FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998.
Commission File Number: 0-15692
TOTAL RESEARCH CORPORATION
--------------------------
(Exact name of Registrant as specified in its Charter)
DELAWARE 22-2072212
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(State of Incorporation) (IRS Employer Identification No.)
Princeton Corporate Center, 5 Independence Way
Princeton, New Jersey 08543-5305
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(Address of principal executive offices) (Zip Code)
(609) 520-9100
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(Registrant's telephone number, including area code)
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 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
--- ---
At February 13, 1999, the Registrant had 11,491,108 shares of Common Stock,
outstanding.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Item 1. Consolidated Financial Statements
- ------- ---------------------------------
<TABLE>
TOTAL RESEARCH CORPORATION
--------------------------
Consolidated Balance Sheets
Unaudited Audited
December 31, June 30,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $4,605,649 $ 2,097,347
Accounts receivable, less allowance for doubtful accounts
of $110,000 at December 31, 1998 and June 30, 1998 6,716,224 6,451,545
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,883,290 1,201,265
Deferred Taxes 243,000 243,000
Other current assets 899,105 715,376
----------- -----------
Total current assets 14,347,268 10,708,533
Fixed assets, less accumulated depreciation 2,528,480 2,110,914
Goodwill, net of accumulated amortization 1,683,618 1,722,540
Deferred taxes 361,100 361,100
Other assets 729,674 566,071
----------- -----------
Total assets $19,650,140 $15,469,158
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Revolving line of credit $ 15,689 $ -
Notes payable - bank 415,000 -
Accounts payable 2,987,277 3,385,709
Accrued expenses and other current liabilities 1,802,804 2,834,060
Billings in excess of earnings 4,917,484 3,394,545
Income taxes payable 772,080 293,171
----------- -----------
Total current liabilities 10,910,334 9,907,485
Long-term liabilities
Other long-term liabilities 573,515 484,207
----------- -----------
Total liabilities 11,483,849 10,391,692
----------- -----------
Stockholders' equity
Common stock-authorized 20,000,000 shares $.001 par value,
11,491,108 shares issued and outstanding at December 31, 1998 and
10,476,108 shares issued and outstanding at June 30, 1998 11,491 10,476
Additional paid-in capital 6,235,753 4,172,904
Cumulative translation adjustment (12,856) 22,602
Retained earnings 2,219,620 1,159,201
----------- -----------
8,454,008 5,365,183
Treasury Stock (287,717) (287,717)
----------- -----------
Total stockholders equity 8,166,291 5,077,466
Total liabilities and stockholders' equity $19,650,140 $15,469,158
=========== ===========
(See notes to the consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
TOTAL RESEARCH CORPORATION
--------------------------
Consolidated Statements of Income
Unaudited Unaudited
--------- ---------
Three Months Ended Six Months Ended
------------------ ----------------
Dec. 31. Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues........................... $9,625,625 $8,749,086 $19,695,071 $16,991,111
Direct Costs....................... 4,913,071 4,204,615 9,866,070 8,268,339
--------- --------- --------- ---------
Gross Profit....................... 4,712,554 4,544,471 9,829,001 8,722,772
Operating Expenses................. 3,848,278 3,935,362 8,149,772 7,528,000
--------- --------- --------- ---------
Income from Operations............. 864,276 609,109 1,679,229 1,194,772
Interest Income (Expense).......... 37,787 (1,904) 69,880 (4,813)
Other income, net ................ - 25,912 - 35,912
--------- --------- --------- ---------
Income before income
taxes............................. 902,063 633,117 1,749,109 1,225,871
Income taxes....................... 362,577 225,592 688,690 465,831
--------- --------- --------- ---------
Net income......................... $ 539,486 $ 407,525 $1,060,419 $ 760,040
--------- --------- --------- ---------
Earnings per share
Basic........................... $ .05 $ .04 $ .09 $ .08
Diluted......................... $ .04 $ .03 $ .08 $ .07
Weighted average common shares
Outstanding - Basic............. 11,466,921 10,087,764 11,460,508 10,071,330
- Diluted........... 12,422,398 11,646,107 12,502,591 11,426,471
(See notes to the consolidated financial statements)
</TABLE>
<PAGE>
<TABLE>
TOTAL RESEARCH CORPORATION
--------------------------
Consolidated Statements of Cash Flows
Unaudited Unaudited
December 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 836,423 $ 1,122,619
Cash flows from investing activities:
Purchase of equipment (787,216) (136,743)
--------- ---------
Net cash used for investing activities (787,216) (136,743)
Cash flows from financing activities:
(Repayment) proceeds from long-term debt 430,689 (15,303)
Proceeds from issuance of common stock 2,063,864 4,376
--------- ---------
Net cash provided by (used in) financing activities 2,494,553 (10,927)
Effect of exchange rate changes on cash (35,458) (6,276)
Net increase (decrease) in cash and cash equivalents 2,508,302 968,673
Cash and cash equivalents at beginning of period 2,097,347 678,350
--------- ---------
Cash and cash equivalents at end of period $4,605,649 $ 1,647,023
========= =========
(See notes to the consolidated financial statements)
</TABLE>
<PAGE>
TOTAL RESEARCH CORPORATION
--------------------------
Notes to Consolidated Unaudited Financial Statements
----------------------------------------------------
December 31, 1998 and 1997
--------------------------
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1999.
NOTE 2 - SEGMENT INFORMATION
The Company operates in one principal industry segment: marketing research
services. Geographic financial information for the three-month and six-month
periods ended December 31, 1998 and 1997 (in 000's) is as follows:
<TABLE>
<CAPTION>
Three Months Six Months
------------ ----------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
United States................ $ 6,524 $ 5,938 $13,665 $11,373
Europe....................... 3,101 2,811 6,030 5,618
------ ------ ------ ------
Totals................................ $ 9,625 $ 8,749 $19,695 $16,991
Operating Income......................
United States................ 777 447 1,438 859
Europe....................... 125 186 311 367
------ ------ ------ ------
Totals................................ $ 902 $ 633 $ 1,749 $ 1,226
</TABLE>
NOTE 3 - MEASUREMENT OF GOODWILL
Goodwill has been recorded in relation to the excess of the purchase price
over the fair values of the identified assets acquired. The Company amortizes
goodwill over twenty-five years. The carrying value of goodwill is evaluated
periodically in relation to the operating performance and future undiscounted
net cash flows of the underlying business. Adjustments are recorded if the sum
of the expected future net cash flows is less than the book value of the
goodwill.
<PAGE>
ITEM II MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company is a full-service consultative marketing research corporation
that provides marketing research and information to assist its clients with the
pricing and positioning of new or existing products, customer loyalty
measurements, brand equity issues and other marketing concerns
The following table sets forth, for the periods indicated certain
historical income statement data as a percentage of gross revenues.
STATEMENT OF INCOME DATA:
(Expressed as a percentage of revenues)
Quarter Ended
December 31,
------------
1998 1997
---- ----
Revenues 100.0% 100.0%
Direct costs 51.0% 48.1%
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Gross profit 49.0% 51.9%
Operating expenses 40.0% 44.9%
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Income from operations 9.0% 7.0%
Interest income (expense) 0.4% 0.0%
Other income, net 0.0% 0.3%
----- -----
Income before income taxes 9.4% 7.3%
Provision for income taxes 3.8% 2.6%
----- -----
Net income 5.6% 4.7%
RESULT OF OPERATIONS - SECOND QUARTER FISCAL 1999 AS COMPARED TO SECOND QUARTER
FISCAL 1998.
- -------------------------------------------------------------------------------
The Company's revenues increased approximately 10 percent from the second
quarter of fiscal 1998 to the second quarter of fiscal 1999. Customer Loyalty
and Global Health Care experienced growth of over 20 percent in the second
quarter of fiscal 1999 versus the second quarter of fiscal 1998. Strategic
Marketing Services experienced growth of approximately nine percent during this
period and US Regional Offices revenues were slightly below those earned in the
previous fiscal year. The decrease in revenues for its US Regional Offices was
the result of lower than anticipated revenues from its Chicago office.
The gross profit of the Company decreased from 51.9 percent to 49.0 percent
of revenues in the second quarter of fiscal 1999. During the period the
Company's overall gross profit as a percentage of revenues was reduced by a
large project for one client. This project had a large amount of data collection
and data processing costs that had a significant negative effect on the overall
gross profit percentage for the Company. However, the Company continues to
generate gross profits of greater than 50 percent for most of its research
projects.
<PAGE>
Result of Operations - Second Quarter Fiscal 1999 as Compared to Second Quarter
Fiscal 1998 (cont'd).
- --------------------------------------------------------------------------------
Operating costs improved from approximately 45 percent of revenues in the
second quarter of fiscal 1999 to approximately 40 percent of revenues in the
second quarter of fiscal 1999. The reduction of the percentage of operating
expenses to revenues is mainly the result of the Company continuing to control
its non-project related expenses as it continues to expand.
Income from operations increased as a percentage of revenues from 7.0
percent in the second quarter of fiscal 1998 to 9.0 percent in the second
quarter of fiscal 1999 or approximately $255,000.
The Company's interest income increased to approximately $38,000 in the
second quarter of fiscal 1999 from an interest expense of approximately $2,000
as a result of the interest earned on its cash reserves.
Income before taxes increased as a percentage of revenues from 7.3 percent
in the second quarter of fiscal 1998 to 9.4 percent in the second quarter of
fiscal 1999 or approximately $269,000.
The provision for income taxes increased due to the increased income in the
second quarter of fiscal 1999. Overall, the Company increased its net income as
a percentage of revenues from 4.7 percent in the second quarter of fiscal 1998
to 5.6 percent in the second quarter of fiscal 1999, or approximately $132,000.
STATEMENT OF INCOME DATA:
(Expressed as a percentage of revenues)
Six Months Ended
December 31,
------------
1998 1997
---- ----
Revenues 100.0% 100.0%
Direct costs 50.1% 48.7%
----- -----
Gross profit 49.9% 51.3%
Operating expenses 41.4% 44.3%
----- -----
Income from operations 8.5% 7.0%
Interest income 0.4% 0.0%
Other income (expense), net 0.0% 0.2%
----- -----
Income before income taxes 8.9% 7.2%
Provision for income taxes 3.5% 2.7%
----- -----
Net income 5.4% 4.5%
<PAGE>
RESULTS OF OPERATIONS - SIX MONTHS YEAR TO DATE FISCAL 1999 AS COMPARED TO SIX
MONTHS YEAR TO DATE FISCAL 1998
- --------------------------------------------------------------------------------
Revenues increased approximately 16 percent for the first six months of
fiscal 1998 compared to the first six months of fiscal 1999. Customer Loyalty
experienced growth of over 32 percent, while Strategic Marketing Services and
Global Health Care experienced growth of over 15 percent. The US Regional
Offices revenues increased by approximately 7 percent during the period.
The gross profit of the Company decreased from 51.3 percent for the
six-month periods in fiscal 1998 to 49.9 percent in fiscal 1999. However, as
stated in the second quarter analysis, the gross profit for the six-month period
was reduced by a large project for one client that included a large amount of
data collection and data processing costs.
Operating costs also improved from 44.3 percent of revenues in the first
six months of fiscal 1998 to 41.4 percent of revenues in the first six months of
fiscal 1999. The reduction of the percentage of operating expenses to revenues
is mainly the result of the Company continuing to control its non-project
related expenses as it continues to expand.
Income from operations increased as a percentage of revenues from 7.0
percent in the first six months of fiscal 1998 to 8.5 percent in the first six
months of fiscal 1999 or approximately $484,000.
Interest income increased from 0.0 percent in the first six months of
fiscal 1998 to 0.4 percent in the first six months quarter of fiscal 1999, or
approximately $75,000 as a result of the Company's interest earned on its cash
reserves.
The provision for income taxes increased due to the increased income in the
first six months of fiscal 1999. Overall, the Company increased its net income
as a percentage of revenues from 4.5 percent in the first six months of fiscal
1998 to 5.4 percent in fiscal 1999 or approximately $300,000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998 the Company's working capital increased $2,635,886 to
$3,436,934 from $801,048 at June 30, 1998, and the current ratio increased to
1.32 from 1.08. The Company's cash balances increased $2,508,302 to $4,605,649
from $2,097,347 at June 30, 1998.
In July of 1998, the Company entered into an agreement with a number of
investors pursuant to which the Company sold 1,000,000 shares of common stock at
$2.25 per share and issued options to purchase an aggregate of 250,000 shares of
common stock at an exercise price of $2.25 per share (exercisable for 5 years).
The agreement also provides that the investors will, under certain
circumstances, provide or arrange for others to provide up to $25,000,000 in
debt or equity financing to complete acquisitions and/or projects approved by
the Board of Directors. The transaction netted the Company $2,048,092 after
offsetting associated costs.
For the six-month period ended December 31, 1998, the Company generated
positive cash from operations of approximately $836,000. The Company uses its
cash to purchase approximately $375,000 of computer equipment and office
furnishings to support its additional business and move to become Y2K compliant.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
In addition, the Company moved to new offices in the United Kingdom during
the period to support its growth strategy. To that end, the Company spent
approximately $325,000, to date, for leasehold improvements. In order to fund
this expansion, the Company borrowed, on a short-term basis, approximately
$415,000 from its UK based bank (Barclays Bank). This borrowing will be repaid
from cash from operations of the UK office.
The Company has a loan agreement with Summit Bank, located in Princeton,
NJ. The loan agreement contains the following:
o A one year $2.5 million revolving line of credit at a variable
interest rate based on certain financial ratios. As of December 31,
1998, the rate is the prime rate plus one-quarter percent (prime rate
at December 31, 1998 was 7.75%). As of December 31, 1998, the Company
was in compliance with all of the financial ratios and has not
borrowed against this line.
o A three-year $500,000 term line secured by equipment, furniture and
fixtures at an interest rate based on certain financial ratios. As of
December 31, 1998, the rate is the prime rate plus one-quarter
percent. As of December 31, 1998, the Company has not borrowed against
this line.
In addition, the Company has a bank overdraft facility of (pounds) 300,000
with Barclays Bank in London, UK. The borrowings are charged at a rate of 3
percent above the UK Base Rate (7.25%). At December 31, 1998 the Company had
borrowed approximately (pounds) 9,450 (approximately $16,000) against this
overdraft facility.
The Company defines backlog as the unearned portions of its existing
contracts at each balance sheet date. The Company's backlog at December 31, 1998
was approximately $11,500,000 as compared to a backlog of approximately
$11,600,000 at December 31, 1998. The amount of backlog at any time may not be
indicative of intermediate or long-term trends in the Company's operations.
The Company believes that its current sources of liquidity and capital
resources will be sufficient to fund its long-term obligations and working
capital needs for the foreseeable future.
The Company is currently in negotiations with Summit Bank for an
acquisition line of credit. This facility, once finalized, will be used to help
fund the Company's growth strategy.
RECENT TRENDS
In the first six months of fiscal 1999, Customer Loyalty was awarded and
virtually completed the largest contract in the history of the Company. Global
Health Care has expanded its scope to include over-the-counter medications and
agri-business markets while the United States Regional Offices have embarked on
an expansion effort; an office was opened in Detroit, Michigan with two
additional offices planned by fiscal year-end. Strategic Marketing Service's and
Global Health Care's UK operations have recently moved to the Company's new
offices located in London, England to support its increasing business.
IMPACT OF INFLATION
Inflation had no material effect on the financial performance of the
Company during the second quarter of fiscal 1999.
<PAGE>
YEAR 2000
In 1998, the Company established an oversight committee to review all of
the Company's computer systems and programs. The Company, through its oversight
committee, currently is upgrading its management information systems which it
expects to complete during the fourth quarter of fiscal 1999, to ensure the
proper processing of transactions related to Year 2000 and beyond. The Company
continues to evaluate appropriate courses of corrective actions, including
replacement of certain systems.
The Company has queried its significant suppliers and subcontractors that
do not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's result of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
The Company has incurred approximately $75,000 of expenses for Year 2000
remediation costs in the six months ended December 31, 1998 and estimates future
additional expenditures for Year 2000 remediation of approximately $125,000. All
costs associated with Year 2000 compliance are being funded with cash flow
generated from operations. The Company has not yet developed a contingency plan
with respect to Year 2000 issues should they arise.
Although the Company does not expect the costs associated with ensuring
Year 2000 compliance to have a material affect on its financial position or
results of operations, if the computer systems used by the Company, or any of
its suppliers or vendors fail or experience significant difficulties related to
the Year 2000, the Company could experience delays that could materially
adversely affect the Company's financial position or its results of operations.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
There are no material legal actions, proceedings or litigations pending or
threatened to the knowledge of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on December
14, 1998, at which meeting the stockholders voted to elect directors
of the Company, approve the amendments to the 1995 Stock Incentive
Plan and ratify the appointment of Ernst & Young, LLP as the Company's
independent auditors of the fiscal year ending June 30, 1998.
The results of the matters voted on the Annual Meeting are shown
below.
(b) The nominees for election as directors of the Company are listed
below, together with the number of votes cast for, against, and
withheld with respect to each such nominee, as well as the number of
non-votes with respect to each such nominee:
Nominee For Against Withheld Non-Voting
------- --- ------- -------- ----------
David Brodsky 9,178,504 21,893 - -
Albert Angrisani 9,178,504 21,893 - -
Anthony Galli 9,167,764 32,633 - -
George Lindemann 9,167,764 32,633 - -
Howard Shecter 9,167,764 32,633 - -
Edward Shrawder 9,158,320 42,077 - -
Roger Thomas 9,167,764 32,633 - -
Lorin Zissman 9,167,147 33,250 - -
<PAGE>
(c) Other matters voted upon at the meeting and the results of those votes
are as follows:
<TABLE>
<CAPTION>
For Against Abstain Unvoted
--- ------- ------- -------
<S> <C> <C> <C> <C>
Approval of amendments to the
1995 Stock Incentive Plan 4,480,877 140,236 17,341 4,561,943
Ratification of Ernst & Young LLP as
the Company's Independent auditors 9,176,551 21,900 1,946 -
</TABLE>
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. None.
B. None.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
undersigned has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOTAL RESEARCH CORPORATION
(Registrant)
/s/ Albert Angrisani
----------------------------------
BY: Albert Angrisani
Chief Executive Officer
/s/ Eric Zissman
----------------------------------
BY: Eric Zissman
Chief Financial Officer
Dated: February 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000803058
<NAME> TOTAL RESEARCH CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,605,649
<SECURITIES> 0
<RECEIVABLES> 6,826,224
<ALLOWANCES> 110,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,347,268
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,640,140
<CURRENT-LIABILITIES> 10,910,334
<BONDS> 0
0
0
<COMMON> 11,491
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,625,625
<SALES> 0
<TOTAL-REVENUES> 9,625,625
<CGS> 4,913,071
<TOTAL-COSTS> 4,913,071
<OTHER-EXPENSES> 3,848,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (37,787)
<INCOME-PRETAX> 902,063
<INCOME-TAX> 362,577
<INCOME-CONTINUING> 539,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 539,486
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
