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 MARCH 31, 1998
[ ] 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.)
750 "B" STREET, SUITE 2350, SAN DIEGO, CA 92101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (619) 515-0811
- -------------------------------------------------------------------------------
(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 May 14, 1998 there were outstanding 8,045,431 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 9
Part II. Other information 11
Signatures 12
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997 (1)
=========== ============
(Unaudited)
ASSETS (pledged)
Current Assets:
<S> <C> <C>
Cash $431 $116
Accounts receivable, less allowance for doubtful accounts 18,397 14,621
Prepaid expenses and other current assets 693 639
------- -------
Total current assets 19,521 15,376
Property and equipment, net 3,531 3,056
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 79,019 62,763
Other assets, net 1,192 1,656
------- --------
80,211 64,419
-------- --------
Total assets $103,263 $82,851
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $3,862 $3,616
Accrued expenses and other current liabilities 6,041 5,727
Current portion of long-term debt 3,226 4,361
-------- ---------
Total current liabilities 13,129 13,704
Long-term debt 56,900 45,442
Other liabilities 213 165
Stockholder's 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, 19,500 and 15,000 shares issued and
outstanding, aggregate liquidation preference $19,500,000
and $15,000,000 in 1998 and 1997, respectively - -
Common stock, $.01 par value, 100,000,000 and 25,000,000 shares authorized,
8,201,431 and 7,049,898 shares issued, respectively,
8,017,931 and 6,866,398 shares outstanding in 1998 and 1997, respectively 74 63
Additional paid-in capital 38,150 29,063
Treasury stock, at cost - 183,500 shares
in 1998 and 1997, respectively (550) (550)
Note receivable (1,156) (1,156)
Accumulated deficit (3,497) (3,880)
-------- --------
Total stockholders' equity 33,021 23,540
-------- --------
Total liabilities and stockholders' equity $103,263 $82,851
======== ========
(1) The balance sheet at December 31, 1997 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
(Dollars in Thousands, Except Share Data)
For the Three Months Ended
March 31, March 31,
1998 1997
============= =============
<S> <C> <C>
Revenues $20,685 $9,944
Costs and expenses:
Operating expenses 11,399 5,836
General and administrative expenses 6,401 3,486
Depreciation and amortization 994 429
-------- --------
18,794 9,751
Income from operations 1,891 193
Other income (expense):
Interest expense (1,265) (370)
Interest income 24 0
Other income 0 0
------- -------
(1,241) (370)
Income (loss) before provision for income taxes 650 (177)
Provision for income taxes (benefit) 0 (9)
------- -------
Net income (loss) 650 (168)
Preferred stock dividends (267) (113)
------- -------
Net income (loss) applicable to common stockholders $383 $(281)
====== ======
Net income (loss) per common share:
Basic:
Weighted average common shares outstanding 7,568,151 4,851,756
========= ==========
Net income (loss) $0.05 $(0.06)
Diluted:
Weighted average common shares outstanding 16,181,092 4,851,756
========== ==========
Net income (loss) $0.04 $(0.06)
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in Thousands)
For the Three Months Ended
March 31, March 31,
1998 1997
=============== ============
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $650 $(168)
Adjustments to reconcile net income(loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 994 429
Deferred income tax expense (benefit) - 23
(Increase) decrease in assets:
Accounts receivable (1,121) (1,020)
Prepaid expenses and other current assets (8) (265)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (898) 146
Other long-term liabilities 48 (70)
--------- ---------
Net cash provided by operating activities (335) (925)
Cash flows from investing activities:
Purchase of property and equipment (203) (219)
Increase in other assets (144) (160)
Acquisition of businesses (13,758) (1,472)
----------- ----------
Net cash used in investing activities (14,105) (1,851)
----------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 14,741 3,024
Principal payments on long-term debt (6,487) (393)
Proceeds from issuance of Series A preferred stock, net 4,500 -
Proceeds from exercise of employee stock options 5 -
Proceeds from exercise of warrants, net 1,996 -
----------- ----------
Net cash provided by financing activities 14,755 2,631
----------- ----------
Net increase (decrease) in cash 315 (145)
Cash - beginning of period 116 186
Cash - end of period $431 $41
============ ===========
Supplemental information:
Approximate interest paid during the period $1,244 $358
============ ===========
Approximate income taxes paid during the period $- $16
============ ===========
Approximate preferred stock dividends accrued and unpaid $417 $113
============ ===========
See notes to condensed consolidated financial statements.
</TABLE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31,1998
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, 1997.
All prior period financial statements presented have been restated to
reflect the November 7, 1997 acquisition of Jurist-Begley Reporting Services,
Inc., Jurist, Inc. and Aarons & Associates, Inc. (collectively Jurist) accounted
for as a pooling of interests. The restated financial statements combine the
historical financial statements of the Company for the three months ended March
31, 1997, with the historical financial statements of Jurist for the three
months ended March 31, 1997.
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
During the year ended December 31, 1997 the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" (Statement 128).
As required by Statement 128, the Company must present basic earnings per share
and diluted earnings per share as defined. Accordingly basic earnings per share
has been computed based upon the weighted average number of shares outstanding
during the period and diluted earnings per share has been computed based upon
the weighted average number of shares outstanding plus the dilutive effects of
common shares contingently issuable from options, warrants and convertible
preferred stock. Common stock options, warrants and convertible preferred stock
are excluded from the computation of net earnings per share if their effect is
anti-dilutive. All prior period information has been restated to conform to the
provisions of Statement 128. The following table sets forth the computation of
basic and diluted earnings per share based on the requirements of Statement 128.
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---- -----
Numerator:
<S> <C> <C>
Net income (loss) 650 (168)
Less preferred stock dividends (267) (113)
----- -----
Numerator for basic and diluted income per
share - available to common stockholders 383 (281)
=== =====
Denominator:
Denominator for basic income per share -
weighted average shares 7,568,151 4,851,756
Effect of dilutive securities - options, warrants
and convertible preferred stock 8,612,941 -
---------- ----------
Denominator for diluted income per share -
weighted average shares 16,181,092 4,851,756
========== =========
</TABLE>
NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS
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" ("Statement No. 131"), effective for fiscal years beginning after
December 15,1997. Statement No. 131 establishes standards for reporting
information about operating segments in annual financial statements and selected
information about operating segments in interim financial reports issued to
stockholders. The Company does not believe the adoption of Statement No. 131
will have a significant impact on the Company's financial statement disclosures.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
NOTE D-- BUSINESS COMBINATIONS
On January 5, 1998, the Company acquired the assets and liabilities of
A & A Court Reporters, a court reporting agency based in Houston, Texas. The
purchase price, inclusive of associated costs, consisted of cash in the amount
of $2,500,000 and 141,000 unregistered shares of the Company's common stock
valued at $1,199,000. The acquisition, accounted for under the purchase method
of accounting, resulted in the inclusion of the results of operations from the
date of acquisition. The excess cost over the fair value of acquired assets and
liabilities assumed approximated $3,452,000.
On January 7, 1998, the Company acquired the assets and liabilities of
Brody & Geiser, a court reporting agency based in Northern New Jersey. The
acquisition, accounted for under the purchase method of accounting, resulted in
the inclusion of the results of operations from the date of acquisition. The
purchase price, inclusive of associated costs, approximated $1,650,000 paid in
cash and 227,586 unregistered shares of the Company's common stock valued at
$1,650,000. The excess of the cost of the Company's investment over the fair
values of the assets acquired and liabilities assumed approximated $2,842,000.
On January 16, 1998, the Company acquired the assets and liabilities
of Kerns & Gradillas, a southern California court reporting agency. The
acquisition, accounted for under the purchase method of accounting, resulted in
the inclusion of the results of operations from the date of acquisition. The
purchase price, inclusive of associated costs, consisted of approximately
$5,500,000 in cash, $1,300,000 convertible promissory note payable in three
years (convertible into common stock at a conversion price of $8.00 per share)
and 171,429 unregistered shares of the Company's common stock valued at
$1,200,000. The excess of the cost of the Company's investment over the fair
values of the assets acquired and liabilities assumed approximated $7,790,000.
On February 12, 1998, the Company acquired the assets and liabilities
of Jewelinski Court Reporters, a southern California court reporting agency. The
acquisition, accounted for under the purchase method of accounting, resulted in
the inclusion of the results of operations from the date of acquisition. The
purchase price, inclusive of associated costs, consisted of approximately
$150,000 in cash, a $390,000 promissory note payable in 24 equal monthly
installments without interest and 75,000 unregistered shares of the Company's
common stock valued at $450,000 (the shares are to be issued equally over the
three years following acquisition date and are contingent upon the seller's
revenue levels). The Company has included in the purchase price the first year
stock issuance of 25,000 shares, and will account for any future stock issuances
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 tangible
assets acquired and liabilities assumed approximated $747,000.
On February 20, 1998, the Company acquired the assets and liabilities
of Friedli, Wolff & Pastore, a Washington, D.C. based court reporting agency.
The acquisition, accounted for under the purchase method of accounting, resulted
in the inclusion of the results of operations from the date of acquisition. The
purchase price, inclusive of associated costs, consisted of approximately
$600,000 in cash and 20,000 shares of the Company's common stock valued at
$120,000. The excess of the cost of the Company's investment over the fair
values of the tangible assets acquired and liabilities assumed approximated
$639,000.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
On March 16, 1998, the Company acquired the assets and liabilities of
VerbaVolant, a New York City court reporting agency, and the assets and
liabilities of McGuire's Reporting Service and Morrissy & Others, both Chicago,
Illinois based court reporting agencies. The acquisitions, accounted for under
the purchase method of accounting, resulted in the inclusion of the results of
operations from the date of acquisition. The purchase price for all three
acquisitions, inclusive of associated costs, consisted of approximately
$1,354,000 in cash, promissory notes in the aggregrate principal amount of
$375,000, 18,000 shares of the Company's common stock valued at $108,000 and
options to purchase 30,000 shares of the Company's common stock valued at
$71,000. The excess of the cost of the Company's investment over the fair values
of the tangible assets acquired and liabilities assumed approximated $2,130,000.
The cash portion of all of the above acquisitions, which approximated
$11,754,000, was financed by the proceeds from borrowings under its revolving
credit agreement.
NOTE E-- STOCKHOLDERS' EQUITY
On January 9, 1998, the Company's Series A Preferred Stockholders
exercised their rights to acquire an additional 4,500 shares of Series A
Preferred Stock at a price of $1,000 per share. Under the agreement, as amended,
the Preferred Stockholders have the right to acquire up to 5,000 shares of
Series B Preferred Stock at a price of $1,000 per share. The Series B Preferred
Stock is identical to the Series A Preferred Stock, except that it is junior to
the Series A Preferred Stock, has a conversion price of $6.00 per share and has
166-2/3 vote per share.
On January 9, 1998, in connection with the Series A Preferred
Stockholders acquiring an additional 4,500 shares of Series A Preferred Stock,
the Company granted the Placement Agent warrants to acquire 75,000 shares of
Company common stock at an exercise price of $4.50 per share. The warrants are
exercisable at any time prior to January 2003.
In connection with the acquisition of A & A Court Reporters, Brody &
Geiser, Kerns & Gradillas, Friedli, Wolff and Pastore and McGuire's Reporting
Service during the quarter, the Company issued 578,015 shares of common stock at
an average recorded share price of $4.51.
On February 27, 1998, the Company's Redeemable Common Stock Purchase
Warrants expired, pursuant to the Warrant Agreement dated May 25, 1993. During
the quarter, 467,485 warrants were exercised at the exercise price of $4.50 per
share.
On March 25, 1998, the placement agent associated with the October 23,
1996 private placement of preferred stock, exercised its right to acquire
shares. Under the terms of the agreement, the placement agent received 105,383
shares of common stock upon the exercise of 187,500 stock warrants issued in
June 1997.
NOTE F--Supplemental Cash Flow Information
During the quarter ended March 31, 1998, the Company issued 105,383
shares of common stock in connection with a cashless exercise of warrants.
During the quarter ended March 31, 1998, the Company issued 578,045
shares of common stock in connection with the acquisitions.
At March 31, 1998 and 1997, accrued and unpaid preferred stock
dividends were $417 and $113, respectively.
Supplemental noncash investing and financing
activities for the quarter ended March 31, 1998:
Acquisitions:
Fair value of Assets acquired $ 3,242
Liabilities Assumed $ 892
Cash paid for acquisitions $12,147
Stock issued $ 1,598
Notes issued $ 3,189
NOTE G - SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company has acquired substantially
all of the assets of Amy Upshaw, a San Antonio, Texas based court reporting
agency with a purchase price of approximately $350,000, Atlantic Court
Reporting, a Ft. Lauderdale, Florida based court reporting agency with a
purchase price of approximately $700,000, Bright & Associates, an Austin, Texas
based court reporting agency with a purchase price of approximately $1,200,000
and Riggleman, Turk & Nelson, a Baltimore, Maryland based court reporting agency
with a purchase price of approximately $850,000.
NOTE H--OTHER MATTERS
None.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In 1997, the Company acquired 17 court reporting agencies
(collectively referred to as "1997 Acquisitions"). In the first quarter of 1998,
the Company acquired 8 court reporting agencies (see note D) (collectively
referred to as "1998 Acquisitions").
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues increased by $10.7 million or 108.0%. The Company believes
that the increase in revenues was largely due to its 1997 and 1998 Acquisitions,
as well as its marketing efforts.
Operating expenses increased by $5.6 million, from $5.8 in 1997 to
$11.4 in 1998, consistent with the increase in revenue. As a percentage of
revenues, operating expenses decreased from 58.7% to 55.1%. The decrease in
operating expenses as a percentage of revenues is in part due to a greater share
of revenues generated in geographic areas with a higher profit margin in 1998.
General and administrative expense increased by $2.9 million to $6.4
million. The increase was largely due to expenses related to the 1997 and 1998
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. General and administrative
expenses as a percentage of revenue decreased from 35.1% to 30.9%. The Company
believes that the decrease is due to the large number of tuck-in acquisitions
included in the 1997 and 1998 Acquisitions, as well as the lower impact of
corporate overhead as a result of increased revenues.
Depreciation and amortization increased by $565,000. This increase is
primarily due to additional amortization charges arising from the 1997 and 1998
Acquisitions. A significant component of the amortization expense relates to the
cost in excess of fair value of net tangible assets of acquired businesses
(goodwill).
Interest expense, net increased by $871,000 due to the incurrence of
additional debt to finance acquisitions and fund working capital.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 the Company's working capital was approximately $6.4
million, which was approximately $4.7 million more than at December 31, 1997.
The increase was primarily due to the increase in the Company's accounts
receivable. The increase in the Company's accounts receivable was due to 1997
and 1998 Acquisitions and increased revenue levels.
In December 1996, the Company entered into a three-year revolving loan
agreement ("Loan Agreement") with a financial institution which, as amended in
June, September and November 1997, provides for borrowings up to $65.0 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 March 31,
1998 was 9.1%. 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 under the Loan Agreement at March 31, 1998 were $49.2 million.
The capital expenditures for 1998 are expected to range between
$700,000 and $800,000. The Company believes that the cash flows from its
operations supplemented, if needed, by additional borrowing capacity from the
Loan Agreement or other financing resources will be sufficient to support the
working capital and capital expenditure requirements through at least the end of
1998.
PART II.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of stockholders on February 24,
1998, to vote on a proposal to amend the Company's Certificate of
Incorporation to increase the number of authorized shares of Common
Stock of the Company. The proposal was approved by a vote of
11,108,492 for, 57,180 against and 8,297 abstentions.
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.
May 14, 1998
By:/S/ DAVID A. WHITE
David A. White
Chief Executive Officer
By:/S/ DAVID A. HIGSON
David A. Higson
Senior Vice President, Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 431
<SECURITIES> 0
<RECEIVABLES> 20,322
<ALLOWANCES> 1,925
<INVENTORY> 0
<CURRENT-ASSETS> 19,521
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,263
<CURRENT-LIABILITIES> 13,129
<BONDS> 56,900
0
0
<COMMON> 74
<OTHER-SE> 32,947
<TOTAL-LIABILITY-AND-EQUITY> 103,263
<SALES> 0
<TOTAL-REVENUES> 20,685
<CGS> 0
<TOTAL-COSTS> 11,399
<OTHER-EXPENSES> 6,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,265
<INCOME-PRETAX> 650
<INCOME-TAX> 0
<INCOME-CONTINUING> 383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 383
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.04
</TABLE>
