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 JUNE 30, 1997
[ ] 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 to such filing
requirements for the past 90 days.
Yes X No
At August 8, 1997 there were outstanding 5,182,225 shares of Common Stock,
$.01 par value.
<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 8
Part II. Other information 10
Signatures 11
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<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December 31,
1997 1996 (1)
========== ============
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash $263 $165
Accounts receivable, less allowance 9,872 6,764
Prepaid expenses and other current assets 1,378 894
--------- ---------
Total current assets 11,513 7,823
Property and equipment, net 2,491 1,946
Other assets:
Cost in excess of fair value of net identifiable
assets of acquired businesses, net 46,626 19,681
Other assets, net 1,042 885
--------- ---------
47,668 20,566
--------- ---------
$61,672 $30,335
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,997 $1,708
Accrued expenses and other current liabilities 4,744 1,306
Current portion of long-term debt 1,357 1,394
--------- ---------
Total current liabilities 8,098 4,408
Long-term debt 31,455 12,891
Other liabilities 285 267
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized in series:
Series A convertible preferred stock, authorized 22,500 and
15,000 shares, 15,000 and 7,500 shares issued and
outstanding, aggregate liquidation preference $15,000,000
and $7,500,000, respectively.
Common Stock, $.01 par value, 25,000,000 authorized,
5,365,725 and 4,330,829 shares issued, respectively,
5,182,225 and 3,897,329 shares outstanding, respectively. 54 43
Additional paid-in capital 25,131 14,911
Treasury stock, at cost-183,500 and 433,500 shares, respectively (550) (1,300)
Note receivable (781)
Accumulated deficit (2,020) (885)
--------- ---------
Total stockholders' equity 21,834 12,769
--------- ---------
$61,672 $30,335
========= =========
(1) The balance sheet at December 31, 1996 is derived from audited
financial statements at that date. See notes to condensed consolidated financial
statements.
</TABLE>
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
========= ======== ========= ==========
<S> <C> <C> <C> <C>
Revenues $10,202 $6,217 $18,955 $11,746
Costs and expenses:
Operating expenses 5,877 3,457 11,057 6,535
General and administrative expenses 4,404 2,045 7,356 3,819
Depreciation and amortization 551 266 981 519
--------- -------- -------- ---------
10,832 5,768 19,394 10,873
Income from operations (630) 449 (439) 873
Other income (expense):
Interest expense (523) (275) (893) (538)
Interest income 11 1 12 3
Other income 2 1 2 1
--------- -------- -------- ---------
(510) (273) (879) (534)
(Loss) income before provision for income taxes (1,140) 176 (1,318) 339
Income Taxes (benefit) provision (415) 139 (424) 269
--------- -------- -------- ---------
Net (loss) income (725) 37 (894) 70
Dividends on preferred stock (127) - (240) -
Net (loss) income applicable to common stockholders ($852) $37 ($1,134) $70
========= ========= ========= =========
(Loss) earnings per common share:
Net (loss) income ($0.20) $0.01 ($0.27) $0.02
========= ========= ========= ==========
Weighted average common shares outstanding 4,341,594 4,126,823 4,168,755 4,126,823
========= ========= ========= ==========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1997 1996
=========== ===========
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($894) $70
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 981 519
Deferred income taxes 54 (17)
(Increase) decrease in assets:
Accounts receivable (637) (537)
Prepaid expenses and other current assets (315) (45)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 1,905 428
Other long-term liabilities (102) 105
----------- -----------
Net cash provided by operating activities 992 523
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (340) (619)
Increase in other assets (159) (409)
Acquisition of businesses (24,956)
----------- -----------
Net cash used in investing activities (25,455) (1,028)
----------- -----------
Cash flows from financing activities:
Borrowing under line of credit 18,424 1,100
Principal payments on long-term debt (788) (651)
Proceeds from private placement of stock, net 7,100
Warrant exchange related cost (175)
----------- -----------
Net cash provided by financing activities 24,561 449
Net increase (decrease) in cash 98 (56)
Cash- beginning of period 165 95
Cash- end of period $263 $39
=========== ===========
Supplemental information:
Approximate interest paid during the period $879 $533
=========== ===========
Approximate income taxes paid during the period $47 $286
=========== ===========
Approximate preferred stock dividends accrued and unpaid $127 -
=========== ===========
The Company incurred capital lease obligations of approximately $176,000 during the six months ended June 30, 1996.
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
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 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, 1996.
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--RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT NO.128 "EARNINGS PER SHARE"
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(Statement 128). Statement 128 supersedes APB Opinion No. 15, "Earnings Per
Share", and specifies the computation, presentation, and disclosure requirements
for earnings per share (EPS) for entities with publicly held common stock or
potential common stock. Statement 128 replaces Primary EPS and Fully Diluted EPS
with Basic EPS and Diluted EPS, respectively. Statement 128 also requires dual
presentation of Basic and Diluted EPS on the face of the income statement for
entities with complex capital structures and reconciliation of the information
utilized to calculate Basic EPS to that used to calculate Diluted EPS.
Statement 128 is effective for financial statements periods ending
after December 15, 1997. Earlier application is not permitted. After adoption,
all prior period EPS is required to be restated to conform with the Statement
128. The Company expects that the adoption of Statement 128 would not have
resulted in Basic EPS being different from Primary EPS.
FASB STATEMENT NO. 129 "DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE"
Statement of Financial Accounting Standards No.129, "Disclosure of
Information about Capital Structure" ( Statement 129) was issued in February
1997. Statement 129 is effective for periods ending after December 15, 1997.
Statement 129 lists required disclosures about capital structure that had been
included in a number of separate statements and opinions of authoritative
accounting literature. As such, the adoption of Statement 129 is not expected to
have a significant impact on the disclosures in financial statements of the
Company.
FASB STATEMENT NO. 130 "REPORTING COMPREHENSIVE INCOME"
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. Under SFAS
130, comprehensive income is divided into net income and other comprehensive
income. Other comprehensive income includes items previously recorded directly
in equity. SFAS 130 is effective for interim and annual periods beginning after
December 15, 1997. Comparative financial statements provided for earlier periods
are required to be reclassified to reflect application of the provisions of the
Statement.
FASB STATEMENT NO. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION"
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
financial information about operating segments in interim financial reports to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997.
NOTE D-- BUSINESS COMBINATION
On January 3, 1997, the Company acquired the assets and liabilities of
Nevill & Swinehart and Pelletier & Jones, both Southern California-based court
reporting companies, and entered into consulting and non competition agreements
for an aggregate consideration of $2,710,000 consisting of cash in the amount of
$1,550,000, subordinated promissory notes and installment payments in the
aggregate amount of $885,000 payable in equal quarterly installments over a
period of six years and 100,000 unregistered shares of the Company's common
stock valued at $275,000. The business combinations are accounted for under the
purchase method of accounting, and accordingly the results of the acquisitions
have been included from the date of acquisition. The excess cost over the fair
value of acquired assets and liabilities assumed approximated $2,050,000 and
other intangible assets of approximately $375,000 were recognized. The Company
borrowed approximately $1,500,000 under its revolving credit agreement to
finance the acquisitions.
On May 28,1997, the Company acquired the assets and liabilities of
Wolfe, Rosenberg & Associates, Inc. (WRA), a court reporting agency based in
Chicago, Illinois. The acquisition, accounted for under the purchase method of
accounting, resulted in the inclusion of the results of operations of WRA from
the date of acquisition. The purchase price, inclusive of associated costs,
approximated $6,069,000, paid in cash. The purchase price is subject to revision
based upon the revenue derived from WRA's business for 24 months commencing June
1997. The Company will account for any such revisions as an adjustment to
goodwill, when such contingencies are resolved. The excess of the cost of the
Company's investment over the fair values of the assets acquired and liabilities
assumed approximated $6,207,000.
On June 13, 1997, the Company acquired the assets and liabilities of
Krauss, Katz & Ackerman, Inc. (KKA), a court reporting agency based in
Philadelphia, Pennsylvania. The acquisition, accounted for under the purchase
method of accounting, resulted in the inclusion of the results of operations of
KKA from the date of acquisition. The purchase price, inclusive of associated
costs, consisted of approximately $9,404,000 in cash. The purchase price is
subject to an increase based upon the revenue derived from KKA's business for
the 36 months ending December 31, 1999. The increase is payable in unregistered
shares of the Company's common stock, up to a maximum of 300,000 shares. The
Company will account for any such revisions as an adjustment to goodwill, when
such contingencies are resolved. The excess of the cost of the Company's
investment over the fair values of the assets acquired and liabilities assumed
approximated $9,059,000.
On June 18, 1997, the Company acquired the assets and liabilities of
American Network Services, Inc. (DepoNet), a court reporting referral network,
based in Atlanta, Georgia. The acquisition, accounted for under the purchase
method of accounting, resulted in the inclusion of the results of DepoNet's
operations from the date of acquisition. The purchase price, inclusive of
associated costs, consisted of approximately $6,633,000 in cash and 750,000
unregistered shares of the Company's common stock valued at $3,000,000. The
preliminary estimate of the excess of the cost of the Company's investment over
the fair values of the tangible assets acquired and liabilities assumed
approximated $10,000,000.
The cash portion of the WRA, KKA and DepoNet acquisitions was financed
by the proceeds from the sale of Series A convertible Preferred Stock (see Note
E) and from borrowings under it's revolving loan agreement.
NOTE E-- STOCKHOLDERS' EQUITY
In April 1997, the Company entered into an agreement with an entity (
the "Manager") affiliated with two of its directors. In accordance with the
agreement, the Manager has agreed to provide the services of one of its officers
to serve as the Chief Executive Officer of the Company. Under the terms of the
agreement, 250,000 shares of the Company's common stock were issued out of its
Treasury Stock to the Manager. In connection with the issuance, the Company
received a note for $781,250 from the Manager. The note is secured by the common
stock issued which generally would vest ratably over four years.
On June 12, 1997 the Company completed an exchange offering pursuant
to which 924,481 warrants were exchanged for 184,896 common shares of the
Company. After the exchange, 513,019 warrants remain outstanding. The warrants
are exercisable until May 18, 1998 at an exercise price of $4.50 per share. The
exercise price and the number of shares of common stock issuable upon the
exercise of the warrants are subject to adjustment in certain circumstances, as
defined. The Company may call the warrants for redemption at a price of $.01 per
warrant, provided the sales price of the common stock has been at least 150% of
the then effective exercise price of the warrants over a specified period of
time. Costs of approximately $175,000 incurred in connection with the exchange
were charged against Stockholders' Equity.
Pursuant to an agreement (Agreement) dated October 23, 1996 with
certain investors, in June 1997 the Company sold 7,500 additional shares of
Series A convertible preferred stock (the Preferred Stock) for an aggregate
sales price of $7,500,000 and amended the Agreement with the Preferred
Stockholders. The Preferred Stock is convertible to common stock of the Company
at a conversion price of $3.00 per share (subject to antidilution adjustments)
and bears cumulative annual dividends at the rate of 6% per annum. The holders
of Preferred Stock have liquidation preference of $1,000 per share, plus accrued
dividends. Pursuant to the amendment of the Agreement, Preferred Stockholders
will have the right from time to time, on or prior to December 17, 1998, to
acquire an additional 7,500 shares of Series A Convertible Preferred Stock at a
price of $1,000 per share, which shares shall have the same terms as the
existing Series A Convertible Preferred Stock.
In connection with the acquisition of DepoNet in June 1997, the
Company issued 750,000 shares of common stock at a recorded share price of
$4.00.
NOTE F--OTHER MATTERS
In May 1997, the Company entered into an agreement ( the "Buyout
Agreement") with one of its officers pursuant to which the Company terminated
the officer's employment and the related employment agreement. The cost of the
buyout including associated cost was approximately $1.0 million on a pre-tax
basis and was charged to operations in the fiscal quarter ending June 30, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company acquired the assets of Kitlas, Dickman & Associates
("KDA") in July 1996, M&M Reporting Referral Services, Inc. ("M&M") in October
1996 and Sherry Roe and Associates, Inc. ("SRA") in November 1996 collectively
referred to as 1996 Acquisitions. The Company acquired the assets of Nevill &
Swinehart and Pelletier & Jones in January of 1997, of Wolfe, Rosenberg &
Associates in May 1997, and of Krauss, Katz & Ackerman and American Network
Services in June 1997, collectively referred to as 1997 Acquisitions.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues increased for the three and six months ended June 30,1997 by
$4.0 million or 64.1% and $7.2 million or 61.4%, respectively, over the same
periods of the prior year. Excluding revenues from the 1996 and 1997
Acquisitions, the revenues increased by approximately 4.7% and 6.4%
respectively. The Company believes that the increase in revenues was due to its
marketing efforts and partly due to several large multi-party projects
undertaken in 1997.
Operating expenses increased by $2.4 and $4.5 million, from $3.5 and
$6.5 million in 1996 to $5.9 and $11.1 million in 1997 for the three and six
month periods, respectively. As a percentage of revenues, operating expenses
were 57.6% and 58.3% for the three and six month periods, compared to 55.6% for
both prior year periods. The increase in the operating expenses as a percentage
of revenues is in part due to a greater share of revenues generated in
geographic areas with a lower profit margin in 1997.
General and administrative expenses for the three and six month
periods ended June 30, 1997 include approximately $1,300,000 primarily relating
to an officer's termination agreement (see Note F) and termination expenses
relating to certain marketing activities. The comparable prior year periods
include $150,000 relating to a sublease loss. Excluding these items, general and
administrative expense increased by $1,209,000 and $2,387,000 for the three and
six month periods as compared to the prior year. The increases were due to
expenses related to the 1996 and 1997 Acquisitions consisting of payroll and
occupancy expenses, as well as increased sales compensation, marketing and
promotional expenses and administrative support expenses due to increased
revenue levels. Excluding the special expenses described above, general and
administrative expense as a percentage of revenue decreased from 30.5% to 30.4%
for the quarter, and increased from 31.2% to 31.9% for the six months ended June
30, 1997.
Depreciation and amortization increased by $285,000 and $462,000 for
the three and six month periods ended June 30, 1997 as compared to the prior
year periods, due to additional amortization charges arising from the 1996 and
1997 Acquisitions and due to additional depreciation arising from the capital
expenditures for the Company's new office space for its New York operations.
Interest expense increased by $248,000 and $355,000 due to incurrence
of additional debt to finance acquisitions and fund working capital.
The Company's operations resulted in a net loss of $725,000 and
$894,000 before preferred dividends for the three and six month periods ended
June 30, 1997 compared to income of $37,000 and $70,000, respectively, in 1996.
The above mentioned special expenses negated the additional contribution from
increased revenues and operations for the three and six months ended June 30,
1997 resulting in a loss compared to a profit in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company's working capital was approximately $3.4
million, without any material increase from the levels at December 31, 1996. The
increase in the Company's accounts receivable was offset by increases in
accounts payable and accruals. The increase in the Company's accounts receivable
was due to 1996 and 1997 Acquisitions and increased revenue levels. The increase
in accounts payable and accruals was due to the 1996 and 1997 Acquisitions and
certain expenses accrued in connection with an officer's termination agreement
(see Note F).
In December 1996, the Company entered into a three-year revolving loan
agreement ("Loan Agreement") with a financial institution which, as amended in
June 1997, provides for borrowings up to $30.0 million based on operating cash
flows as defined therein. Borrowings under the Loan Agreement bear interest at
either prime rate or London Interbank Offered Rate (LIBOR), at the Company's
election, plus the applicable margin rate. The applicable margin varies on the
basis of operating cash flows and the overall leverage ratio as defined in the
Loan Agreement. The effective rate at June 30, 1997 was 9.7%. The Loan
Agreement, which is secured by substantially all the assets of the Company,
restricts future indebtedness, investments, distributions, acquisitions or sale
of assets and capital expenditures and also requires maintenance of certain
financial ratios and covenants. The aggregate borrowings at June 30, 1997 were
$26.6 million with additional availability of $0.5 million.
The capital expenditures for 1997, excluding any business acquisition,
are expected to range between $575,000 and $625,000. The Company believes that
the cash flows from its operations supplemented, if needed, by additional
borrowing capacity from the Loan Agreement will be sufficient to support the
working capital and capital expenditure requirements through at least the end of
1997.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-- None
(b) Reports on Form 8-K
On June 5, 1997, the Company filed a Report on Form 8-K to
report under Items 2 and 7 the acquisition of Wolfe,
Rosenberg & Associates, Inc.
On June 25, 1997, the Company filed a Report on Form 8-K to
report under Items 2 and 7 the acquisition of Krauss, Katz &
Ackerman, Inc. and American Network Services, Inc. and the
private sale of Series A convertible Preferred Stock.
<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.
August 12, 1997
By:/S/ MALCOLM L. ELVEY
Malcolm L. Elvey
Chairman of the Board
By:/S/ DAVID A. HIGSON
David A. Higson
Senior Vice President, Chief
Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 263
<SECURITIES> 0
<RECEIVABLES> 10,603
<ALLOWANCES> 731
<INVENTORY> 0
<CURRENT-ASSETS> 11,513
<PP&E> 4,246
<DEPRECIATION> 1,755
<TOTAL-ASSETS> 61,672
<CURRENT-LIABILITIES> 8,098
<BONDS> 31,455
0
0
<COMMON> 54
<OTHER-SE> 21,780
<TOTAL-LIABILITY-AND-EQUITY> 61,672
<SALES> 0
<TOTAL-REVENUES> 18,955
<CGS> 0
<TOTAL-COSTS> 11,057
<OTHER-EXPENSES> 7,356
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 893
<INCOME-PRETAX> (1,318)
<INCOME-TAX> (424)
<INCOME-CONTINUING> (1,134)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,134)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
