UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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: 1-11782
ESQUIRE COMMUNICATIONS LTD.
( Exact name of Small Business issuer as specified in its
charter)
Delaware 13-3703760
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
216 East 45th Street, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (212) 687-8010
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed from 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 such shorter period that the registrant
was required to file such reports), and (2) has been subject of such filing
requirements for the past 90 days.
Yes X No
At November 1, 1996 there were outstanding 4,126,823 shares of Common
Stock, $.01 par value were outstanding.
<PAGE>
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. Other information 9
Signatures 10
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
( In Thousands Except Share Data) September 30, December 31,
1996 1995 (1)
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $22 $95
Accounts receivable, less allowance 4,743 4,263
Prepaid expenses and other current assets 289 247
-------- ---------
Total current assets 5,054 4,605
Property and equipment, net 1,709 1,026
Other assets:
Costs in excess of fair value of net
tangible assets of acquired businesses, net 13,128 12,752
Other assets, net 985 690
-------- ---------
14,113 13,442
-------- ----------
$20,876 $19,073
========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $1,161 $577
Accrued expenses and other current liabilities 667 822
Current portion of long-term debt 4,632 1,605
--------- ---------
Total current liabilities 6,460 3,004
Long-term debt 6,789 8,634
Preferred rent obligation 100 35
Deferred income taxes and other payables 193
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued
Common stock, $.01 par value, 25,000,000
shares authorized, 4,126,823 issued
and outstanding 41 41
Additional paid-in capital 7,703 7,703
Accumulated deficit (410) (344)
------- ---------
Total stockholders' equity 7,334 7,400
--------- ---------
$20,876 $19,073
============ =========
(1) The balance sheet at December 31, 1995 is derived from audited
financial statements at that date. See notes to condensed consolidated
financial statements.
</TABLE>
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In Thousands Except Per Share Data)
For the Three Months Ended For the Nine Months Ended
September 30 September 30 September 30 September 30
1996 1995 1996 1995
============= ============= ============= ==========
<S> <C> <C> <C> <C>
Revenues $5,645 $5,234 $17,391 $15,384
Costs and expenses:
Operating expenses 3,243 3,009 9,778 8,690
General and administrative 1,950 1,483 5,769 4,453
Depreciation and amortization 292 258 811 770
------- ----------- ---------- --------
5,485 4,750 16,358 13,913
-------- ---------- ---------- --------
Income from operations 160 484 1,033 1,471
Other income (expense):
Interest expense (286) (270) (824) (804)
Interest income 1 2 4 7
Other 2 2 1
---------- ----------- ---------- --------
(283) (268) (818) (796)
---------- ----------- ---------- --------
Income (loss) before income tax provision (123) 216 215 675
Income tax provision 12 135 281 439
-------- ------------ -------- --------
Net income (loss) ($135) $81 ($66) $236
========= ============= ======== ========
Per common share:
Net income (loss) ($0.03) $0.02 ($0.02) $0.06
========== ================ ========= =========
Weighted average common shares
outstanding 4,127 4,127 4,127 4,125
========= ============= =========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In Thousands)
For the Nine Months Ended
September 30, September 30,
1996 1995
============= ============
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($66) $236
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 811 769
Deferred income tax expense (benefit) (56) 5
(Increase) decrease in assets:
Accounts receivable (325) (208)
Prepaid expenses and other current assets 27 (25)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 126 (52)
Deferred rent obligation 65 (5)
----------- ---------
Net cash provided by operating activities 582 720
----------- ---------
Cash flows from investing activities:
Purchase of property and equipment (747) (128)
Increase in other assets (477) (67)
Business acquired, and related expenses (290) (550)
----------- ----------
Net cash used in investing activities (1,514) (745)
----------- ---------
Cash flows from financing activities:
Borrowings under bank line of credit, net 1,864 800
Principal payments on long-term debt (1,005) (633)
---------- ---------
Net cash provided by financing activities 859 167
---------- --------
Net increase ( decrease) in cash (73) 142
Cash - beginning of period 95 14
----------- ---------
Cash - end of period $22 $156
=========== ==========
Supplemental information:
Approximate interest paid during the period $839 $785
========== ==========
Approximate income taxes paid during the period $696 $258
========== ===========
</TABLE>
The Company incurred capital lease obligations of approximately $176,000
during the nine months ended September 30, 1996.
See notes to condensed consolidated financial statements.
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. 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 the management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. The results of operations for the interim
periods are not necessarily indicative of the results that may be attained for
an entire year. For further information, refer to the Financial Statements and
footnotes thereto in the Company's annual report on Form 10-KSB for the fiscal
year ended December 31, 1995.
The condensed consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
NOTE B--EARNINGS PER COMMON SHARE
Earnings per common share are computed on the basis of weighted average
number of shares outstanding. No effect has been given to outstanding warrants
and options since their assumed exercise would be antidilutive.
NOTE C--SUBLEASE LOSS
In May 1996, the Company moved into a new office space for its New York
operations and, based on its current space requirements, plans to sublease its
old office space which lease expires in February 2000. It is expected that the
future rental obligation pursuant to the lease would exceed the anticipated
sublease rental income. Accordingly, an estimated discounted loss of
approximately $150,000 resulting from the excess of the lease obligation over
the expected sublease income during the remaining term of the lease has been
charged to operations during the nine months ended September 30, 1996. The non-
current portion of the liability is included in the financial statements under
the caption "deferred rent obligation".
NOTE D-- STOCKHOLDERS' EQUITY
In June 1996, the Company's stockholders approved an amendment to the
Certificate of Incorporation of the Company increasing the number of authorized
shares of Common Stock to 25,000,000.
NOTE E-- BUSINESS COMBINATION
On July 26, 1996, the Company acquired the assets and liabilities of
Kitlas Dickman & Associates (KDA), a court reporting agency based in San Diego,
California. The acquisition, accounted for under the purchase method of
accounting, has resulted in the inclusion of the results of operations of KDA
from the date of acquisition. The excess of the cost of the Company's investment
over the fair values of the assets acquired and liabilities assumed including an
estimated earn-out approximated $792,000. The approximate value of tangible
assets acquired and liabilities assumed were $200,000 and $407,000,
respectively.
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1996
NOTE F--SUBSEQUENT EVENTS
On October 23, 1996, the Company completed a private placement of 7,500
shares of Series A Convertible Preferred Stock (the "Preferred Stock") for an
aggregate purchase price of $7,500,000 and entered into an agreement (the
"Agreement") with the Preferred Stockholders. The Preferred Stockholders have
the right within 21 months to acquire up to an additional 7,500 shares of
Preferred Stock at a price of $1,000 per share. The Preferred Stock is
convertible into common stock of the Company at a conversion price of $3.00 per
share (subject to anti-dilution adjustments) and bears cumulative annual
dividends at the rate of 6% per annum. The holders of Preferred Stock have a
liquidation preference of $1,000 per share, plus accrued dividends. The
Preferred Stockholders have the right to vote with the holders of common stock
and are entitled to one vote for each whole share of common stock into which the
Preferred Stock is convertible (presently 333-1/3 votes per share). The
Agreement restricts future dividend payments on common stock, issuance of
certain equity securities, mergers, acquisitions and sale of assets. In
connection with the private placement, the Company granted the placement agent
warrants to acquire 187,500 of common stock of the Company at an exercise price
of $3.00 per share in addition to cash compensation. The warrants are
exercisable at any time prior to October 2001.
Effective October 28, 1996, the Company acquired the assets and
liabilities of M&M Reporting Referral Service, Inc. (M&M), a Southern
California-based court reporting company. The purchase price consisted of
$2,600,000 of cash, subordinated promissory notes in the aggregate principal
amount of $2,712,700 and 132,528 unregistered shares of the Company's common
stock. The principal amount of one of the notes and the cash portion of the
purchase price are subject to revision based on the revenue derived from the
Seller's business for the twelve months commencing November 1, 1996. The
promissory notes are payable in equal quarterly installments over a period of
five years, together with interest at the rate of 9% per annum. For the year
ended December 31, 1995, M&M's revenues, income before officers compensation and
net income approximated $5 million, $1.2 million and $768,000, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations
On July 26, 1996, the Company acquired the assets of Kitlas Dickman &
Associates ("KDA") (see Note-E). The acquisition was accounted for under the
purchase method of accounting and accordingly its results of operations have
been included from the date of acquisition.
Comparison of the three and nine months ended September 30, 1996 and 1995
Revenues increased for the three and nine month periods ended September
30, 1996 by approximately $411,000 or 7.9% and by $2,007,000 or 13.0%,
respectively, over the same periods of the prior year. Excluding revenues from
KDA, the revenues for the three and nine months increased by 4.9% and 12.1%,
respectively over the same periods of the prior year. The Company believes that
the increase in revenues was in part due to its marketing efforts and several
large multi-party projects undertaken in the three and nine month periods ended
September 30, 1996.
For the three month period ended September 30, 1996, operating expenses
increased by approximately $234,000 from $3,009,000 to $3,243,000, in line with
the revenue increase, and remained constant as a percentage of revenues at
57.5%. For the nine month period ended September 30, 1996, operating expenses
increased by approximately $1,088,000, from $8,690,000 to $9,778,000, in line
with the revenue increase, but declined as a percentage of revenues from 56.5%
to 56.2%.
General and administrative expenses for the nine month period ended
September 30,1996 include approximately $150,000 relating to the sublease loss
(see Note C). For the three month period ended September 30, 1996, general and
administrative expenses increased by approximately $467,000 to $1,950,000 or
34.5% of revenues. For the nine month period ended September 30, 1996 general
and administrative expenses excluding the sublease loss increased by $1,166,000
to $5,619,000 or 32.3% of revenues. The increase was in part due to additional
expenses incurred as a result of the Company's Corporate Services Division,
expenses related to KDA and due to additional marketing and promotional costs
resulting from increased revenue levels.
The Company's new office in New York is substantially larger in size
compared with its old office without commensurate increase in rent. The Company
believes that a larger and better-equipped facility will enable it to provide
improved service to its clients.
Depreciation and amortization increased by $34,000 and $41,000 for the
three and nine month periods, respectively. Interest expense increased by
$16,000 and $20,000 for the three and nine month periods, respectively, due to
increased debt levels.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The Company generated a net loss for the three and nine month periods
ended September, 1996 of approximately $135,000 and $66,000 compared to a net
income of approximately $81,000 and $236,000 over the same periods of the prior
year. For the three month period, earnings before interest, taxes, depreciation
and amortization ("EBITDA") decreased by $290,000 from $742,000 to $452,000. For
the nine month period, EBITDA decreased by $397,000 from $2,241,000 to
$1,844,000. Excluding the non-recurring sublease loss of $150,000 charged in the
second fiscal quarter of 1996, EBITDA and the net income, adjusted for taxes,
for the nine months ended September 30, 1996 approximated $1,994,000 and
$21,000, respectively. The net loss for nine months adjusted for non-cash items
provided positive cash flows of approximately $745,000 compared to $1,005,000 in
1995.
Liquidity and Capital Resources
At September 30, 1996, the Company's working capital decreased by
approximately $3,007,000 from December 31, 1995 to a deficit of approximately
$1,406,000. The decrease was principally due to reclassification of borrowings
under its revolving credit agreement to current liabilities based on the
scheduled maturity date of September 1997. EBITDA for the nine month period
approximated $1,844,000 and net loss adjusted for non-cash items provided
positive cash flows of approximately $745,000.
In September 1994, the Company entered into a revolving credit
agreement with a bank which provides for borrowing up to $3,000,000 through
September 1997 based upon eligible accounts receivable and is secured by
substantially all of the assets of the Company. The agreement, as amended in
April 1996, provides for borrowing up to $2,450,000 for working capital and
$550,000 as a term loan for capital expenditures related to the Company's new
office space for its New York operations. The term loan is payable in 53 equal
monthly installments commencing in November 1996. The aggregate borrowings at
September 30, 1996 including temporary over- advance of $500,000 approximated
$3,500,000 and there was no additional availability. In addition, the agreements
under which the Company has borrowed money contain certain restrictive covenants
with respect to incurring additional debt, investments, distributions,
acquisitions and capital expenditures and also require the maintenance of
certain financial ratios.
In October 1996, the Company raised $7,500,000 gross proceeds through a
private sale of Series A Convertible Preferred Stock (See Note-F) for its
acquisitions, working capital and general corporate purposes. The funds were
used to finance the M&M acquisition, repay approximately $500,000 of the
Company's debt and reduce its borrowings under the revolving credit agreement.
The capital expenditures, excluding any business acquisition, for 1996
are expected to range between $200,000 and $250,000. In addition, the capital
expenditures for the Company's new office space for its New York operations is
approximately $725,000, substantially all of which was incurred in the nine
months ended September 30, 1996. The Company believes that its current cash
position together with the cash flows from its operations supplemented, if
needed, by additional borrowing capacity from the revolving credit line will be
sufficient to support the working capital and capital expenditure requirements
through at least the end of 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Other matters
The Company is in negotiation with a financial institution to obtain a
revolving credit facility for $20 million to finance acquisitions, for working
capital and general corporate purposes. The transaction is subject to a number
of conditions including negotiation of a definitive agreement and due diligence.
There is no assurance that the Company will be successful in obtaining the
revolving credit line. If the Company is successful in obtaining the revolving
credit and uses the proceeds to repay certain of its debt, the related
unamortized financing costs will be charged to operations. The net book value of
the unamortized financing costs at September 30, 1996 approximated $270,000.
In October 1996, the Company acquired assets and liabilities of M&M
Reporting Referral Service, Inc. In addition, the Company has executed
definitive agreement and/or letters of intent to acquire four other court
reporting companies. Although all the stipulated transaction closing dates
have expired the Company anticipates consummating the majority of the
transactions within the next four months. The transactions are subject to a
number of conditions including negotiation of definitive agreements, necessary
approvals, due diligence and financing. There is no assurance that the Company
will be successful in completing the financing and closing the acquisitions.
Further, the negotiations to acquire another court reporting agency have been
mutually terminated.
The Company has entered into an agreement with one of its stockholders
to acquire 433,500 shares of the Company's outstanding stock at $3.00 per share.
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-- None
(b) Reports on Form 8-K-- None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 12, 1996
By:/s/Malcolm L. Elvey
Malcolm L. Elvey
Chairman of the Board and
Chief Executive Officer
By:/s/Vasan Thatham
Vasan Thatham
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 22
<SECURITIES> 0
<RECEIVABLES> 5,018
<ALLOWANCES> 275
<INVENTORY> 0
<CURRENT-ASSETS> 5,054
<PP&E> 3,027
<DEPRECIATION> 1,318
<TOTAL-ASSETS> 20,876
<CURRENT-LIABILITIES> 6,460
<BONDS> 6,789
0
0
<COMMON> 41
<OTHER-SE> 7,703
<TOTAL-LIABILITY-AND-EQUITY> 20,876
<SALES> 0
<TOTAL-REVENUES> 17,391
<CGS> 0
<TOTAL-COSTS> 9,778
<OTHER-EXPENSES> 6,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 824
<INCOME-PRETAX> 215
<INCOME-TAX> 281
<INCOME-CONTINUING> (66)
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<NET-INCOME> (66)
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</TABLE>
