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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
(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 ____________
COMMISSION FILE NO. 0-20189
EQUITRAC CORPORATION(R)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
FLORIDA 59-1797862
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
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 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 such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of 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 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
NONE
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EXPLANATORY NOTE
Item 7 of the Annual Report on Form 10-K/A No. 1 of Equitrac
Corporation ("Equitrac" or the "Company") for the fiscal year ended February 28,
1999 is amended and restated in its entirety.
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 an affiliate of Cornerstone Equity
Investors, LLC ("Cornerstone") entered into a recapitalization agreement and
plan of merger (the "original 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 the Company's senior management, for $25.25 per share in cash.
On June 4, 1999, the Company and Cornerstone entered into an amended and
restated recapitalization agreement and plan of merger (the "Merger Agreement")
for the reasons described below. The Merger Agreement is on substantially the
same terms as the original merger agreement with the exception of the reduction
of the cash merger consideration to $21.00 per share from $25.25 per share.
Prior to entering into the original merger agreement, the Company had
provided Cornerstone various financial projections, including projections for
the fourth quarter of the fiscal year ending February 28, 1999 and for the
fiscal year ending February 29, 2000. The terms and conditions of the original
merger agreement had been based upon these various projections. In early April,
the Company provided Cornerstone its preliminary financial results for the
fourth quarter of fiscal 1999 and its preliminary fiscal 2000 budget, both of
which differed from the Company's prior projections. On April 12, 1999, the
Company received notice from Cornerstone that, based upon a review of this
preliminary financial information, Cornerstone believed that the Company had
suffered an "adverse change" under the original merger agreement. Cornerstone
also indicated that as a result of this "adverse change" the financing
commitments necessary to complete the recapitalization and merger (the
"Transactions") were no longer available. On April 21, 1999, Cornerstone advised
the Company that it would be willing to proceed with the Transactions on
substantially the same terms under the original merger agreement but at a
revised price of $21.00 per share.
The Company's fiscal 1999 fourth quarter results for operating income,
EBITDA and EBITDA less capital expenditures were approximately 19%, 7% and 67%,
respectively, lower than anticipated in the Company's prior fourth quarter
projections. The following is illustrative:
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<CAPTION>
QUARTER ENDED
FEBRUARY 28, 1999
-----------------
(IN THOUSANDS)
PRIOR PROJECTION ACTUAL DIFFERENCE
---------------- ----------------- ----------
<S> <C> <C> <C>
Operating income................ 1,998 1,610 (388)
EBITDA.......................... 2,943 2,737 (206)
EBITDA -- capital
expenditures.................. 1,428 475 (953)
</TABLE>
The Company's fiscal 1999 fourth quarter results differ from its prior
projections because of higher operating expenses and capital expenditures
relating to year 2000 compliance, customer service, technical support and
product development initiatives.
The Company's current expectations are that its fiscal 2000 revenues,
operating income, EBITDA and EBITDA less capital expenditures will be
approximately 7%, 48%, 34% and 52%, respectively, lower than anticipated in
the Company's prior fiscal 2000 projections. The following is illustrative:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
FEBRUARY 29, 2000
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(IN THOUSANDS)
PRIOR PROJECTION CURRENT PROJECTION DIFFERENCE
---------------- ------------------ ----------
<S> <C> <C> <C>
Revenue......................... 64,054 59,540 (4,514)
Operating income................ 11,246 5,860 (5,386)
EBITDA.......................... 15,511 10,193 (5,318)
EBITDA -- capital
expenditures.................. 11,511 5,493 (6,018)
</TABLE>
The Company's expected fiscal 2000 results also differ from its prior
projections because of lower than anticipated sales revenue, primarily relating
to its TelemeTrac product line, as well as higher operating expenses and capital
expenditures relating to year 2000 compliance, customer service, technical
support and product development initiatives. In addition, while information
previously provided to Cornerstone estimated that the Company would have
approximately $14 million of cash on hand at closing, the Company currently
estimates that it will have approximately $9.5 million of cash on hand at
closing. Lower EBITDA and higher capital expenditures for the fourth quarter of
fiscal 1999 along with lower anticipated EBITDA and higher anticipated capital
expenditures for the first and second quarters of fiscal 2000 caused the Company
to reduce its estimate for cash on hand at closing.
In connection with Cornerstone's revised proposal of $21.00 per share, the
Company provided to Cornerstone its fiscal 2000 budget, which included the
following projections:
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<CAPTION>
FEBRUARY 29,
2000
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(IN THOUSANDS)
<S> <C>
Total revenues.............................................. $60,877
Operating income............................................ 7,567
EBITDA...................................................... 11,900
EBITDA-capital expenditures................................. 7,200
</TABLE>
The foregoing projections include approximately $675,000 of cost savings
relating to public company expenses and certain employment and consulting
agreements that management believes would be achieved as a result of the
Transactions.
The material assumptions underlying these projections are as follows:
- For Professional Market cost recovery products an increase in revenue of
approximately 10% for the fiscal year ending February 29, 2000.
- For the newer Business Technology Commercial Market products (1) digital
print tracking product sales of approximately $2.2 million for the fiscal
year ending February 29, 2000 (2) OEM Sales of Pitney Bowes AccuTrac Mail
Accounting products of approximately $3.5 million for the fiscal year
ending February 29, 2000 and (3) sales of TelemeTrac of approximately
$1.5 million for the fiscal year ending February 29, 2000.
Subsequent to providing the foregoing projections to Cornerstone, the
Company informed Cornerstone that (i) its first quarter revenue and operating
income would be approximately $511,000 and $290,000, respectively, lower than
anticipated in the fiscal 2000 budget, and (ii) its second quarter revenue and
operating income would be approximately $430,000 and $337,000, respectively,
lower than anticipated in the fiscal 2000 budget. Further, the Company informed
Cornerstone that its Business Technology division may not achieve its corporate
print log sales budget of $1.8 million for fiscal 2000. Cornerstone took this
information, together with its own analysis, into account in determining to
enter into the Merger Agreement.
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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.
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
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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>
3
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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.
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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.
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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,
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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.
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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.
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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.
9
<PAGE> 10
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
their behalf of the undersigned thereunto duly authorized.
Date: June 30, 1999 EQUITRAC CORPORATION
By: /s/ Scott J. Modist
-----------------------------------------
Scott J. Modist
Vice President and Chief Financial
Officer
