<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
COMMISSION FILE NO. 0-20189
EQUITRAC CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 59-1797862
(State or other jurisdiction of (IRS Employee Identification Number)
incorporation or organization)
836 PONCE DE LEON BOULEVARD
CORAL GABLES, FLORIDA 33134
(305) 442-2060
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No .
----- -----
As of July 8, 1999, there were 3,539,600 shares of the Registrant's
common stock, par value $.01, outstanding.
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EQUITRAC CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets
as of May 31, 1999
and February 28, 1999 2
Condensed Statements of Income
for the three months ended
May 31, 1999 and 1998 3
Condensed Statements of
Stockholders' Equity and Accumulated Other
Comprehensive Income for the three months ended
May 31, 1999 and 1998 4
Condensed Statements of Cash Flows
for the three months ended
May 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
</TABLE>
1
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITRAC CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
(Unaudited)
MAY 31, FEBRUARY 28,
ASSETS 1999 1999
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,719 $ 964
Short-term investment securities -- 7,383
Accounts receivable, net of allowance of $900 11,308 10,600
Inventories 4,357 3,946
Deferred income taxes 1,168 1,166
Other current assets 254 415
-------- --------
Total current assets 25,806 24,474
Investment securities -- 2,772
Property and equipment, net 10,323 9,302
Intangible assets, net 2,155 2,312
Deferred income taxes 562 562
Other assets 812 321
-------- --------
Total assets $ 39,658 $ 39,743
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,020 $ 2,084
Accrued expenses and other current liabilities 3,010 3,673
Unearned income 932 925
-------- --------
Total current liabilities 5,962 6,682
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,970,500 shares issued
at May 31, and February 28 40 40
Additional paid-in capital 12,746 12,746
Retained earnings 24,342 23,743
Accumulated other comprehensive income (55) (91)
Treasury stock, at cost (430,900 shares) (3,377) (3,377)
-------- --------
Total stockholders' equity 33,696 33,061
-------- --------
Total liabilities and stockholders' equity $ 39,658 $ 39,743
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
(Unaudited)
THREE MONTHS ENDED
MAY 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Sales $ 6,458 $ 5,988
Service and support 4,122 4,617
Rental 2,662 2,653
-------- --------
Total revenues 13,242 13,258
-------- --------
Costs and expenses:
Cost of revenues 5,362 5,287
Product development 992 762
Selling expenses 1,959 1,907
General and administrative 4,028 3,929
-------- --------
Total costs and expenses 12,341 11,885
-------- --------
Operating income 901 1,373
Interest income 50 188
-------- --------
Income before income taxes 951 1,561
Income taxes 352 593
-------- --------
Net income $ 599 $ 968
======== ========
Earnings per share:
Basic $ 0.17 $ 0.28
======== ========
Diluted $ 0.16 $ 0.25
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 5
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(in thousands, except number of shares)
(Unaudited)
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1999 3,970,500 $12,786 $23,743 $ (91) $ (3,377) $ 33,061
Net income for the three
months ended May 31, 1999 -- -- 599 -- -- 599
Accumulated other
comprehensive income
net of tax:
Unrealized gain on marketable
securities, net of tax -- -- -- 8 -- 8
Translation adjustment -- -- -- 28 -- 28
Total comprehensive income -- -- -- -- -- 635
Exercise of employee
stock options -- -- -- -- -- --
Tax benefit from stock plans -- -- -- -- -- --
========== ======== ======= ======== ======== ========
Balance, May 31, 1999 3,970,500 $ 12,786 $24,342 $ (55) $ (3,377) $ 33,696
========== ======== ======= ======== ======== ========
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- ---------- -------- ------------- -------- -------------
Balance, February 28, 1998 3,877,100 $ 11,529 $18,830 $ 7 $ (2,187) $ 28,179
Net income for the three months
ended May 31, 1998 -- -- 968 -- -- 968
Accumulated other
comprehensive income
net of tax:
Unrealized loss on marketable
securities, net of tax -- -- -- (34) -- (34)
Translation adjustment -- -- -- (21) -- (21)
Total comprehensive income -- -- -- -- -- 913
Exercise of employee
stock options 35,900 323 -- -- -- 323
Tax benefit from stock plans -- 238 -- -- -- 238
========== ======== ======= ======== ======== ========
Balance, May 31, 1998 3,913,000 $ 12,090 $19,798 $ (48) $ (2,187) $ 29,653
========== ======== ======= ======== ======== ========
</TABLE>
See accompanying notes.
4
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EQUITRAC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
THREE MONTHS ENDED
MAY 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 599 $ 968
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation 955 688
Amortization 164 249
Deferred income taxes -- (701)
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (708) (65)
Inventories (411) (1,229)
Other current assets 161 65
Other assets (491) (3)
Increase (decrease) in:
Accounts payable (64) 279
Accrued expenses (663) 1,240
Unearned income 7 (124)
-------- --------
Net cash (used in) provided by operating activities (451) 1,367
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,976) (917)
Sales and maturities of investment securities 10,246 1,407
Purchase of investment securities (92) (2,985)
-------- --------
Net cash provided by (used in) investing activities 8,178 (2,495)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 323
-------- --------
Exchange rate effect on cash 28 (21)
-------- --------
Net increase (decrease) in cash and cash equivalents 7,755 (826)
Cash and cash equivalents, beginning of period 964 5,819
-------- --------
Cash and cash equivalents, end of period $ 8,719 $ 4,993
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 196 $ 249
</TABLE>
See accompanying notes.
5
<PAGE> 7
EQUITRAC CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. 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.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the accompanying
condensed financial statements include all adjustments (of a normal recurring
nature) which are necessary to state fairly the results for the interim periods
presented. The results for the three months ended May 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
These unaudited condensed financial statements should be read in conjunction
with the financial statements and notes thereto included in the Annual Report
on Form 10-K, as amended, for the fiscal year ended February 28, 1999, filed
with the Securities and Exchange Commission.
3. 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
6
<PAGE> 8
recognized ratably over the term of the respective lease. Rental contracts are
accounted for as operating leases.
4. 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.
5. 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 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.
6. 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.
7. 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.
As of May 31, 1999, the Company liquidated its entire investment
portfolio to meet certain cash requirements relating to the Cornerstone
transaction (see Note 16). As a result of the liquidation of investment
securities, the Company realized a $74,000 loss on the sale of said securities.
The loss is reflected net of interest income for the period ended May 31, 1999.
8. 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.
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9. 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.
10. 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 May 31, 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.
11. 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.
12. EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") 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.
<TABLE>
<CAPTION>
Net Per-Share
(in thousands, except per share amounts) Income Shares Amount
---------- ------ ---------
<S> <C> <C> <C>
Quarter ended May 31, 1999
Basic Earnings Per Share:
Income available to common stockholders $ 599 3,540 $ 0.17
------
Options issued to employees 272
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 599 3,812 $ 0.16
====== ====== ======
Quarter ended May 31, 1998
Basic Earnings Per Share:
Income available to common stockholders $ 968 3,517 $ 0.28
------
Options issued to employees 302
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 968 3,819 $ 0.25
====== ====== ======
</TABLE>
8
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13. 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.
14. SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 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 No.
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 No. 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.
15. COMPREHENSIVE INFORMATION
In fiscal 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.
16. PROPOSED RECAPITALIZATION AND MERGER:
On June 4, 1999, the Company and an affiliate of Cornerstone Equity
Investors, LLC ("Cornerstone") entered into an amended and restated
recapitalization agreement and plan of merger (the "Merger Agreement").
Pursuant to the Merger Agreement, Cornerstone will acquire in a
recapitalization and merger transaction 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 $21.00 per share in
cash. The Merger Agreement is on substantially the same terms as the parties'
original recapitalization agreement and plan of merger dated February 17, 1999,
with the exception of the reduction of the cash merger consideration to $21.00
per share from $25.25 per share.
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Completion of the transaction is subject to the approval of the
Company's shareholders and other customary conditions. The Company will seek
shareholder approval of the transaction at a special shareholders' meeting to
be held on July 27, 1999.
The foregoing description of the Merger Agreement and the transactions
contemplated thereby is qualified in its entirety by reference to the Company's
Definitive Proxy Statement on Schedule 14A dated July 2, 1999 (the "Definitive
Proxy Statement"), as filed with the Securities and Exchange Commission.
17. CONTINGENCIES
The Company is involved from time to time in legal proceedings
incident to the normal course of its business. Management believes that the
ultimate outcome of any pending or threatened litigation would not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
In November 1997, the Company filed a lawsuit in Canada against
Promatek Industries, Ltd., a Canadian company ("Promatek") for infringement of
two Canadian patents owned by the Company. Promatek has not yet filed a defense
against the Company's claims in the Canadian lawsuit. However, 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.
Reference is made to the Definitive Proxy Statement for a description
of a pending stockholder class action lawsuit relating to the Merger Agreement
and the transactions contemplated thereby.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues are derived from three principal sources: (1)
sales of new systems, upgrades and add-ons of equipment or software; (2)
monthly revenues from service and software support agreements and (3) monthly
revenues from leases of its systems. The Company offers its customers the
option of purchasing a system or leasing a system pursuant to an operating
lease (the term of which is typically 36 months or longer), which includes all
service and software support. The Company offers its purchase customers service
and software support agreements (the terms of which are typically for 36 months
or longer). Systems that are not purchased in conjunction with a service
agreement are serviced by the Company on a time-and-materials basis. The
Company's computer service division offers its customers service agreements
(the terms of which are typically for 12 months) and also provides service on a
time-and-materials basis.
On November 30, 1998, the Company sold the ECS division which provided
maintenance services on computer equipment manufactured by third parties. 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 revenues
and an operating loss of $1,110,000 and $171,000 for the quarter ended May 31,
1998.
On June 4, 1999, the Company and Cornerstone entered into the Merger
Agreement. Pursuant to the Merger Agreement, Cornerstone will acquire in a
recapitalization and merger transaction 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 $21.00 per share in
cash. The Merger Agreement is on substantially the same terms as the parties'
original recapitalization agreement and plan of merger dated February 17, 1999,
with the exception of the reduction of the cash merger consideration to $21.00
per share from $25.25 per share.
Completion of the transaction is subject to the approval of the
Company's shareholders and other customary conditions. The Company will seek
shareholder approval of the transaction at a special shareholders' meeting to
be held on July 27, 1999.
The foregoing description of the Merger Agreement and the transactions
contemplated thereby is qualified in its entirety by reference to the
Definitive Proxy Statement.
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The following table sets forth, for the periods presented, selected
items from the Condensed Statements of Income as a percentage of total
revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
FOR THE THREE MONTHS ENDED
MAY 31,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Sales 48.8% 45.2%
Service and support 31.1 34.8
Rental 20.1 20.0
-------- --------
Total revenues 100.0 100.0
-------- --------
Costs and expenses:
Cost of revenues 40.5 39.9
Product development 7.5 5.8
Selling expenses 14.8 14.4
General and administrative 30.4 29.6
-------- --------
Total costs and expenses 93.2 89.7
-------- --------
Operating income 6.8 10.3
Interest income .4 1.4
-------- --------
Income before income taxes 7.2 11.7
Income taxes 2.7 4.5
-------- --------
Net income 4.5% 7.2%
======== ========
</TABLE>
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REVENUES
Sales revenues. Sales revenues for the quarter ended May 31, 1999
increased 8% to $6,458,000 from $5,988,000 in the same quarter last fiscal
year. Comparable (excluding ECS from fiscal 1998) sales increased 15% for the
quarter ended May 31, 1999 compared to the same quarter last fiscal year. This
increase in comparable sales revenues 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. Sales by the Company's cost
recovery divisions increased 17% to $5,581,000 for the quarter ended May 31,
1999 from $4,771,000 in the same quarter last fiscal year.
Service and support revenues. Service and support revenues for the
quarter ended May 31, 1999 decreased 11% to $4,122,000 from $4,617,000 in the
same quarter last fiscal year. Comparable service and support revenues
increased 6% to $4,122,000 from $3,875,000 in the same quarter last fiscal
year. This increase in comparable service and support revenues resulted from an
increase in service contracts in the Company's cost recovery 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.
Rental Revenues. Rental revenues increased to $2,662,000 for the
quarter ended May 31, 1999 from $2,653,000 in the same quarter last fiscal
year. As a percentage of total revenues, rental revenues remained constant at
20% for the quarters ended May 31, 1999 and 1998. 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.
EXPENSES
Cost of revenues. Cost of revenues is comprised primarily of (i)
payroll and other expenses related to customer support and service personnel,
(ii) the cost of hardware and system components associated with system sales
and service, and (iii) depreciation of rental and service units. Cost of
revenues for the quarter ended May 31, 1999 increased to $5,362,000 from
$5,287,000 in the same quarter last fiscal year. Comparable cost of revenues as
a percentage of total revenues increased to 40.5% for the quarter ended May 31,
1999 compared to 35.9% for the same quarter last fiscal year. This increase in
comparable cost of revenues can be primarily attributed 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. Management
anticipates that the cost of revenues as a percentage of total revenues may
fluctuate in future periods, depending upon the product mix and the
concentration of revenues from the Company's BTD division in addition to an
increase in personnel and depreciation costs. The majority of sales revenue
generated by the BTD division has a higher cost of revenues expense as a
percentage of revenues compared to the Company's cost recovery divisions.
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<PAGE> 15
Product development expenses. Product development expenses for the
quarter ended May 31, 1999 increased to $992,000 from $762,000 in the same
quarter last fiscal year. Product development expenses as a percentage of total
revenues was 7.5% for the quarter ended May 31, 1999 compared to 5.8% for the
same quarter last fiscal year. Current 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, (iv) System 4 WebX(TM), the Company's web-based transaction editor used
with System 4 and (v) 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 continue to increase during the
current fiscal year as the Company evaluates market opportunities and invests
in the development of additional products.
Selling expenses. Selling expenses for the quarter ended May 31, 1999
increased 3% to $1,959,000 from $1,907,000 in the same quarter last fiscal
year. Comparable selling expenses increased 10% during the quarter ended May
31, 1999 compared to the same quarter last fiscal year. Comparable selling
expenses as a percentage of total revenues were 14.8% for the quarter ended May
31, 1999 compared to 14.6% for the same quarter last fiscal year. This increase
is attributed to an increase in the infrastructure supporting the business
technology products.
General and administrative expenses. General and administrative
expenses for the quarter ended May 31, 1999 increased to $4,028,000 from
$3,929,000 in the same quarter last fiscal year. Comparable general and
administrative expenses increased 9% during the quarter ended May 31, 1999
compared to the same quarter last fiscal year. Comparable general and
administrative expenses as a percentage of total revenues remained constant at
30% for the quarter ended May 31, 1999 compared to the same quarter last fiscal
year. Management anticipates that general and administrative expenses may
increase as a percentage of total revenues during the current fiscal year due
to increased personnel and benefit costs.
Interest income. The Company's interest income decreased to $50,000
during the quarter ended May 31, 1999 from $188,000 during the same quarter
last fiscal year. Interest income for the quarter ended May 31, 1999 is
presented net of $74,000 in realized losses on the sale of securities for the
quarter ended May 31, 1999. The remaining decrease in interest income during
the quarter ended May 31, 1999 is due to the liquidation of securities.
Income taxes. The Company's effective income tax rate was 37% for the
quarter ended May 31, 1999 and 38% for the quarter ended May 31, 1998.
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company used $451,000 in cash for operating activities for the
quarter ended May 31, 1999. The Company generated $1,367,000 in cash flows from
operating activities for the quarter ended May 31, 1998. 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. The Company generated $8,718,000 in cash
flows from investing activities for the quarter ended May 31, 1999. Included in
the cash flows from investing activities is $10,154,000 generated from the
liquidation of the Company's entire investment portfolio, in anticipation of
cash requirements related to the proposed recapitalization and merger. Also
included in investing activities for the quarter ended May 31, 1999 is the
purchases of property and equipment relating to the implementation of a new
enterprise-wide Oracle information system and other new information technology
of $482,000. The Company's cash and cash equivalents and investment securities
decreased to $8,719,000 at May 31, 1999 from $11,119,000 at February 28, 1999.
The Company anticipates that its cash and cash equivalents, and cash
flows from operating activities will be adequate to meet the Company's cash
requirements for the foreseeable future.
The Board of Directors has authorized the Company to spend up to
$4,500,000 to repurchase shares of the Company's issued and outstanding common
stock, based upon consideration of the Company's current cash position,
management's expectations of future cash flows from operating activities and
the level of cash required to fund future growth opportunities. Through May 31,
1999, the Company repurchased 430,900 shares of common stock for an aggregate
purchase price of $3,377,000.
YEAR 2000 CONSIDERATIONS
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.
15
<PAGE> 17
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
16
<PAGE> 18
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS No. 133") was issued in June 1998, subsequently amended by
SFAS No. 137, and is effective for the Company's fiscal year ending February
28, 2002. SFAS No. 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 No. 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.
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.
17
<PAGE> 19
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
<TABLE>
<S> <C>
A. Exhibits
2 Amended and Restated Recapitalization Agreement and Plan
of Merger dated June 4, 1999 among Chargeback Acquisition
Corp., the Company and John T. Kane and George P. Wilson
Incorporated by reference to Exhibit 2.1 to the Company's
current report on Form 8-K dated June 4, 1999.
27 Financial Data Schedule of the Company
B. Reports on Form 8-K
None.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf thereunto
duly authorized.
EQUITRAC CORPORATION
Date: July 14, 1999 By: /s/George P. Wilson
-----------------------------
George P. Wilson
President and Chief
Executive Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MAY 31, 1999 AND INCOME STATEMENT FOR THE THREE MONTHS ENDED MAY 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 8,719,000
<SECURITIES> 0
<RECEIVABLES> 12,208,000
<ALLOWANCES> 900,000
<INVENTORY> 4,357,000
<CURRENT-ASSETS> 25,806,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,658,000
<CURRENT-LIABILITIES> 5,962,000
<BONDS> 0
0
0
<COMMON> 40,000
<OTHER-SE> 33,656,000
<TOTAL-LIABILITY-AND-EQUITY> 39,658,000
<SALES> 6,458,000
<TOTAL-REVENUES> 13,242,000
<CGS> 5,362,000
<TOTAL-COSTS> 1,959,000
<OTHER-EXPENSES> 5,020,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 951,000
<INCOME-TAX> 352,000
<INCOME-CONTINUING> 599,000
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