SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period Commission File No.
ended November 30, 1998 0-27682
GLOBE BUSINESS RESOURCES, INC.
Incorporated under the IRS Employer
laws of Ohio Identification No.
31-1256641
11260 Chester Road
Suite 400
Cincinnati, OH 45246
Phone: (513) 771-8287
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
As of January 4, 1999, 4,661,398 shares of the Registrant's common stock,
no par value, were outstanding.
<PAGE>
GLOBE BUSINESS RESOURCES, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - 3
November 30, 1998 and February 28, 1998
Consolidated Statement of Income - 4
Three and nine months ended November 30,
1998 and 1997
Consolidated Statement of Cash Flows - 5
Nine months ended November 30, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
November 30, February 28,
1998 1998
------------ -------------
(Unaudited)
ASSETS:
Cash $ 494 $ 526
Trade accounts receivable,
less allowance for doubtful
accounts of $810 and $609, 11,658 8,252
respectively
Other receivables 710 131
Prepaid expenses 4,362 2,038
Rental furniture, net 55,575 53,220
Property and equipment, net 8,201 7,743
Goodwill and other intangibles,
less accumulated amortization
of $2,676 and $1,228, respectively 37,452 26,695
Note receivable from officer 100 100
Other, net 571 732
---------- ----------
Total assets $ 119,123 $ 99,437
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 5,966 $ 3,561
Customer deposits 1,928 2,027
Accrued compensation 3,211 2,061
Accrued taxes 363 325
Deferred income taxes 4,852 4,183
Accrued interest payable 1,105 1,121
Other accrued expenses 1,014 1,025
Debt 61,749 49,713
---------- ----------
Total liabilities 80,188 64,016
---------- ----------
Common stock and other shareholders'
equity:
Common stock, no par,
15,000,000 shares authorized,
4,507,215, and 4,548,399
shares outstanding 20,859 21,492
Retained earnings 22,160 18,013
Fair market value in excess of
historical cost of acquired net
assets attributable to related
party transactions (4,084) (4,084)
---------- ----------
Total common stock and other
shareholders' equity 38,935 35,421
---------- ----------
Total liabilities and shareholders' equity $ 119,123 $ 99,437
========== ==========
The accompanying notes are an integral part of these financial
statements.
Page 3
<PAGE>
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
For the three For the nine
months ended, months ended,
----------------------- -------------------
November November November November
30, 1998 30, 1997 30, 1998 30, 1997
---------- ---------- --------- --------
(Unaudited) (Unaudited)
Revenues:
Corporate housing sales $ 23,033 $ 11,586 $ 64,381 $ 28,050
Rental sales 10,741 11,415 33,219 35,015
Retail sales 4,434 5,032 13,166 12,246
--------- --------- --------- --------
38,208 28,033 110,766 75,311
--------- --------- --------- --------
Cost of revenues:
Cost of corporate housing sales 16,652 8,309 45,318 19,899
Cost of rental sales 637 808 2,108 2,587
Cost of retail sales 2,545 3,041 7,825 7,594
Furniture depreciation and
disposals 2,410 1,888 7,260 6,198
--------- --------- --------- --------
22,244 14,046 62,511 36,278
--------- --------- --------- --------
Gross profit 15,964 13,987 48,255 39,033
Operating expenses:
Warehouse and delivery 2,544 2,579 7,989 7,358
Occupancy 1,835 1,774 5,567 5,171
Selling and advertising 2,740 2,529 8,327 7,006
General and administration 4,947 3,916 14,868 10,169
Amortization of intangible
assets 510 261 1,448 630
--------- --------- --------- --------
12,576 11,059 38,199 30,334
--------- --------- --------- --------
Operating income 3,388 2,928 10,056 8,699
Other expenses:
Interest expense 1,145 801 3,254 2,154
Other, net (118) 80 (52) 155
--------- --------- --------- --------
1,027 881 3,202 2,309
Income before income taxes 2,361 2,047 6,854 6,390
Provision for income taxes 921 790 2,674 2,485
---------- --------- --------- --------
Net income $ 1,440 $ 1,257 $ 4,180 $ 3,905
========= ========= ========= ========
Earnings per common share:
Basic $ 0.32 $ 0.28 $ 0.92 $ 0.88
========= ========= ========= ========
Diluted $ 0.31 $ 0.27 $ 0.90 $ 0.86
========= ========= ========= ========
Weighted average number of
common shares outstanding:
Basic 4,532 4,470 4,546 4,451
Diluted 4,648 4,578 4,670 4,535
The accompanying notes are an integral part of these financial statements.
Page 4
<PAGE>
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the nine months ended,
-------------------------------
November 30, November 30,
1998 1997
------------- ---------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,180 $ 3,905
Adjustments to reconcile net
income to net cash provided
by operating activities:
Rental furniture depreciation 5,839 5,399
Other depreciation and
amortization 2,992 1,752
Provision for losses on
accounts receivable 511 398
Provision for deferred
income taxes 669 1,107
Gain on sale of property
and equipment (8) (4)
Book value of furniture sales
and rental buyouts 10,394 9,234
Changes in assets and liabilities:
Accounts receivable (4,565) (4,188)
Note receivable - -
Other assets, net 195 13
Prepaid expenses (1,618) (38)
Accounts payable 2,404 1,429
Customer deposits (161) (143)
Accrued compensation 1,065 85
Accrued taxes 37 (40)
Accrued interest payable (16) 151
Other accrued expenses (310) 276
--------- ----------
Net cash provided by
operating activities 21,608 19,336
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental furniture (17,493) (19,419)
Purchases of property and equipment (1,992) (3,291)
Proceeds from disposition of
property and equipment 8 7
Purchases of businesses,
net of cash acquired (13,551) (11,814)
--------- ----------
Net cash used in
investing activities (33,028) (34,517)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on the revolving
credit agreement 126,708 95,756
Repayments on the revolving
credit agreement (114,015) (111,458)
Borrowings on the senior note - 30,000
Borrowings/(repayments) of other debt (393) 1,384
Principal payments under
capital lease obligations (264) (366)
Purchase of treasury stock (653) -
Exercise of common stock options 5 24
--------- ----------
Net cash provided by
financing activities 11,388 15,340
--------- ----------
Net (decrease)/increase in cash (32) 159
Cash at beginning of period 526 717
--------- ----------
Cash at end of period $ 494 $ 876
========= ==========
The accompanying notes are an integral part of these financial
statements.
Page 5
<PAGE>
GLOBE BUSINESS RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
NOTE 1 -- PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Globe Business Resources, Inc., the
accompanying unaudited consolidated financial statements include all adjustments
considered necessary to present fairly its financial position as of November 30,
1998, and the results of its operations for the three and nine months ended
November 30, 1998 and 1997 and its cash flows for the nine months ended November
30, 1998 and 1997. All adjustments are of a normal recurring nature. Interim
results are not necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented in accordance
with the requirements of Form 10-Q, and do not contain certain information
included in the Company's audited consolidated financial statements and notes in
its Form 10-K for the fiscal year ended February 28, 1998.
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2 -- ACQUISITIONS
During the first nine months of fiscal 1999, the Company completed three
asset acquisitions and settled certain contingent consideration on two fiscal
1998 acquisitions. These transactions were completed by payment of approximately
$13.6 million in cash and the assumption of certain liabilities. One of the
fiscal 1999 acquisitions operates in the rent-to-rent segment of the furniture
rental business. The remaining acquisitions, which include the June 1, 1998
purchase of Detroit-based Village Suites, operate in the corporate housing
business, providing short-term housing to transferring or temporarily assigned
corporate personnel, new hires, trainees and consultants. At their respective
dates of acquisition, the corporate housing businesses maintained inventories
totaling approximately 1,000 leased housing units and had annual revenues in
their most recent fiscal year totaling approximately $18.0 million.
In accordance with APB No. 16, these acquisitions were accounted for using
the purchase method.
The purchase price allocation for the acquired businesses is as follows:
(Unaudited)
-----------
Cash, receivables and prepaids $ 637
Rental furniture 1,095
Property and equipment 10
Other assets 34
Goodwill and other intangibles 12,205
---------
13,981
Liabilities assumed (430)
---------
$ 13,551
=========
Page 6
<PAGE>
The following table sets forth certain Globe consolidated income statement
data on a pro forma basis, as if the fiscal 1999 acquisitions were completed at
the beginning of the periods indicated.
Nine months ended November 30,
------------------------------
1998 1997
---------- ---------
Revenues $115,432 $90,143
Net income 4,314 4,376
Basic earnings per common share $ 0.95 $ 0.98
Diluted earnings per common share $ 0.92 $ 0.96
Weighted average number of common
shares outstanding:
Basic 4,546 4,451
Diluted 4,670 4,535
SUBSEQUENT EVENTS
In December 1998, the Company issued 71,900 shares of common stock,
previously held in escrow, as settlement of contingent consideration for two
fiscal 1998 acquisitions.
Effective January 1, 1999, Globe acquired substantially all the assets of
privately owned Castleton (CSTL) for approximately $3.0 in cash, a $0.5 million
four year 5% note payable, 82,283 shares of Globe common stock and contingent
consideration up to a maximum of $0.75 million payable via a note payable,
subject to certain levels of operating income for the twelve months ended
December 31, 1999. CSTL, based in St. Louis with additional operations in Kansas
City, Louisville, Orlando and Indianapolis, operates in the corporate housing
business. CSTL maintained an inventory of approximately 800 leased housing units
at the date of acquisition and had revenues in excess of $13.0 million for the
year ended December 31, 1998.
NOTE 3 -- EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", in the fourth
quarter of fiscal 1998. All earnings per share amounts for prior periods have
been restated to conform to this statement, which had no material effect on the
previously reported earnings per share.
For all periods presented, basic earnings per share was calculated by
dividing net income applicable to common stock by the weighted average number of
shares outstanding during the period.
For all periods presented, diluted earnings per share was calculated by
dividing net income applicable to common stock by the weighted average number of
shares and dilutive potential common shares outstanding during the period.
Potential common shares include outstanding stock options and contingently
issuable shares.
Page 7
<PAGE>
The following table presents the calculation of basic and diluted earnings
per share for the periods indicated.
<TABLE>
<CAPTION>
For the three months ended, For the nine months ended,
----------------------------- -----------------------------
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income used to calculate basic
and diluted earnings per share $ 1,440 $ 1,257 $ 4,180 $ 3,905
======== ======== ======== =======
Weighted average common shares used
to calculate basic earnings per share 4,532 4,470 4,546 4,451
======== ======== ======== =======
Basic earnings per common share $ 0.32 $ 0.28 $ 0.92 $ 0.88
======== ======== ======== =======
Shares used in the calculation
of diluted earnings per share:
Weighted average common shares 4,532 4,470 4,546 4,451
Dilutive effect of assumed exercise
of options for the purchase of
common shares 44 99 52 81
Dilutive effect of assumed issuance
of contingently issuable shares 72 9 72 3
-------- ------- -------- -------
Weighted average common shares used
to calculate diluted earnings
per share 4,648 4,578 4,670 4,535
======= ======= ======== =======
Diluted earnings per common share $ 0.31 $ 0.27 $ 0.90 $ 0.86
======= ======= ======== =======
</TABLE>
NOTE 4 -- RENTAL FURNITURE
Rental furniture consists of the following:
November 30, 1998 February 28, 1998
----------------- -----------------
(Unaudited)
Furniture on rental $ 43,045 $ 41,884
Furniture on hand 24,161 21,537
-------- --------
67,206 63,421
Accumulated depreciation (11,631) (10,201)
-------- --------
$ 55,575 $ 53,220
======== ========
Page 8
<PAGE>
NOTE 5 -- DEBT
Outstanding debt consists of:
November 30, February 28,
1998 1998
------------ ------------
(Unaudited)
The Fifth Third Bank, PNC Bank and
Norwest Bank unsecured revolving note,
average interest of 7.07% $29,183 $ -
The Fifth Third Bank and PNC Bank unsecured
revolving note, average interest of 7.39% - 16,476
7.54% Senior Notes, unsecured, interest
payable semi-annually on March 1 and
September 1, due September 1, 2007 30,000 30,000
6.0% note payable to seller of acquired
business, payable in monthly installments,
due December 31, 2000 625 850
7.5% note payable to seller of acquired
business, payable in monthly installments,
due November 2, 1998 - 181
7.2% mortgage note payable to The Fifth
Third Bank, interest payable in monthly
installments, due December 1, 2002 1,466 1,510
Capital lease obligations 475 696
------- -------
$61,749 $49,713
======= =======
The funds required for the fiscal 1999 acquisitions were derived from
borrowings under the Company's unsecured revolving Credit Agreement.
On May 14, 1998, the Company's $30 million unsecured revolving line of
credit with the Fifth Third Bank and PNC Bank was increased, by amendment, to a
$45 million unsecured revolving line of credit with The Fifth Third Bank, PNC
Bank and Norwest Bank. Interest rates, unused facility fees and other terms are
unchanged from the original revolving Credit Agreement. At November 30, 1998,
the revolving Credit Agreement provided a total unused credit facility of
approximately $15.8 million.
Page 9
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements beginning on page 3.
GENERAL
Globe is a major participant in the temporary relocation industry,
operating in both the corporate housing and rent-to-rent furniture businesses.
The corporate housing business provides short-term housing through an inventory
of leased housing units to transferring or temporarily assigned corporate
personnel, new hires, trainees and consultants. The rent-to-rent furniture
business rents quality office and residential furniture to a variety of
corporate and individual customers. Additionally, the Company sells residential
and office furniture that no longer meets its "showroom condition" standards for
rental through its clearance centers and offers new furniture for sale through
its showrooms and account executives.
The Company's fiscal year ends on February 28/29.
The discussions contained under Results of Operations and Liquidity and
Capital Resources include forward-looking information which is subject to risks
and qualifications including, but not limited to, those set forth in Exhibit 99.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
statement data as a percentage of total revenues and certain gross profit data
as a percentage of respective corporate housing, rental and retail sales
revenues.
<TABLE>
<CAPTION>
For the three months ended, For the nine months ended,
---------------------------- -----------------------------
November 30, November 30, November 30, November 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Corporate housing sales 60.3% 41.3% 58.1% 37.2%
Rental sales 28.1% 40.7% 30.0% 46.5%
Retail sales 11.6% 18.0% 11.9% 16.3%
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit:
Corporate housing sales 27.7% 28.3% 29.6% 29.1%
Rental sales 94.1% 92.9% 93.7% 92.6%
Retail sales 42.6% 39.6% 40.6% 38.0%
------ ------ ------ ------
Gross profit before
depreciation and disposals 48.1% 56.6% 50.1% 60.1%
Furniture depreciation
and disposals (6.3%) (6.7%) (6.6%) (8.2%)
------ ------ ------ ------
Combined gross profit 41.8% 49.9% 43.6% 51.8%
Operating expenses 31.6% 38.5% 33.2% 39.4%
Amortization of intangible assets 1.3% 0.9% 1.3% 0.8%
------ ------ ------ ------
Operating income 8.9% 10.4% 9.1% 11.6%
Interest/other 2.7% 3.1% 2.9% 3.1%
------ ------ ------ ------
Income before taxes 6.2% 7.3% 6.2% 8.5%
====== ====== ====== ======
</TABLE>
Page 10
<PAGE>
IMPACT OF CORPORATE HOUSING ACQUISITIONS
Globe entered the corporate housing business in fiscal 1997 by making three
acquisitions. Seven additional corporate housing businesses were acquired in
fiscal 1998. Globe continued its corporate housing acquisition program in fiscal
1999 with the acquisitions of Feld Corporate Housing in May 1998 and Village
Suites in June 1998. An additional corporate housing acquisition, Castleton, was
made in January 1999, subsequent to completion of the third quarter. All
acquisitions to date have been accounted for using the purchase method of
accounting.
Corporate housing companies' assets consist primarily of accounts
receivable, customer deposits and some minor furniture and fixed asset balances.
Consequently, the purchase price for these businesses is allocated largely to
goodwill and other intangibles. Cost of goodwill and other intangibles related
to the corporate housing acquisitions approximates $38.8 million and is being
amortized on a straight-line basis over periods ranging from three to
thirty-five years, with a weighted average life of approximately twenty-three
years. Goodwill and intangibles amortization, which is a separate component of
operating expenses, reduced operating profit by $1.4 million, or 1.3% of
revenues, in the first nine months of fiscal 1999 and $0.6 million, or 0.8% of
revenues, in the first nine months of fiscal 1998.
The corporate housing business has a slightly lower operating margin than
the furniture rental business, consisting of a lower gross profit margin offset
somewhat by lower operating expenses. As a result, the Company's gross profit
margin and operating expenses as a percentage of revenues have been declining
since the Company entered the corporate housing business. Gross profit margin
decreased to 43.6% in the first nine months of fiscal 1999 from 51.8% in the
first nine months of fiscal 1998, resulting from the larger percentage of total
revenues from corporate housing (58.1% in the first nine months of fiscal 1999
versus 37.2% in the comparable period of fiscal 1998). Gross profit margin on
rental sales in the first nine months of fiscal 1999 was 93.7%, versus 29.6% for
corporate housing. Comparable gross profit margins for the first nine months of
fiscal 1998 were 92.6% and 29.1%, respectively. Because the Company is
integrating its furniture rental and corporate housing operations, these gross
profit percentages exclude furniture depreciation and disposals which can no
longer be separately identified. An additional result of this integration is
that operating expenses and, therefore, operating margins for furniture rental
and corporate housing cannot be specifically identified. Combined operating
expenses, excluding goodwill amortization, decreased to 33.2% of revenues in the
first nine months of fiscal 1999 from 39.4% in the first nine months of fiscal
1998, while the operating margin, after goodwill amortization, decreased to 9.1%
of revenues in the first nine months of fiscal 1999 from 11.6% of revenues in
the first nine months of fiscal 1998. The reduction in operating margin is
primarily the result of the increasing mix of corporate housing revenues,
additions to the Company's management team and related infrastructure spending
to support the Company's rapid growth, and greater amortization expenses.
Excluding amortization expenses, operating margins declined to 10.4% in the
first nine months of fiscal 1999 from 12.4% in the first nine months of fiscal
1998.
Globe plans to continue its consolidation of corporate housing through
additional acquisitions, thereby capitalizing on the desire of many corporations
to have a corporate housing company that can meet their needs nationally. With
the acquisitions to date, Globe has expanded its presence into twenty-six
markets and is the market leader in ten of these markets, with annualized
corporate housing revenues in excess of $100 million. Globe is vying with two
other corporate housing companies for the number two position in the industry.
As Globe increases its presence in the corporate housing business, some
competing corporate housing companies that are customers of Globe may transfer
their furniture rental business to other vendors. At the end of December 1998,
the Company's annualized revenues from these corporate housing companies
approximated $6.9 million.
Due to the significant impact of the corporate housing acquisitions on the
Company's operations and financial results, certain aspects of the Company's
historical results of operations and period-to-period comparisons will not be
indicative of future results.
Page 11
<PAGE>
COMPARISON OF THIRD QUARTER FISCAL 1999 TO THIRD QUARTER FISCAL 1998
Total revenues of $38.2 million increased $10.2 million, or 36.3%, in the
third quarter of fiscal 1999, from $28.0 million in the third quarter of fiscal
1998, primarily due to acquisitions. Excluding the corporate housing operations
and the impact of the elimination of intercompany revenues (furniture rented to
Company-owned corporate housing operations), total revenues increased 2.3% in
the third quarter of fiscal 1999 when compared to the third quarter of fiscal
1998.
Corporate housing sales of $23.0 million in the third quarter of fiscal
1999 increased 98.8% from $11.6 million in the third quarter of fiscal 1998.
This increase was primarily caused by acquisitions which occurred during or
after the third quarter of fiscal 1998.
Rental sales of $10.7 million in the third quarter of fiscal 1999 decreased
5.9% from $11.4 million in the third quarter of fiscal 1998 largely as a result
of intercompany eliminations. Excluding the impact of these eliminations, rental
revenues increased 8.5%.
Retail sales of $4.4 million decreased $0.6 million, or 11.9%, in the third
quarter of fiscal 1999 from $5.0 million in the third quarter of fiscal 1998,
attributable to a reduction in new office furniture sales during the quarter.
The prior year quarter included a large one-time new office furniture sale.
Excluding this sale, retail sales increased 6.2%.
Gross profit of $16.0 million in the third quarter of fiscal 1999 increased
$2.0 million, or 14.1%, from $14.0 million in the third quarter of fiscal 1998
and declined as a percentage of revenues to 41.8% from 49.9% over the same
period due to the higher mix of corporate housing revenues and the lower margins
associated with these revenues. Gross profit margin on corporate housing
revenues declined slightly versus the comparable prior year period, while gross
margin on both rental and retail sales revenues improved during the third
quarter of fiscal 1999 versus the comparable prior year period.
Operating expenses of $12.6 million in the third quarter of fiscal 1999
increased 13.7% from $11.1 million in the third quarter of fiscal 1998 primarily
as a result of acquisitions. As a percentage of total revenues, these expenses
declined to 32.9% from 39.4% over the same period as a result of corporate
housing's lower operating expenses as a percent of revenues.
As a result of the changes in revenues, gross profit and operating expenses
discussed above, operating income increased 15.7% to $3.4 million, or 8.9% of
revenues in the third quarter of fiscal 1999, from $2.9 million, or 10.4% of
revenues in the third quarter of fiscal 1998.
Interest/other expense increased $0.1 million to $1.0 million in the third
quarter of fiscal 1999 from $0.9 million in the third quarter of fiscal 1998 and
as a percentage of total revenues decreased to 2.7% from 3.1% over the same
period. A $0.3 million increase in interest expense for the third quarter of
fiscal 1999 was due primarily to higher debt balances than in the comparable
period of fiscal 1998 and was partially offset by a $0.2 million insurance
settlement. The debt increase was the result of funding required for
acquisitions.
Income before income taxes of $2.4 million in the third quarter of fiscal
1999 increased $0.4 million, or 15.3%, compared to the third quarter of fiscal
1998 and as a percentage of revenues decreased to 6.2% from 7.3% over the same
period.
The Company's effective tax rate, which includes federal, state and local
taxes, increased slightly to 39.0% in the third quarter of fiscal 1999 as
compared to a 38.6% rate in the third quarter of fiscal 1998.
COMPARISON OF NINE MONTHS ENDED NOVEMBER 30, 1998
TO NINE MONTHS ENDED NOVEMBER 30, 1997
Total revenues of $110.8 million increased $35.5 million, or 47.1%, in the
first nine months of fiscal 1999, from $75.3 million in the first nine months of
fiscal 1998, primarily due to acquisitions.
Page 12
<PAGE>
Excluding the corporate housing operations and the impact of the
elimination of intercompany revenues, total revenues increased 6.3% in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 1998.
Corporate housing sales of $64.4 million in the first nine months of fiscal
1999 increased 129.5% from $28.1 million in the first nine months of fiscal
1998. This increase was primarily caused by acquisitions.
Rental sales of $33.2 million in the first nine months of fiscal 1999
decreased 5.1% from $35.0 million in the first nine months of fiscal 1998 due to
intercompany eliminations. Excluding the impact of intercompany eliminations,
rental revenues increased 5.8%, reflecting strong growth in intercompany sales
offset to some extent by a loss of business from some competing corporate
housing customers.
Retail sales of $13.2 million increased $1.0 million, or 7.5%, in the first
nine months of fiscal 1999 from $12.2 million in the first nine months of fiscal
1998, driven by increases of 13.9% in clearance center revenues and 4.2% in new
office furniture sales versus the comparable prior year period. Excluding the
impact of a large one-time sale which occurred in the third quarter of fiscal
1998, retail sales and new office furniture sales increased 15.6% and 26.8%,
respectively, versus the comparable period.
Gross profit of $48.3 million in the first nine months of fiscal 1999
increased $9.3 million, or 23.6%, from $39.0 million in the first nine months of
fiscal 1998 and declined as a percentage of revenues to 43.6% from 51.8% over
the same period due to the higher mix of corporate housing revenues and the
lower margins associated with these revenues. Gross profit percent on corporate
housing, rental and retail sales revenues all improved versus the comparable
prior year period.
Operating expenses of $38.2 million in the first nine months of fiscal 1999
increased 25.9% from $30.3 million in the first nine months of fiscal 1998 as a
result of acquisitions, as well as additions to the Company's management team
and related infrastructure spending to support the Company's rapid growth. As a
percentage of total revenues, these expenses declined to 34.5% from 40.3% over
the same period as a result of corporate housing's lower operating expenses as a
percent of revenues.
As a result of the changes in revenues, gross profit and operating expenses
discussed above, operating income increased 15.6% to $10.1 million, or 9.1% of
revenues in the first nine months of fiscal 1999, from $8.7 million, or 11.6% of
revenues in the first nine months of fiscal 1998.
Interest/other expense increased $0.9 million to $3.2 million in the first
nine months of fiscal 1999 from $2.3 million in the first nine months of fiscal
1998 and as a percentage of total revenues declined to 2.9% from 3.1% over the
same period. The $1.1 million increase in interest expense for fiscal 1999 was
due primarily to higher debt balances than in the comparable period of fiscal
1998 and was partially offset by a $0.2 million insurance settlement. The debt
increase was the result of funding required for acquisitions.
Income before income taxes of $6.9 million in the first nine months of
fiscal 1999 increased $0.5 million, or 7.3%, compared to the first nine months
of fiscal 1998 and as a percentage of revenues decreased to 6.2% from 8.5% over
the same period.
The Company's effective tax rate, which includes federal, state and local
taxes, increased slightly to approximately 39.0% in the first nine months of
fiscal 1999 as compared to 38.9% the first nine months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
On May 14, 1998, the Company's $30.0 million unsecured line of credit was
increased to $45.0 million. Interest rates for this revolving line of credit are
based on a leverage formula, which is currently the lesser of the prime rate
minus 25 basis points or LIBOR plus 150 basis points. At January 4, 1999, the
unused line of credit was $12.6 million, which is available for acquisitions and
general corporate purposes.
Page 13
<PAGE>
The term of the line of credit will expire on September 30, 2000, requiring
full payment of the then outstanding balance. The Company expects to have other
financing arrangements in place prior to this date.
From March 1, 1998 through January 4, 1999 Globe used approximately $16.6
million from its lines of credit, issued 82,283 shares of stock for fiscal 1999
acquisitions and 71,900 shares of stock previously held in escrow for fiscal
1998 acquisitions, issued $0.5 million of notes payable and assumed
approximately $0.4 million of certain liabilities in completing four
acquisitions and settling certain contingent consideration for three fiscal 1998
acquisitions. (See note 2 to the consolidated financial statements for further
discussion of these acquisitions.)
The Company's principal use of cash is for furniture purchases. The Company
purchases furniture to replace furniture which has been sold and to maintain
adequate levels of rental furniture to meet existing and new customer needs.
Furniture purchases were $17.5 million in the first nine months of fiscal 1999
and $19.4 million in the first nine months of fiscal 1998. The lower level of
purchases in fiscal 1999 reflects the Company's efforts to better manage
inventory levels while continuing to ensure that existing and new customer needs
can be met. As the Company's growth strategies are implemented, furniture
purchases are expected to increase.
Capital expenditures were $2.0 million and $3.3 million in the first nine
months of fiscal 1999 and 1998, respectively. Expenditures for the first nine
months of fiscal 1999 were largely attributable to continued development of
computer systems. The decrease from the prior year results from the completion
of construction of a showroom/warehouse facility in Indianapolis, Indiana during
fiscal 1998. Costs to develop the computer systems further, which are
anticipated to be approximately $1.6 million, will be incurred in the next 3-15
months and are expected to be financed through cash generated by operations.
In the first nine months of fiscal 1999 and 1998, net cash provided by
operations was $21.6 million and $19.3 million, respectively, generating $2.1
million more cash than was necessary to fund investing activities (excluding
acquisitions) in the first nine months of fiscal 1999 and $3.4 million less cash
than was necessary to fund investing activities (excluding acquisitions) in the
first nine months of fiscal 1998. The improvement in cash flow in the first nine
months of fiscal 1999 results primarily from lower levels of furniture purchases
and capital expenditures.
In October 1998, Globe repurchased 50,000 shares of stock for $0.7 million,
pursuant to the Company's authorized $3.0 million stock repurchase program.
These shares are held in treasury.
Aside from acquisitions, furniture purchases, which have historically been
seasonally weighted to the first half of the fiscal year, are the primary reason
for use of the credit facilities. Any temporary cash deficiencies resulting from
these purchases will be funded via the line of credit. The Company expects cash
flow from operations plus the credit facilities to be sufficient to fund the
Company's needs for the foreseeable future, except for significant acquisitions
and any additional repurchases that may be made under the Company's stock
repurchase program.
YEAR 2000
The Company has developed a Year 2000 Remediation Plan and is currently
evaluating the potential impact of the Year 2000 issue on both its information
technology systems and its non-information technology systems. The initial
phases of the plan consist of planning and assessment and involve developing
complete inventories of all hardware and software containing potential date
sensitivity, completing vendor and customer surveys and performing a series of
controlled tests to determine compliance. These phases are approximately 50%
complete, with the inventory phase completed and the vendor and customer survey
phase in process. The controlled tests are currently scheduled for February,
1999. Preliminary results indicate that the Company's existing internal
financial and operational software is Year 2000 compliant, and that a moderate
number of desktop computers may need to be replaced. The systems currently under
development have been designed to be Year 2000 compliant.
Page 14
<PAGE>
Globe expects to have the initial phases of the remediation plan completed
by February 28, 1999. Costs incurred to date and those anticipated to complete
the initial phases are immaterial to the Company's results of operations.
Based upon the results of the initial phases, Globe will develop a detailed
remediation and contingency plan. This plan will address such concerns as the
time required to replace equipment or software and contingency plans for
unforeseen Year 2000 failures, including the identification of alternate vendors
or financial institutions, as well as the financial resources necessary to
reasonably ensure compliance by the Year 2000. It is expected that this plan
will be completed by July 1, 1999. Costs associated with this phase are not
expected to exceed $120,000.
While Globe is not aware of exposures related to the operations of
customers or vendors and it does not have a relationship with any third-party
vendor which is material to its operations, there can be no assurance that the
systems of other companies on which the Company relies will be converted in a
timely manner or that the failure to convert would not have an adverse impact on
Globe's operations. Costs associated with any such failure cannot be reasonably
estimated.
PART II
ITEM 1
LEGAL PROCEEDINGS
None
ITEM 2
CHANGES IN SECURITIES
None
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5
OTHER INFORMATION
None
Page 15
<PAGE>
ITEM 6
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
10.5.1 Amendment to Credit Agreement among the Registrant, The Fifth
Third Bank, PNC Bank and Norwest Bank dated May 14, 1998.*
10.13 1998 Stock Option and Incentive Plan**
27 Financial Data Schedule
99 Safe Harbor Statement
* Incorporated by reference to the Company's Form 10-Q for the quarter
ended May 31, 1998.
** Incorporated by reference to the definitive proxy statement for the 1998
annual shareholders meeting.
(b) Reports on Form 8-K filed during the third quarter of 1999: None.
Page 16
<PAGE>
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 by the
undersigned, thereunto duly authorized.
Globe Business Resources, Inc.
By: /s/Sharon G. Kebe
------------------------------------
Senior Vice President-Finance and
Treasurer
(Principal Financial Officer)
Signed: January 7, 1999
Page 17
GLOBE BUSINESS RESOURCES, INC.
EXHIBIT 99 - SAFE HARBOR
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
from civil litigation in many instances for forward-looking statements. In order
to take advantage of the Act, such statements must be accompanied by meaningful
cautionary statements that identify important factors that could cause actual
results to differ materially from those that might be projected. This exhibit to
the Registrant's Form 10-Q is being filed in order to allow the Registrant to
take advantage of the new provisions of this Act by providing the following
cautionary statements:
Risk Factors Affecting Globe
Globe's business operations and strategy are subject to a number of
uncertainties and risks which could adversely affect its performance in the
future. Among these are the following factors:
Globe's principal growth strategy depends on the acquisition of other
companies in the rent-to-rent and corporate housing businesses. Although
previous acquisitions have been successful to date, there can be no assurance
that any additional acquisitions will be consummated or that, if acquisitions
are consummated, they will be successful. Acquisitions require a significant
commitment of corporate resources, management attention and capital which, in
certain cases, could exceed that available to Globe. Additionally, Globe could
experience unexpected costs and operational difficulties in integrating acquired
businesses.
There can be no assurances that Globe will be able to maintain large
customer contracts, enter into new contracts, or increase market share by
expanding into new markets in the future.
Many of Globe's competitors have greater financial and other resources than
Globe. These resources could give them an advantage in price and service areas.
Several of Globe's rental customers compete with Globe in its corporate
housing business. As Globe expands in the corporate housing area, it may
continue to lose rental business from those competitors.
Globe is dependent on its computer systems in its daily operations. In
addition, Globe is developing a common computer system for its Corporate Stay
International business. Significant cost or time overruns on the Corporate Stay
International system development or unidentified deficiencies in other Globe
systems could have a material adverse affect on Globe's operations.
While Globe is not aware of Year 2000 noncompliance exposures related to
either its own operations or the operations of customers or vendors and it does
not have a relationship with any third-party vendor which is material to its
operations, there can be no assurance that either its own systems or the systems
of other companies on which the Company relies will be converted in a timely
manner or that the failure to convert would not have an adverse impact on
Globe's operations. Costs associated with any such failure cannot be reasonably
estimated.
The Company believes that the industry it serves is significantly
influenced by economic conditions generally and by levels of job creation,
relocations of employees and general business activity. A prolonged economic
downturn could have a material adverse affect on Globe's operations.
Page 18
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