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 ended August 31, 1999 Commission File No. 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 October 4, 1999, 4,794,958 shares of the Registrant's common stock,
no par value, were outstanding.
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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 -
August 31, 1999 and February 28, 1999 3
Consolidated Statement of Income -
Three and six months ended August 31, 1999 and 1998 4
Consolidated Statement of Cash Flows -
Six months ended August 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 18
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PART I - FINANCIAL INFORMATION
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
August 31, February 28,
1999 1999
------------- -----------
(Unaudited)
ASSETS:
Cash $ 1,299 $ 1,123
Trade accounts receivable, less
allowance for doubtful accounts
of $930 and $977, respectively 11,408 11,982
Other receivables 1,313 1,418
Prepaid expenses 4,683 4,229
Rental furniture, net 56,771 55,426
Property and equipment, net 9,041 8,469
Goodwill and other intangibles,
less accumulated amortization
of $4,505 and $3,262, respectively 47,174 47,580
Note receivable from officer 100 100
Other notes receivable 1,090 490
Other, net 947 980
--------- ---------
Total assets $ 133,826 $ 131,797
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 5,565 $ 6,250
Customer deposits 2,310 2,072
Accrued compensation 1,722 2,628
Accrued taxes 119 304
Deferred income taxes 5,949 5,738
Accrued interest payable 1,786 1,541
Other accrued expenses 1,104 1,250
Debt 69,727 68,900
--------- ---------
Total liabilities 88,282 88,683
--------- ---------
Common stock and other shareholders'
equity:
Common stock, no par, 15,000,000
shares authorized, 4,794,958,
and 4,794,489 shares outstanding 23,992 24,018
Retained earnings 25,636 23,180
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 45,544 43,114
--------- ---------
Total liabilities and
shareholders' equity $ 133,826 $ 131,797
========= =========
The accompanying notes are an integral part of these financial statements
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GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
For the three For the six
months ended, months ended,
---------------------- ---------------------
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
----------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Corporate housing sales $28,535 $24,490 $55,188 $41,348
Rental sales 10,167 11,123 20,291 22,478
Retail sales 4,213 4,063 7,812 8,732
------- ------- ------- -------
42,915 39,676 83,291 72,558
------- ------- ------- -------
Cost of revenues:
Cost of corporate housing sales 19,624 16,684 38,060 28,666
Cost of rental sales 893 774 1,882 1,746
Cost of retail sales 2,706 2,513 4,733 5,463
Furniture depreciation
and disposals 2,343 2,333 4,711 4,392
------- ------- ------- -------
25,566 22,304 49,386 40,267
------- ------- ------- -------
Gross profit 17,349 17,372 33,905 32,291
Operating expenses:
Warehouse and delivery 2,807 2,869 5,606 5,445
Occupancy 2,037 1,878 3,960 3,732
Selling and advertising 2,646 2,953 5,281 5,587
General and administration 5,833 5,251 11,191 9,921
Amortization of intangible
assets 622 511 1,243 938
------- ------- ------- -------
13,945 13,462 27,281 25,623
------- ------- ------- -------
Operating income 3,404 3,910 6,624 6,668
Other expenses:
Interest expense 1,207 1,145 2,419 2,109
Other, net 30 35 59 66
------- ------- ------- -------
1,237 1,180 2,478 2,175
Income before income taxes 2,167 2,730 4,146 4,493
Provision for income taxes 898 1,065 1,689 1,753
------- ------- ------- -------
Net income $ 1,269 $ 1,665 $ 2,457 $ 2,740
======= ======= ======= =======
Earnings per common share:
Basic $ 0.26 $ 0.37 $ 0.51 $ 0.60
======= ======= ======= =======
Diluted $ 0.26 $ 0.36 $ 0.51 $ 0.59
======= ======= ======= =======
Weighted average number of
common shares outstanding:
Basic 4,797 4,556 4,797 4,553
Diluted 4,838 4,681 4,835 4,680
The accompanying notes are an integral part of these financial statements
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GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the six months ended,
---------------------------
August 31, August 31,
1999 1998
----------- ------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,457 $2,740
Adjustments to reconcile net income to
net cash provided by operating activities:
Rental furniture depreciation 4,092 3,924
Other depreciation and amortization 2,621 1,963
Provision for losses on
accounts receivable 384 324
Provision for deferred income taxes 211 (61)
Loss (gain) on sale of
property and equipment 8 (6)
Book value of furniture sales
and rental buyouts 6,019 6,874
Changes in assets and liabilities:
Accounts receivable 293 (3,049)
Notes receivable (600) -
Other assets, net 37 (32)
Prepaid expenses (452) (1,754)
Accounts payable (685) 3,012
Customer deposits 228 345
Accrued compensation (916) 333
Accrued taxes (185) 564
Accrued interest payable 245 454
Other accrued expenses (194) (55)
-------- ---------
Net cash provided by operating activities 13,563 15,576
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental furniture (11,456) (12,897)
Purchases of property and equipment (1,774) (1,354)
Purchases of businesses, net of cash acquired (488) (13,492)
Other investing activities - 6
-------- ---------
Net cash used in investing activities (13,718) (27,737)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on the revolving credit agreement 102,428 87,160
Repayments on the revolving credit agreement (101,504) (74,543)
Repayments of other debt (314) (150)
Principal payments under capital
lease obligations (255) (222)
Exercise of common stock options 39 5
Purchase of treasury stock (63) -
-------- ---------
Net cash provided by financing activities 331 12,250
-------- ---------
Net increase in cash 176 89
Cash at beginning of period 1,123 526
-------- ---------
Cash at end of period $1,299 $ 615
======== =========
The accompanying notes are an integral part of these financial statements
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GLOBE BUSINESS RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data;
shares in whole numbers except where noted)
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 August 31,
1999, and the results of its operations for the three and six months ended
August 31, 1999 and 1998 and its cash flows for the six months ended August 31,
1999 and 1998. 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, 1999.
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2 -- ACQUISITIONS
During the first six months of fiscal 2000, the Company completed the asset
acquisition of Castleton of Tulsa, a privately owned corporate housing business,
and paid certain other consideration on fiscal 1998 and 1999 acquisitions. These
transactions were completed by payment of approximately $0.5 million in cash,
issuance of $0.3 million of notes payable and the assumption of certain
liabilities. 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 $ 8
Property and equipment 10
Other assets 4
Goodwill and other intangibles 837
-----
859
Liabilities assumed (363)
-----
$ 496
=====
Certain pro forma Globe consolidated income statement data are not
presented due to the immaterial impact of Castleton of Tulsa on the previously
reported operating results. Current year actual results reflect the acquisition
for the entire reporting period.
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NOTE 3 -- RENTAL FURNITURE
Rental furniture consists of the following:
August 31, February 28,
1999 1999
---------- ------------
(Unaudited)
Furniture on rental $ 44,479 $ 43,648
Furniture on hand 25,427 24,120
-------- --------
69,906 67,768
Accumulated depreciation (13,135) (12,342)
-------- --------
$ 56,771 $ 55,426
======== ========
NOTE 4 -- 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 for all periods
presented and contingently issuable shares in fiscal 1999.
The following table presents the calculation of basic and diluted earnings
per share for the periods indicated. (Shares in thousands)
For the three For the six
months ended, months ended,
------------------ ------------------
August August August August
31, 1999 31, 1998 31, 1999 31, 1998
-------- -------- -------- --------
(Unaudited) (Unaudited)
Net income used to calculate
basic and diluted
earnings per share $1,269 $1,665 $2,457 $2,740
====== ====== ====== ======
Weighted average common shares
used to calculate
basic earnings per share 4,797 4,556 4,797 4,553
====== ====== ====== ======
Basic earnings per common share $ 0.26 $ 0.37 $ 0.51 $ 0.60
====== ====== ====== ======
Shares used in the calculation
of diluted earnings per share:
Weighted average common shares 4,797 4,556 4,797 4,553
Dilutive effect of assumed exercise
of options for the purchase of
common shares 41 53 38 55
Dilutive effect of assumed issuance
of contingently issuable shares -- 72 -- 72
------ ------ ------ ------
Weighted average common shares used to
calculate diluted earnings per share 4,838 4,681 4,835 4,680
====== ====== ====== ======
Diluted earnings per common share $ 0.26 $ 0.36 $ 0.51 $ 0.59
====== ====== ====== ======
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NOTE 5 -- DEBT
Outstanding debt consists of:
August 31, February 28,
1999 1999
------------ ------------
(Unaudited)
The Fifth Third Bank, PNC Bank and
Norwest Bank unsecured revolving note,
average interest of 6.66% $ 35,340 $ 34,416
7.54% Senior Notes, unsecured, interest
payable semi-annually on March 1 and
September 1, due September 1, 2007 30,000 30,000
6.25% mortgage note payable to The Fifth
Third Bank, interest payable in monthly
installments, due December 1, 2002 1,417 1,445
6.0% note payable to seller of acquired
business, payable in monthly installments,
due December 31, 2000 400 550
6.0% note payable to seller of acquired
business, payable in quarterly
installments, due December 31, 2002 1,298 1,463
5.0% note payable to seller of acquired
business, payable in quarterly
installments, due December 31, 2002 450 500
5.0% note payable to seller of acquired
business, payable in monthly
installments, due February 29, 2000 253 -
Capital lease obligations 569 526
------------ ----------
$ 69,727 $ 68,900
============ ==========
The funds required for the acquisition related payments were derived from
borrowings under the Company's unsecured revolving Credit Agreement and through
the issuance of a note payable.
The Company's unsecured revolving line of credit provides credit facilities
of up to $45 million. At August 31, 1999, the revolving Credit Agreement
provided a total unused credit facility of approximately $9.7 million.
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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 furniture rental 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, consultants and individual customers. The
furniture rental 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 sells new furniture
through its showrooms and account executives.
The Company's fiscal year ends on February 28/29.
The discussions contained in this Item 2 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.
For the three For the six
months ended, months ended,
------------------ ------------------
August August August August
31, 1999 31, 1998 31, 1999 31, 1998
-------- -------- -------- --------
Revenues:
Corporate housing sales 66.5% 61.7% 66.3% 57.0%
Rental sales 23.7% 28.0% 24.4% 31.0%
Retail sales 9.8% 10.2% 9.4% 12.0%
-------- -------- -------- --------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit:
Corporate housing sales 31.2% 31.9% 31.0% 30.7%
Rental sales 91.2% 93.0% 90.7% 92.2%
Retail sales 35.8% 38.1% 39.4% 37.4%
-------- -------- -------- --------
Gross profit before
depreciation and disposals 45.9% 49.7% 46.4% 50.6%
Furniture depreciation and
disposals (5.5%) (5.9%) (5.7%) (6.1%)
-------- -------- -------- --------
Combined gross profit 40.4% 43.8% 40.7% 44.5%
Operating expenses 31.0% 32.6% 31.3% 34.0%
Amortization of intangible assets 1.4% 1.3% 1.5% 1.3%
-------- -------- -------- --------
Operating income 7.9% 9.9% 8.0% 9.2%
Interest/other 2.9% 3.0% 3.0% 3.0%
-------- -------- -------- --------
Income before taxes 5.0% 6.9% 5.0% 6.2%
======== ======== ======== ========
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Fiscal 2000 second quarter and first half results were impacted by certain
nonrecurring expenses related primarily to the consolidation of real estate and
clearance center inventories in Globe Furniture Rentals western markets. The
following table presents selected income statement data in dollars and as a
percentage of total revenues after adjustment to exclude these nonrecurring
expenses.
For the three months ended, For the six months ended,
--------------------------- -------------------------
August 31, August 31, August 31, August 31,
1999 1998 1999 1998
---------- ----------- ---------- ----------
Operating expenses $12,883 $12,951 $25,348 $24,685
30.0% 32.6% 30.4% 34.0%
Operating income $ 3,844 $ 3,910 $ 7,314 $ 6,668
9.0% 9.9% 8.8% 9.2%
Income before taxes $ 2,607 $ 2,730 $ 4,836 $ 4,493
6.1% 6.9% 5.8% 6.2%
Impact of Corporate Housing Acquisitions
Globe implemented an aggressive corporate housing acquisition strategy in
fiscal 1997. Since that time, the Company has completed fifteen corporate
housing acquisitions, including the March 1999 acquisition of Castleton of
Tulsa. 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 $50.4 million and is being
amortized on a straight-line basis over periods ranging from three to 35 years,
with a weighted average life of approximately 24 years. Goodwill and intangibles
amortization, which is a separate component of operating expenses, reduced
operating profit by $1.2 million, or 1.5% of revenues, in the first six months
of fiscal 2000 and $0.9 million, or 1.3% of revenues, in the first six months of
fiscal 1999.
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 percentage of revenues. 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 40.7% in the first six months of
fiscal 2000 from 44.5% in the first six months of fiscal 1999, resulting from
corporate housing's increasing percentage of total revenues (66.3% in the first
six months of fiscal 2000 versus 57.0% in the comparable period of fiscal 1999).
Gross profit margin on rental sales in the first six months of fiscal 2000 was
90.7%, versus 31.0% for corporate housing. Comparable gross profit margins for
the first six months of fiscal 1999 were 92.2% and 30.7%, 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 related to specific revenue categories. An
additional result of this integration is that operating expenses and, therefore,
operating margins for furniture rental and corporate housing cannot be
specifically identified. Operating expenses, excluding amortization, decreased
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to 31.3% of revenues in the first six months of fiscal 2000 from 34.0% of
revenues in the first six months of fiscal 1999, while the operating margin,
excluding amortization, decreased to 9.4% of revenues in the first six months of
fiscal 2000 from 10.5% of revenues in the first six months of fiscal 1999. The
reduction in operating margin is primarily the result of the increasing mix of
corporate housing revenues over the comparable periods and a soft sales
environment. Including amortization expenses, the operating margin declined to
8.0% in the first six months of fiscal 2000 from 9.2% in the first six months of
fiscal 1999.
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 29 markets and is
the market leader in ten of these markets, with annualized corporate housing
revenues exceeding $100 million. Globe is vying with two other corporate housing
companies for the number two position in the industry based on revenues.
A major risk of Globe's increasing presence in the corporate housing
business is the potential loss of furniture rental revenues from competing
corporate housing companies that are also customers. To date, the majority of
this business with unaffiliated customers has been retained, largely due to the
Company's superior level of service. Additionally, the significance of this risk
has lessened since Globe entered the corporate housing business. In the first
six months of fiscal 2000, unaffiliated corporate housing customers accounted
for $3.7 million, or 4.4%, of Globe's revenues versus $4.3 million, or 6.0%, of
Globe's revenues in the first six months of fiscal 1999. During these same
periods, furniture rental revenues from affiliated corporate housing providers,
which are not included in reported revenues, were $3.6 million and $2.2 million,
respectively.
The Company is implementing a comprehensive corporate housing business
information system which provides the tools for supporting Company-wide
standardization, as well as enhancing apartment unit inventory management and
allowing operational efficiencies. Additionally, the system will facilitate the
national sales effort and provide a common platform as the Company begins to
implement its business-to-business e-commerce efforts in the second half of
fiscal 2000. Implementation of the corporate housing business information system
has been successfully completed in several markets and Globe has retained the
services of an outside consulting firm to expedite the Company-wide rollout.
Nonrecurring expenses consisting of consulting fees of approximately $0.6
million are expected to be incurred and recorded in administrative expenses
during fiscal year 2000. In excess of $0.5 million of these costs will be
incurred in the third and fourth quarters.
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.
Comparison of Second Quarter Fiscal 2000 to Second Quarter Fiscal 1999
Total revenues of $42.9 million increased $3.2 million, or 8.2%, in the
second quarter of fiscal 2000, from $39.7 million in the second quarter of
fiscal 1999, primarily due to acquisitions.
Corporate housing sales of $28.5 million in the second quarter of fiscal
2000 increased 16.5% from $24.5 million in the second quarter of fiscal 1999.
This increase was primarily caused by acquisitions.
Rental sales of $10.2 million in the second quarter of fiscal 2000
decreased 8.6% from $11.1 million in the second quarter of fiscal 1999 largely
as a result of the elimination of intercompany revenues (furniture rented to
Company-owned corporate housing operations). Excluding the impact of these
eliminations, rental revenues decreased $0.5 million, or 3.8%, when compared
with the prior year quarter, reflecting a general softness in the residential
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market and a loss of business from some competing corporate housing customers.
Management believes this softness represents a cyclical slowdown attributable to
the fact that corporate housing has taken over a substantial portion of the
furnished apartment distribution channel. As corporate housing has taken over
more of the furnished apartment distribution channel, furniture rental volume
growth from corporate housing customers has slowed. To date, the other customers
in the furnished apartment distribution channel (property management companies
and showroom trade) have not offset this slowdown.
Retail sales of $4.2 million increased $0.1 million, or 3.7%, in the second
quarter of fiscal 2000 from $4.1 million in the second quarter of fiscal 1999,
driven by the growth of new office furniture sales.
Gross profit of $17.3 million in the second quarter of fiscal 2000
decreased $0.1 million, or 0.1%, from $17.4 million in the second quarter of
fiscal 1999 and declined as a percentage of revenues to 40.4% from 43.8% over
the same period due to the higher mix of corporate housing revenues and the
lower margins associated with these revenues. Gross profit percentage on
corporate housing sales dropped slightly to 31.2% from 31.9% over the period.
Gross profit percentage on rental sales decreased to 91.2% from 93.0% over the
period primarily due to an increase in housewares expenses. Gross profit
percentage on retail sales decreased to 35.8% from 38.1% over the period
resulting from lower margins on clearance center revenues.
Operating expenses of $13.3 million (excluding amortization) in the second
quarter of fiscal 2000 increased 2.9% from $13.0 million in the second quarter
of fiscal 1999 as a result of acquisitions and approximately $0.4 million of
nonrecurring expenses associated primarily with the consolidation of real estate
and clearance center inventories in the western markets. As a percentage of
total revenues, operating expenses declined to 31.0% from 32.6% over the same
period due to corporate housing's lower operating expenses as a percentage of
revenues. Excluding the nonrecurring expenses, operating expenses decreased to
30.0% of revenues from 32.6% of revenues during the period. Additional
nonrecurring expenses, estimated at approximately $0.7 million, are expected to
be incurred during the second half of fiscal year 2000 primarily due to the
accelerated rollout of the Company's corporate housing system.
As a result of the Company's continuing acquisition program, amortization
of intangible assets increased $0.1 million, or 21.7%, to $0.6 million in the
second quarter of fiscal 2000, from $0.5 million in the second quarter of fiscal
1999. As a percentage of revenues, amortization expense increased to 1.4% from
1.3% over the same period.
As a result of the changes in revenues, gross profit, operating expenses
and amortization discussed above, operating income decreased 12.9% to $3.4
million, or 7.9% of revenues in the second quarter of fiscal 2000, from $3.9
million, or 9.9% of revenues in the second quarter of fiscal 1999. Excluding
nonrecurring expenses, operating income decreased to 9.0% of revenues during the
quarter from 9.9% of revenues in the prior year quarter.
Interest/other expense remained flat at $1.2 million in the second quarter
of fiscal 2000 versus the second quarter of fiscal 1999 and as a percentage of
total revenues decreased slightly to 2.9% from 3.0% over the same period.
Interest expense was comparable during the periods despite an increased debt
balance due to the effects of lower interest rates in the current year period.
The debt increase was the result of funding required for acquisitions.
Income before income taxes of $2.2 million in the second quarter of fiscal
2000 decreased $0.5 million, or 20.6%, compared to the second quarter of fiscal
1999 and as a percentage of revenues decreased to 5.0% from 6.9% over the same
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period. Excluding nonrecurring expenses, income before taxes as a percentage of
revenues decreased to 6.1% from 6.9% during the comparable quarters of fiscal
2000 and fiscal 1999.
The Company's effective tax rate, which includes federal, state and local
taxes, increased to 41.4% in the second quarter of fiscal 2000 from 39.0% in the
second quarter of fiscal 1999. This increase in tax rate is largely attributable
to Globe's expansion into states with higher tax rates than those included in
the prior year quarter.
Comparison of Six Months Ended August 31, 1999
to Six Months Ended August 31, 1998
Total revenues of $83.3 million increased $10.7 million, or 14.8%, in the
first six months of fiscal 2000, from $72.6 million in the first six months of
fiscal 1999, primarily due to acquisitions.
Corporate housing sales of $55.2 million in the first six months of fiscal
2000 increased 33.5% from $41.3 million in the first six months of fiscal 1999.
This increase was primarily caused by acquisitions.
Rental sales of $20.3 million in the first six months of fiscal 2000
decreased 9.7% from $22.5 million in the first six months of fiscal 1999
primarily due to the elimination of intercompany revenues. Excluding the impact
of these eliminations, rental revenues decreased 3.2%, reflecting a general
softness in the residential market and a loss of business from some competing
corporate housing customers. Management believes the slowdown is cyclical in
nature and is attributable to the fact that corporate housing has taken over a
substantial portion of the furnished apartment distribution channel.
Retail sales of $7.8 million decreased $0.9 million, or 10.5% in the first
six months of fiscal 2000 from $8.7 million in the first six months of fiscal
1999, resulting from a decrease of $0.9 million, or 22.9%, in clearance center
revenues over the period. The decrease is primarily the result of closure of a
store in Michigan and a decrease in revenues in the Company's western markets
resulting from the decision to consolidate clearance centers.
Gross profit of $33.9 million in the first six months of fiscal 2000
increased $1.6 million, or 5.0%, from $32.3 million in the first six months of
fiscal 1999 and declined as a percentage of revenues to 40.7% from 44.5% over
the same period due to the higher mix of corporate housing revenues and the
lower margins associated with these revenues. Gross profit percentage on
corporate housing and retail sales revenues improved versus the comparable prior
year period, while gross profit percentage on rental sales decreased to 90.7%
from 92.2%. The decrease in rental gross profit percentage was largely
attributable to higher housewares expenses.
Operating expenses of $26.0 million (excluding amortization) in the first
six months of fiscal 2000 increased 5.5% from $24.7 million in the first six
months of fiscal 1999 as a result of acquisitions and approximately $0.7 million
of nonrecurring expenses associated primarily with the consolidation of real
estate and clearance center inventories in the western markets. As a percentage
of total revenues, these expenses declined to 31.3% from 34.0% over the same
period due to corporate housing's lower operating expenses as a percentage of
revenues. Excluding the nonrecurring charges, operating expenses decreased to
30.4% of revenues during the first six months of fiscal 2000 from 34.0% of
revenues in the first six months of fiscal 1999. Additional nonrecurring
expenses, estimated at approximately $0.7 million, are expected to be incurred
during the second half of fiscal year 2000 primarily due to the accelerated
rollout of the corporate housing system.
As a result of Globe's continuing acquisition program, amortization of
intangible assets increased $0.3 million, or 32.5%, to $1.2 million in the first
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six months of fiscal 2000, from $0.9 million in the first six months of fiscal
1999. As a percentage of revenues, amortization expenses increased to 1.5% from
1.3% over the same period.
As a result of the changes in revenues, gross profit, operating expenses
and amortization discussed above, operating income decreased 0.7% to $6.6
million, or 8.0% of revenues in the first six months of fiscal 2000, from $6.7
million, or 9.2% of revenues in the first six months of fiscal 1999. Excluding
nonrecurring charges, operating income decreased to 8.8% of revenues from 9.2%
over the period.
Interest/other expense increased $0.3 million to $2.5 million in the first
six months of fiscal 2000 from $2.2 million in the first six months of fiscal
1999 and remained flat at 3.0% of total revenues. The increased expense for
fiscal 2000 was due primarily to higher debt balances than in the comparable
period of fiscal 1999. The debt increase was the result of funding required for
acquisitions.
Income before income taxes of $4.1 million in the first six months of
fiscal 2000 decreased $0.3 million, or 7.7%, compared to the first six months of
fiscal 1999 and as a percentage of revenues decreased to 5.0% from 6.2% over the
same period. Excluding nonrecurring charges, income before taxes decreased to
5.8% of revenues from 6.2% of revenues during the period.
The Company's effective tax rate, which includes federal, state and local
taxes, increased to 40.7% in the first six months of fiscal 2000 from 39.0% in
the first six months of fiscal 1999. This increase in tax rate is largely
attributable to Globe's expansion into states with higher tax rates than those
included in the prior six month period.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $45.0 million unsecured line of credit which may be
used for acquisitions and general corporate purposes. At October 4, 1999, the
unused line of credit was $9.2 million. The term of this 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.
Principal payments of $4.3 million are due annually beginning September 1,
2001 on the $30.0 million unsecured Senior Notes due September 1, 2007. These
notes may be redeemed at a premium.
The Company maintains a $1.4 million mortgage note which requires full
payment of the then outstanding balance at the end of the initial term (December
1, 2002). Globe expects to renew the note for an additional five-year period at
that date.
From March 1, 1999 through October 4, 1999 Globe used approximately $0.5
million from its line of credit, issued approximately $0.3 million of notes
payable and assumed approximately $0.1 million of certain liabilities in
completing one acquisition and paying certain other consideration on fiscal 1998
and 1999 acquisitions. (See Note 2 to the consolidated financial statements for
further discussion of these acquisitions.)
Other than 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 $11.5 million in the
first six months of fiscal 2000 and $12.9 million in the first six months of
fiscal 1999. The lower level of purchases in the first half of fiscal 2000
versus the prior year period reflects the lower level of rental sales revenues.
As the Company's growth strategies are implemented, furniture purchases may
increase.
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<PAGE>
Capital expenditures were $1.8 million and $1.4 million in the first six
months of fiscal 2000 and 1999, respectively. These expenditures were financed
through cash provided by operations and utilization of the credit facilities.
Expenditures for the first six months of both fiscal 2000 and fiscal 1999 were
largely attributable to continued development of computer systems. Costs to
further develop the computer systems, which are anticipated to be approximately
$1.5 million, will be incurred in the next 6-18 months and are expected to be
financed through cash generated by operations. Remaining capital expenditures
are expected to be approximately $1.0 million and are also expected to be funded
by cash generated by operations. Any temporary cash deficiencies resulting from
timing of these expenditures will be funded via the line of credit.
In the first six months of fiscal 2000 and 1999, net cash provided by
operations was $13.6 million and $15.6 million, respectively, generating $0.3
million more cash than was necessary to fund investing activities (excluding
acquisitions) in the first six months of fiscal 2000 and $1.3 million more cash
than was necessary to fund investing activities (excluding acquisitions) in the
first six months of fiscal 1999.
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 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 consisted of planning and assessment and involved 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 of the plan have been
successfully completed. No issues have been identified to date. A Year 2000
consultant has been retained to review Globe's progress to date and assist in
the final stages of testing and remediation. Costs associated with the Company's
Year 2000 project are not expected to exceed $0.1 million.
All mission critical aspects of the Company's existing internal financial
and operational systems have been tested and remediated. Testing on internal
reporting programs will continue through the month of October 1999. A small
number of desktop computers needing remediation have been identified and will be
addressed by mid-November 1999. The new corporate housing system, which is fully
compliant, is currently being implemented in locations where the existing
software is non-compliant. This implementation will be completed during Globe's
third quarter.
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.
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<PAGE>
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
INTEREST RATE RISK
The Company is exposed to interest rate volatility with regard to future
issuances of fixed rate debt and existing issuances of variable rate debt.
Primary exposures include movements in the prime rate, U.S. Treasury Note rates
and LIBOR.
The table below provides information on Globe's significant debt issuances
by expected maturity date. (See Note 5 to the Consolidated Financial Statements
for further information.)
<TABLE>
<CAPTION>
Twelve Months Ended August 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total
------- -------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Debt Characteristics:
Unsecured revolving note $35,340 $35,340
Average interest rate 6.66% 6.66%
Unsecured senior note $ 4,285 $4,286 $4,286 $4,286 $12,857 $30,000
Fixed interest rate 7.54% 7.54% 7.54% 7.54% 7.54% 7.54%
Mortgage note $ 70 $ 75 $ 80 $ 85 $ 90 $ 1,017 $ 1,417
Fixed interest rate 6.25% 6.25% 6.25% 6.25% 6.25% 6.25% 6.25%
Other debt issues $1,001 $ 575 $502 $323 $ 2,401
Average fixed interest rate 5.64% 5.81% 5.77% 5.63% 5.71%
</TABLE>
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<PAGE>
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
The Company's Annual Meeting of Shareholders was held on July 20, 1999.
Each of the following matters was voted upon and approved by the Company's
shareholders as indicated below:
1. Elected the following directors:
a. David D. Hoguet, 4,528,643 votes for, 96,444 withheld
b. Blair D. Neller, 4,528,643 votes for, 96,444 withheld
c. Alvin Z. Meisel, 4,526,643 votes for, 98,444 withheld
d. William R. Griffin, 4,528,943 votes for, 96,144 withheld
e. Thomas C. Parise, 4,528,443 votes for, 96,644 withheld
2. Adopted the Amendment to the Globe 1998 Stock Option and Incentive Plan,
4,274,048 votes for, 175,239 votes against, 175,800 abstentions.
3. Ratified the appointment of PricewaterhouseCoopers LLP as independent
public accountants for fiscal 2000, 4,566,736 votes for, 55,844 votes
against, 2,507 abstentions.
ITEM 5
Other Information
The Company announced on September 13, 1999 that it has hired the
investment banking firm of Friedman, Billings, Ramsey and Co., Inc. to assist it
in completing a review of strategic alternatives to maximize shareholder value.
The alternatives under review include the possible sale of business segments, an
expansion of the Company's previously authorized share repurchase program, a
possible merger or sale of the corporation or taking the company private.
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<PAGE>
ITEM 6
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
99 Safe Harbor Statement
(b) Reports on Form 8-K filed during the second quarter of 2000: 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 by the
undersigned, thereunto duly authorized.
Globe Business Resources, Inc.
By: /s/ Sharon G. Kebe
-----------------------------------
Sharon G. Kebe
Senior Vice President-Finance
and Treasurer
(Principal Financial Officer)
Signed: October 12, 1999
Page 18
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 corporate housing and furniture rental 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.
Globe depends on the continued availability of an adequate supply of
corporate housing units in its markets. There can be no assurances that Globe
will be able to obtain the necessary units and lease terms to match customer
demand.
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 furniture rental customers compete with Globe in its
corporate housing business. As Globe expands in the corporate housing area, it
may continue to lose furniture rental business from those competitors.
Globe is dependent on its computer systems in its daily operations. In
addition, Globe is developing and implementing a comprehensive corporate housing
business information system. Significant time or cost overruns, in excess of the
anticipated $0.6 million in consulting fees, on this system development and
implementation 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
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<PAGE>
GLOBE BUSINESS RESOURCES, INC.
EXHIBIT 99 - SAFE HARBOR - CONTINUED
general business activity. A prolonged economic downturn could have a material
adverse affect on Globe's operations.
Page 20
<PAGE>
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<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> AUG-31-1999
<CASH> 1,299
<SECURITIES> 0
<RECEIVABLES> 12,338
<ALLOWANCES> 930
<INVENTORY> 56,771
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0
0
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