. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has a lease obligation with related parties through September
30, 2000, for certain office space. Under this agreement, the related parties
hold a $50,000 security deposit. Additionally, the Company leases other office
space and office equipment under operating leases from unrelated parties. Total
rent expense for fiscal years 1999, 1998 and 1997 was approximately $1,914,000
$1,818,000, and $1,661,000, respectively, including rent expense to related
parties of approximately $418,000 in each year.
31
<PAGE> 33
At February 28, 1999, the future minimum lease payments under
non-cancelable operating leases are as follows (in thousands):
Fiscal Year
-----------
2000 $ 1,855
2001 1,157
2002 667
2003 494
2004 279
Thereafter 86
--------
$ 4,538
========
LITIGATION
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.
EMPLOYMENT AGREEMENTS
During fiscal 1998, the Company entered into employment agreements with its
Chairman of the Board and Chief Executive Officer. Pursuant to the agreements,
each executive receives annual base salaries of $340,000, subject to cost of
living increases and other benefits. Each executive is eligible to receive an
annual bonus in an amount equal to the product of his base salary times the
greater of (i) the percentage increase in the Company's earnings per share over
the preceding fiscal year or (ii) the percentage increase in the market price of
the Company's common stock as of the end of the fiscal year compared to the end
of the preceding fiscal year, subject to certain restrictions. During the fiscal
years ended February 28, 1999 and 1998, each executive was paid an annual bonus
of $100,000 and $90,000, respectively. Each executive will also receive
post-retirement payments of $100,000 per year for a period of ten years after he
reaches age 58 1/2.
32
<PAGE> 34
9. 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>
Per-Share
(in thousands, except per share amounts) Net Income Shares Amount
---------- ---------- ----------
<S> <C> <C> <C>
Year ended February 28, 1999
Basic Earnings Per Share:
Income available to common stockholders $ 4,913 3,531 $ 1.39
----------
Options issued to employees 267
---------- ----------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 4,913 3,798 $ 1.29
========== ========== ==========
Year ended February 28, 1998
Basic Earnings Per Share:
Income available to common stockholders $ 3,158 3,485 $ 0.91
----------
Options issued to employees 245
---------- ----------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 3,158 3,730 $ 0.85
========== ========== ==========
Year ended February 28, 1997
Basic Earnings Per Share:
Income available to common stockholders $ 2,614 3,412 $ 0.77
----------
Options issued to employees 171
---------- ----------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 2,614 3,583 $ 0.73
========== ========== ==========
</TABLE>
33
<PAGE> 35
10. INCOME TAXES:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between financial statement
carrying amounts and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates and laws expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of enactment. The
total income tax expense included the following components (in thousands):
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
February 28, February 28, February 28,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 3,013 $ 1,328 $ 1,618
State 884 459 604
----------- ----------- -----------
3,897 1,787 2,222
----------- ----------- -----------
Deferred tax expense:
Federal (726) 117 (449)
State (210) 40 (169)
----------- ----------- -----------
(936) 157 (618)
----------- ----------- -----------
Total income tax expense $ 2,961 $ 1,944 $ 1,604
=========== =========== ===========
</TABLE>
The components of the net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
February 28, February 28,
1999 1998
----------- -----------
<S> <C> <C>
Deferred income taxes, current:
Allowance for doubtful accounts $ 164 $ -
Inventories 138 96
Accrued expenses 864 138
----------- -----------
1,166 234
----------- -----------
Deferred income taxes, long-term:
Intangible assets 820 717
Property and equipment (256) (130)
Other (2) (31)
----------- -----------
562 556
----------- -----------
Net deferred tax asset $ 1,728 $ 790
=========== ===========
</TABLE>
34
<PAGE> 36
A reconciliation of income tax expense computed at the U.S. federal
statutory tax rate of 34% to the Company's income tax provision is as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
February 28, February 28, February 28,
1999 1998 1997
-------------- ------------ ------------
<S> <C> <C> <C>
Expected income taxes $ 2,677 $ 1,735 $ 1,434
State income taxes, net of federal benefit 442 318 274
Research and development tax credit (170) (167) (92)
Other 12 58 (12)
---------- ---------- -----------
$ 2,961 $ 1,944 $ 1,604
========== ========== ==========
</TABLE>
11. COMMON STOCK:
The Company has reserved 850,000 shares of its common stock for issuance
under its Amended and Restated 1992 Stock Option Plan (the "Plan"). Under the
Plan, incentive and nonqualified stock options are available to employees of the
Company. The terms of each option agreement are determined by the Company's
Stock Option Committee of the Board of Directors. Under the Company's prior
stock option plan, which terminated in April 1992, options to acquire 56,700
shares of common stock remain exercisable through May 6, 2001.
The Company also has a 1992 Directors Stock Option Plan (the "Directors
Plan") under which 40,000 shares of common stock are reserved for issuance upon
exercise of stock options. The Directors Plan provides for an automatic grant of
an option to purchase 5,000 shares of common stock to each nonemployee director
of the Company upon election as a director of the Company and an automatic grant
of an option to purchase 1,000 shares upon reelection as a director of the
Company, in both instances at an exercise price equal to the fair market value
of the common stock on the date of grant.
35
<PAGE> 37
A summary of the status and activity of the Company's stock option plan is as
follows:
<TABLE>
<CAPTION>
Exercise Weighted
Price Average
Number of ---------------------- Exercise
Shares Low High Price
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Options outstanding, February 29, 1996 363,950 $ 1.78 $ 7.25 $ 4.68
Granted 118,000 8.00 9.00 8.97
Exercised (82,550) 1.78 7.00 4.26
Canceled -- -- -- --
-------- --------- ---------
Options outstanding, February 28, 1997 399,400 1.78 9.00 5.99
Granted 225,800 12.00 17.00 12.06
Exercised (51,800) 1.78 9.00 5.65
Canceled (3,000) 12.00 12.00 12.00
-------- --------- ---------
Options outstanding, February 28, 1998 570,400 1.78 17.00 8.38
Granted 148,750 17.13 20.13 19.61
Exercised (83,400) 1.78 12.00 8.00
Canceled (17,750) 12.00 19.63 15.54
-------- --------- ---------
Options outstanding, February 28, 1999 618,000 $ 1.78 $ 20.13 $ 10.96
======== ========= =========
</TABLE>
Information about stock options outstanding at February 28, 1999 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range ------------------------------------------------- ---------------------------------
of Weighted
Exercisable Average Weighted Weighted
Prices Number Remaining Average Number Average
------------- Outstanding at Contractual Exercise Exercisable at Exercise
Low High February 28, 1999 Life (Years) Price February 28, 1999 Price
---- ---- ----------------- ------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$1.78 - $1.78 56,700 2.2 $ 1.78 56,700 $ 1.78
4.25 - 6.25 87,500 5.0 5.10 87,500 5.10
7.00 - 9.00 142,500 5.9 8.05 142,500 8.05
12.00 - 17.13 189,100 8.2 12.11 83,100 12.25
19.63 - 20.13 142,200 9.1 19.63 4,700 19.89
---------------- ------------ -------- ------------------- ----------
$1.78 - $20.13 618,000 6.9 $ 10.96 374,500 $ 7.49
================ ============ ======== =================== ==========
</TABLE>
As permitted under SFAS No. 123 ("SFAS 123"), ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company has elected to follow Accounting Principles Board
Opinion No. 25 ("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations, in accounting for stock-based awards to employees. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.
The fair value of the Company's stock option grants to employees was
estimated using a Black-Scholes option pricing model with the following
assumptions used for grants in fiscal 1999, 1998 and 1997, respectively:
expected lives of 5.17, 5.23 and 5.21 years; volatility factors of 54.6%, 27.9%
and 26.8%; risk free interest rates of 5.15%, 6.21% and 6.81% and no dividend
payments. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options
36
<PAGE> 38
which have no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility and the expected holding period of
options. Because the Company's stock options granted to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
option grants to employees.
The weighted average fair value of stock options granted was $10.47, $4.54
and $3.43 in fiscal 1999, 1998 and 1997, respectively. Generally, stock options
issued under the Plan and the Directors Plan are exercisable within three years
from the date of grant and expire ten years after the date of grant.
Had compensation cost for the Company's options plans been determined and
recorded consistent with the Black-Scholes option pricing model in accordance
with SFAS 123, the Company's net income and diluted earnings per share would
have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
February 28, February 28, February 28,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (in thousands)
As reported $ 4,913 $ 3,158 $ 2,614
Pro forma 4,149 2,772 2,223
Diluted earnings per share
As reported $ 1.29 $ 0.85 $ 0.73
Pro forma 1.09 0.74 0.62
</TABLE>
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.
Through February 28, 1999, the Company repurchased 430,900 shares of its
outstanding common stock at an aggregate purchase price of $3,377,000, including
34,000 shares from a director for an aggregate purchase price of $189,125.
37
<PAGE> 39
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized financial data by quarter for fiscal 1999 and 1998 is
as follows (in thousands, except earnings per share):
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------
May 31 August 31 November 30 February 28
---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Fiscal 1999
Revenues $ 13,258 $ 15,025 $ 14,430 $ 12,977
Operating income 1,373 1,621 1,680 1,610
Net income 968 1,123 1,684 1,138
Diluted earnings per share $ 0.25 $ 0.29 $ 0.45 $ 0.30
May 31 August 31 November 30 February 28
---------- ------------- ----------- -----------
Fiscal 1998
Revenues $ 11,730 $ 12,369 $ 12,444 $ 13,241
Operating income 1,005 1,057 1,150 1,275
Net income 706 734 815 903
Diluted earnings per share $ 0.19 $ 0.20 $ 0.22 $ 0.24
</TABLE>
On November 30, 1998, the Company sold the ECS division. The cash proceeds
from the sale were $2,127,000 and the Company recorded a gain on sale of assets
in the amount of $830,000.
38
<PAGE> 40
13. PROPOSED RECAPITALIZATION AND MERGER:
On February 17, 1999, the Company and Cornerstone Equity Investors, LLC
("Cornerstone") entered into a recapitalization agreement and plan of merger
(the "Merger Agreement"), pursuant to which Cornerstone would acquire all of the
outstanding shares of common stock of the Company, other than certain shares
held by John Kane, George Wilson and certain other members of senior management,
for $25.25 per share in cash.
On April 12, 1999, the Company received notice from Cornerstone that
Cornerstone believed that, based upon certain financial information provided by
the Company, the Company had suffered an "adverse change" under the Merger
Agreement. Cornerstone advised representatives of the Company that it wanted to
proceed with the recapitalization and merger transaction but on revised terms.
At that time, Cornerstone had not proposed to the Company the revised terms and
conditions of a transaction, but had preliminarily indicated that such revised
terms would result in the Company's shareholders receiving between $19.00 to
$20.00 per share in cash.
On April 21, 1999, Cornerstone advised the Company that it would be willing
to proceed with the recapitalization and merger on substantially the same terms
under the Merger Agreement but at a revised price of $21.00 per share in cash.
The Company's Board of Directors authorized the Company to proceed with the
transactions at $21.00 per share, but conditioned its authorization upon its
approval of definitive documentation and receipt of a fairness opinion.
Since then, Cornerstone has conducted further due diligence on the
Company's business and operations, and representatives of the Company and
Cornerstone have had discussions with regard to revising the Merger Agreement.
As of the date hereof, no agreement has been reached between the parties and
there is no assurance that the transaction will proceed.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
39
<PAGE> 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to directors of the Company
will be included in the Company's definitive Proxy Statement in connection with
its 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") which will
be filed with the Securities and Exchange Commission, and is incorporated herein
by reference. Information with respect to executive officers of the Company is
presented in Part I, above, under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in the 1999 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in the 1999 Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by this item will be contained in the 1999 Proxy
Statement and is incorporated herein by reference.
40
<PAGE> 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. INDEX TO FINANCIAL STATEMENTS
The following financial statements of Equitrac Corporation are filed as
part of this report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants 21
Report of Independent Certified Public Accountants 22
Balance Sheets - February 28, 1999 and February 28, 1998 23
Statements of Income - Years ended February 28, 1999, February 28, 1998
and February 28, 1997 24
Statements of Stockholders' Equity - Years ended February 28, 1999,
February 28, 1998 and February 28, 1997 25
Statements of Cash Flows - Years ended February 28, 1999,
February 28, 1998 and February 28, 1997 26
Notes to Financial Statements 27
2. SUPPLEMENTAL SCHEDULE
Report of Independent Certified Public Accountants S-1
Report of Independent Certified Public Accountants S-1.1
Schedule II - Valuation and Qualifying Accounts S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or required under the related
instructions or is included in the Financial Statements or notes thereto.
41
<PAGE> 43
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
------ ----------- ----------------
<S> <C> <C>
2 Recapitalization Agreement and Plan of Incorporated by reference to Exhibit 2.1 to the
Merger dated February 17, 1999 among Company's current report on Form 8-K dated February 17,
Chargeback Acquisition Corp., the 1999
Company and John T. Kane and George P.
Wilson
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit No. 3.1 to the
Incorporation Company's Registration Statement on Form S-1 (No.
33-47367) (the "S-1")
3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the
Company's S-1
4 Form of Common Stock Certificate Incorporated by reference to Exhibit 4 to the Company's
S-1
10.1 Executive Compensation Plan and
Arrangements
10.1 (a) 1992 Stock Option Plan, as amended Incorporated by reference to the Company's S-8
10.1 (b) Directors Stock Option Plan Incorporated by reference to Exhibit 10.2 to the
Company's S-1
10.1 (c) Employment Agreement, dated as Incorporated by reference to Exhibit 10.1 (c) to the
of June 17, 1997, between the Company's annual report on Form 10-K for the
Company and John T. Kane fiscal year ended February 28, 1998
10.1 (d) Employment Agreement, dated as of June Incorporated by reference to Exhibit 10.1 (d) to the
17, 1997, between the Company and Company's Annual Report on Form 10-K for the fiscal
George P. Wilson year ended February 28, 1998
10.2 Form of Indemnification Agreement Incorporated by reference to Exhibit 10.5 to the
between the Company and each of its Company's S-1
Executive Officers and Directors
10.3 Lease Agreement dated September 17, Incorporated by reference to Exhibit 10.8 to the
1990, between the Company and 3200 Company's S-1
Ponce de Leon Associates
</TABLE>
42
<PAGE> 44
<TABLE>
<CAPTION>
<S> <C> <C>
21 Subsidiaries Incorporated by reference to Exhibit 22.1 to the
Company's S-1
23 Consent of Independent Certified Public Accountants
24 Consent of Independent Certified Public Accountants
27 Financial Data Schedule of the Company
</TABLE>
Each management contract or compensatory plan or arrangement to be filed as
an exhibit to this report pursuant to Item 14(c) is listed in exhibit Nos.
10.1(a), 10.1(b) 10.1(c) and 10.1(d).
(C) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the three months
ended February 28, 1999.
Date Items Financial Statements
- ---- ----- --------------------
February 17, 1999 5,7 None
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 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, in the City of Coral Gables,
Florida on May 28, 1999.
EQUITRAC CORPORATION
By /s/ George P. Wilson
-----------------------------
George P. Wilson
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John T. Kane Chairman of the Board of Directors May 28, 1999
- -------------------------------
John T. Kane
/s/ George P. Wilson President, Chief Executive Officer
- ------------------------------- and Director May 28, 1999
George P. Wilson
/s/ Scott J. Modist Senior Vice President, Treasurer
- -------------------------------- and Chief Financial Officer (Principal
Scott J. Modist Financial Officer) May 28, 1999
/s/ Ida Davis-padron Controller (Principal Accounting Officer) May 28, 1999
- -------------------------------
Ida Davis-Padron
/s/ James F. Courbier Director May 28, 1999
- -------------------------------
James F. Courbier
/s/ Marc M. Watson Director May 28, 1999
- -------------------------------
Marc M. Watson
/s/ Peter Marx Director May 28, 1999
- -------------------------------
Peter Marx
</TABLE>
44
<PAGE> 46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Equitrac Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements as of February 28, 1999 and 1998 and the years then
ended included in this Form 10-K and have issued our report thereon dated May
10, 1999. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The information listed under Schedule II of this
Form 10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
May 10, 1999.
S-1
<PAGE> 47
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Equitrac Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements for the year ended February 28, 1997 included in this
Form 10-K and have issued our report thereon dated April 14, 1997. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
The information listed under Schedule II of this Form 10-K is the responsibility
of the Company's management and is presented for the purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida,
April 14, 1997.
S-1.1
<PAGE> 48
SCHEDULE II
EQUITRAC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 28, 1999, FEBRUARY 28, 1998 AND FEBRUARY 28, 1997
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- -------- -------- -------- -------- --------
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER DEDUCT- AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS TIONS OF YEAR
- ----------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Year ended
February 28, 1999
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 650 $ 250 $ -- $ -- $ 900
Year ended
February 28, 1998
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 550 $ 100 $ -- $ -- $ 650
Year ended
February 28, 1997
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 350 $ 200 $ -- $ -- $ 550
</TABLE>
S-2
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports dated May 10, 1999 included in this Form 10-K into
Equitrac Corporation's previously filed Form S-8 Registration Statements File
Nos. 33-49656 and 333-12307.
ARTHUR ANDERSEN LLP
Miami, Florida,
May 25, 1999.
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 33-49656 and 333-12307) of Equitrac Corporation
of our reports dated April 14, 1997 relating to the financial statements and
financial statement schedule which appear in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Miami, Florida,
May 28, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF FEBRUARY 28, 1999 AND INCOME STATEMENT FOR THE YEAR ENDED FEBRUARY
28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 964,000
<SECURITIES> 7,383,000
<RECEIVABLES> 11,500,000
<ALLOWANCES> 900,000
<INVENTORY> 3,946,000
<CURRENT-ASSETS> 24,474,000
<PP&E> 15,905,000
<DEPRECIATION> 6,603,000
<TOTAL-ASSETS> 39,743,000
<CURRENT-LIABILITIES> 6,682,000
<BONDS> 0
0
0
<COMMON> 40,000
<OTHER-SE> 33,021,000
<TOTAL-LIABILITY-AND-EQUITY> 39,743,000
<SALES> 26,718,000
<TOTAL-REVENUES> 55,690,000
<CGS> 23,554,000
<TOTAL-COSTS> 7,520,000
<OTHER-EXPENSES> 18,332,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,874,000
<INCOME-TAX> 2,961,000
<INCOME-CONTINUING> 4,913,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,913,000
<EPS-BASIC> $1.39
<EPS-DILUTED> $1.29
</TABLE>
