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, 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: (800) 496-4969
- -----------------------------------------------------------------------------
(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 July 5, 1998 there were outstanding 8,801,046 shares of Common Stock, $.01
par value.
Transitional small business format (check one):
Yes __ No X
<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 10
Part II. Other information 14
Signatures 15
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
=========== =============
(Unaudited)
ASSETS (pledged)
Current Assets:
<S> <C> <C>
Cash $740 $116
Accounts receivable, less allowance for doubtful accounts 25,532 14,621
Prepaid expenses and other current assets 1,314 639
----------- ----------
Total current assets 27,586 15,376
Property and equipment, net 4,422 3,056
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 99,065 62,763
Other, net 1,119 1,656
---------- -----------
Total assets $132,192 $82,851
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $4,213 $3,616
Accrued expenses and other current liabilities 8,532 5,727
Current portion of long-term debt 4,123 4,361
----------- ------------
Total current liabilities 16,868 13,704
Long-term debt 75,138 45,442
Other liabilities 402 165
----------- ------------
Total liabilities 92,408 59,311
Stockholder's equity:
Preferred Stock, $.01 par value, authorized 1,000,000 shares;
Series A Convertible Preferred Stock, authorized 22,500 and
15,000 shares; 22,500 and 15,000 shares issued and
outstanding, aggregate liquidation preference $22,500
and $15,000 in 1998 and 1997, respectively - -
Series B Convertible Preferred Stock, authorized 5,000
and 0 shares; 0 shares issued and outstanding in 1998
and 1997, respectively - -
Common Stock, $.01 par value, 100,000,000 and 25,000,000 shares
authorized; 8,984,546 and 7,049,898 shares issued, respectively,
8,801,046 and 6,866,398 shares outstanding in 1998 and 1997,
respectively 82 63
Additional paid-in capital 44,603 29,063
Treasury stock, at cost - 183,500 shares
in 1998 and 1997, respectively (550) (550)
Notes receivable (1,156) (1,156)
Accumulated deficit (3,195) (3,880)
----------- ------------
Total stockholders' equity 39,784 23,540
----------- ------------
Total liabilities and stockholders' equity $132,192 $82,851
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenue $25,812 $11,393 $46,497 $21,338
Costs and expenses:
Operating expenses 14,366 6,563 25,765 12,430
General and administrative expenses 7,890 4,854 14,291 8,256
Depreciation and amortization 1,109 553 2,103 983
--------- --------- ---------- ---------
23,365 11,970 42,159 21,669
Income (loss) from operations 2,447 (577) 4,338 (331)
Other income (expense):
Interest expense (1,502) (523) (2,767) (893)
Interest income 20 11 44 12
Other income 0 2 0 2
---------- ---------- --------- ----------
(1,482) (510) (2,723) (879)
---------- ---------- --------- ----------
Income (loss) before provision for income taxes 965 (1,087) 1,615 (1,210)
Provision for income taxes (benefit) 357 (415) 357 (424)
---------- ----------- ---------- ----------
Net income (loss) 608 (672) 1,258 (786)
Dividends on preferred stock (307) (127) (574) (240)
----------- ----------- ---------- -----------
Net income (loss) applicable to common stockholders $301 $(799) $684 $(1,026)
=========== =========== ============= ===========
Net income (loss) per common share:
Basic:
Weighted average common shares outstanding 8,394,766 5,196,021 7,983,742 5,023,182
============== ============== ============= ============
Net income (loss) $0.04 $(0.15) $ 0.09 $(0.20)
Diluted:
Weighted average common shares outstanding 16,616,511 5,196,021 16,038,824 5,023,182
=============== ============= ============== ============
Net income (loss) $0.04 $(0.15) $0.08 $(0.20)
</TABLE>
See notes to condensed consolidated financial statements.
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, June 30,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net Income (loss) $1,258 $(786)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,103 983
Deferred income tax expense (benefit) 92 54
(Increase) decrease in assets:
Accounts receivable (3,066) (637)
Prepaid expenses and other current assets (500) (315)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses (1,777) 1,795
and other current liabilities
Other long-term liabilities 45 (102)
----------- ----------
Net cash provided by (used in) operating activities (1,845) 992
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment (417) (340)
Increase in other assets (147) (159)
Acquisition of businesses (31,724) (24,956)
------------- ------------
Net cash used in investing activities (32,288) (25,455)
-------------- ------------
Cash flows from financing activities:
Proceeds from long-term debt 24,824 18,424
Principal payments on long-term debt (1,493) (788)
Proceeds from issuance of Series A convertible
preferred stock, net 7,500 7,100
Proceeds from exercise of employee stock options 21 -
Proceeds from exercise of warrants, net 3,905 (175)
------------- -------------
Net cash provided by financing activities 34,757 24,561
------------- -------------
Net increase in cash 624 98
Cash - beginning of period 116 165
------------- -------------
Cash - end of period $740 $263
========== ==========
Supplemental information:
Interest paid during the period $2,748 $879
========== ==========
Income taxes paid during the period $ - $47
---------- ----------
Preferred stock dividends accrued and unpaid $724 $127
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30,1998
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 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 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 for the fiscal
year ended December 31, 1997.
All prior 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 and six month
periods ended June 30, 1997, with the historical financial statements of Jurist
for the three and six month periods ended June 30, 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 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 on following page)
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1998 1998
------------ -----------
<S> <C> <C>
Numerator:
Net income (loss) - numerator for diluted
income per share $608 $1,258
Less preferred stock dividends $(307) $(574)
----- -----
Numerator for basic income per share - income $301 $684
---- ----
available to common stockholders
Denominator:
Denominator for basic income per share -
weighted average shares 8,394,766 7,983,742
Effect of dilutive securities - options, warrants,
and convertible preferred stock 8,221,745 8,055,082
--------- ---------
Denominator for diluted income per share - weighted
average shares 16,616,511 16,038,824
---------- ----------
</TABLE>
Stock options to purchase 1,242,251 shares of common stock at exercise prices
ranging from $2.64 - $9.00 for the six months ended June 30, 1997 were not
included in the computation of diluted earnings per share as their effect
would have been antidilutive.
Warrants to purchase 1,877,770 shares of common stock at exercise prices ranging
from $2.90 - $4.50 for the six months ended June 30, 1997 were not included in
the computation of diluted earnings per share as their effect would have been
antidilutive.
Preferred stock convertible into 5,000,000 shares of common stock at the
conversion price of $3.00 per share and options to purchase 2,500,000 shares
of common stock at the conversion price of $3.00 per share were not
included in the computation of diluted earnings per share for the six months
ended June 30, 1997 as their effect would have been antidilutive.
NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), was issued and is effective for fiscal years beginning after December
15,1997. Statement No. 131 establishes standards for segment reporting in
financial statements. The Company is in the process of implementing SFAS No. 131
and currently anticipates that its segments will be geographically based.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Retirement Benefits" ("SFAS No.
132"), was issued and is effective for fiscal years beginning after December 15,
1997. This statement standardizes disclosure requirements for pensions and other
post retirement benefits. It does not change the measurement or recognition
provisions for those benefit plans.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities.
The Company anticipates that the adoption of SFAS Nos. 131, 132 and
133 will not have a material effect on the financial position, results of
operations or liquidity of the Company.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE D-- BUSINESS COMBINATIONS
On April 17, 1998, the Company acquired the assets and liabilities of
Pollock & Upshaw, a court reporting agency based in San Antonio, Texas. The
purchase price, inclusive of associated costs, consisted of cash in the amount
of $300,000 and a $100,000 convertible promissory note payable in three years
(convertible into common stock at a conversion price of $10.00 per share). 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 of the Company's investment over the fair values of the acquired
assets and liabilities assumed approximated $345,000.
On April 30, 1998, the Company acquired the assets and liabilities of
Atlantic Court Reporting, a court reporting agency based in Fort Lauderdale,
Florida. 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 a $150,000 promissory note payable in 16
equal quarterly installments with interest at the rate of 7% per annum. The
excess of the cost of the Company's investment over the fair values of the
assets acquired and liabilities assumed approximated $710,000.
On May 5, 1998, the Company acquired the assets and liabilities of
Bright & Associates, a court reporting agency based in Austin, Texas. 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
$914,000 in cash and a $340,000 promissory note payable in 12 equal quarterly
installments with interest at the rate of 6.125% per annum. The excess of the
cost of the Company's investment over the fair values of the assets acquired and
liabilities assumed approximated $1,198,000.
On May 7, 1998, the Company acquired the assets and liabilities of
Riggleman, Turk & Nelson, a court reporting agency based in Baltimore, Maryland.
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
$763,000 in cash and 27,500 unregistered shares of the Company's common stock
valued at $125,000. The excess of the cost of the Company's investment over the
fair values of the assets acquired and liabilities assumed approximated
$761,000.
On May 15, 1998, the Company acquired the assets and liabilities of
A-L Associates Inc. and Attorneys on Assignment, a New York, New York based
permanent staffing agency and temporary legal staffing 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 $7,787,000 in cash,
166,667 shares of the Company's common stock valued at $733,000 and options to
purchase 200,000 shares of the Company's common stock valued at $208,000. The
excess of the cost of the Company's investment over the fair values of the
assets acquired and liabilities assumed approximated $7,120,000.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
On May 27, 1998, the Company acquired the assets and liabilities of
Rubin Reporting, 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 from the date of acquisition. The
purchase price, inclusive of associated costs, consisted of approximately
$1,091,000 in cash, a $250,000 promissory note payable in 12 equal quarterly
installments without interest and 19,847 shares of the Company's common stock
valued at $86,000. The excess of the cost of the Company's investment over the
fair values of the assets acquired and liabilities assumed approximated
$1,351,000.
On June 10, 1998, the Company acquired the assets and liabilities of
Summit Reporting and Summit Document Retrieval Services, a court reporting
agency and records retrieval agency, respectively, based in Houston, Texas. 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
$1,262,000 in cash, a $200,000 promissory note payable in 12 equal quarterly
installments with interest at 7% and 35,000 shares of the Company's stock valued
at $161,000. The excess of the cost of the Company's investment over the fair
values of the assets acquired and liabilities assumed approximated $1,506,000.
On June 15, 1998, the Company acquired the assets and liabilities of
Hamilton-Legato Deposition Centers, a court reporting agency based in Troy,
Michigan. 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 $5,205,000 in cash and a $2,800,000 convertible promissory note
payable in three years (convertible into common stock at a conversion price of
$10.00 per share). The excess of the cost of the Company's investment over the
fair values of the assets acquired and liabilities assumed approximated
$7,487,000.
The cash portion of all of the above acquisitions, which approximated
$17,922,000, was financed by the proceeds from borrowings under the Company's
revolving credit agreement.
The following unaudited pro forma information assumes that the 1997
acquisitions of Nevill & Swinehart, Pelletier & Jones, Wolfe, Rosenberg &
Associates, Krauss, Katz & Ackerman and American Network Services, Inc. occurred
on January 1, 1997, and all acquisition made during the period January 1, 1998
through June 30, 1998 occurred on January 1, 1998. These results are not
necessarily indicative of future operations, nor of results that would have
occurred had the acquisitions been consummated as of the beginning of the
periods presented.
JUNE 30, 1998 JUNE 30, 1997
------------- --------------
Revenue $ 55,690 $ 27,670
Net income (loss) applicable to
common stockholders $ 1,346 $ (291)
Net income (loss) per common
share - basic $ 0.17 $ (0.06)
Net income (loss) per common
share - diluted $ 0.12 $ (0.06)
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE E-- STOCKHOLDERS' EQUITY
On June 15, 1998, the Company's Series A Preferred Stockholders
exercised their rights to acquire an additional 3,000 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 7,500 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 votes per share.
In connection with the acquisition of Riggleman, Turk & Nelson, A-L
Associates, Rubin Reporting and Summit Reporting during the quarter, the Company
issued 249,014 shares of common stock at an average recorded share price of
$4.44.
On May 14 and 21, 1998, the underwriters associated with the Company's
initial public offering exercised their rights to acquire shares under option
and warrant agreements. Under the terms of the agreements, the underwriters
acquired 264,751 shares at the exercise price of $2.64 per share for the options
and 264,751 shares at the exercise price of $4.56 per share for the warrants.
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
During the six month period ended June 30, 1998, the Company issued
105,383 shares of common stock in connection with a cashless exercise of
warrants.
During the six month period ended June 30, 1998, the Company issued
827,059 shares of common stock in connection with acquisitions.
Supplemental noncash investing and financing
activities for the six months ended June 30, 1998:
Acquisitions:
Fair value of assets acquired $ 9,619
Liabilities assumed $ 4,674
Cash paid for acquisitions $ 31,724
Stock issued $ 2,704
Notes issued $ 5,438
Options issued $ 279
NOTE G - SUBSEQUENT EVENTS
Subsequent to June 30, 1998 the Company acquired substantially all of
the assets of Cooksey-Regal Deposition Reporters, a Sacramento, California
based court reporting agency for a purchase price of approximately $699,000,
Messenger and Associates, a Dallas, Texas based court reporting agency for a
purchase price of approximately $384,000, Mudrick Witt Professional Reporting, a
Fort Lauderdale, Florida based court reporting agency for a purchase price of
approximately $5,804,000 and Sandra S. Phillips and Associates, a Sacramento,
California based court reporting agency for a purchase price of approximately
$1,814,000.
<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 two quarters of
1998, the Company acquired 15 court reporting agencies and one staffing agency
(collectively referred to as "1998 Acquisitions").
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUE. Revenue increased by approximately $14.4 million, or 126.6%,
to $25.8 million, and $25.2 million, or 117.9%, to $46.5 million for the three
and six months ended June 30, 1998 from $11.4 million and $21.3 million for the
three and six months ended June 30, 1997. This increase in revenue was due
primarily to the effect of acquisitions completed after June 30, 1997.
OPERATING EXPENSES. Operating expenses increased by approximately $7.8
million, or 118.9%, to $14.4 million and $13.3 million, or 107.3%, to $25.8
million for the three and six months ended June 30, 1998 from $6.6 million and
$12.4 million for the three and six months ended June 30, 1997. Operating
expenses as a percentage of revenue decreased to 55.7% and 55.4% for the three
and six months ended June 30, 1998 from 57.6% and 58.3% for the three and six
months ended June 30, 1997. This decrease was due primarily to the
standardization of the Company's pricing and direct court reporting costs and a
greater share of revenue generated in geographic areas with higher profit
margins for the three and six months ended June 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expense increased by approximately $3.0 million, or 62.5%, to $7.9 million and
$6.0 million, or 73.1%, to $14.3 million for the three and six months ended June
30, 1998 from $4.9 million and $8.3 million for the three and six months ended
June 30, 1997. This 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 to 30.6% and 30.7%
for the three and six months ended June 30, 1998 from 42.6% and 38.7% for the
three and six months ended June 30, 1997. This decrease was due to the large
number of tuck-in acquisitions completed in 1997 and the six months ended June
30, 1998 (which allowed the Company to operate the acquired businesses through
its existing infrastructure), resulting in a lower impact of corporate overhead
as a percentage of revenue.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by approximately $556,000, or 100.5%, to $1.1 million and $1.1 million, or
113.9%, to $2.1 million for the three and six months ended June 30, 1998 from
$553,000 and $983,000 for the three and six months ended June 30, 1997. This
increase was due primarily to additional amortization arising from the 1997 and
1998 Acquisitions. A significant component of the amortization expense relates
to goodwill, which is the cost in excess of fair market value of net tangible
assets of acquired businesses.
INCOME FROM OPERATIONS. Income from operations increased by
approximately $3.0 million to $2.4 million and $4.7 million to $4.3 million for
the three and six months ended June 30, 1998 from a loss from operations of
$577,000 and $331,000 for the three and six months ended June 30, 1997. Income
from operations as a percentage of revenues increased to 9.5% and 9.3% for the
three and six months ended June 30, 1998 from a loss from operations of 5.1% and
1.6% for the three and six months ended June 30, 1997.
<PAGE>
OTHER EXPENSE, NET. Other expense, net, consisting primarily of
interest expense, increased by approximately $972,000, to $1.5 million and $1.8
million, to $2.7 million for the three and six months ended June 30, 1998 from
$510,000 and $879,000 for the three and six months ended June 30, 1997 due to
the incurrence of additional debt to finance acquisitions and to fund working
capital.
PROVISION FOR INCOME TAXES (BENEFIT). The Company offset the majority
of its current income tax expense by utilizing its deferred tax asset for the
three and six months ended June 30, 1998, and recorded a tax expense of $357,000
for the three and six months ended June 30, 1998 and recorded a $415,000 and
$424,000 tax benefit for the three and six months ended June 30, 1997. The
deferred tax asset relating to the net operating loss carryforward was fully
utilized during the six months ended June 30, 1998. Consequently, income tax
expense, if any, in future periods will not be offset by the deferred tax
asset, thereby resulting in a higher effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly
affected by acquisitions and, given the Company's acquisition strategy, may be
significantly affected for the foreseeable future. The Company's primary source
of cash in the past two years has been from bank borrowings and equity
investments from its investors which has been used primarily for acquisitions,
repayment of debt, capital expenditures and working capital.
OPERATING ACTIVITIES
Net cash used in operating activities totaled $1.8 million for the six
months ended June 30, 1998 compared to net cash provided by operating activities
of $992,000 for the six months ended June 30, 1997, representing a decrease of
$2.8 million. The increase in usage of operating cash flow in the six months
ended June 30, 1998 was due primarily to an increase in accounts receivable and
a decrease in accounts payable, accrued expenses and other current liabilities.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $32.3 million and $25.5
million for the six months ended June 30, 1998 and June 30, 1997, respectively,
and primarily has been used to fund payments for the net assets of acquired
businesses and investments in capital equipment. Net cash used to acquire
businesses was $31.7 million and $25.0 million for the six months ended June 30,
1998 and June 30, 1997, respectively. The Company continues to invest in capital
equipment, principally to upgrade facilities, computer systems and photocopy
equipment. At June 30, 1998, the Company had no commitments to purchase
equipment; however, the Company expects to make additional capital expenditures
of between $500,000 and $600,000 in the second half of 1998, none of which is
pursuant to a firm commitment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the six months ended
June 30, 1998 and June 30, 1997 was $34.8 million and $24.6 million,
respectively, and consisted primarily of proceeds from Credit Agreement
borrowings and the issuance of Series A Convertible Preferred Stock used to fund
payments for acquired businesses and for working capital.
The Company currently has a three-year Credit Agreement with financial
institutions which, as amended, provides for borrowings up to $80.0 million
based on operating cash flow as defined therein and expires in December 1999.
Borrowings under the Credit Agreement bear interest at either the prime rate or
LIBOR, at the Company's election, plus the applicable margin rate. The
applicable margin varies on the basis of operating cash flow and the overall
leverage ratio as defined in the Credit Agreement. The Credit 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. At June 30, 1998, the effective interest rate was 9.1% and
aggregate borrowings under the Credit Agreement were $64.9 million. During the
third quarter of 1998, the Company expects to reach the limit of available
borrowings under its current Credit Agreement. The Company is currently
considering various financing alternatives, including the raising of equity
through a secondary offering of stock and increasing its current Credit
Agreement.
<PAGE>
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs
and operating systems in its internal operations, including applications used in
financial business systems, sales and marketing, billing and various
administrative functions. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year
and impacts both information technology ("IT") and non-IT systems. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could cause the
Company to incur expenses and the risk and potential expense of any disruptions
that may be caused by the software's impaired functioning as the year 2000
approaches and by the modification or replacement of such software, including a
temporary inability to integrate scheduling throughout the Company's offices and
to send correct invoices or engage in similar normal administrative activities.
The Company has completed its identification of IT systems that are
not year 2000 compliant and is in the process of making appropriate responses to
address certain identified problem areas. The Company has hired an outside firm
to assist in developing a new management information system for scheduling,
billing and paying independent contractors that is designed to be Year 2000
compliant and it intends to implement the system by April 1999. The Company
planned to replace its existing management information system and did not
accelerate the replacement due to year 2000 issues. Testing of all aspects of
the new system is expected to commence in the fourth quarter of 1998 and be
completed during the first quarter of 1999. Costs incurred through June 30, 1998
in connection with the management information system were $100,000 and the total
cost is estimated to be $750,000. The Company is currently in the process of
assessing its non-IT systems for year 2000 compliance.
The ability of third parties with whom the Company transacts business
to address adequately their year 2000 compliance is beyond the Company's
control. At this time, the Company is unable to determine the extent to which it
will be dependent on third parties to identify or address year 2000 issues or
the impact of any year 2000 problems of such third parties on the Company's
business, financial condition, results of operations or ability to sustain
growth.
In the event of a delay in the implementation of the new management
information system and the associated year 2000 compliance plan, the Company's
contingency plan is to modify its existing IT system. The Company has been
advised by the outside firm hired to assist in developing and implementing the
new management information system that this would take 90 days and the costs
would not be material (not to exceed $100,000). The Company's contingency plan
also includes some non-computerized backup systems, including manually
scheduling and sending invoices.
Thc Company's accounting system presently is Year 2000 compliant. The
Company has hired an outside firm to assist in inplementing and installing a new
centralized accounting system which is Year 2000 compliant.
The costs incurred by the Company, including the cost of the
replacement system, to address year 2000 compliance have not had, and are not
anticipated to have, a material adverse effect on the Company's business,
financial condition, results of operations or ability to sustain growth. These
costs, and the date on which the Company plans to complete the Year 2000
modification and testing processes, are based on management's best estimates,
which were derived using numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
<PAGE>
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
----------
In accordance with 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 14, 1998
By:/S/ DAVID A. WHITE
David A. White
Chief Executive Officer
By:/S/ DAVID A. HIGSON
David A. Higson
Executive Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 27,882
<ALLOWANCES> 2,350
<INVENTORY> 0
<CURRENT-ASSETS> 27,586
<PP&E> 7,643
<DEPRECIATION> 3,221
<TOTAL-ASSETS> 132,192
<CURRENT-LIABILITIES> 16,638
<BONDS> 75,138
<COMMON> 82
0
0
<OTHER-SE> 39,923
<TOTAL-LIABILITY-AND-EQUITY> 132,192
<SALES> 0
<TOTAL-REVENUES> 46,497
<CGS> 0
<TOTAL-COSTS> 25,765
<OTHER-EXPENSES> 14,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,767
<INCOME-PRETAX> 1,615
<INCOME-TAX> 127
<INCOME-CONTINUING> 914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 914
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.09
</TABLE>
