<PAGE> P-i
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-Q
/X/QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1998
OR
/ /Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From ___________ To ___________
Commission File Number 0-8615
BRC HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1533071
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1111 West Mockingbird Lane, Suite 1400, Dallas, Texas 75247
(Address of principal executive including zip code)
Registrant's telephone number, including area code (214) 688-1800
None
Former name, former address and former fiscal year, if changed since last report
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
Common Stock 13,738,144
$.10 Par Value
<PAGE> P-ii
BRC HOLDINGS, INC.
INDEX
PAGE
Part I. Financial Information (Unaudited)
Consolidated Condensed Balance
Sheets - September 30, 1998 and
December 31, 1997 1
Consolidated Condensed Statements
of Income - Three Months Ended
September 30, 1998 and 1997 2
Consolidated Condensed Statements
of Income - Nine Months Ended
September 30, 1998 and 1997 3
Consolidated Condensed Statement of
Shareholders' Equity - Nine Months
Ended September 30, 1998 and Year
Ended December 31, 1997 4
Consolidated Condensed Statements
of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial
Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information 18
<PAGE> P-1
PART I. FINANCIAL INFORMATION
BRC HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
September 30, December 31,
ASSETS 1998 1997
Current assets:
Cash and cash equivalents. . . . . . . $ 1,366,000 $ 6,464,000
Short-term investments . . . . . . . . 63,431,000 25,084,000
Accounts receivable, net . . . . . . . 30,457,000 21,094,000
Current portion of installment and
notes receivable. . . . . . . . . . . 5,176,000 5,539,000
Inventories (Note 3) . . . . . . . . . 1,925,000 1,585,000
Deferred tax asset . . . . . . . . . . 6,783,000 4,623,000
Interest receivable on investments . . 1,572,000 1,831,000
Other current assets . . . . . . . . . 2,236,000 1,446,000
Total current assets . . . . . . . . 112,946,000 67,666,000
Property, plant and equipment. . . . . 39,081,000 39,268,000
Less accumulated depreciation . . . . (27,671,000) (28,084,000)
11,410,000 11,184,000
Long-term investments (Note 4) . . . . 38,445,000 77,833,000
Long-term installment and notes
receivable . . . . . . . . . . . . . 8,115,000 19,398,000
Goodwill and intangibles, net. . . . . 26,506,000 22,867,000
Other assets . . . . . . . . . . . . . 4,079,000 3,162,000
Total assets . . . . . . . . . . . . . $201,501,000 $202,110,000
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . $ 3,315,000 $ 2,671,000
Accrued liabilities . . . . . . . . . 18,005,000 18,692,000
Accrued income taxes. . . . . . . . . 1,526,000 11,148,000
Current portion of notes and capital
leases . . . . . . . . . . . . . . . 295,000 304,000
Total current liabilities. . . . . . 23,141,000 32,815,000
Long-term notes and capital leases . . --- 144,000
Deferred tax liability . . . . . . . . 2,036,000 1,723,000
Shareholders' Equity:
Common stock . . . . . . . . . . . . . 719,000 719,000
Additional paid-in capital . . . . . . 81,081,000 80,414,000
Retained earnings. . . . . . . . . . . 104,684,000 94,397,000
Treasury stock (Note 7). . . . . . . . (10,160,000) (8,102,000)
Total shareholders' equity . . . . . 176,324,000 167,428,000
Total liabilities and shareholders'
equity . . . . . . . . . . . . . . . $201,501,000 $202,110,000
See accompanying Notes to the Consolidated Condensed Financial Statements.
<PAGE> P-2
BRC HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30,
1998 1997
Revenues . . . . . . . . . . . . . . . . $ 33,966,000 $ 26,321,000
Cost of products and services. . . . . . 23,345,000 18,985,000
Selling, general and administrative. . . 6,266,000 4,492,000
29,611,000 23,477,000
Operating profit . . . . . . . . . . . . 4,355,000 2,844,000
Interest income, net . . . . . . . . . . 1,646,000 1,044,000
Income from continuing operations
before income taxes . . . . . . . . . . 6,001,000 3,888,000
Income taxes . . . . . . . . . . . . . . 2,380,000 1,565,000
Income from continuing operations. . . . 3,621,000 2,323,000
Income from discontinued operations
(Note 6) (net of income tax of $27,000
in 1998 and $160,000 in 1997) . . . . . 40,000 241,000
Net income . . . . . . . . . . . . . . . $ 3,661,000 $ 2,564,000
Earnings per share (Note 8):
Basic:
Income from continuing operations. . . $ .26 $ .17
Income from discontinued operations. . --- .02
$ .26 $ .19
Average shares. . . . . . . . . . . . . 14,070,000 13,796,000
Diluted:
Income from continuing operations. . . $ .26 $ .17
Income from discontinued operations. . --- .01
$ .26 $ .18
Average shares. . . . . . . . . . . . . 14,245,000 14,059,000
Cash dividends per share . . . . . . . . $ --- $ ---
See accompanying Notes to the Consolidated Condensed Financial Statements.
<PAGE> P-3
BRC HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended September 30,
1998 1997
Revenues . . . . . . . . . . . . . . . . $93,335,000 $79,455,000
Cost of products and services. . . . . . 65,772,000 55,622,000
Selling, general and administrative. . . 18,017,000 15,282,000
83,789,000 70,904,000
Operating profit . . . . . . . . . . . . 9,546,000 8,551,000
Interest income, net . . . . . . . . . . 5,871,000 3,043,000
Income from continuing operations
before income taxes . . . . . . . . . . 15,417,000 11,594,000
Income taxes . . . . . . . . . . . . . . 6,153,000 4,639,000
Income from continuing operations. . . . 9,264,000 6,955,000
Income (loss) from discontinued
operations (Note 6) (net of income tax
expense (benefit) of $683,000 in 1998
and $(360,000) in 1997) . . . . . . . . 1,024,000 (540,000)
Net income . . . . . . . . . . . . . . . $10,288,000 $ 6,415,000
Earnings per share (Note 8):
Basic:
Income from continuing operations. . . $ .66 $ .50
Income (loss) from discontinued
operations. . . . . . . . . . . . . . .07 (.04)
$ .73 $ .46
Average shares. . . . . . . . . . . . . 14,083,000 14,003,000
Diluted:
Income from continuing operations. . . $ .65 $ .49
Income (loss) from discontinued
operations. . . . . . . . . . . . . . .07 (.04)
$ .72 $ .45
Average shares. . . . . . . . . . . . . 14,347,000 14,261,000
Cash dividends per share . . . . . . . . $ --- $ ---
See accompanying Notes to the Consolidated Condensed Financial Statements.
<PAGE> P-4
BRC HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Additional
Stock $.10 Paid-In Retained Treasury
par Value Capital Earnings Stock
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 716,000 $ 79,375,000 $ 74,105,000 $ ---
Net income. . . . . . . . . . . --- --- 20,250,000 ---
Purchase of common stock for
treasury (Note 7). . . . . . . --- --- --- (10,225,000)
Exercise of stock options . . . 3,000 845,000 (154,000) 2,123,000
Stock option tax benefits . . . --- 194,000 196,000 ---
Balance at December 31, 1997 719,000 80,414,000 94,397,000 (8,102,000)
Net income. . . . . . . . . . . --- --- 10,288,000 ---
Exercise of stock options . . . --- --- (1,000) 1,932,000
Purchase of common stock for
treasury (Note 7). . . . . . . --- --- --- (7,228,000)
Stock option tax benefits . . . --- 155,000 --- ---
Stock issued for acquisition
(Notes 5 and 7) . . . . . . . --- 512,000 --- 3,238,000
Balance at September 30, 1998 $ 719,000 $ 81,081,000 $104,684,000 $(10,160,000)
</TABLE>
<PAGE> P-5
BRC HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
1998 1997
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 10,288,000 $ 6,415,000
Adjustments to reconcile net income to net
cash from continuing operations:
(Income) loss from discontinued operations. (1,023,000) 540,000
Depreciation . . . . . . . . . . . . . . . . 3,621,000 5,144,000
Amortization . . . . . . . . . . . . . . . . 1,745,000 1,464,000
Amortization of bond premium . . . . . . . . 801,000 750,000
Loss on disposal of assets . . . . . . . . . 110,000 269,000
Deferred income tax. . . . . . . . . . . . . (1,847,000) 256,000
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . (7,786,000) 3,259,000
Inventories. . . . . . . . . . . . . . . . . (151,000) (223,000)
Other assets . . . . . . . . . . . . . . . . 1,721,000 417,000
Accounts payable . . . . . . . . . . . . . . 408,000 (663,000)
Other liabilities. . . . . . . . . . . . . . 529,000 (1,422,000)
Net cash provided by continuing operations . . 8,416,000 16,206,000
Net cash provided by (used in) discontinued
operations:
Operating/transition activities. . . . . . 222,000 7,808,000
Payment of taxes on divestiture. . . . . . (12,524,000) ---
Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . . . . (3,886,000) 24,014,000
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . (2,992,000) (2,470,000)
Capital expenditures of discontinued
operations . . . . . . . . . . . . . . . . . --- (1,038,000)
Purchase of investments. . . . . . . . . . . . (21,877,000) (38,446,000)
Redemption of investments. . . . . . . . . . . 19,817,000 37,024,000
Proceeds from sale of business units . . . . . 11,216,000 481,000
Acquired businesses (Note 5) . . . . . . . . . (4,999,000) (4,824,000)
Additions to installment receivables . . . . . (700,000) (1,686,000)
Proceeds from installment receivables. . . . . 3,773,000 4,124,000
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . 4,238,000 (6,835,000)
Cash flows from financing activities:
Principal payments on capital leases . . . . . (153,000) (424,000)
Issuance of common stock . . . . . . . . . . . 1,931,000 1,529,000
Purchases of treasury stock. . . . . . . . . . (7,228,000) (10,225,000)
Net cash used in financing activities. . . . . . (5,450,000) (9,120,000)
Increase (decrease) in cash and cash equivalents (5,098,000) 8,059,000
Cash and cash equivalents at beginning of period 6,464,000 7,089,000
Cash and cash equivalents at end of period . . . $ 1,366,000 $ 15,148,000
Supplemental disclosures -- Cash payments during the first nine months of 1998
for income taxes and interest were $17,633,000 and $162,000, respectively.
Cash payments during the first nine months of 1997 for income taxes and
interest were $1,054,000 and $199,000, respectively.
See accompanying Notes to the Consolidated Condensed Financial Statements.
<PAGE> P-6
BRC HOLDINGS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The interim consolidated condensed financial statements included herein
have been prepared by BRC Holdings, Inc. ("BRC") (the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to such rules and regulations. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes contained in the Company's 1997
annual report on Form 10-K. In the opinion of management, the
consolidated condensed financial statements contain all adjustments
necessary to present fairly the financial position as of September 30,
1998 and the results of operations and cash flows for the nine months
ended September 30, 1998 and 1997. These adjustments include recurring
accruals and a pro rata portion of certain estimated expenses. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Management believes that the procedures followed in preparing these
consolidated condensed financial statements are reasonable under the
circumstances, but the accuracy of the amounts in the financial statements
are in some respects dependent upon facts that will exist and procedures
that will be performed by the Company later in the fiscal year.
On March 3, 1998, the Board of Directors of the Company voted to issue a
100% common stock dividend to shareholders of record on March 20, 1998.
The distribution date for the common stock was April 6, 1998. As a
result, all historical weighted-average shares and EPS data have been
retroactively restated.
Revenue Recognition - In October 1997, Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2") was issued and addresses
software revenue recognition matters primarily from a conceptual level and
does not include specific implementation guidance. SOP 97-2 supersedes SOP
91-1 and is effective for transactions entered into during fiscal years
beginning after December 15, 1997. SOP 97-2 was adopted by the Company
effective January 1, 1998; however, on March 31, 1998, Statement of
Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2,
Software Revenue Recognition", ("SOP 98-4") was issued, which defers for
one year the effective date of certain provisions of SOP 97-2. The
Company believes it is currently in compliance with SOP 97-2, as amended
by SOP 98-4.
Comprehensive Income - In June 1997, Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" was issued. This statement was
adopted by the Company effective January 1, 1998. The Company has no
comprehensive income to report for the periods presented. The Company
expects to present any future comprehensive income amounts as a component
of the Consolidated Statements of Shareholders' Equity.
<PAGE> P-7
2. The provision for income tax is based on the estimated annual rate.
Certain reclassifications of the September 30, 1998 balances between
current income tax and deferred income tax may be necessary at year end to
reflect the annual computation of differences between book and tax income.
3. Inventories consist of the following:
September 30, December 31,
1998 1997
Raw materials and supplies. . $ 1,444,000 $ 1,438,000
Work in progress. . . . . . . --- ---
Finished goods. . . . . . . . 481,000 147,000
Total inventories . . . . . . $ 1,925,000 $ 1,585,000
4. Long-term investments includes a $5,027,500 minority investment in equity
securities of MatriDigm Corporation ("MatriDigm"), a privately-held
information technology firm, headquartered in San Jose, California.
MatriDigm specializes in automated solutions to the "Year 2000" computer
date recognition problem. On October 6, 1998, MatriDigm announced that it
has executed a definitive Merger Agreement with Zitel Corporation, a
publicly-traded information systems concern, headquartered in Fremont,
California.
5. On February 28, 1998, a subsidiary of the Company purchased the assets and
operations of MIDS, Inc. ("MIDS"), a Tucson, Arizona-based provider of
specialized case management and quality measurement software and related
services for the healthcare industry. MIDS was purchased for $3.4 million
in cash and $3.8 million in common stock. In connection with the
purchase, the Company recorded $4.6 million in goodwill which will be
amortized over 25 years. MIDS had annual revenues of approximately $5.4
million in 1997.
On May 31, 1998, a subsidiary of the Company purchased the assets and
operations of The Tenacity Manufacturing Company ("Tenacity"), a
Cincinnati, Ohio-based producer of products used in government records
management. Tenacity was purchased for $1.8 million in cash. In
connection with the purchase, the Company recorded $0.6 million in
goodwill which will be amortized over 20 years. Tenacity had annual
revenues of approximately $2.7 million in 1997.
6. On November 20, 1997, the Company consummated its sale of the assets of
its election business to Election Systems and Software, Inc. ("ES&S") and
the Sequoia Pacific Systems Division of The Smurfit Packaging Corporation
("Sequoia"). As a result of the sale, the Company entered into transition
agreements to operate the Berkeley, California and Rockford, Illinois
facilities for a maximum period of two years for the benefit of ES&S and
Sequoia. Under its agreements with ES&S and Sequoia, BRC is to be
reimbursed for costs it incurs during these transition periods. In July
1998, the Company received notice from ES&S and Sequoia that the
transition periods would be concluded in November 1998 for both
facilities. Accordingly, the Company will continue to reflect the
activity of these operations as a discontinued operation through November
1998. The Company had no material net assets of discontinued operations
as of September 30, 1998.
<PAGE> P-8
In June 1998, the Company sold a promissory note representing a portion of
the proceeds received in connection with the divestiture of its election
business. The note was sold for $11.2 million and a related pre-tax gain
of $1.5 million was recorded. This gain was reported net of tax as a
component of income from discontinued operations for the period ended June
30, 1998. In 1998, the Company paid $12.5 million of income tax associated
with the gain on sale of the election business.
7. During the first nine months of 1998, the Company repurchased 465,950
shares of its common stock, in open market transactions, at an average
price of $15.51 per share. During the first nine months of 1997, the
Company repurchased 510,000 shares of its common stock, in open market
transactions, at an average price of $16.76, and 100,000 shares of its
common stock in a privately negotiated purchase at $16.75 per share.
During the first nine months of 1998 and 1997, common stock was issued
from treasury upon exercise of 115,548 and 47,392 employee stock options,
respectively. The difference between the aggregate option exercise
proceeds and the Company's basis in the treasury stock of $2,000 and
$26,000 was charged to retained earnings during the first nine months of
1998 and 1997, respectively. In addition, on February 28, 1998, the
Company issued 195,312 shares of common stock from treasury in association
with the acquisition of MIDS, Inc. The difference between the carrying
value of the treasury stock and the acquisition price of $512,000 was
recorded as additional paid-in capital. See Note 5. At September 30,
1998, the Company reflected treasury stock of $10,160,000.
8. During 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128") which establishes
standards for computing and presenting earnings per share ("EPS"). This
statement requires dual presentation of basic and diluted EPS on the face
of the income statement for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes the effect of potentially dilutive
securities while diluted EPS reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised, converted into or resulted in the issuance of common stock. In
addition, the statement requires restatement of all prior-period EPS data.
As such, EPS figures for 1997 have been restated.
The following sets forth the weighted-average number of shares
outstanding:
Basic EPS
Basic EPS data was calculated using the number of weighted-average shares
outstanding of 14,070,000 and 13,796,000 for the three months ended
September 30, 1998 and 1997, respectively, and 14,083,000 and 14,003,000
for the nine months ended September 30, 1998 and 1997, respectively.
Basic EPS is calculated by dividing net income by the weighted-average
number of shares outstanding.
<PAGE> P-9
Diluted EPS
The following is a reconciliation of the weighted-average shares used in
the calculation of basic EPS to the adjusted weighted-average shares used
in the calculation of diluted EPS.
Three Months Ended September 30,
1998 1997
Weighted-average shares . . . . . . 14,070,000 13,796,000
Incremental shares from assumed
conversions of stock options. . . 175,000 263,000
Adjusted weighted-average shares. . 14,245,000 14,059,000
Nine Months Ended September 30,
1998 1997
Weighted-average shares . . . . . . 14,083,000 14,003,000
Incremental shares from assumed
conversions of stock options. . . 264,000 258,000
Adjusted weighted-average shares. . 14,347,000 14,261,000
Diluted EPS is computed by dividing net income by the adjusted weighted-
average shares outstanding.
9. The Company has continued to address Year 2000 issues throughout 1998 by
completing all inventorying, assessment, analysis and high level planning
required to remediate (1) its software products sold to customers, (2) its
obligations, if any, under certain software support, outsourcing or other
service contracts and (3) its internal operational and financial systems.
As of September 30, 1998, assuming the continued availability of labor
resources, the Company believes that all currently known Year 2000 issues
which could have a significant effect on the Company will be addressed by
December 31, 1999. With respect to Year 2000 issues relating to third
parties with which the Company has a material relationship, the Company is
in the process of obtaining Year 2000 certification documentation. The
Company believes that its key vendors are addressing Year 2000 issues in
a satisfactory manner, however, the Company can make no assurances that
all vendors will be Year 2000 compliant in a timely manner. In the event
that certain third parties with which the Company relies upon to conduct
business, such as telephone, electric or other utility providers, are not
Year 2000 compliant in a timely fashion, the Company could be affected in
a materially adverse manner.
<PAGE> P-10
Currently, the Company has not developed a contingency plan to address its
most reasonably likely worst-case Year 2000 scenarios. As of September
30, 1998, the Company believes that its worst-case Year 2000 scenario
would involve, at a minimum, the inability to upgrade certain customers to
Year 2000 compliant versions of its software prior to December 31, 1999 as
a result of a potential labor resource shortage. Based upon the
availability of labor resources to the Company to address Year 2000 issues
to date, the Company believes that adequate labor resources are available
to achieve timely completion of its Year 2000 projects. However, no
assurances can be made that adequate labor resources will continue to be
available as the Year 2000 approaches.
At this time, and based upon current labor costs and availability of labor
resources, the Company continues to estimate its costs to address Year
2000 issues at $5.5 million. Of this amount, approximately $1.3 million
had been expended as of September 30, 1998.
10. On October 19, 1998, the Company signed a definitive Merger Agreement with
Affiliated Computer Services, Inc. ("ACS") under which the Company will be
acquired by and merged into a subsidiary of ACS. ACS commenced a cash
tender offer for approximately 51% of the fully-diluted shares of BRC at
a price of $19.00 per share. The Merger Agreement also provides that
subsequent to the consummation of the cash tender offer, ACS will acquire
all remaining outstanding shares of BRC at $19.00 per share in cash.
In connection with the tender offer, ACS and the Company have filed
Schedules 14D-1 and 14D-9, respectively. The merger agreement is subject
to certain conditions, including regulatory and shareholder approvals.
Subsequently, on November 2, 1998, the Company received notification that
Matador Capital Management Corporation and certain of its affiliates have
filed suit against the Company, ACS Acquisition Corporation ("ACS
Acquisition"), ACS, and the directors of BRC, making certain allegations
regarding the negotiation and contents of the Merger Agreement and the
Company's public disclosure relating thereto. Among other relief sought,
the plaintiffs seek to enjoin the consummation of the tender offer
commenced by ACS for 51% of the fully-diluted shares of BRC or the
consummation of any transaction contemplated in the Merger Agreement. The
Company intends to vigorously defend itself in the lawsuit and does not
currently believe that the lawsuit will have a material adverse effect on
the operations or financial condition of the Company.
<PAGE> P-11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General Considerations
On October 19, 1998, the Company announced that it has signed a definitive
agreement with Affiliated Computer Services, Inc. ("ACS") under which BRC will
be acquired by and merged into a subsidiary of ACS. ACS commenced a cash tender
offer for approximately 51% of the fully-diluted shares of BRC at a price of
$19.00 per share. The merger agreement is subject to certain conditions,
including regulatory approvals and approval of the merger by the shareholders of
BRC. Upon satisfaction of these conditions, ACS will acquire all of the
remaining shares of common stock of BRC at a price of $19.00 per share in cash.
Based on the Company's 13.7 million outstanding common shares at September 30,
1998, the gross transaction value for all shares is approximately $261 million.
(See Item 5).
Subsequently, on November 2, 1998, the Company received notification that
Matador Capital Management Corporation and certain of its affiliates have filed
suit in Delaware Chancery Court against BRC, ACS Acquisition Corporation ("ACS
Acquisition"), ACS and the directors of BRC, making certain allegations
regarding the negotiation and contents of the Merger Agreement among BRC, ACS
and ACS Acquisition and BRC's public disclosures relating thereto. Among other
relief sought, the plaintiffs seek to enjoin the consummation of the tender
offer commenced by ACS for 51% (on a fully-diluted basis) of the outstanding
common stock of BRC or the consummation of any transaction contemplated in the
related Merger Agreement. (See Note 10 to the unaudited consolidated condensed
financial statements and Item 5 hereto).
Statements about the Company's outlook and all other statements in this 10-Q
other than historical facts are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements rely on a number of assumptions concerning future events and are
subject to a number of uncertainties and factors, many of which are outside the
Company's control, that could cause actual results to differ materially from
such statements. While the Company believes that the assumptions concerning
future events are reasonable, it cautions that there are inherent difficulties
in predicting certain important factors, especially the timing and magnitude
of technological advances; market responses to the Company's product and
service offerings, pricing pressures, results from litigation, the timely
development and acceptance of new products and services, changes in customer
preferences, inventory risks due to shifts in market demand, costs and
liabilities associated with the compliance of the Company-provided computer
software and hardware with the Year 2000 date convention and the successful
consummation of the transactions contemplated in the merger agreement discussed
above. Consequently, the actual results realized by the Company could differ
materially from the statements made herein. Shareholders and all other readers
of this Form 10-Q are cautioned not to place an undue reliance on the
forward-looking statements made herein.
<PAGE> P-12
Discontinued Operations
On November 20, 1997, the Company and its wholly-owned subsidiary, Business
Records Corporation, consummated the divestiture of its business of providing
goods and services utilized by public authorities in the conduct of elections.
In connection with the divestiture, the Company agreed to operate the Berkeley,
California and Rockford, Illinois facilities for the benefit of the acquirers
for transition periods which are currently expected to end in November 1998.
Accordingly, the Company has continued to reflect the activity of these
operations as a discontinued operation through September 30, 1998. (See Note 6
to the unaudited consolidated condensed financial statements).
Revenues from election products and services associated with the Company's
provision of transition services to ES&S and Sequoia constituted approximately
3% of the Company's combined revenues from continuing and discontinued
operations during the third quarter and first nine months of 1998. This
compared to 24% and 19% of total revenues during the third quarter and first
nine months of 1997, respectively.
Acquisitions
In February 1998, the Company's wholly-owned subsidiary, The Pace Group,
acquired the assets and operations of MIDS, Inc. ("MIDS") for $7.2 million.
MIDS is a Tucson, Arizona-based provider of specialized case management and
quality measurement software and related services for the healthcare industry.
MIDS had revenues of approximately $5.4 million in 1997. The purchase price
consisted of $3.4 million in cash and $3.8 million in the Company's common
stock. See Note 5 to the unaudited consolidated condensed financial statements.
In May 1998, a subsidiary of the Company purchased the assets and operations of
The Tenacity Manufacturing Company, ("Tenacity") a Cincinnati, Ohio-based
producer of government records management products. Tenacity was purchased for
$1.8 million in cash. Tenacity had annual revenues of approximately $2.7
million in 1997. See Note 5 to the unaudited consolidated condensed financial
statements.
Status of Year 2000 Issues
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As the Year 2000
approaches, these code fields will need to accept four digit entries to
distinguish years beginning with "19" from those beginning with "20". As a
result, computer systems and/or software products used by many of the Company's
customers may need to be upgraded to comply with such Year 2000 requirements.
The Company is currently expending resources to remediate or replace its
products and services as well as its internal use software in order to ensure
those products, services and systems are Year 2000 ready.
<PAGE> P-13
In 1996, the Company began the process of evaluating the extent of its Year
2000 date convention problems within its software products sold or licensed to
customers and the obligations it may have under software support, outsourcing
and other service contracts with existing customers. Additionally, during 1996
the Company reviewed its internal accounting systems to determine the scope and
extent of the Year 2000 date conversion problem with respect to these systems.
Based on these evaluations, during 1996 and 1997, the Company has dedicated
extensive resources to reprogramming its tax and financial software packages
licensed to government entities and expects to complete the upgrade process
with customers to Year 2000 compliant software by August 1999. The Company's
EmStat software has also undergone extensive reprogramming efforts and
installation of a new Year 2000 compliant version at customer sites is expected
to be completed by April 1999. The Company's dental and vision care softwares
are also in varying stages of reprogramming and the Company expects to offer
Year 2000 compliant versions during 1999. The contracts under which the Company
provides customers with on-site information systems management outline varying
degrees of responsibility for Year 2000 compliant hardware and software, ranging
from financial responsibility for the systems to simply advising on
customer-sponsored Year 2000 projects. The government records management
business is currently updating its records indexing software to a Year 2000
compliant version. Software and hardware will need to be replaced at most
customer sites to become Year 2000 compliant. Internally, the Company upgraded
its accounting systems to Year 2000 compliant software in March 1998, and
expects to complete conversion of peripheral software by March 1999.
With respect to Year 2000 issues relating to third parties with which the
Company has a material relationship, the Company is in the process of obtaining
Year 2000 certification documentation. The Company believes that its key
vendors are addressing Year 2000 issues in a satisfactory manner, however, the
Company can make no assurances that all vendors will be Year 2000 compliant in
a timely fashion. In the event that third parties with which the Company
relies upon to conduct business, such as telephone, electric and other utility
providers, are not Year 2000 compliant in a timely fashion, material adverse
conditions could arise.
Currently, the Company has not developed a contingency plan to address its most
reasonably likely worst-case Year 2000 scenarios. As of September 30, 1998, the
Company believes that its worst-case Year 2000 scenario would involve, at a
minimum, the inability to upgrade certain customers to Year 2000 compliant
versions of its software prior to December 31, 1999 as a result of a potential
labor resource shortage. Based upon the availability of the labor resources to
the Company to address Year 2000 issues to date, the Company believes that
adequate labor resources are available to achieve timely completion of its Year
2000 projects. However, no assurances can be made that adequate labor resources
will continue to be available as the Year 2000 approaches.
At this time, and based upon current labor costs and availability of labor
resources, the Company continues to estimate its costs to address Year 2000
issues at $5.5 million. Of this amount, approximately $1.3 million had been
expended as of September 30, 1998.
<PAGE> P-14
Three Months Ended September 30, 1998 and 1997
Revenues from continuing operations for the third quarter of 1998 increased $7.6
million, or 29%, over those reported during the third quarter of 1997. The
Company experienced revenue growth in most of its product lines during the third
quarter. Specifically, significant growth was reported by information systems
and services to governmental customers which increased $4.8 million, or 65%,
when compared to the third quarter of 1997. When including revenues associated
with information systems and services provided to health care clients, total
information systems and services increased by $4.1 million, or 25%. Revenues
from the Company's government records management business increased by $1.9
million, or 29%, as compared to the previous year, while consulting services
revenues grew $1.4 million, or 46%. These changes in revenues are discussed in
further detail below.
Information systems and services revenues increased $4.1 million during the
third quarter of 1998 as a result of revenues generated from new on-site
systems management contracts with the cities of Carrollton, Texas, and
Riverside, California. These contracts and additional special project revenues
generated increased revenues from government customers of $4.3 million over the
third quarter of 1997. After adjusting for the mid-quarter 1997 acquisition of
MCSI, this business unit reported third quarter 1998 revenue growth of $0.7
million, or 88%, over the third quarter of 1997. This increase can be
attributed to growth in the customer base and a broadening of the services
provided. These revenue increases were offset by a decrease in revenues of $0.7
million, or 8%, from on-site systems management services provided to health care
accounts. This decrease can be attributed to the attrition of such accounts
during 1997 and 1996.
Government records management revenues increased $1.9 million, or 29%, during
the third quarter of 1998 when compared to the third quarter of 1997. This
increase is attributed to a growth in customer base and favorable economic
conditions which have generated a significant increase in the number of real
estate transactions required to be recorded by government entities. In
addition, binder sales increased by $0.9 million, or 52%, over the third
quarter of 1997 primarily as a result of the acquisition of The Tenacity
Manufacturing Company during the second quarter of 1998. (See Note 5 to the
unaudited consolidated condensed financial statements).
Consulting services revenues increased $1.4 million, or 46%, in the third
quarter of 1998 as compared to the same period last year. This increase is a
result of the acquisition of MIDS in February of this year which reported
third quarter revenues of $2.1 million. This increase in revenues was partially
offset by a decrease in revenues of The Pace Group due to the completion of
several large, non-recurring consulting engagements in the second half of 1997.
Millennium services revenues were $0.6 million for the third quarter of 1998.
This business unit did not generate significant revenues in 1997 during its
start-up phase. While the Company currently anticipates continued growth in
revenues from millennium services within the next 15 months, there can be no
certainty that potential customers will select the Company's methodology for
addressing their Year 2000 concerns.
In July 1997 the Company sold its title services business which accounted for
other revenues during the second quarter of 1997 of $0.4 million.
<PAGE> P-15
The Company's gross margins for the third quarters of 1998 and 1997 were 31%
and 28%, respectively. This increase in margins can be attributed to the
government records management business where significant revenue growth has been
achieved with minimal additional personnel costs.
Selling, general and administrative expenses increased from 17% of revenues in
the third quarter of 1997 to 18% of revenues during the third quarter of 1998.
This increase can be substantially attributed to additional personnel costs
incurred to enable and support the Company's revenue growth.
Nine Months Ended September 30, 1998 and 1997
Revenues from continuing operations for the first nine months of 1998 were $13.9
million, or 18%, greater than those reported during the first nine months of
1997. Year to date information systems and services and government records
management revenues increased $9.0 million, or 19%, and $3.4 million, or 17%,
respectively, when compared to the first nine months of 1997. Millennium
services reported revenues of $2.9 million for the first nine months of 1998,
and MIDS, acquired in February of 1998, contributed $4.8 million in revenues
year to date.
The increase in information systems and services revenues of $9.0 million, or
19%, during the first nine months of 1998, is primarily related to new on-site
systems management contracts and additional special project revenues generated
in the government sector of $8.5 million over the first nine months of 1997.
In addition, the Company's CSI and MCSI business units which were acquired in
May and July, 1997, respectively, reported revenues of $4.8 and $2.1 million,
respectively, during the first nine months of 1998. These additional revenues
were offset by decreased revenues of $5.8 million from on-site systems
management services provided to health care accounts. This decrease can be
attributed to the cancellation of large contracts during 1997 and 1996.
Government records management revenues increased $3.4 million, or 17%, during
the first nine months of 1998 when compared to the first nine months of 1997.
This growth is attributed to additional sales in all products lines and
services of this business as a result of increased real estate transactions
associated with positive economic conditions nationwide coupled with an expanded
customer base. In addition, the Company's binders business unit sales increased
in the first nine months of 1998 by $1.4 million, or 25%, over the first nine
months of 1997.
Consulting services revenues increased by $1.5 million, or 14%, in the first
nine months of 1998 as compared to the same period last year. This increase
in revenues can primarily be attributed to additional revenues of $4.8 million
generated by the Company's acquisition of MIDS in February of this year. This
increase was substantially offset due to the completion of several large,
non-recurring consulting engagements by The Pace Group during 1997.
For the first nine months of 1998, revenues from millennium services were $2.9
million. As previously mentioned, this business unit was in the start-up phase
during 1997 and no significant revenues were generated during that period of
time.
Other revenues associated with the Company's title services business which was
sold in July 1997 accounted for $2.8 million in revenues during the first nine
months of 1997.
<PAGE> P-16
The Company's gross margins for the first nine months of 1998 and 1997 were
consistent at 30%. Gross margins in government records management have
increased when compared to the first nine months of 1997 as a result of
substantial revenue growth, as previously discussed, with minimal increase in
costs. However, other product lines, such as technology outsourcing and the
healthcare-related softwares, have reported decreased gross margins when
compared to the first nine months of 1997 as Year 2000 issued with to existing
customers are being addressed. It should also be noted that the Company has
experienced a shift from higher margin healthcare technology outsourcing
contracts which terminated in 1997 and 1996 to lower margin services provided
by MCSI and CSI which were acquired during 1997.
Selling, general and administrative expenses remained constant at 19% of
revenues for the first nine months of 1998 and 1997.
Liquidity and Capital Resources
At September 30, 1998, the Company had net working capital (total current
assets minus total current liabilities) of $89.8 million. This represents a
$55.0 million increase in working capital since December 31, 1997. This can be
attributed to a $33.2 million increase in cash equivalents and short-term
investments as the Company has shifted from longer term instruments to
short-term investments and generated additional cash reserves of $6.1 million.
During June 1998, the Company received $11.3 million in proceeds associated with
the sale of a promissory note received in connection with the divestiture of the
Company's election business. (See Note 6 to the unaudited consolidated
condensed financial statements). Proceeds from this note contributed to the
increase in short-term investment balances. The $9.4 million increase in
accounts receivable since December 31, 1997, is primarily related to increased
customer billings by the millennium services and government information systems
and services business units as a result of the revenue growth previously
discussed. The acquisition of MIDS and Tenacity also increased accounts
receivable balances by $2.3 million. In addition, the Company reflected a $9.6
million reduction in accrued income taxes which was primarily related to the
payment of taxes associated with the sale of the elections business. As of
September 30, 1998, the Company's total current assets were 4.9 times total
current liabilities.
Net cash provided by operating activities from continuing operations during the
first nine months of 1998 decreased by $7.8 million when compared to the first
nine months of 1997. This change is primarily due to a decrease in cash
provided from accounts receivable of $11.0 million as balances have increased
due to the Company's revenue growth. In addition, other liabilities have
increased in 1998 due to additional compensation-related accruals associated
with increased profits, and increased deferred revenues associated with new
customer contracts where customer invoicing precedes revenue recognition.
The change in other assets in the third quarter of 1998 when compared to the
third quarter of 1997 represents an increase in cash used of $1.3 million.
This increase can be attributed to the prepayment of millennium consulting
services and increases in accrued interest receivable. Net cash used in
operating activities of discontinued operations included income taxes paid of
$12.5 million in connection with the gains on divestiture of the election
business.
<PAGE> P-17
Cash flows provided by investing activities of continuing operations increased
$10.0 million in the first nine months of 1998 when compared to the first nine
months of 1997. As mentioned above, the Company received $11.3 million in
payments from a promissory note received in connection with the divestiture of
the Company's election business. The note was sold for $11.2 million at a
gain, net of taxes and commissions, of $0.8 million. In addition, notes
receivable additions during the first nine months of 1998 decreased $9.9
million when compared to the first nine months of 1997. This decrease is a
result of a shift away from Company-financed hardware sales to customers.
These increases in cash provided by investing activities have been offset by
minor increased capital expenditures and a reduction in proceeds from
installment receivables of $0.5 and $0.4 million, respectively. In addition,
net long-term investment activity resulted in a $0.6 million increase in the
use of funds when compared to the first nine months of 1997.
Cash flows used in financing activities decreased $3.7 million in the first
nine months of 1998 when compared to the first nine months of 1997. During the
first nine months of 1997 the Company purchased $10.2 million in treasury
stock, compared to $7.2 million of such purchases during the first nine months
of 1998. In addition, proceeds from common stock were slightly higher in 1998
by $0.4 million when compared to 1997 while cash used to pay down lease
obligations decreased by $0.3 million.
Due to continuing positive cash flows from existing operations and anticipated
future exercises of stock options, the Company generally foresees experiencing
positive cash flows during the coming year.
The Company is not currently subject to any material indebtedness or aware of
any liabilities which would cause it to believe it will be subject to a
materially adverse long-term liquidity position. Due to the foregoing, and its
working capital position, the Company does not maintain any active lines of
credit.
<PAGE> P-18
PART II. OTHER INFORMATION
Item 5. Other Information
On October 19, 1998, the Company announced that it had signed a definitive
agreement with Affiliated Computer Services, Inc. ("ACS") under which BRC will
be acquired by and merged into a subsidiary of ACS. ACS commenced a cash
tender offer for approximately 51% of the fully-diluted shares of BRC at a
price of $19.00 per share. The merger agreement is subject to certain
conditions, including regulatory approvals and approval of the merger by the
shareholders of BRC. Upon satisfaction of these conditions, ACS will acquire
all of the remaining shares of common stock of BRC at a price of $19.00 per
share in cash. Based on the Company's 13.7 million outstanding common shares,
the gross transaction value for all shares is approximately $261 million as of
September 30, 1998.
On October 23, 1998, ACS filed, with the Securities and Exchange Commission, a
Schedule 14d-1, offering to purchase 51%, on a fully-diluted basis, of the
Company's outstanding common stock. Also on October 23, 1998, the Company
filed, with the Securities and Exchange Commission, a Schedule 14d-9 relating
to ACS's offer to purchase the Company's common stock.
Subsequently, on November 2, 1998, the Company received notification that
Matador Capital Management Corporation and certain of its affiliates have
filed suit in Delaware Chancery Court against BRC, ACS Acquisition Corporation
("ACS Acquisition"), ACS and the directors of BRC, making certain allegations
regarding the negotiation and contents of a Merger Agreement among BRC, ACS
and ACS Acquisition and BRC's public disclosures relating thereto. Among other
relief sought, the plaintiffs seek to enjoin the consummation of the tender
offer commenced by ACS for 51% (on a fully-diluted basis) of the outstanding
common stock of BRC or the consummation of any transaction contemplated in the
related Merger Agreement. (See Note 10 to the unaudited consolidated condensed
financial statements). In addition, on November 4, 1998, Matador Capital
Management Corporation filed a Schedule 14d-9 with regard to the Company's
common stock. The Company's stockholders are encouraged to review the filings,
together with such amendments thereto as may be filed from time to time, for
information regarding ACS's offer to purchase the Company's common stock and
responses by the Company and third parties relating to that offer. All
statements made in this Report on Form 10-Q are qualified in their entirety by
reference to the more complete descriptions and other material contained in
such Schedules 14d-1 and 14d-9, together with any amendments thereto.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27. Financial Data Schedule for the Nine Months Ended September 30,
1998. (Pursuant to Item 601(c)(iv) of Regulation S-X, the
Financial Data Schedule is not deemed to be "filed" for purpose
of Section 11 of the Securities Act of 1933, as amended, or Section
18 of the Securities Exchange Act of 1934, as amended.)
B. Reports on Form 8-K
During the period from July 1, 1998 through September 30, 1998 the
Company did not file a Current Report on Form 8-K.
<PAGE> P-19
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.
BRC HOLDINGS, INC.
(Registrant)
By
Date: November 12, 1998 /s/ J. L. Morrison
J. L. Morrison
President and Chief Operating Officer
Date: November 12, 1998 /s/ Thomas E. Kiraly
Thomas E. Kiraly
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from Form 10-Q
financial statements filed for the period ended September 30, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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