<PAGE> 1
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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 November 30, 1998.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
COMMISSION FILE NO. 0-20189
EQUITRAC CORPORATION
(Exact name of Registrant as specified in its charter)
FLORIDA 59-1797862
(State or other jurisdiction of (IRS Employee 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 January 6, 1999, there were 3,539,500 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 November 30, 1998
and February 28, 1998 2
Condensed Statements of Income
for the three months and nine months
ended November 30, 1998 and 1997 3
Condensed Statement of Stockholders' Equity and
Accumulated Other Comprehensive Income for the
nine months ended November 30, 1998 and 1997 4
Condensed Statements of Cash Flows
for the nine months ended
November 30, 1998 and 1997 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 16
SIGNATURES 16
</TABLE>
1
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EQUITRAC CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,701 $ 5,819
Short-term investment securities 6,600 5,208
Accounts receivable, net of allowances of $650 10,864 8,178
Inventories 3,530 2,465
Deferred income taxes 1,130 234
Other current assets 388 444
-------- --------
Total current assets 25,213 22,348
Investment securities 3,687 2,497
Property and equipment, net 8,009 6,418
Intangible assets, net 2,468 3,111
Deferred income taxes 637 556
Other assets 238 184
-------- --------
Total assets $ 40,252 $ 35,114
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,426 $ 1,720
Accrued expenses and other current liabilities 6,179 3,878
Unearned income 781 1,337
-------- --------
Total current liabilities 8,386 6,935
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 15,000,000 shares
authorized; 3,964,200 and 3,877,100 shares issued
at November 30, and February 28, respectively 40 39
Additional paid-in capital 12,690 11,490
Retained earnings 22,605 18,830
Accumulated other comprehensive income (92) 7
Treasury stock, at cost (430,900 and 370,800 shares at
November 30, and February 28, respectively) (3,377) (2,187)
-------- --------
Total stockholders' equity 31,866 28,179
-------- --------
Total liabilities and stockholders' equity $ 40,252 $ 35,114
======== ========
</TABLE>
See accompanying notes.
2
<PAGE> 4
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF INCOME
(in thousands, except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 6,913 $ 5,512 $20,454 $16,480
Service and support 4,878 4,306 14,312 12,242
Rental 2,639 2,626 7,947 7,821
------- ------- ------- -------
Total revenues 14,430 12,444 42,713 36,543
------- ------- ------- -------
Costs and expenses:
Cost of revenues 5,955 5,223 18,038 15,065
Product development 730 669 2,203 2,150
Selling expenses 1,870 1,697 5,780 5,190
General and administrative 4,195 3,705 12,018 10,926
------- ------- ------- -------
Total costs and expenses 12,750 11,294 38,039 33,331
------- ------- ------- -------
Operating income 1,680 1,150 4,674 3,212
Gain on sale of assets 830 -- 830 --
Interest income 185 165 563 435
------- ------- ------- -------
Income before income taxes 2,695 1,315 6,067 3,647
Income taxes 1,011 500 2,292 1,392
------- ------- ------- -------
Net income $ 1,684 $ 815 $ 3,775 $ 2,255
======= ======= ======= =======
Earnings per share
Basic $ 0.48 $ 0.23 $ 1.07 $ 0.66
======= ======= ======= =======
Diluted $ 0.45 $ 0.22 $ 1.00 $ 0.62
======= ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
EQUITRAC CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 28, 1998 3,877,100 $ 11,529 $ 18,830 $ 7 $ (2,187) $ 28,179
Net income for the nine
months ended
November 30, 1998 -- -- 3,775 -- -- 3,775
Accumulated other
comprehensive income
net of tax:
Unrealized loss on marketable
securities, net of tax -- -- -- (39) -- (39)
Translation adjustment -- -- -- (60) -- (60)
Total comprehensive income -- -- -- -- -- 3,676
Exercise of employee
stock options 87,100 733 -- -- -- 733
Tax benefit from stock
plans -- 468 -- -- -- 468
Purchase of treasury stock
60,100 shares -- -- -- -- (1,190) (1,190)
--------- --------- --------- --------- --------- ---------
Balance, November 30, 1998 3,964,200 $ 12,730 $ 22,605 $ (92) $ (3,377) $ 31,866
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
COMMON
STOCK AND ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES CAPITAL EARNINGS INCOME STOCK EQUITY
--------- -------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, February 28, 1997 3,800,300 $ 10,779 $ 15,672 $ (23) $ (1,653) $ 24,775
Net income for the nine
months ended
November 30, 1997 -- -- 2,255 -- -- 2,255
Accumulated other
comprehensive income,
net of tax:
Unrealized gain on marketable
securities, net of tax -- -- -- 15 -- 15
Translation adjustment -- -- -- (36) -- (36)
Total comprehensive income -- -- -- -- -- 2,234
Exercise of employee
stock options 57,800 326 -- -- -- 326
Purchase of treasury stock
50,000 shares -- -- -- -- (534) (534)
--------- -------- --------- --------- --------- ---------
Balance, November 30, 1997 3,858,100 $ 11,105 $ 17,927 $ (44) $ (2,187) $ 26,801
========= ======== ========= ========= ========= =========
</TABLE>
See accompanying notes.
4
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EQUITRAC CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
---------------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,775 $ 2,255
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,094 2,147
Amortization 597 905
Provision for doubtful accounts -- 50
Deferred income taxes (969) --
Gain on sale of assets (830) --
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (3,061) (1,681)
Inventories (1,516) 456
Other current assets 56 (51)
Other assets (54) 6
Increase (decrease) in:
Accounts payable (294) (518)
Accrued expenses 2,397 88
Unearned income (468) 446
------- -------
Net cash provided by operating activities 1,727 4,103
------- -------
Cash flows from investing activities:
Purchases of property and equipment (3,852) (2,027)
Acquisitions of product lines, principally intangible assets -- (1,023)
Cash proceeds from gain on sale of assets 2,127 --
Sales and maturities of investment securities 4,269 2,255
Purchases of investment securities (6,872) (3,694)
------- -------
Net cash used in investing activities (4,328) (4,489)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 733 326
Purchase of treasury stock (1,190) (534)
------- -------
Net cash used in by financing activities (457) (208)
------- -------
Exchange rate effect on cash (60) (36)
------- -------
Net decrease in cash and cash equivalents (3,118) (630)
Cash and cash equivalents, beginning of period 5,819 4,755
------- -------
Cash and cash equivalents, end of period $ 2,701 $ 4,125
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 1,912 $ 1,825
</TABLE>
See accompanying notes.
5
<PAGE> 7
EQUITRAC CORPORATION
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared by the Company, in accordance with generally accepted accounting
principles, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements have been condensed or omitted pursuant to
such rules and regulations. In the opinion of management, the accompanying
financial statements include all adjustments (of a normal recurring nature)
which are necessary to state fairly the results for the interim periods
presented. The results for the nine months ended November 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal
year. These unaudited condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Annual Report on Form 10-K for the fiscal year ended February 28, 1998,
filed with the Securities and Exchange Commission.
In March 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 Reporting Comprehensive Income ("SFAS 130"). The
calculation of comprehensive income is included in the accompanying
unaudited Condensed Statements of Stockholder's Equity and Accumulated
Other Comprehensive Income.
2. GAIN ON SALE OF ASSETS
On November 30, 1998, the Company sold the Equitrac Computer Services
("ECS") division which provides maintenance services on a wide range of
computer equipment manufactured by others. ECS revenues for the quarter and
nine months ended November 30, 1998 decreased to $1,165,000 and $4,056,000,
respectively from $1,484,000 and $4,074,000 in the same periods last 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 an operating loss of $117,000 and $217,000 for the
quarter and nine months ended November 30, 1998, respectively.
3. REVENUE RECOGNITION
Revenues from sales of company-manufactured products sold to end-users
are recognized upon installation and customers' acceptance, in accordance
with the provisions of SOP 97-2, Software Revenue Recognition. Revenues
from sales of company-manufactured products to independent dealers and
distributors are recognized upon shipment. Revenues from resale of products
by the 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.
6
<PAGE> 8
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. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a remaining
maturity of three months or less at the time of purchase to be cash
equivalents. Cash equivalents are carried at cost, which approximates fair
value.
6. INVESTMENT SECURITIES
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value
with unrealized gains and losses included in stockholders' equity.
Interest and dividends on all securities are recognized when earned.
Both gross unrealized gains and losses as of November 30, 1998 and
1997, and realized gains and losses on sales of each type of security for
the periods ended November 30, 1998 and 1997, were not material. For the
purpose of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
7. 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.
8. 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.
9. 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.
7
<PAGE> 9
10. FOREIGN CURRENCY TRANSLATION
Translation of foreign currencies into U.S. dollars is computed for
revenue and expense accounts using average exchange rates during the year.
Net assets of the Company's Canadian operations, whose "functional
currency" is the Canadian dollar are translated at current rates of
exchange, with the resulting translation adjustment recorded directly into
a separate component of stockholders' equity. The functional currency for
the Company's other foreign operations is the U.S. dollar. Net assets of
these operations are translated at current rates of exchange, with the
resulting translation gains and losses included in the statement of income.
8
<PAGE> 10
11. 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>
Quarter ended November 30, 1998
Basic Earnings Per Share:
Income available to common stockholders $1,684 3,520 $ 0.48
--------
Options issued to employees 255
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $1,684 3,775 $ 0.45
====== ====== ========
Nine months ended November 30, 1998
Basic Earnings Per Share:
Income available to common stockholders $3,775 3,514 $ 1.07
--------
Options issued to employees 271
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $3,775 3,785 $ 1.00
====== ====== ========
Quarter ended November 30, 1997
Basic Earnings Per Share:
Income available to common stockholders $ 815 3,497 $ 0.23
--------
Options issued to employees 293
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $ 815 3,790 $ 0.22
====== ====== ========
Nine months ended November 30, 1997
Basic Earnings Per Share:
Income available to common stockholders $2,255 3,397 $ 0.66
--------
Options issued to employees 253
------ ------
Diluted Earnings Per Share:
Income available to common stockholders
plus assumed conversions $2,255 3,650 $ 0.62
====== ====== ========
</TABLE>
9
<PAGE> 11
12. CONTINGENCIES
The Company is involved from time to time in legal proceedings incident to
the normal course of its business. Management believes that the ultimate outcome
of any pending or threatened litigation would not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
In November, 1997, the Company filed a lawsuit in Canada against Promatek
Industries, Ltd., a Canadian company ("Promatek") for infringement of two
Canadian patents owned by the Company. In June 1998, Promatek filed a lawsuit in
the United States District Court for the Northern District of Illinois alleging,
among other things, violations by the Company of various U.S. antitrust and
trade practice laws and seeking injunctive relief and compensatory and punitive
damages against the Company. The Company believes that the U.S. lawsuit has been
brought by Promatek solely as a defensive measure to encourage the Company to
dismiss or settle its Canadian lawsuit. The Company believes that the claims
made by Promatek in the U.S. lawsuit are without merit and intends to vigorously
defend that action. The Company also intends to continue to pursue enforcement
of its patents against Promatek in the Canadian lawsuit.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's revenues are derived from three principal sources: (1) sales
of new systems, upgrades and add-ons of equipment or software; (2) monthly
revenues from service and software support agreements and (3) monthly revenues
from leases of its systems. The Company offers its customers the option of
purchasing a system or leasing a system pursuant to an operating lease (the term
of which is typically 36 months or longer), which includes all service and
software support. The Company offers its purchase customers service and software
support agreements (the terms of which are typically for 36 months or longer).
Systems that are not purchased in conjunction with a service contract are
serviced by the Company on a time-and-materials basis. The Company's computer
service division offers its customers service agreements (the terms of which are
typically for 12 months) and also provides service on a time-and-materials
basis.
On November 30, 1998, the Company sold the ECS division which provides
maintenance services on a wide range of computer equipment manufactured by
others. ECS revenues for the quarter and nine months ended November 30, 1998
decreased to $1,165,000 and $4,056,000, respectively from $1,484,000 and
$4,074,000 in the same periods last 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 an operating loss of $117,000 and
$217,000 for the quarter and nine months ended November 30, 1998, respectively.
The following table sets forth, for the periods presented, selected items
in the Condensed Statements of Income as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Sales 47.9% 44.3% 47.9% 45.1%
Service and support 33.8 34.6 33.5 33.5
Rental 18.3 21.1 18.6 21.4
------- ------- ------- -------
Total revenues 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Expenses:
Cost of revenues 41.3 42.0 42.2 41.2
Product development 5.1 5.4 5.2 5.9
Selling expenses 12.9 13.6 13.5 14.2
General and administrative 29.1 29.8 28.1 30.0
------- ------- ------- -------
Total expenses 88.4 90.8 89.0 91.3
Operating income 11.6 9.2 11.0 8.7
Gain on sale of assets 5.8 -- 1.9 --
Interest income 1.3 1.3 1.3 1.2
------- ------- ------- -------
Income before income taxes 18.7 10.5 14.2 9.9
Income taxes 7.0 4.0 5.4 3.8
------- ------- ------- -------
Net income 11.7% 6.5% 8.8% 6.1%
======= ======= ======= =======
</TABLE>
11
<PAGE> 13
REVENUES
SALES REVENUES. Sales revenues for the quarter ended November 30, 1998
increased 25% to $6,913,000 from $5,512,000 in the same quarter last fiscal
year. Sales revenues for the nine months ended November 30, 1998 increased 24%
to $20,454,000 from $16,480,000 in the same nine month period last fiscal year.
The increase resulted primarily from an increase in sales of cost recovery
systems to professional service firms and from revenues derived from sales of
new Business Technology Division ("BTD") products, including OEM sales of Pitney
Bowes AccuTrac Mail Accounting Systems. These increases were offset by decreases
in computer equipment resale revenues from the ECS division. Resale revenues
decreased by $471,000 and $737,000 for the quarter and nine months ended
November 30, 1998 compared to the same periods last fiscal year. Sales of cost
recovery systems increased 21% to $5,695,000 for the quarter ended November 30,
1998 from $4,700,000 in the same quarter last fiscal year. BTD sales revenues
totaled $861,000 and $2,879,000 for the quarter and nine months ended November
30, 1998.
SERVICE AND SUPPORT REVENUES. Service and support revenues for the quarter
ended November 30, 1998 increased 13% to $4,878,000 from $4,306,000 in the same
quarter last fiscal year. Service and support revenues for the nine months ended
November 30, 1998 increased 17% to $14,312,000 from $12,242,000 in the same nine
month period last fiscal year. This increase in service and support revenues
resulted from an increase in service contracts in the Company's cost recovery
divisions and an increase in service and support revenues generated by the ECS
division. Service and support revenues from the Company's cost recovery
divisions increased 12% and 13% for the quarter and nine months ended November
30, 1998 compared to the same periods last fiscal year. Service and support
revenues for the quarter and nine months ended November 30, 1998 and 1997,
included $822,000 and $1,691,000 of revenues generated by the ECS division
compared to $672,000 and $2,411,000 for the same periods last fiscal year.
RENTAL REVENUE. Rental revenues for the quarter ended November 30, 1998
were $2,639,000 compared to $2,626,000 in the same quarter last fiscal year.
Rental revenues for the nine months ended November 30, 1998 increased to
$7,947,000 from $7,821,000 in the same nine month period last fiscal year.
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 November 30, 1998 increased to $5,955,000, or 41.3% of total
revenues, from $5,223,000, or 42.0% of total revenues, in the same quarter last
fiscal year. Cost of revenues for the nine months ended November 30, 1998
increased to $18,038,000, or 42.2% of total revenues, from $15,065,000, or 41.2%
of total revenues. Comparing the quarters ended November 30, 1998 and 1997, the
decrease in cost of revenues as a percentage of revenues is attributable to the
decrease in sales revenues from the ECS division which has a higher cost of
revenues expense as a percentage of revenues compared to the Company's cost
recovery divisions. For the nine months ended November 30, 1998 and 1997, the
increase in the cost of revenues as a percentage of total revenues is
attributable to the increase in revenues from the Company's BTD and ECS
divisions.
12
<PAGE> 14
PRODUCT DEVELOPMENT EXPENSES. Product development expenses for the quarter
ended November 30, 1998 increased to $730,000, or 5.1% of total revenues from
$669,000, or 5.4% of total revenues, in the same quarter last fiscal year.
Product development expenses for the nine months ended November 30, 1998
increased to $2,203,000, or 5.2% of total revenues, from $2,150,000, or 5.9% of
total revenues, in the same nine month period last fiscal year. Current
development efforts were focused primarily on enhancing and expanding the cost
recovery product lines as well as developing several new products. Products
under development during these periods include (i) TelemeTrac(TM), a product
which collects and reports photocopier meter totals remotely through cellular
telephone networks, (ii) PrintLog(TM), a digital output tracking application
designed to track all pages printed from a workstation to laser printers and
network photocopiers and assign each transaction to a client, project or
department, (iii) new version of System 4(TM), a Windows(R) NT based cost
recovery operating system and (iv) enhancements to the Pitney Bowes OEM product
line. The Company does not capitalize any of its product development costs since
development costs incurred subsequent to attainment of technological feasibility
of a new product line have not been material. Management anticipates that
product development costs may increase during the remainder of fiscal 1999 as
the Company invests in the development and enhancements of existing products, as
well as, new products.
SELLING EXPENSES. Selling expenses for the quarter ended November 30, 1998
increased to $1,870,000, or 12.9% of total revenues from $1,697,000, or 13.6% of
total revenues, in the same quarter last fiscal year. Selling expenses for the
nine months ended November 30, 1998 increased to $5,780,000, or 13.5% of total
revenues, from $5,190,000, or 14.2% of total revenues, in the same nine month
period last fiscal year. These decreases in selling expenses as a percentage of
revenues resulted from the sales of BTD products which have a lower associated
selling expense and incremental revenues derived per sales representative during
the quarter and nine months ended November 30, 1998 compared to the same quarter
and nine month period last fiscal year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended November 30, 1998 increased to $4,195,000, or 29.1% of
total revenues, from $3,705,000, or 29.8% of total revenues, in the same quarter
last fiscal year. General and administrative expenses for the nine months ended
November 30, 1998 increased to $12,018,000, or 28.1% of total revenues, from
$10,926,000, or 30.0% of total revenues, in the same nine month period last
fiscal year. 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
support and administrative positions.
INTEREST INCOME. The Company's interest income increased to $185,000 during
the quarter ended November 30, 1998 from $165,000 during the same quarter last
fiscal year. Interest income for the nine months ended November 30, 1998
increased to $563,000 from $435,000 in the same nine month period last fiscal
year.
INCOME TAXES. The Company's effective income tax rate was 37.5% and 37.8%
for the quarter and nine months ended November 30, 1998, compared to 38.0% and
38.2% in the same quarter and nine month period last fiscal year.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations over the past several years
principally from cash flow from operations. The Company generated $1,727,000 and
$4,103,000 in cash flows from operating activities for the nine months ended
November 30, 1998 and 1997, respectively. The Company's cash and cash
equivalents and investment securities decreased to $12,988,000 at November 30,
1998 from $13,524,000 at February 28, 1998 primarily as a result of the Company
purchasing its own outstanding common stock and the purchase of additional
inventory for its BTD and ECS divisions. The Company received cash proceeds from
the gain on sale of assets in the amount of $2,127,000 during the quarter ended
November 30, 1998. The decrease in cash flows from operating activities results
from an increase in working capital needs as the Company expands its product
lines, resulting in an increase in inventory and accounts receivables.
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 November 30, 1998,
the Company repurchased 430,900 shares of common stock for an aggregate purchase
price of $3,377,000.
The Company has purchased and has begun implementing a new enterprise-wide
information system. The Company has budgeted and anticipates spending
approximately $600,000 over the remainder of the current fiscal year relating to
the purchase and implementation of this new Oracle information system. In
addition, the Company will be relocating its manufacturing facilities in
anticipation of future growth. The relocation is expected to take place during
the first half of fiscal 1999. The Company anticipates that its cash and cash
equivalents, investment securities and cash flows from operating activities will
be adequate to meet the Company's cash requirements for the foreseeable future.
YEAR 2000 CONSIDERATIONS
The Company has begun the implementation of a new enterprise wide
information system that correctly identifies the Year 2000. The Company is
currently implementing Oracle financial modules and expects to complete the
implementation before the fourth quarter of calendar year 1999. However, there
can be no assurance that this software implementation will be successfully
completed, or that the implementation will not have a material adverse impact on
the Company's financial position or results of operations. Although the Company
believes that the information systems of its major vendors (insofar as they
relate to the Company's business) comply with Year 2000 requirements, there can
be no assurance that the Year 2000 issue will not affect the information systems
of the Company's major vendors as they relate to the Company's business, or that
any such impact of a major vendor's information system would not have a material
adverse effect on the Company. The Company will be formulating a contingency
plan with respect to such entities with which it does business. The Company
believes that all current versions of its product lines are Year 2000 compliant.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements contained herein
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance
14
<PAGE> 16
or achievements of the Company to be materially different from any future
results, performance or achievements express or implied by such forward-looking
statements. Such factors include, but are not limited to the following: general
economic and business conditions; charges and costs related to acquisitions; and
the ability of the Company to develop and market products for the markets in
which it operates, to successfully integrate its acquired products and services,
to adjust to changes in technology, customer preferences, enhanced competition
and new competitors in the markets in which it operates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statements of Financial Accounting No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS
131"). The Company is required to adopt this statement during fiscal year 1999.
SFAS 131 establishes standards for reporting information about operating
segments. The Company is currently evaluating the impact of this standard on its
financial statement disclosures.
In March 1998, the ACSEC issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 establishes
criteria for determining which costs of developing or obtaining internal-use
computer software should be charged to expense and which should be capitalized.
SOP 98-1 is effective for all transactions entered into in fiscal years
beginning after December 15, 1998.
15
<PAGE> 17
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule (for SEC use only)
B. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf thereunto duly
authorized.
EQUITRAC CORPORATION
Date: January 15, 1999 By: /s/ George P. Wilson
------------------------------
George P. Wilson
President and Chief
Executive Officer
Date: January 15, 1999 By: /s/ Scott J. Modist
------------------------------
Scott J. Modist
Sr. Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF NOVEMBER 30, 1998 AND INCOME STATEMENT FOR THE NINE MONTHS ENDED
NOVEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 2,701,000
<SECURITIES> 6,600,000
<RECEIVABLES> 11,514,000
<ALLOWANCES> 650,000
<INVENTORY> 3,530,000
<CURRENT-ASSETS> 25,213,000
<PP&E> 16,817,000
<DEPRECIATION> 8,808,000
<TOTAL-ASSETS> 40,252,000
<CURRENT-LIABILITIES> 8,386,000
<BONDS> 0
0
0
<COMMON> 40,000
<OTHER-SE> 31,826,000
<TOTAL-LIABILITY-AND-EQUITY> 40,252,000
<SALES> 20,454,000
<TOTAL-REVENUES> 42,713,000
<CGS> 18,038,000
<TOTAL-COSTS> 5,780,000
<OTHER-EXPENSES> 14,221,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,067,000
<INCOME-TAX> 2,292,000
<INCOME-CONTINUING> 3,775,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,775,000
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.00
</TABLE>
