<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION STATEMENT NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ESQUIRE COMMUNICATIONS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7338 13-3703760
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
750 "B" STREET
SUITE 2350
SAN DIEGO, CALIFORNIA 92101
(800) 496-4969
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID A. WHITE
CHIEF EXECUTIVE OFFICER
ESQUIRE COMMUNICATIONS LTD.
750 "B" STREET
SUITE 2350
SAN DIEGO, CALIFORNIA 92101
(800) 496-4969
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MARTIN H. NEIDELL, ESQ. BRYAN E. DAVIS, ESQ.
STROOCK & STROOCK & LAVAN LLP ALSTON & BIRD LLP
180 MAIDEN LANE ONE ATLANTIC CENTER
NEW YORK, NEW YORK 10038-4982 1201 WEST PEACHTREE STREET
(212) 806-5836 ATLANTA, GEORGIA 30309-3424
(404) 881-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, $.01 par value.............. 11,553,475 shares(2) $6.625 $76,541,772 $22,580
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, on the basis of
the average of the high and low prices per share of the Common Stock on July
16, 1998 as reported in the Nasdaq SmallCap Market.
(2) Includes 1,506,975 shares subject to an over-allotment option granted to the
Underwriters by the Registrant.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED JULY 20, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
[ESQUIRE COMMUNICATIONS LOGO]
10,046,500 Shares
ESQUIRE COMMUNICATIONS LTD.
Common Stock
- --------------------------------------------------------------------------------
Of the 10,046,500 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 7,500,000 shares are being sold by
Esquire Communications Ltd. (the "Company") and 2,546,500 shares are being sold
by certain stockholders of the Company (the "Selling Stockholders"). The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders. See "Principal and Selling Stockholders" and
"Underwriting."
Prior to the Offering, there has been a limited trading market for the Common
Stock in The Nasdaq Stock Market's SmallCap Market (the "Nasdaq SmallCap
Market") and on the Boston Stock Exchange under the symbol "ESQS." The last
reported sales price of the Common Stock in the Nasdaq SmallCap Market on July
16, 1998 was $6.375 per share. See "Price Range of Common Stock." It is
currently anticipated that the public offering price of the Common Stock will be
between $ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the public offering price. There can be
no assurance that the public offering price of the Common Stock will be within
such price range or will be at or above the current market price of the Common
Stock. The Company has applied for inclusion of the Common Stock in The Nasdaq
Stock Market's National Market (the "Nasdaq National Market") under the symbol
"ESQS," which is expected to become effective concurrently with the Offering.
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- ------------------------------------------------------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
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Total(3).......................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $750,000.
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,506,975 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be
$ , the total Proceeds to Company will be $ , and the
total Proceeds to Selling Stockholders will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made through the facilities of The Depository Trust Company, New York, New
York on or about , 1998.
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
JANNEY MONTGOMERY SCOTT INC.
, 1998
<PAGE> 3
[MAP OF UNITED STATES DENOTING
COMPANY-OWNED OFFICES]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS, IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS, AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes appearing elsewhere in the Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes (i) that the Underwriters'
over-allotment option will not be exercised, (ii) that the Series A Convertible
Preferred Stock and the options to acquire Series B Convertible Preferred Stock
will be converted into shares of Common Stock and (iii) the exercise of certain
warrants by the holders thereof, with the Company to repurchase the remaining
warrants held by such holders.
THE COMPANY
Esquire Communications Ltd. (the "Company") is the nation's leading
provider of court reporting services to law firms, insurance companies and
corporations through Company-owned offices located in 24 markets in 11 states
and the District of Columbia. In certain markets, the Company also provides
permanent and temporary staffing of financial and legal professionals, legal
video services, records retrieval, process service and document depository
services. The Company also has contractual relationships with approximately 400
independent court reporting, legal video and process service firms through its
DepoNet(R) marketing network, which enables the Company to deliver these
services to its clients in every market within the United States and in certain
international markets. In 1997 and during the three months ended March 31, 1998,
the Company provided court reporting and related services to over 1,000 law
firms, insurance companies and corporations, including The Chase Manhattan Bank,
Conrail, Fireman's Fund Insurance Company, Ford Motor Company, O'Melveny &
Myers, Otis Elevator Company, Reliance Insurance and Skadden, Arps, Slate,
Meagher & Flom LLP. The Company intends to leverage its client relationships and
nationwide delivery system to expand into a broad range of legal support
services.
The Company's predecessor was founded in 1988 to create a national court
reporting company by consolidating the highly fragmented court reporting
industry. In October 1996, Golder, Thoma, Cressey, Rauner Fund IV, L.P.
("GTCR"), a private equity fund with a focus on investing in and consolidating
highly fragmented business services industries, became a principal stockholder
of the Company and has invested approximately $21.9 million to date. The Company
subsequently recruited a senior management team with significant experience
increasing profitability and managing and implementing aggressive acquisition
programs in consolidating service industries. Since February 1997, the new
management team has accelerated the Company's acquisition program and has
acquired 34 court reporting companies and one provider of permanent and
temporary staffing of financial and legal professionals with aggregate estimated
revenues (based on the twelve month revenues preceding each acquisition) of
approximately $90.6 million. The Company's acquisition program emphasizes
expanding into new geographic markets through platform acquisitions, building
market share in existing markets through smaller "tuck-in" acquisitions and
focusing on strong, locally managed companies with a well-recognized market
presence. Management has further developed an integration strategy to (i)
streamline operations to increase the profitability of acquired operations, (ii)
increase internal growth and (iii) expand the range of legal support services
available to its clients.
The Company has achieved revenue growth through the successful
implementation of its acquisition strategy and has increased the profitability
of existing and acquired operations by implementing standardized operating
procedures and financial controls, consolidating operations and standardizing
pricing and compensation structures in each local market. The Company's pro
forma revenues and earnings before interest, taxes, depreciation and
amortization ("EBITDA"), excluding unusual items, were $124.4 million and $15.5
million, respectively, in 1997 and $30.8 million and $4.2 million, respectively,
for the three months ended March 31, 1998.
The legal support services industry is comprised of a broad range of
services that assist legal professionals in all aspects of their practice. Based
on industry data, the Company believes that the market for court reporting and
temporary and permanent legal staffing services exceeds $5 billion and is highly
fragmented with more than 1,000 independent court reporting and over 400 legal
staffing firms. Despite tort reform and the growing popularity of alternative
dispute resolution methods, a study completed in 1997 by the National Center for
State Courts indicated that the number of lawsuits filed through state district
courts nationwide
3
<PAGE> 5
increased by 25% between 1984 and 1996. The Company believes that the legal
support services market is growing due to several trends, including an increase
in: (i) efforts by law firms and corporations, especially insurance companies,
to reduce legal expenses; (ii) the outsourcing of legal support services to
companies that specialize in providing such services; (iii) the use of lawyers
on a temporary basis by law firms and corporations; (iv) the volume and
complexity of litigation; and (v) the national scope of litigation, particularly
in class action and product liability lawsuits.
The Company seeks to become the nationally recognized leader in providing a
broad range of legal support services. The Company believes that the
implementation of its operating strategy has contributed to increases in EBITDA
margins, which increased to 13.9% for the three months ended March 31, 1998 from
6.3% for the same period in 1997. The key elements of the Company's operating
strategy are to focus on offering a broad range of legal support services to its
clients on a regional or national basis, maintain a strong local presence and
entrepreneurial environment that rewards quality, client service and
performance, centralize functional management by providing support and strategic
direction to assist general managers in executing their local business and
growth plans, attract and retain high-quality professionals through its
management development and training programs and emphasize value-added services
in an effort to establish and maintain long-term client relationships. The
Company's internal growth strategy will focus on offering a broad range of
services, developing new and leveraging existing client relationships,
leveraging the Esquire brand to develop a national accounts program, opening new
locations and leveraging the DepoNet(R) referral network. The Company's
corporate management has extensive experience in acquiring and integrating
service businesses in consolidating industries. The Company's acquisition growth
strategy consists of entering new markets through platform acquisitions,
acquiring smaller tuck-in businesses in existing markets and expanding service
offerings.
The Company was incorporated in 1993 under the laws of the State of
Delaware. Its principal executive offices are located at 750 "B" Street, Suite
2350, San Diego, California 92101, and its telephone number at that location is
(800) 496-4969.
RECENT DEVELOPMENTS
In connection with the Offering, various organizational and capitalization
changes will be or have been effectuated as set forth below. Effective upon
consummation of the Offering, (a) the holders of the Company's Series A
Convertible Preferred Stock will convert such stock into an aggregate of
7,500,000 shares of Common Stock and (b) the options to acquire Series B
Convertible Preferred Stock will be terminated and the holders will be issued a
number of shares of Common Stock equal to $4.5 million divided by the public
offering price less underwriting discounts and commissions (600,000 shares
assuming a public offering price of $8.00 per share, the mid-point of the
anticipated price range set forth on the cover page of this Prospectus). As a
result, the Company will not have outstanding any class or series of Preferred
Stock. In addition, Allied Investment Corporation, Allied Investment Corporation
II and Allied Capital Corporation II (collectively, "Allied") will exercise
warrants to purchase an aggregate of 312,500 shares of Common Stock, with the
Company to repurchase the remaining warrants to purchase 312,500 shares of
Common Stock at a price equal to the assumed public offering price of $8.00 per
share (the mid-point of the anticipated price range set forth on the cover page
of this Prospectus) less underwriting discounts and commissions minus the $2.90
exercise price of the warrants. See "Use of Proceeds" and "Capitalization." The
Stockholders Agreement (as defined herein) among various stockholders of the
Company will also be terminated effective upon consummation of the Offering. In
June 1998, Dr. John C. Durham and Messrs. Andrew P. Garvin and Fir M. Geenen
resigned as directors of the Company, and Messrs. David A. Higson and Gary L.
Monroe were elected as directors of the Company. In July 1998, Mr. David J.
Feldman resigned as a director of the Company. See "Management -- Directors and
Executive Officers."
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company................... 7,500,000 shares
Common Stock Offered by the Selling Stockholders...... 2,546,500 shares
Common Stock to be Outstanding after the Offering..... 24,713,546 shares (1)
Use of Proceeds by the Company........................ To repay bank debt incurred to finance
acquisitions, to pay accrued dividends on
the Series A Convertible Preferred Stock
and to repurchase outstanding warrants.
See "Use of Proceeds."
Nasdaq SmallCap Market Symbol......................... ESQS
Proposed Nasdaq National Market Symbol................ ESQS
</TABLE>
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(1) Based upon the number of shares of Common Stock outstanding as of June 30,
1998. Excludes as of June 30, 1998, (i) 3,500,000 shares of Common Stock
reserved for issuance under the Company's Stock Option Plan, of which
options to purchase 1,789,718 shares of Common Stock have been granted to
certain directors, executive officers and other employees at a weighted
average exercise price of $4.91 per share, (ii) 580,000 shares of Common
Stock issuable upon exercise of options granted in connection with completed
acquisitions at a weighted average exercise price of $6.09 per share, (iii)
84,000 shares of Common Stock issuable upon exercise of outstanding warrants
at an exercise price of $4.50 per share and (iv) 531,000 shares of Common
Stock issuable upon conversion of $4.7 million of convertible debt
securities. See "Capitalization," "Management" and "Principal and Selling
Stockholders."
RISK FACTORS
Investors should consider the material risk factors involved in connection
with an investment in the Common Stock and the impact to investors from various
events that could adversely affect the Company's business. See "Risk Factors."
5
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA AS ADJUSTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
----------- -----------
1995 1996 1997 1997(3) 1997 1998 1998(4)
------- ------- ------- ----------- ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $26,781 $29,501 $53,178 $124,444 $9,944 $20,685 $30,823
Costs and expenses:
Operating expenses.................. 15,095 16,662 30,284 74,659 5,836 11,399 17,768
General and administrative
expenses.......................... 8,647 10,585(1) 20,046(2) 36,502 3,486 6,401 8,829
Depreciation and amortization....... 1,051 1,198 2,522 4,770 429 994 1,267
------- ------- ------- -------- ------ ------- -------
Total costs and expenses.............. 24,793 28,445 52,852 115,931 9,751 18,794 27,864
------- ------- ------- -------- ------ ------- -------
Income from operations................ 1,988 1,056 326 8,513 193 1,891 2,959
Other expense, net.................... 1,093 1,216 2,656 2,397 370 1,241 556
------- ------- ------- -------- ------ ------- -------
Income (loss) before provision for
income taxes and extraordinary
item................................ 895 (160) (2,330) 6,116 (177) 650 2,403
Provision for income taxes
(benefit)........................... 574 216 125 2,446 (9) -- 962
------- ------- ------- -------- ------ ------- -------
Income (loss) before extraordinary
item................................ 321 (376) (2,455) 3,670 (168) 650 1,441
Extraordinary item, net of tax
benefit............................. -- (157) -- -- -- -- --
------- ------- ------- -------- ------ ------- -------
Net income (loss)..................... 321 (533) (2,455) 3,670 (168) 650 1,441
Dividends on preferred stock.......... -- (75) (702) -- (113) (267) --
------- ------- ------- -------- ------ ------- -------
Net income (loss) applicable to common
stockholders........................ $ 321 $ (608) $(3,157) $ 3,670 $ (281) $ 383 $ 1,441
======= ======= ======= ======== ====== ======= =======
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary
item............................ $ 0.06 $ (0.09) $ (0.56) $ 0.15 $(0.06) $ 0.05 $ 0.06
Extraordinary item................ -- (0.03) -- -- -- -- --
------- ------- ------- -------- ------ ------- -------
Net income (loss)................. $ 0.06 $ (0.12) $ (0.56) $ 0.15 $(0.06) $ 0.05 $ 0.06
======= ======= ======= ======== ====== ======= =======
Weighted average shares
outstanding..................... 4,980 4,959 5,630 23,513 4,852 7,568 24,720
Diluted:
Income (loss) before extraordinary
item............................ $ 0.06 $ (0.09) $ (0.56) $ 0.15 $(0.06) $ 0.04 $ 0.06
Extraordinary item................ -- (0.03) -- -- -- -- --
------- ------- ------- -------- ------ ------- -------
Net income (loss)................. $ 0.06 $ (0.12) $ (0.56) $ 0.15 $(0.06) $ 0.04 $ 0.06
======= ======= ======= ======== ====== ======= =======
Weighted average shares
outstanding..................... 5,05l 4,959 5,630 24,398 4,852 16,181 25,605
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 6,392 $ 7,718
Total assets................................................ 103,263 139,392
Total debt.................................................. 60,126 27,319
Stockholders' equity........................................ 33,021 96,613
</TABLE>
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(1) Includes $150,000 expense related to sublease loss.
(2) Includes approximately $1.3 million expense relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities, as well as approximately $922,000 of costs incurred in
connection with an acquisition accounted for under the pooling of interests
method of accounting.
(3) Gives effect to the 17 acquisitions completed in 1997 (collectively referred
to as the "1997 Acquisitions") and to the 20 acquisitions completed in 1998
(collectively referred to as the "1998 Acquisitions") as if they occurred on
January 1, 1997. See Note (5) below, which adjustments also apply to the pro
forma as adjusted statement of operations data, with the exception of clause
(iii) of such note.
6
<PAGE> 8
(4) Gives effect to the 1998 Acquisitions as if they occurred on January 1,
1998. See Note (5) below, which adjustments also apply to the pro forma as
adjusted statement of operations data, with the exception of clause (iii) of
such note.
(5) Gives effect to (i) the sale by the Company of 3,000 shares of Series A
Convertible Preferred Stock; (ii) the exercise of certain warrants to
purchase 529,502 shares of Common Stock at an exercise price of $4.56 per
warrant; (iii) the acquisitions completed by the Company subsequent to March
31, 1998; (iv) the sale of the 7,500,000 shares of Common Stock offered
hereby by the Company at an assumed public offering price of $8.00 per share
(the mid-point of the anticipated price range set forth on the cover page of
this Prospectus) and the application of the estimated net proceeds
therefrom, see "Use of Proceeds;" (v) the conversion of the Company's Series
A Convertible Preferred Stock and of the options to acquire Series B
Convertible Preferred Stock into shares of Common Stock and (vi) the
exercise of warrants by Allied to purchase an aggregate of 312,500 shares of
Common Stock.
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Prospective investors should consider
carefully the following risk factors, in addition to the other information set
forth in this Prospectus, in connection with an investment in the shares of
Common Stock offered hereby.
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Such statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or expectations of the Company, its
directors and its officers with respect to, among other things: (i) trends
affecting the Company's financial condition or results of operations, (ii) the
Company's financing plans and (iii) the Company's business and growth
strategies. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including without
limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences.
MANAGEMENT OF GROWTH; FUTURE PROFITABILITY. The Company expects to spend
significant time and effort in expanding its existing businesses and
identifying, acquiring and integrating acquisitions. Most of the businesses
acquired by the Company historically have operated with limited financial and
other management operating systems. Although the Company believes that its
existing financial reporting and accounting control systems are satisfactory for
the operation of the combined businesses in the near future, these systems may
not be capable of addressing the needs of the Company as it continues to
implement its growth strategy. The Company anticipates implementing new
accounting system software in the fourth quarter of 1998 that will replace the
general accounting system currently utilized by the Company's different offices.
Certain risks are inherent with implementing new accounting system software,
such as delays in implementation, the costs of eliminating system "bugs" and the
time and expense associated with educating the Company's employees on the use of
the system. There can be no assurance that the Company will be successful in
implementing its new accounting system software or that the Company's management
and financial reporting systems, procedures and controls will be adequate to
support the Company's operations as they expand.
Any future growth also will impose significant added responsibilities on
members of senior management, including the need to identify, recruit and
integrate additional management and employees. There can be no assurance that
such additional management and employees will be identified and retained by the
Company. To the extent that the Company's financial reporting and accounting
software is not satisfactory to support the Company's growth, the Company is
unable to manage its growth efficiently and effectively or the Company is unable
to attract and retain additional qualified personnel, the Company's business,
financial condition, results of operations or ability to sustain growth could be
materially adversely affected. Although the Company was profitable in the first
quarter of 1998, the Company incurred a net loss of $3.2 million for its year
ended December 31, 1997. There is no assurance that the Company will be
profitable in the future. In addition, because a significant portion of the
Company's growth and development in recent years has been attributable to its
acquisitions, the Company, as now constituted, has a limited operating history
upon which prospective investors may judge the Company's performance. See
"Business -- Internal Growth Strategy" and "-- Acquisition Strategy."
IMPLEMENTATION OF ACQUISITION STRATEGY. A primary element of the Company's
growth strategy is to continue to pursue strategic acquisitions that expand and
complement the Company's business. The Company's ability to expand is dependent
upon identifying, acquiring and integrating companies that meet its acquisition
criteria. There can be no assurance that the Company will be able to identify
additional acquisition candidates on terms favorable to the Company or in a
timely manner, enter into acceptable agreements or close any such transactions.
There can also be no assurance that the Company will be able to continue to
8
<PAGE> 10
execute its acquisition strategy, and any failure to do so could have a material
adverse effect on the Company's business, financial condition, results of
operations or ability to sustain growth. In addition, due to industry
consolidation, the Company believes that it will compete for attractive
acquisition candidates with other companies serving the legal support services
industry, certain of whom have greater resources than the Company. Increased
competition for such acquisition candidates could have the effect of increasing
the cost to the Company of pursuing this growth strategy or could reduce the
number of attractive candidates to be acquired. The Company must obtain the
consent of its lenders under its credit facility in connection with significant
acquisitions. There can be no assurance that the Company will be able to obtain
any requested consents. Future acquisitions could divert management's attention
from the daily operations of the Company and otherwise require additional
management, operational and financial resources, any of which could have a
material adverse effect on the Company's business, financial condition, results
of operations or ability to sustain growth.
The process of integrating acquired businesses often involves unforeseen
difficulties and may require a disproportionate amount of the Company's
financial and other resources, including management time. The successful
integration of businesses acquired by the Company depends on a number of
factors, including the Company's ability to transition acquired businesses to
the Company's management systems, to improve the profitability of the businesses
it acquires and to integrate acquisitions effectively. There can be no assurance
that the Company will be able to integrate successfully acquired businesses
without substantial costs, delays or other operational or financial problems. In
addition, there can be no assurance that the Company will be able to manage
profitably or achieve anticipated cost savings from the combined operations of
acquired companies or implement the Company's internal and acquisition growth
strategies subsequent to the Offering. The inability of the Company to
accomplish any of the foregoing could have a material adverse effect on the
Company's business, financial condition, results of operations or ability to
sustain growth. See "Business -- Acquisition Strategy" and "Management."
In addition, although the Company conducts due diligence and requires
representations, warranties and indemnifications from the former owners of
acquired businesses, there can be no assurance that such owners will have
accurately represented the financial and operating conditions of their companies
or will be able to meet any indemnification obligations that may arise. Any
material unforeseen liabilities or inaccuracies with respect to its acquired
businesses could have a material adverse effect on the Company's business,
financial condition, results of operations or ability to sustain growth. See
"Business -- Acquisition Strategy."
Finally, as a result of its acquisitions, which are most often accounted
for using the purchase method of accounting, the Company has incurred and
expects to continue to incur significant amortization charges resulting from the
excess of the purchase price paid over the fair value of the net assets of the
businesses acquired (goodwill). These current and future goodwill amortization
charges have and will continue to have a material impact on the Company's
results of operations over the foreseeable future. If the value of goodwill is
impaired, the Company could incur a significant non-cash charge in the period of
such impairment and the market price of the Common Stock could be adversely
affected when the Company reports such charges, if any. In addition, in the
event of the sale of the Company or its assets, there can be no assurance that
the value of such intangible assets would be recovered. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
DEVELOPMENT OF NEW LEGAL SUPPORT SERVICES. The Company believes that a
significant element of its future growth depends on its ability to develop new
services that address the needs of law firms, insurance companies and other
corporations. The Company's growth strategy is dependent in part on the
Company's ability to expand into other legal support services by capitalizing on
cross-selling opportunities and acquiring companies that provide new services.
The Company has limited operating experience in providing certain legal support
services, such as permanent and temporary staffing services. The failure of the
Company to develop and introduce enhancements and new legal support services in
a timely and cost-effective manner in response to changing technologies,
customer requirements or increased competition could have a material adverse
effect on the Company's business, financial condition, results of operations or
ability to sustain growth. See "Business -- Internal Growth Strategy."
9
<PAGE> 11
The Company's strategy is based, in part, upon the concept of bundling
various legal support services so that legal consumers will be able to access a
broad range of services through a single provider. In light of the evolving
nature of both the legal support services industry and the concept of "one-stop
shopping" in the industry, there can be no assurance as to the ultimate or
continuing level of demand for, or market acceptance of, the Company's
integrated approach towards offering legal support services. Failure to gain
sufficient market acceptance for the Company's strategy would have a material
adverse effect on the Company's business, financial condition, results of
operations or ability to sustain growth.
NEED FOR ADDITIONAL FINANCING. Although the Company intends to finance
future acquisitions by using a combination of Common Stock, debt and borrowings
under its revolving line of credit, it will require additional financing to fund
future acquisitions and maintain its growth strategy. In the event that the
Common Stock of the Company does not maintain a sufficient market value, or
potential acquisition candidates are unwilling to accept the Company's Common
Stock or debt securities as part of or all of the consideration to be paid for
their businesses, the Company may be required to utilize its cash resources, if
available, to maintain its acquisition program. There can be no assurance that
the Company will be able to obtain such financing if and when it is needed or
that, if available, such financing can be obtained on terms the Company deems
acceptable. The inability to obtain such financing could negatively impact the
Company's acquisition program and have a resulting material adverse effect on
the Company's business, financial condition and results of operations. The
Company has a revolving line of credit, as amended (the "Credit Agreement"),
which provides it with up to $70.0 million of borrowings on a secured basis and
expires in December 1999. The Credit Agreement contains restrictive covenants
with respect to incurring additional debt, investments, distributions,
acquisitions and capital expenditures and also requires the maintenance of
certain financial ratios and covenants. Specifically, the Credit Agreement
contains a restrictive covenant that prohibits the Company from consummating
certain acquisitions without the approval of the lenders.
The Company intends to use part of the net proceeds of the Offering to
reduce the amount of current borrowings under the Credit Agreement. In
connection with future acquisitions, the Company anticipates incurring
substantial amounts of new indebtedness which will also be collateralized by
substantially all of the Company's assets. In that regard, the Company expects
to renegotiate the Credit Agreement, or to enter into a new credit agreement
after the Offering, to increase the line of credit available to the Company. The
Company's level of indebtedness could have important consequences to the holders
of the Common Stock, including the following: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of the
principal of and interest on its indebtedness and will not be available for
other purposes; (ii) the ability of the Company to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes may be materially
limited or impaired; and (iii) the Company's level of indebtedness may reduce
the Company's flexibility to respond to changing business and economic
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
GOVERNMENT REGULATION; REGULATORY INITIATIVES. The practice of court
reporting is currently regulated by many states, and the practice of law,
including the practice of law by temporary attorneys, is currently regulated by
every state. Court reporters in many states and attorneys in every state are
subject to licensure requirements and to continuing oversight by their
respective regulatory bodies, many of whom have broad discretion in interpreting
and enforcing applicable laws and regulations. The regulatory framework of
certain jurisdictions may limit the Company's expansion into, or ability to
continue operations within, such jurisdictions, unless the Company is able to
comply with such regulatory framework. Any limitation on the Company's ability
to expand or to continue operations could have a material adverse effect on the
Company's business, financial condition, results of operations or ability to
sustain growth.
With respect to court reporting specifically, legislation has been adopted
by several states, where the Company currently does not have Company-owned
operations, and in Georgia, where the Company does have a Company-owned
operation, that prohibit the provision of services by a court reporter under any
agreement other than on a case-by-case basis. Legislation has also been enacted
or proposed in certain other states that prohibit a court reporter from being
employed by, or serving as an independent contractor for, a court
10
<PAGE> 12
reporting firm unless a majority of the firm is owned by certified shorthand
reporters. The Company expects that there will continue to be efforts to sponsor
the adoption of similar prohibitions by legislative or regulatory action or
through the ethics codes governing the conduct of court reporters. In addition,
recent federal and state legislative proposals have included limitations on the
number and length of depositions or have proposed the substitution of videotaped
recording for stenographic transcription of certain legal proceedings.
With respect to temporary legal staffing, state and national bar
associations and committees on legal ethics and professional responsibility have
from time to time issued opinions regarding the ethical implications of
arrangements involving temporary attorneys. These opinions have suggested that
the payment of fees to agencies that place temporary attorneys may constitute,
in certain circumstances, the improper splitting of legal fees with a
non-lawyer. The applicability of these opinions to the Company's business is
uncertain, and there can be no assurance that a state will not determine that
the business as conducted by the Company violates ethical or professional
responsibility regulations for attorneys. In addition, the practice of placing
temporary lawyers with a number of firms may raise conflict of interest issues
under applicable ethics codes, particularly when attorneys from the same
placement firm are placed with opposing parties, or law firms representing such
parties, in a lawsuit or business transaction.
The Company's growth strategy is based, in part, on the concept of bundling
various legal support services, many aspects of which have not been subject to
judicial or regulatory interpretations. There can be no assurance that a review
of the business of the Company by the courts or regulatory authorities will not
result in a determination that could materially and adversely affect the
Company's operations or that the regulatory environment will not change so as to
restrict the Company's existing or future operations. See "Business --
Regulation."
QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's
revenues may fluctuate from period to period due to the commencement or
termination of large-scale litigation. Large, complex litigation cases can
result in the concentration of revenues over a relatively short period. The
Company's revenues can also be adversely affected by a general economic
recession that reduces demand for legal support services. In addition, as
economic activity has slowed, the use of temporary and contract personnel often
has been curtailed before permanent employees have been laid off; accordingly,
the use of placement search firms tends to decline significantly. As economic
activity increases and unemployment levels decline, the competition among
staffing services firms for qualified personnel is intense and the Company may
face increased competitive pricing pressure during such period. The Company's
revenues are lower in the third quarter when many attorneys are on vacation and
the pace of litigation is slower. The impact on sales due to acquisitions and
internal growth has historically made it difficult to identify the precise
impact of seasonal variations in the Company's reported financial results. The
Company's quarterly results of operations may also be subject to fluctuations as
a result of the timing of acquisitions and new office openings. The results in
any particular quarter are not necessarily indicative of future results or of
the results that may be expected for the full year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Quarterly
Results of Operations."
COMPETITION. The legal support services industry is highly competitive and
fragmented with limited barriers to entry. Although the industry is undergoing
consolidation, the principal competition for the Company's court reporting and
record retrieval businesses currently consists of numerous local and regional
firms. In the legal staffing business, the Company expects to compete with
national, regional and local firms, some of which have substantially greater
resources, offer more diversified services and operate in broader geographic
areas than the Company. As the Company seeks to expand into new geographic
markets, its growth will depend upon its ability to gain market share from
competitors, and there can be no assurance that such additional market share
will be obtained. As the consolidation among providers of legal support services
continues, the Company could encounter more intense price-based competition that
could adversely affect the Company's results of operations. There can be no
assurance that these businesses will continue to increase their outsourcing of
legal support and staffing services needs or that such businesses will not bring
in-house services that they currently outsource. See "Business -- Competition."
11
<PAGE> 13
ALTERNATIVE DISPUTE RESOLUTION. The high cost of litigation in the United
States has resulted in the more frequent use of alternative dispute resolution
practices, such as arbitration and mediation. The increasing use of such
practices could affect the demand for the Company's services, since such
alternatives generally entail more limited discovery, both in scope and period
of time, and could materially and adversely affect its business, financial
condition, results of operations or ability to sustain growth.
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. The Company is
dependent on the availability of a sufficient number of qualified court
reporters substantially all of whom are independent contractors to the Company
and are free to work for the Company's competitors. From time to time, there are
shortages of qualified court reporters, and there can be no assurance that the
Company will be able to maintain an adequate force of court reporters or that
the Company's expenses will not increase as a result of such shortage. The
Company expects to compete with other financial services and legal staffing
companies, as well as its clients, in recruiting and retaining qualified
professionals and other personnel. The Company believes that a substantial
number of the Company's temporary personnel will terminate their temporary
assignments to accept full-time employment with Company clients or others. The
Company's inability to maintain an adequate force of court reporters or to
attract and retain a sufficient number of qualified temporary personnel could
adversely affect the Company's business, financial condition, results of
operations or ability to sustain growth.
RELIANCE ON KEY PERSONNEL. The Company's success is largely dependent on
the efforts and relationships of the Company's executive officers, who
collectively have substantial experience in consolidating fragmented industries
and in operating legal support services businesses. Furthermore, the Company
will likely be dependent on the senior management of any businesses acquired in
the future who have on-going relationships with customers. The loss of the
services of any of these individuals could have a material adverse effect on the
Company's business, financial condition, results of operations or ability to
sustain growth. There can be no assurance that such individuals will continue in
their present capacity for any particular period of time. The Company does not
intend to obtain key man life insurance covering any of its executive officers
or other members of senior management. The Company has entered into employment
contracts, with varying terms, with six of its executive officers. The Company's
future success and plans for growth also depend on the Company's ability to
attract, train and retain skilled personnel in all areas of its business. See
"Management."
RISKS OF TAX AUTHORITIES CLASSIFYING INDEPENDENT CONTRACTORS AS
EMPLOYEES. As substantially all of the court reporters utilized by the Company
are independent contractors, the Company does not pay or withhold any federal or
state employment tax with respect to these individuals. The Company believes
that such personnel are not employees under existing interpretations of federal
and state laws. However, from time to time, federal and state taxing authorities
have sought to assert that such persons are employees, rather than independent
contractors. In this regard, there can be no assurance that federal and state
authorities will not challenge the position taken by the Company, or that the
laws or regulations relied on by the Company, including tax laws, or
interpretations thereof, will not change. If the Internal Revenue Service
successfully asserts that persons classified by the Company as independent
contractors are in fact employees of the Company, the Company would be required
to pay withholding and employment taxes and administer added employee benefits.
In addition, the Company could become responsible for such taxes, including
interest and penalties for prior periods. Any of the foregoing circumstances
could increase the Company's operating costs and could have a material adverse
effect on the Company's business, financial condition, results of operations or
ability to sustain growth. See "Business -- Independent Contractors."
POTENTIAL LIABILITY TO CLIENTS. The provision of personnel in the legal
support services business entails an inherent risk of professional malpractice
and similar claims, and the Company could be named as a defendant in litigation
in connection with services rendered. Although the Company maintains errors and
omissions insurance for court reporting, record retrieval and permanent and
temporary staffing businesses, there can be no assurance that, if named, the
Company would be able to defend such claims within policy limits. The Company's
business also involves the handling of clients' documents containing
confidential and other sensitive information. There can be no assurance that
unauthorized disclosures will not occur, or that clients' documents will not be
mishandled or lost, which could have a material adverse effect on the
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<PAGE> 14
Company's business, financial condition, results of operations or ability to
sustain growth. The Company also may be subject to discrimination and harassment
claims for the acts of temporary staffing personnel who are placed with the
Company's clients.
TECHNOLOGICAL ADVANCES. The Company's business is subject to changes in
technology, which may result in the introduction of new products or services
that are competitive with, superior to, or which could render obsolete certain
services provided by the Company. For example, voice recognition technology is
designed to eliminate the need for manual transcription of oral testimony and
has been under development for several years. There can be no assurance that
substantial advances will not be made in the area of voice recognition
technology or that other technology will not be developed that renders the
Company's services obsolete or impractical. These changes in technology could
also include conducting document retrieval electronically and transmitting and
returning deposition notices and subpoenas electronically to document
custodians. The Company's ability to compete effectively will depend upon its
ability to adapt to such changes and to develop services to satisfy evolving
client requirements. There can be no assurance that current technologies, or
technologies developed in the future, will not compete with or replace services
provided by the Company, or that any technological advances made by the Company
will be responsive to client requirements or represent the best available
technology to meet client needs. See "Business."
LIMITED AND SPORADIC PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to the Offering, there has been a limited and sporadic public
market for the Company's Common Stock. While shares of the Common Stock have
traded in the Nasdaq SmallCap Market and on the Boston Stock Exchange, such
trading has been limited and sporadic due to the relatively small public float
of the Common Stock. As of June 30, 1998, 3,252,642 shares of Common Stock were
freely tradeable without limitations in the public market. The number of shares
of Common Stock that are freely tradeable without limitations will increase to
13,299,142 shares of Common Stock upon completion of the Offering. The public
offering price will be determined by negotiations among the Company, the Selling
Stockholders and the representatives of the Underwriters. There can be no
assurance that the public offering price of the Common Stock will be within the
price range indicated on the cover of this Prospectus or that it will be at or
above the current market price of the Common Stock on the Nasdaq SmallCap
Market. The Company has applied for inclusion of the Common Stock in the Nasdaq
National Market. There can be no assurance an active trading market will develop
or be sustained after the Offering. See "Underwriting."
The market price for the Company's shares of Common Stock may fluctuate
based on the Company's operating results or in response to material
announcements by the Company or competitors of the Company, changes in the
economic or other conditions impacting the Company, changes in the economic or
other conditions impacting the Company's targeted clients or changes in general
economic conditions. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many emerging growth companies,
often unrelated to the operating performance of the specific companies. Such
market fluctuations could have a material adverse effect on the market price of
the Common Stock. See "Price Range of Common Stock."
CONTROL BY INSIDERS; ANTI-TAKEOVER CONSIDERATIONS. After the Offering, the
Company's officers, directors and GTCR will beneficially own approximately 37.8%
of the outstanding Common Stock (approximately 35.7%, if the Underwriters'
over-allotment option is exercised in full). Such persons will have the ability
to significantly influence the election of the Company's directors and the
outcome of all other issues submitted to the Company's stockholders. The
beneficial ownership of such persons, together with the ability of the Board of
Directors of the Company to issue shares of preferred stock and to fix the
rights and preferences thereof, also may have the effect of delaying, deterring
or preventing an unsolicited change in the control of the Company, which may
adversely affect the market price of the Common Stock or the ability of the
stockholders to participate in a transaction in which they might otherwise
receive a premium for their shares. Furthermore, the Company recently entered
into change in control agreements with certain of its key executive officers.
See "Management" and "Principal and Selling Stockholders."
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<PAGE> 15
The Company's Certificate of Incorporation authorizes the issuance of
"blank check" preferred stock with such designations, rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. The preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company, which could have the effect of discouraging bids for the
Company and, thereby, prevent stockholders from receiving the maximum value for
their shares. In addition, certain provisions of the Delaware General
Corporation Law ("DGCL") also may discourage takeover attempts that have not
been approved by the Company's Board of Directors. See "Description of Capital
Stock."
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. To the extent that these software
applications contain source code that is unable to appropriately interpret the
calendar year 2000, some level of modification or even possibly replacement of
such source code or applications will be necessary. 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. The Company is currently in
the process of completing its identification of software applications that are
not year 2000 compliant and expects to make appropriate responses by the end of
1998 to address any issue identified. The Company is still in the preliminary
stages of analyzing its software applications and, to the extent they are not
fully year 2000 compliant, there can be no assurance that the costs necessary to
update software or potential systems interruptions, would not have a material
adverse effect on the Company's business, financial condition, results of
operations or ability to sustain growth.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Upon completion of
the Offering, 24,713,546 shares of Common Stock will be outstanding (26,220,521
shares if the Underwriters' over-allotment option is exercised in full). The
10,046,500 shares of Common Stock sold in the Offering (plus up to 1,506,975
additional shares of Common Stock to be sold by the Company if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or future registration under the Securities Act, unless such shares
are held by an "affiliate" of the Company as that term is defined under Rule 144
of the Securities Act ("Rule 144"). Upon completion of the Offering,
approximately 11,414,404 shares of the currently outstanding shares of Common
Stock will not have been registered under the Securities Act. Of those shares,
464,725 shares of Common Stock will not be subject to lock-up agreements (as
described below) or to contractual resale restrictions and will be eligible for
sale under Rule 144 subject to certain volume and other limitations during the
180-day period after the date of this Prospectus.
The Company, its directors and executive officers, the Selling Stockholders
and certain other securityholders of the Company have agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any other securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except that during such period, shares of Common
Stock may be issued in connection with acquisitions (including issuances of
options, warrants and convertible notes in connection therewith) and upon the
exercise or conversion of employee stock options, warrants and convertible notes
outstanding on the date of this Prospectus (and the persons acquiring such
securities in acquisition transactions that are not "restricted securities" (as
defined in Rule 144) shall execute and deliver to Prudential Securities
Incorporated lock-up agreements with respect to such securities), and the
Company may issue employee stock options that are exercisable after the 180th
day after the date of this Prospectus. The Company will not grant registration
rights to any person where such rights are exercisable less than
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<PAGE> 16
180 days after the date of this Prospectus. Prudential Securities Incorporated
may, in its sole discretion, at any time and without notice, release all or any
portion of the shares subject to such lock-up agreements.
In connection with various acquisitions by the Company and equity financing
provided to the Company, the Company and certain of its stockholders, including
GTCR, certain members of the Company's management, and persons affiliated with
them, entered into various registration rights agreements (collectively, the
"Registration Rights Agreements"). Upon the completion of the Offering, pursuant
to such agreements, such stockholders and their transferees, who will hold in
the aggregate 9,960,267 shares of Common Stock, are entitled to certain demand
and piggy-back registration rights with respect to such shares of Common Stock
which may be exercised after the expiration of the 180-day period described
above. Such rights could be used to force the Company to file one or more
registration statements with respect to the Common Stock owned by such persons.
The existence of the Registration Rights Agreements and such other registration
rights and the perception that sales of Common Stock could occur thereunder
could adversely affect the prevailing market price of the Common Stock and could
impair the Company's future ability to raise capital through the sale of its
equity securities. See "Description of Capital Stock -- Registration Rights" and
"Shares Eligible for Future Sale."
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<PAGE> 17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 7,500,000 shares of
Common Stock offered hereby, assuming a public offering price of $8.00 per share
(the mid-point of the anticipated price range set forth on the cover page of
this Prospectus), after deducting underwriting discounts and commissions and
estimated Offering expenses, are estimated to be approximately $55.5 million
(approximately $66.8 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
the shares of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds of the Offering as follows: (i)
approximately $54.1 million to repay debt outstanding under the Credit Agreement
used primarily to fund acquisitions; (ii) approximately $531,250 (after giving
effect to the proceeds of $906,250 received from Allied in connection with the
exercise of warrants to purchase 312,500 shares of Common Stock) to repurchase
warrants to purchase 312,500 shares of Common Stock held by Allied at a price
equal to the assumed public offering price of $8.00 per share (the mid-point of
the anticipated price range set forth on the cover page of this Prospectus) less
underwriting discounts and commissions minus the $2.90 exercise price and (iii)
$892,000 to pay accrued dividends on the Series A Convertible Preferred Stock.
The debt outstanding under the Credit Agreement bears interest at either the
prime rate or the London Interbank Offered Rate ("LIBOR"), at the Company's
election, plus an applicable margin rate, which varies on the basis of operating
cash flows and overall leverage ratio (the effective rate at June 30, 1998 was
9.1%) and expires in December 1999. Amounts repaid under the Credit Agreement
may be re-borrowed under such facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and Note 4 of Notes to the Company's Consolidated Financial
Statements. As part of its ongoing corporate development activities, the Company
expects that it will continue to consider acquisition candidates. See
"Business -- Acquisition Strategy."
DIVIDEND POLICY
The Company has never declared or paid cash or other dividends on its
Common Stock. The declaration or payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend upon the
Company's earnings, capital requirements, financial condition, and other
relevant factors. Pursuant to the terms of the Credit Agreement, the Company is
prohibited from paying cash dividends on the Common Stock. The Company has paid
cash dividends on its Series A Convertible Preferred Stock. Upon consummation of
the Offering, the Company will not have outstanding any class or series of
Preferred Stock. The Company presently intends to retain all earnings for use in
its business and does not anticipate declaring or paying cash dividends on its
Common Stock in the foreseeable future.
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<PAGE> 18
PRICE RANGE OF COMMON STOCK
Prior to the Offering, there has been a limited and sporadic public market
for the Company's Common Stock. While shares of the Common Stock have traded in
the Nasdaq SmallCap Market and on the Boston Stock Exchange under the symbol
"ESQS," such trading has been limited and sporadic due to the relatively small
public float of the Common Stock. As of June 30, 1998, 3,252,642 shares of
Common Stock were freely tradeable without limitations in the public market. The
number of shares of Common Stock that are freely tradeable without limitations
will increase to 13,299,142 shares of Common Stock upon completion of the
Offering. The public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters.
There can be no assurance that the public offering price of the Common Stock
will be within the price range indicated on the cover of this Prospectus or that
the public offering price will be at or above the current market price of the
Common Stock on the Nasdaq SmallCap Market. The Company has applied for
inclusion of the Common Stock in the Nasdaq National Market, which is expected
to be effective concurrently with the Offering. There can be no assurance an
active trading market will develop or be sustained after the Offering. See
"Underwriting."
The following table sets forth for the calendar periods indicated the high
and low bid prices on the Nasdaq SmallCap Market for the Common Stock for the
period commencing January 1, 1996. The prices set forth below do not include
retail mark-ups, mark-downs or commissions and represent prices between dealers
and are not necessarily actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
First Quarter............................................. $3.500 $2.750
Second Quarter............................................ 3.500 2.750
Third Quarter............................................. 3.250 2.000
Fourth Quarter............................................ 3.375 2.125
1997
First Quarter............................................. $4.625 $2.375
Second Quarter............................................ 5.625 3.250
Third Quarter............................................. 9.375 4.563
Fourth Quarter............................................ 8.625 4.625
1998
First Quarter............................................. $7.375 $4.750
Second Quarter............................................ 6.875 5.125
Third Quarter (through July 16)........................... 6.938 6.250
</TABLE>
On July 16, 1998, the last reported sales price on the Nasdaq SmallCap
Market was $6.375 per share. As of June 30, 1998, there were approximately 109
stockholders of record of Common Stock. This number does not include beneficial
owners holding shares through nominee or "street" names. The Company believes
that it has more than 2,000 beneficial holders of Common Stock.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 (i) on an actual basis; (ii) on a pro forma basis to give effect to (a)
the sale by the Company of an additional 3,000 shares of Series A Convertible
Preferred Stock; (b) the exercise of certain warrants to purchase 529,502 shares
of Common Stock at an exercise price of $4.56 per warrant and (c) the
acquisitions completed by the Company subsequent to March 31, 1998; and (iii) on
such pro forma as adjusted basis to give effect to (a) the sale of the 7,500,000
shares of Common Stock offered hereby by the Company at an assumed public
offering price of $8.00 per share (the mid-point of the anticipated price range
set forth on the cover page of this Prospectus) and the application of the
estimated net proceeds therefrom, see "Use of Proceeds;" (b) the conversion of
the Company's Series A Convertible Preferred Stock and of the options to acquire
Series B Convertible Preferred Stock into shares of Common Stock and (c) the
exercise of warrants by Allied to purchase an aggregate of 312,500 shares of
Common Stock. This table should be read in conjunction with the Company's
Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Statements and
Consolidated Financial Statements and related notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, including current portion................... $60,126 $ 81,396 $ 27,319
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 1,000,000
shares;
Series A Convertible Preferred Stock, authorized 22,500
shares; issued and outstanding, 19,500 shares, 22,500
shares and 0 shares, actual, pro forma and pro forma
as adjusted, respectively, aggregate liquidation
preference, $19,500, $22,500 and $0, actual, pro
forma and pro forma as adjusted, respectively........ 0 0 --
Series B Convertible Preferred Stock, authorized 5,000
shares; issued and outstanding, 0 shares, 0 shares
and 0 shares, actual, pro forma and pro forma as
adjusted, respectively............................... -- -- --
Common Stock, $.01 par value, authorized 100,000,000
shares; issued 8,201,431 shares, 8,984,546 shares and
24,897,046 shares, outstanding 8,017,931 shares,
8,801,046 shares and 24,713,546 shares, actual, pro
forma and pro forma as adjusted, respectively(1)....... 74 88 247
Additional paid-in capital................................ 38,150 47,234 102,044
Treasury stock, at cost 183,500 shares.................... (550) (550) (550)
Notes receivable.......................................... (1,156) (1,156) (1,156)
Accumulated deficit....................................... (3,497) (3,972) (3,972)
------- -------- --------
Total stockholders' equity............................. 33,021 41,644 96,613
------- -------- --------
Total capitalization........................................ $93,147 $123,040 $123,932
======= ======== ========
</TABLE>
- ---------------
(1) Excludes as of June 30, 1998, (i) 3,500,000 shares of Common Stock reserved
for issuance under the Company's Stock Option Plan, of which options to
purchase 1,789,718 shares of Common Stock have been granted to certain
directors, executive officers and other employees at a weighted average
exercise price of $4.91 per share, (ii) 580,000 shares of Common Stock
issuable upon exercise of options granted in connection with completed
acquisitions at a weighted average exercise price of $6.09 per share, (iii)
84,000 shares of Common Stock issuable upon exercise of outstanding warrants
at an exercise price of $4.50 per share and (iv) 531,000 shares of Common
Stock issuable upon conversion of $4.7 million of convertible debt
securities. See "Management" and "Principal and Selling Stockholders."
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's statement of operations for the fiscal years ended December 31, 1995,
1996 and 1997 and the balance sheet data as of December 31, 1997 are derived
from the Consolidated Financial Statements of the Company, which are included
elsewhere in this Prospectus, and which have been audited by Freed Maxick Sachs
& Murphy, P.C., independent certified public accountants, as of and for the year
ended December 31, 1995, and by KPMG Peat Marwick LLP, independent certified
public accountants, as of and for the years ended December 31, 1996 and 1997.
The selected consolidated financial data as of and for the years ended December
31, 1993 and 1994 are derived from audited consolidated financial statements of
the Company, as adjusted on an unaudited basis for an acquisition in November
1997 accounted for as a pooling of interests, not included herein. The following
selected historical financial data with respect to the Company's statement of
operations for the three month periods ended March 31, 1997 and 1998 and the
balance sheet data as of March 31, 1998 are derived from unaudited consolidated
financial statements of the Company which have been prepared on the same basis
as the audited financial statements, and, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position and results of operations.
The results for the three-month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
The financial information set forth below should be read in conjunction
with, and is qualified in its entirety by, the detailed information in the
Company's Consolidated Financial Statements and related notes thereto and other
financial information included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------ ------- ------- ------- ------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................. $9,390 $17,536 $26,781 $29,501 $53,178 $9,944 $20,685
Costs and expenses:
Operating expenses.................... 5,223 9,703 15,095 16,662 30,284 5,836 11,399
General and administrative expenses... 3,681 6,677 8,647 10,585(1) 20,046(2) 3,486 6,401
Depreciation and amortization......... 284 668 1,051 1,198 2,522 429 994
------ ------- ------- ------- ------- ------ -------
Total costs and expenses................ 9,188 17,048 24,793 28,445 52,852 9,751 18,794
------ ------- ------- ------- ------- ------ -------
Income from operations.................. 202 488 1,988 1,056 326 193 1,891
Other expense, net...................... 168 536 1,093 1,216 2,656 370 1,241
------ ------- ------- ------- ------- ------ -------
Income (loss) before provision for
income taxes, extraordinary item and
cumulative effect of change in
accounting method..................... 34 (48) 895 (160) (2,330) (177) 650
Provision for income taxes (benefit).... 44 (87) 574 216 125 (9) --
------ ------- ------- ------- ------- ------ -------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting method..................... (10) (135) 321 (376) (2,455) (168) 650
Extraordinary item, net of tax
benefit............................... (73) -- -- (157) -- -- --
------ ------- ------- ------- ------- ------ -------
Net income (loss) before cumulative
effect of change in accounting
method................................ (83) (135) 321 (533) (2,455) (168) 650
Cumulative effect of change in
accounting method..................... 160 -- -- -- -- -- --
------ ------- ------- ------- ------- ------ -------
Net income (loss)....................... 77 (135) 321 (533) (2,455) (168) 650
Dividends on preferred stock............ -- -- -- (75) (702) (113) (267)
------ ------- ------- ------- ------- ------ -------
Net income (loss) applicable to common
stockholders.......................... $ 77 $ (135) $ 321 $ (608) $(3,157) $ (281) $ 383
====== ======= ======= ======= ======= ====== =======
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------ ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) per common share:
Basic:
Net income (loss) before extraordinary
item and cumulative effect of change
in accounting method.................. $ 0.00 $ (0.03) $ 0.06 $ (0.09) $ (0.56) $(0.06) $ 0.05
Extraordinary item...................... (0.02) -- -- (0.03) -- -- --
Cumulative effect of change in
accounting method..................... 0.05 -- -- -- -- -- --
------ ------- ------- ------- ------- ------ -------
Net income (loss)....................... $ 0.03 $ (0.03) $ 0.06 $ (0.12) $ (0.56) $(0.06) $ 0.05
====== ======= ======= ======= ======= ====== =======
Weighted average shares outstanding..... 3,272 4,549 4,980 4,959 5,630 4,852 7,568
Diluted:
Net income (loss) before extraordinary
item and cumulative effect of change
in accounting method.................. $ 0.03 $ 0.03 $ 0.06 $ (0.09) $ (0.56) $(0.06) $ 0.04
Extraordinary item...................... (0.02) -- -- (0.03) -- -- --
Cumulative effect of change in
accounting method..................... 0.05 -- -- -- -- -- --
------ ------- ------- ------- ------- ------ -------
Net income (loss)....................... $ 0.03 $ (0.03) $ 0.06 $ (0.12) $ (0.56) $(0.06) $ 0.04
====== ======= ======= ======= ======= ====== =======
Weighted average shares outstanding..... 3,272 4,549 5,05l 4,959 5,630 4,852 16,181
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------
AS OF DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(3)
------------------ -------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 1,672 $ 6,392 $ 7,718
Total assets............................................. 82,851 103,263 139,392
Total debt............................................... 49,803 60,126 27,319
Stockholders' equity..................................... 23,540 33,021 96,613
</TABLE>
- ---------------
(1) Includes $150,000 expense related to sublease loss.
(2) Includes approximately $1.3 million expense relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities, as well as approximately $922,000 of costs incurred in
connection with an acquisition accounted for under the pooling of interests
method of accounting.
(3) Gives effect to (i) the sale by the Company of 3,000 shares of Series A
Convertible Preferred Stock; (ii) the exercise of certain warrants to
purchase 529,502 shares of Common Stock at an exercise price of $4.56 per
warrant; (iii) the acquisitions completed by the Company subsequent to March
31, 1998; (iv) the sale of the 7,500,000 shares of Common Stock offered
hereby by the Company at an assumed public offering price of $8.00 per share
(the mid-point of the anticipated price range set forth on the cover page of
this Prospectus) and the application of the estimated net proceeds
therefrom, see "Use of Proceeds;" (v) the conversion of the Company's Series
A Convertible Preferred Stock and of the options to acquire Series B
Convertible Preferred Stock into shares of Common Stock and (vi) the
exercise of warrants by Allied to purchase an aggregate of 312,500 shares of
Common Stock.
20
<PAGE> 22
SUMMARY PRO FORMA AS ADJUSTED FINANCIAL INFORMATION
The following unaudited summary pro forma as adjusted statement of
operations data for the Company have been adjusted to give effect to (i) the
consummation of the 1997 Acquisitions and 1998 Acquisitions; (ii) the sale by
the Company of 3,000 shares of Series A Convertible Preferred Stock; (iii) the
exercise of certain warrants to purchase 529,502 shares of Common Stock at an
exercise price of $4.56 per warrant; (iv) the sale of the 7,500,000 shares of
Common Stock offered hereby by the Company at an assumed public offering price
of $8.00 per share (the mid-point of the anticipated price range set forth on
the cover page of this Prospectus) and the application of the estimated net
proceeds therefrom, see "Use of Proceeds;" (v) the conversion of the Company's
Series A Convertible Preferred Stock and of the options to acquire Series B
Convertible Preferred Stock into shares of Common Stock; (vi) the exercise of
warrants by Allied to purchase an aggregate of 312,500 shares of Common Stock
and (vii) certain pro forma adjustments to the historical financial statements
as described in the notes below. The following unaudited summary pro forma as
adjusted condensed consolidated balance sheet of the Company has been adjusted
to give effect to (i) acquisitions completed subsequent to March 31, 1998; (ii)
the accrual of dividends on the Series A Convertible Preferred Stock and (iii)
each of the adjustments set forth above, except for clause (i) above. The
Summary Pro Forma As Adjusted Financial Information is not necessarily
indicative of the Company's operating results or financial position that might
have occurred had the events described above been consummated at the beginning
of the period and should not be construed as representative of future operating
results or financial position. The Summary Pro Forma As Adjusted Financial
Information should be read in conjunction with the Company's Unaudited Pro Forma
As Adjusted Condensed Consolidated Financial Statements and Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997(1) MARCH 31, 1998(2)
-------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................................. $124,444 $30,823
Costs and expenses:
Operating expenses..................................... 74,659 17,768
General and administrative(3)(4)....................... 36,502 8,829
Depreciation and amortization(5)....................... 4,770 1,267
-------- -------
Total costs and expenses................................. 115,931 27,864
-------- -------
Income from operations................................... 8,513 2,959
Other expense, net(6).................................... 2,397 556
-------- -------
Income before provision for income taxes................. 6,116 2,403
Provision for income taxes(7)............................ 2,446 962
-------- -------
Net income............................................... $ 3,670 $ 1,441
======== =======
Net income per share (diluted)........................... $ 0.15 $ 0.06
======== =======
Weighted average shares outstanding (diluted)............ 24,398 25,605
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 7,718
Total assets................................................ 139,392
Total debt.................................................. 27,319
Stockholders' equity........................................ 96,613
</TABLE>
- ---------------
(1) Gives effect to the 1997 Acquisitions and the 1998 Acquisitions as if they
occurred on January 1, 1997.
(2) Gives effect to the 1998 Acquisitions as if they occurred on January 1,
1998.
21
<PAGE> 23
(3) Includes approximately $1.3 million expense relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities, as well as approximately $922,000 of costs incurred in
connection with an acquisition accounted for under the pooling of interests
method of accounting.
(4) Gives effect to pro forma reductions in compensation expense for the
difference between the actual compensation paid to certain owners of the
acquired companies and the compensation negotiated in conjunction with the
1997 Acquisitions and the 1998 Acquisitions.
(5) Gives effect to pro forma adjustments for the amortization of goodwill which
would have been recorded relating to the 1997 Acquisitions and the 1998
Acquisitions. Goodwill is amortized over a period of 40 years.
(6) Gives effect to (i) the net reduction in interest expense which would have
resulted from the reduction of indebtedness under the Credit Agreement from
the application of the net proceeds of the Offering and (ii) the increase in
interest expense resulting from notes issued in connection with the 1997
Acquisitions and the 1998 Acquisitions.
(7) Income taxes have been provided for at an assumed rate of 40%, assuming that
the amortization of goodwill is deductible for tax purposes.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the nation's leading provider of court reporting services to
law firms, insurance companies and corporations through Company-owned offices
located in 24 markets in 11 states and the District of Columbia. In certain
markets, the Company also provides permanent and temporary staffing of financial
and legal professionals, legal video services, records retrieval, process
service and document depository services. The Company also has contractual
relationships with approximately 400 independent court reporting, legal video
and process service firms through its DepoNet(R) marketing network, which
enables the Company to deliver these services to its clients in every market
within the United States and in certain international markets. In 1997 and
during the three months ended March 31, 1998, the Company provided court
reporting and related services to over 1,000 law firms, insurance companies and
corporations, including The Chase Manhattan Bank, Conrail, Fireman's Fund
Insurance Company, Ford Motor Company, O'Melveny & Myers, Otis Elevator Company,
Reliance Insurance and Skadden, Arps, Slate, Meagher & Flom LLP. The Company
intends to leverage its client relationships and nationwide delivery system to
expand into a broad range of legal support services.
History
The Company's predecessor was founded in 1988 to create a national court
reporting company by consolidating the highly fragmented court reporting
industry. In October 1996, GTCR, a private equity fund with a focus on investing
in and consolidating highly fragmented business services industries, became a
principal stockholder of the Company and has invested approximately $21.9
million to date. The Company subsequently recruited a senior management team
with significant experience increasing profitability and managing and
implementing aggressive acquisition programs in consolidating service
industries. Since February 1997, the new management team has accelerated the
Company's acquisition program and has acquired 34 court reporting companies and
one provider of permanent and temporary staffing of financial and legal
professionals with aggregate estimated revenues (based on the twelve month
revenues preceding each acquisition) of approximately $90.6 million. The
Company's acquisition program emphasizes expanding into new geographic markets
through platform acquisitions, building market share in existing markets through
smaller "tuck-in" acquisitions and focusing on strong, locally managed companies
with a well-recognized market presence. Management has further developed an
integration strategy to (i) streamline operations to increase the profitability
of acquired operations, (ii) increase internal growth and (iii) expand the range
of legal support services available to its clients.
Acquisitions
Since 1993, the Company has pursued an aggressive acquisition strategy,
having acquired 42 court reporting companies and one permanent and temporary
staffing company. Of these acquisitions, three were acquired in 1996
(collectively referred to as the "1996 Acquisitions"), 17 were acquired in 1997
and 20 were acquired in 1998. These acquisitions have been for a total purchase
price of $74.1 million in cash, 5,158,285 shares of Common Stock of the Company
and $16.8 million of debt securities of the Company, plus, in certain instances,
stock options and contingent payments based on future performance. All but one
of these acquisitions have been accounted for using the purchase method, and a
substantial portion of each acquisition's purchase price represents goodwill. As
of March 31, 1998, approximately $79.0 million, or 76.5% of the Company's total
assets, were intangible assets consisting primarily of goodwill. The Company
will incur non-cash charges as a result of the amortization of such assets over
their lives. For all acquisitions completed before January 1, 1997, the Company
amortizes goodwill using the straight-line method over 25 years, but for all
acquisitions completed after January 1, 1997, goodwill is amortized using the
straight-line method over 40 years.
23
<PAGE> 25
Description of Operations
Revenue from court reporting services are primarily derived from services
provided for recording sworn testimony at depositions and typically are based on
the number of pages transcribed, with a significant portion of revenues being
derived from the production of additional certified copies. Substantially all of
the Company's court reporting services are performed by independent contractors.
Under arrangements with independent court reporters, the Company retains a
portion, averaging 50%, of the total court reporting fee and the independent
court reporter receives the balance. The different types of court reporting
services provided by the Company yield varying profit margins, with accelerated
delivery transcripts, transcript copies and compressed transcripts providing
higher margins. In addition, profit margins vary among the different geographic
markets in which the Company operates. The Company also derives revenues from
its DepoNet(R) network, which consists, in part, of over 400 affiliated firms in
locations not directly served by the Company. Under contractual arrangements
with DepoNet(R) members, the Company refers court reporting and certain other
assignments to network participants for which it receives an annual fee.
The Company recruits and places legal professionals on a temporary or
contract basis. The Company charges its clients an hourly fee for the number of
hours worked by attorneys and paralegals placed with clients on a temporary or
contract basis. Recruiters are paid commissions based upon revenues from hourly
fee income less the direct cost of the attorneys or paralegals placed. The
Company's permanent placement recruiters are compensated on a commission basis.
Fees for successful placement of professionals typically are based upon a
percentage, approximately 25% to 30% of such professional's total compensation
earned during the year following the placement, of which 40% to 50% is
customarily paid to the individual permanent placement recruiter. This fee is
subject to a partial refund if the new employment arrangement is terminated
prior to the expiration of a negotiated period, usually three months.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenue, certain items
in the Company's consolidated statement of income for the indicated periods:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue......................................... 100% 100% 100% 100% 100%
Operating expenses.............................. 56.4 56.5 57.0 58.7 55.1
General and administrative expenses............. 32.3 35.9(1) 37.7(2) 35.1 31.0
Depreciation and amortization................... 3.9 4.1 4.7 4.3 4.8
Income from operations.......................... 7.4 3.6 0.6 1.9 9.1
Other expense, net.............................. 4.1 4.1 5.0 3.7 6.0
Provision for income taxes (benefit)............ 2.1 0.7 0.2 (0.1) 0.0
</TABLE>
- ---------------
(1) Includes $150,000 expense related to sublease loss.
(2) Includes approximately $1.3 million expense relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities, as well as approximately $922,000 of costs incurred in
connection with an acquisition accounted for under the pooling of interests
method of accounting.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Revenue. Revenue increased by approximately $10.7 million, or 108.0%, to
$20.7 million for the three months ended March 31, 1998 from $10.0 million for
the three months ended March 31, 1997. This increase in revenue was due
primarily to the effect of acquisitions completed after March 31, 1997.
Operating Expenses. Operating expenses increased by approximately $5.6
million, or 95.3%, to $11.4 million for the three months ended March 31, 1998
from $5.8 million for the three months ended March 31, 1997. Operating expenses
as a percentage of revenue decreased to 55.1% for the three months ended
24
<PAGE> 26
March 31, 1998 from 58.7% for the three months ended March 31, 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 months ended March 31,
1998.
General and Administrative Expenses. General and administrative expenses
increased by approximately $2.9 million, or 83.6%, to $6.4 million for the three
months ended March 31, 1998 from $3.5 million for the three months ended March
31, 1997. This increase was largely due to expenses related to the acquisitions
completed in 1997 and the three months ended March 31, 1998 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 31.0% for the three months ended March 31, 1998 from 35.1%
for the three months ended March 31, 1997. This decrease was due to the large
number of tuck-in acquisitions completed in 1997 and in the three months ended
March 31, 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 $565,000, or 131.7%, to $994,000 for the three months ended March
31, 1998 from $429,000 for the three months ended March 31, 1997. This increase
was due primarily to additional amortization resulting from the acquisitions
completed in 1997 and in the three months ended March 31, 1998. 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
$1.7 million to $1.9 million for the three months ended March 31, 1998 from
$193,000 for the three months ended March 31, 1997. Income from operations as a
percentage of revenues increased to 9.1% for the three months ended March 31,
1998 from 1.9% for the three months ended March 31, 1997.
Other Expense, Net. Other expense, net, consisting primarily of interest
expense, increased by approximately $871,000, to $1.2 million for the three
months ended March 31, 1998 from $370,000 for the three months ended March 31,
1997 due to the incurrence of additional debt to finance acquisitions and to
fund working capital.
Provision for Income Taxes (Benefit). The Company offset its current
income tax expense by utilizing its deferred tax asset for the three months
ended March 31, 1998 and recorded a $9,000 tax benefit for the three months
ended March 31, 1997. The Company currently expects to utilize a majority of its
deferred tax asset during 1998. Consequently, income tax expense, if any, in
future periods may not be offset by the deferred tax asset, thereby resulting in
a higher effective income tax rate.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue increased approximately $23.7 million, or 80.3%, to $53.2
million in 1997 from $29.5 million in 1996. Substantially all of the increase in
revenue was due to the 1997 Acquisitions as well as a full year of operating
results from the 1996 Acquisitions.
Operating Expenses. Operating expenses increased by $13.6 million, or
81.8%, to $30.3 million in 1997 from $16.7 million in 1996. Operating expenses
as a percentage of revenue increased to 57.0% in 1997 from 56.5% in 1996. This
increase was due primarily to the increase in revenue of acquired companies
during the year which generally experienced higher operating expenses, offset,
in part, by the benefit of the ongoing standardization and integration of these
acquired companies.
General and Administrative Expenses. General and administrative expenses
increased by approximately $9.4 million to $20.0 million in 1997 from $10.6
million in 1996. General and administrative expenses in 1997 included
approximately $1.3 million relating to an officer's termination agreement and
termination expenses relating to certain marketing activities, as well as
approximately $922,000 of costs incurred in connection with an acquisition
accounted for under the pooling of interests method of accounting. General and
administrative expenses in 1996 included a $150,000 expense relating to a
sublease loss. Excluding these items, general and
25
<PAGE> 27
administrative expenses increased by approximately $7.4 million, or 70.8%, to
$17.8 million in 1997 from $10.4 million in 1996. Excluding the foregoing items,
general and administrative expenses, as a percentage of revenue, decreased to
33.5% in 1997 from 35.4% in 1996. This decrease was due to the large number of
tuck-in acquisitions completed in 1996 and 1997, resulting in a lower impact of
corporate overhead as a percentage of revenue.
Depreciation and Amortization. Depreciation and amortization increased by
approximately $1.3 million, or 110.5%, to $2.5 million in 1997 from $1.2 million
in 1996. This increase was primarily due to additional amortization expense
arising from the 1996 Acquisitions and 1997 Acquisitions. A significant
component of the amortization expense relates to goodwill, which is the cost in
excess of fair market value of the net tangible assets of acquired businesses.
Income from Operations. Income from operations decreased by approximately
$730,000 to $326,000 in 1997 from $1.1 million in 1996. Excluding the
approximately $1.3 million relating to an officer's termination agreement and
termination expenses relating to certain marketing activities and $922,000 of
costs incurred in connection with an acquisition accounted for using the pooling
of interests method of accounting in 1997, as well as a $150,000 expense
relating to a sublease loss in 1996, income from operations increased by
approximately $1.3 million, or 111.3%, to $2.5 million in 1997 from $1.2 million
in 1996. Excluding these items, income from operations as a percentage of
revenue increased to 4.8% in 1997 from 4.1% in 1996.
Other Expense, Net. Other expense, net, consisting primarily of interest
expense, increased by approximately $1.4 million to $2.7 million in 1997 from
$1.2 million in 1996 due to the incurrence of additional debt to finance
acquisitions and fund working capital.
Provision for Income Taxes (Benefit). Provision for income taxes for 1997
was $125,000 compared to $216,000 in 1996. For 1997, the Company offset the
majority of its current income tax expense by utilizing its deferred tax asset.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue increased approximately $2.7 million, or 10.2%, to $29.5
million in 1996 from $26.8 million in 1995. Approximately half of this increase
in revenue was due to the effect of the 1996 Acquisitions with the remainder
from internal growth.
Operating Expenses. Operating expenses increased by approximately $1.6
million, or 10.4%, to $16.7 million in 1996 from $15.1 million in 1995.
Operating expenses as a percentage of revenue remained relatively unchanged in
1996 compared to 1995.
General and Administrative Expenses. General and administrative expenses
increased by approximately $1.9 million to $10.6 million in 1996 from $8.7
million in 1995. General and administrative expenses in 1996 included a $150,000
expense relating to a sublease loss. Excluding this item, general and
administrative expenses increased by approximately $1.7 million, or 20.7%, to
$10.4 million in 1996 from $8.7 million in 1995. Excluding this item, as a
percentage of revenue, general and administrative expenses increased to 35.4% in
1996 from 32.3% in 1995. This increase as a percentage of revenue was due to the
1996 Acquisitions and increased sales and marketing expenses, including payroll,
advertising and promotional expenses.
Depreciation and Amortization. Depreciation and amortization increased by
approximately $147,000 to $1.2 million in 1996 from $1.1 million in 1995. This
increase was primarily due to additional amortization charges arising from the
1996 Acquisitions and, to a lesser extent, additional depreciation arising from
the capital expenditures for the Company's new office space for its New York
operations. A significant component of the amortization expense relates to
goodwill, which is the cost in excess of the net tangible assets of acquired
businesses.
Income from Operations. Income from operations decreased by $932,000 to
$1.1 million in 1996 from $2.0 million in 1995. Excluding the $150,000 sublease
loss in 1996, income from operations decreased by $782,000 to $1.2 million from
$2.0 million in 1995. Excluding this item, income from operations as a
percentage of revenue decreased to 4.1% in 1996 from 7.4% in 1995.
26
<PAGE> 28
Other Expense, Net. Other expense, net, consisting primarily of interest
expense, increased by approximately $123,000, or 11.3%, to $1.2 million in 1996
from $1.1 million in 1995 due to the incurrence of additional debt to finance
acquisitions and fund working capital.
Provision for Income Taxes (Benefit). Provision for income taxes in 1996
was $216,000 compared to $574,000 in 1995 as a result of lower net income in
1996 compared to 1995.
QUARTERLY RESULTS OF OPERATIONS
The unaudited quarterly results of operations of the Company are presented
below for informational purposes only. The Company's quarterly results of
operations may also be subject to fluctuations as a result of the timing of
acquisitions, new office openings and the absence or presence of significant
non-recurring litigation matters. Large complex litigation could result in large
amounts of revenue being recognized over a relatively short period of time. The
Company's revenues are lower in the third quarter when many attorneys are on
vacation and the pace of litigation is slower. The impact on sales due to
acquisitions and internal growth have historically made it difficult to identify
in the Company's reported financial results the impact of seasonal variations.
The results in any particular quarter are not necessarily indicative of future
results or of the results which may be expected for the full year. The unaudited
quarterly results of operations should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------------- ---------------------------------------- -------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31,
------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................... $6,759 $7,446 $6,875 $8,421 $9,945 $11,393 $13,618 $18,222 $20,685
Income (loss) from
operations.............. 425 448(1) 161 22 246 (577)(2) 623 34(3) 1,891
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------
1996 1997 1998
---------------------------------------- ---------------------------------------- -------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31,
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Income (loss) from
operations.............. 6.3 6.0(1) 2.3 0.3 2.5 (5.1)(2) 4.6 0.2(3) 9.1
</TABLE>
- ---------------
(1) Includes $150,000 expense, or 2.0% of revenue, relating to a sublease loss.
(2) Includes $1.3 million expense, or 11.4% of revenue, relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities.
(3) Includes $922,000 expense, or 5.1% of revenue, incurred in connection with
an acquisition accounted for under the pooling of interests accounting
method.
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 by GTCR which has been used primarily for acquisitions, repayment of
debt, capital expenditures and working capital.
Operating Activities
Net cash used in operating activities totaled $335,000 for the three months
ended March 31, 1998 compared to $925,000 for the three months ended March 31,
1997, representing a decrease of $590,000. The decrease in usage of operating
cash flow in 1998 was due primarily to increased operating income for the three
months ended March 31, 1998.
27
<PAGE> 29
Net cash used in operating activities totaled $416,000 for the year ended
December 31, 1997 compared to $175,000 in 1996. The increase in usage of
operating cash flow in 1997 was due primarily to decreased operating income in
1997 and an increase in customer deposits partially offset by an increase in
accounts receivable.
Investing Activities
Net cash used in investing activities totaled $5.2 million, $36.2 million
and $14.1 million for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998, 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 $4.0 million, $34.9 million
and $13.8 million for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998, respectively. Cash used to invest in capital
equipment totaled $952,000, $737,000 and $203,000 in 1996 and 1997 and the three
months ended March 31, 1998, respectively. The Company continues to invest in
capital equipment, principally to upgrade facilities, computer systems and
photocopy equipment. At March 31, 1998, the Company had no commitments to
purchase equipment; however, the Company expects to make additional capital
expenditures of between $700,000 and $800,000 in 1998, none of which is pursuant
to a firm commitment.
Financing Activities
Net cash provided by financing activities for 1996 and 1997 and the three
months ended March 31, 1998 was $5.4 million, $36.6 million and $14.8 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 $70.0 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 effective interest rate
at March 31, 1998 was 9.1%. 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. The aggregate borrowings under the Credit Agreement at March 31, 1998
were $49.2 million. 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.
Future Capital Needs
The Company believes that available borrowings under its Credit Agreement
after repayment with the net proceeds from the Offering and, to a lesser extent,
cash from operations, will be sufficient to fund its operations, planned capital
expenditures, payment of certain cash earn-outs, if any, under certain
acquisition agreements, repayment of indebtedness to certain former owners of
acquired businesses and potential acquisitions for the next 18 months. The
Company intends to use part of the net proceeds of the Offering to reduce
substantially the amount of current borrowings under the Credit Agreement. In
connection with future acquisitions, the Company anticipates incurring
substantial amounts of new indebtedness which will also be collateralized by
substantially all of the Company's assets. In that regard, the Company expects
to renegotiate the Credit Agreement, or to enter into a new credit agreement
after the Offering, to increase the line of credit available to the Company.
However, there can be no assurance in this regard, nor any assurance that the
terms available for any future debt or equity financing, if required, would be
favorable to the Company.
28
<PAGE> 30
INFLATION
Certain of the Company's expenses, such as wages and benefits, occupancy
costs and equipment repair and replacement, are subject to normal inflationary
effects. Supplies, such as paper and related products, can be subject to
significant price fluctuations. Although the Company to date has been able to
substantially offset any such cost increases through increased operating
efficiencies, there can be no assurance that the Company will be able to offset
any future cost increases through similar efficiencies or increased charges for
its products and services.
NEW ACCOUNTING STANDARDS
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. This statement 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 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.
The Company anticipates that the adoption of SFAS Nos. 131 and 132 will not
have a material effect on the financial position, results of operations or
liquidity of the Company.
29
<PAGE> 31
BUSINESS
GENERAL
The Company is the nation's leading provider of court reporting services to
law firms, insurance companies and corporations through Company-owned offices
located in 24 markets in 11 states and the District of Columbia. In certain
markets, the Company also provides permanent and temporary staffing of financial
and legal professionals, legal video services, records retrieval, process
service and document depository services. The Company also has contractual
relationships with approximately 400 independent court reporting, legal video
and process service firms through its DepoNet(R) marketing network, which
enables the Company to deliver these services to its clients in every market
within the United States and in certain international markets. In 1997 and
during the three months ended March 31, 1998, the Company provided court
reporting and related services to over 1,000 law firms, insurance companies and
corporations, including The Chase Manhattan Bank, Conrail, Fireman's Fund
Insurance Company, Ford Motor Company, O'Melveny & Myers, Otis Elevator Company,
Reliance Insurance and Skadden, Arps, Slate, Meagher & Flom LLP. The Company
intends to leverage its client relationships and nationwide delivery system to
expand into a broad range of legal support services.
The Company's predecessor was founded in 1988 to create a national court
reporting company by consolidating the highly fragmented court reporting
industry. In October 1996, GTCR, a private equity fund with a focus on investing
in and consolidating highly fragmented business services industries, became a
principal stockholder of the Company and has invested approximately $21.9
million to date. The Company subsequently recruited a senior management team
with significant experience increasing profitability and managing and
implementing aggressive acquisition programs in consolidating service
industries. Since February 1997, the new management team has accelerated the
Company's acquisition program and has acquired 34 court reporting companies and
one provider of permanent and temporary staffing of financial and legal
professionals with aggregate estimated revenues (based on the twelve month
revenues preceding each acquisition) of approximately $90.6 million. The
Company's acquisition program emphasizes expanding into new geographic markets
through platform acquisitions, building market share in existing markets through
smaller "tuck-in" acquisitions and focusing on strong, locally managed companies
with a well-recognized market presence. Management has further developed an
integration strategy to (i) streamline operations to increase the profitability
of acquired operations, (ii) increase internal growth and (iii) expand the range
of legal support services available to its clients.
The Company has achieved revenue growth through the successful
implementation of its acquisition strategy and has increased the profitability
of existing and acquired operations by implementing standardized operating
procedures and financial controls, consolidating operations and standardizing
pricing and compensation structures in each local market. The Company's pro
forma revenues and EBITDA, excluding unusual items, were $124.4 million and
$15.5 million, respectively, in 1997 and $30.8 million and $4.2 million,
respectively, for the three months ended March 31, 1998.
INDUSTRY
The legal support services industry is comprised of a broad range of
services that assist legal professionals in all aspects of their practice. Based
on available industry data, the Company believes that the market for court
reporting and temporary and permanent legal staffing services exceeds $5 billion
and is highly fragmented with more than 1,000 independent court reporting and
over 400 legal staffing firms. Despite tort reform and the growing popularity of
alternative dispute resolution methods, a study completed in 1997 by the
National Center for State Courts indicated that the number of lawsuits filed
through state district courts nationwide increased by 25% between 1984 and 1996.
The Company believes that the legal support services market is growing due to
several trends, including an increase in: (i) efforts by law firms and
corporations, especially insurance companies, to reduce legal expenses; (ii) the
outsourcing of legal support services to companies that specialize in providing
such services; (iii) the use of lawyers on a temporary basis by law firms and
corporations; (iv) the volume and complexity of litigation; and (v) the national
scope of litigation, particularly in class action and product liability
lawsuits.
30
<PAGE> 32
Legal support services, such as court reporting, records retrieval and
temporary and permanent legal staffing, traditionally have been marketed to law
firms. Increasingly, insurance companies and corporations, who ultimately pay
the cost of legal support services used by their counsel, are seeking to control
and reduce the costs associated with lawsuits, centralize their purchasing
decisions and ensure consistent service quality. As a result, these companies
are more frequently selecting the providers of legal support services
themselves, rather than delegating that decision to the law firms engaged to
represent them.
The highly fragmented legal support services industry consists primarily of
local and regional firms that typically provide a single or limited number of
services. Legal support businesses often lack a broad range of services,
regional or national coverage, access to capital or effective marketing programs
and, therefore, are unable to meet the needs of large, geographically dispersed
clients. In addition, as there are limited opportunities for owners of local
legal support service firms to obtain liquidity or to sell their businesses, the
Company believes that many such owners will be receptive to consolidation.
OPERATING STRATEGY
The Company seeks to become the nationally recognized leader in providing a
broad range of legal support services. The Company believes that the
implementation of its operating strategy has contributed to increases in EBITDA
margins, which increased to 13.9% for the three months ended March 31, 1998 from
6.3% for the same period in 1997. The key elements of the Company's operating
strategy are:
- FOCUS ON LEGAL SUPPORT SERVICES. The Company's core business has been to
provide court reporting and related services to the legal profession. Law
firms, insurance companies and corporations are increasingly seeking to
control costs and ensure quality. Consequently, the Company believes
these firms increasingly seek to do business with companies that offer a
range of legal support services on a regional or national basis. The
Company intends to offer a broad range of legal support services to its
current and prospective clients, which requires distinct operational
knowledge to screen and recruit personnel with functional or industry
expertise, match resources to client needs and manage, service and expand
ongoing client relationships. Recent acquisitions have given the Company
additional capabilities in permanent and temporary placement of financial
and legal professionals, records retrieval, process service and document
depository services. The Company constantly evaluates other legal support
services to offer to its clients. The Company believes its leadership in
court reporting, combined with management's operating expertise, provides
it with an advantage over competitors who either do not focus exclusively
on providing legal support services or do not have the resources or
expertise to offer a broad range of services.
- MAINTAIN STRONG LOCAL PRESENCE AND ENTREPRENEURIAL ENVIRONMENT. The
Company's management promotes a culture that rewards quality, client
service and performance. To capitalize on existing client relationships
of acquired companies and be responsive to local business practices and
market conditions, the Company intends to continue to manage its business
on a local basis. General managers are given considerable latitude in
running their day-to-day operations in such areas as hiring, pricing and
sales and are accountable for the profitability of their operations. The
Company has instituted profit-based incentive and stock option programs
to motivate key employees. The Company believes that allowing local
management to retain appropriate autonomy and aligning their long-term
interests with those of the Company provide greater opportunity for
profitable internal growth and increase the Company's attractiveness to
prospective sellers. The Company believes its operating structure enables
it to react more effectively to business opportunities in dynamic local
markets as well as to utilize managers of acquired companies as an
important resource for identifying additional acquisition candidates and
implementing its acquisition strategy.
- CENTRALIZE FUNCTIONAL MANAGEMENT. The Company's experienced corporate
management team provides support and strategic direction to assist
general managers in executing their local business and growth plans. The
Company's corporate management has developed financial and administrative
procedures to help integrate and manage the Company's local operations.
These systems and controls include the preparation of annual business
plans and budgets and the submission of detailed daily,
31
<PAGE> 33
weekly and monthly financial reports, which are reviewed with general
managers. Corporate management also oversees marketing, human resources
and information technology to increase operating efficiencies, maintain
control and ensure consistent management of these functional areas. The
Company's corporate management also conducts weekly operations committee
meetings to review performance, identify areas for improvement and
develop strategies to increase profitability.
- ATTRACT AND RETAIN HIGH-QUALITY PROFESSIONALS. The Company seeks to
attract, retain and develop strong local general managers through its
management development and training programs. In addition, the Company
places great emphasis on developing relationships with skilled court
reporters and recruiting permanent and temporary financial and legal
professionals. Operating employees screen each financial and legal
staffing candidate to assess qualifications and match the candidate with
specific client requirements. The Company further participates in several
legal trade associations and has developed an active recruitment program.
- EMPHASIZE VALUE-ADDED SERVICES. The Company's marketing and operational
staff seeks to establish and maintain long-term client relationships by
developing knowledge of each client's business, responding promptly to
client needs and measuring individual job performance and overall client
satisfaction through a structured quality assurance program. The Company
offers additional value-added services including video depositions, video
editing, remote electronic access to client deposition databases,
electronic delivery of depositions, client activity and cost savings
reports and consolidated billing. The Company targets clients who
consider quality of service, such as timeliness, accuracy and customized
solutions, to be as important as pricing of services.
INTERNAL GROWTH STRATEGY
The Company's internal growth strategy will focus on the following key
elements:
- OFFER A BROAD RANGE OF SERVICES. The Company believes that national and
regional clients are increasingly contracting with service providers,
such as the Company, that are capable of delivering a broad range of
legal support services. Many of the businesses acquired by the Company to
date have specialized in providing a narrow range of legal support
services. The Company seeks to capitalize on the trend towards
consolidation of service providers and is implementing a plan to
introduce permanent and temporary placement of legal professionals,
records retrieval, process service and document depository services into
each of the Company's existing operations within the next 18 months. The
Company will introduce a range of services in new markets in which the
Company makes platform acquisitions in an effort to meet client demands.
- DEVELOP NEW AND LEVERAGE EXISTING CLIENT RELATIONSHIPS. The Company
intends to establish new client relationships through expansion of its
sales force. The Company's business development process focuses on
regular contact with decision makers responsible for procuring legal
support services. These client contacts work within numerous functional
areas and at many different levels of the client's organization. The
Company's sales personnel are trained to develop a thorough understanding
of each client's total legal support services needs and are motivated to
identify opportunities to sell additional services to existing clients.
The Company believes that cross-selling opportunities exist as a result
of the interrelationships among its service offerings, thereby enabling
the Company to leverage new and existing relationships.
- LEVERAGE THE ESQUIRE BRAND TO DEVELOP A NATIONAL ACCOUNTS PROGRAM. The
Company is engaged in an initiative to transition the brand names of the
local and regional companies it has acquired to the Esquire brand name.
The Company believes that it is developing significant brand equity
through its leadership position in court reporting services and intends
to further leverage the Esquire brand to develop a national accounts
program. Large national law firms, insurance providers and corporations
are increasingly seeking to centralize their purchasing decisions to
control litigation costs and ensure quality. The Company believes that a
national accounts program will allow it greater access to senior
decision-makers, which management believes will enable the Company to
increase market share and achieve marketing efficiencies and greater
operating leverage. To date, the Company has established
32
<PAGE> 34
several national and regional relationships with corporate law departments and
large law firms. The Company has also entered into a marketing alliance with the
American Corporate Counsel Association ("ACCA") to serve as ACCA's preferred
provider of court reporting services for corporate law departments.
- OPEN NEW LOCATIONS. The Company continually evaluates potential
expansion into new geographic markets. To facilitate entry into new
markets, the Company transfers or recruits experienced personnel to
manage new locations as they are opened. The Company opened an office in
1997 in the San Francisco market and intends to open offices in four new
markets over the next 18 months.
- LEVERAGE DEPONET(R) REFERRAL NETWORK. The Company provides referrals for
court reporting, process service and legal video services through its
DepoNet(R) subsidiary, a referral network with contractual relationships
with approximately 400 independent court reporting, legal videography and
process service firms. DepoNet(R) targets legal professionals who require
services outside of their normal work locations, but do not have the
ability to easily identify and contact directly quality out-of-town
providers. Using sophisticated call-forwarding telecommunications
technology, DepoNet(R) is a marketing delivery system that enables the
Company to provide services in every zip code in the United States and in
certain international markets through either Company-owned operations or
through members of the DepoNet(R) system (who pay an annual license fee
to the Company). The Company leverages the DepoNet(R) system, which
receives in excess of 75,000 calls annually, to retain approximately 20%
of these calls within Company-owned operations. The Company expects the
retention rate to increase as it opens or acquires additional locations
in new markets and also plans to offer other legal support services that
it may make available through the DepoNet(R) system.
ACQUISITION STRATEGY
The Company's corporate management has extensive experience in acquiring
and integrating service businesses in consolidating industries. The Company has
an acquisition committee, consisting of representatives from senior management,
that meets weekly to review and evaluate current lists of potential acquisition
candidates. Since the formation of the new management team, the Company has
acquired 34 court reporting companies and one provider of permanent and
temporary staffing of financial and legal professionals with aggregate estimated
revenues (based on the twelve month revenues preceding each acquisition) of
approximately $90.6 million. The Company believes its national presence,
strategies, reputation and locally focused, entrepreneurial management structure
facilitates its effort to acquire companies. In targeting acquisitions, the
Company focuses on businesses with a history of profitable operations, a strong
management team, a strong local market position, services that complement the
Company's operations and compatible corporate philosophies and culture. The
Company's acquisition growth strategy consists of the following key elements:
- ENTER NEW MARKETS THROUGH PLATFORM ACQUISITIONS. The Company presently
operates in 24 markets and intends to expand into additional major
metropolitan markets. The Company will continue to target acquisitions in
new markets where the Company seeks to establish operations, particularly
in markets with substantial legal activity.
- ACQUIRE SMALLER TUCK-IN BUSINESSES IN EXISTING MARKETS. The Company
targets businesses in existing markets to increase market share and
leverage the Company's fixed cost structure in each existing market.
- EXPAND SERVICE OFFERINGS. The Company intends to pursue acquisitions of
firms that will expand its service offerings. In May 1998, the Company
acquired a provider of permanent and temporary staffing of financial and
legal professionals to establish the Company's management and service
capabilities and serve as a platform to expand these new services
throughout the Company-owned operations.
33
<PAGE> 35
The following table summarizes the Company's acquisition activity since the
formation of the new management team in February 1997. All acquisitions were of
court reporting firms, except as otherwise indicated.
<TABLE>
<CAPTION>
DATE OF
ACQUIRED COMPANY ACQUISITION REVENUE(1) MARKETS SERVED
- ------------------------------------- ------------- -------------- ---------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Wolfe, Rosenberg & Associates........ May 1997 $ 5,012 Chicago
Krauss, Katz & Ackerman.............. June 1997 $ 6,915 Philadelphia
American Network Services
(DepoNet).......................... June 1997 $ 2,961 Nationwide Referral Network
Hyatt Court Reporting................ August 1997 $ 1,435 Denver
Kim Tindall & Associates............. October 1997 $ 2,948 San Antonio
Associates/Certified Reporting....... October 1997 $ 1,780 Fort Lauderdale
County Reporting..................... October 1997 $ 368 Fort Lauderdale
Justice Reporting.................... October 1997 $ 766 Fort Lauderdale
Lauderdale Reporting................. October 1997 $ 2,278 Fort Lauderdale
Merit Reporting...................... October 1997 $ 1,872 Fort Lauderdale
Haynes & Harpster Court Reporters.... October 1997 $ 738 Southern California
Cynthia Varelli...................... October 1997 $ 1,585 Chicago
Jurist-Begley Reporting Services..... November 1997 $ 5,052 Philadelphia
Henry Jacobs & Associates............ December 1997 $ 1,151 New York City
Certified Reporting Company.......... December 1997 $ 2,163 New York City
A&A Court Reporters.................. January 1998 $ 2,427 Houston
Brody & Geiser....................... January 1998 $ 1,910 Northern New Jersey
Kerns & Gradillas.................... January 1998 $ 6,093 Southern California
Jewelinski Court Reporters........... February 1998 $ 933 Southern California
Friedli, Wolff & Pastore............. February 1998 $ 1,920 District of Columbia
VerbaVolant.......................... March 1998 $ 504 New York City
McGuire's Reporting Service.......... March 1998 $ 754 Chicago
Morrissy & Others.................... March 1998 $ 466 Chicago
Pollock & Upshaw..................... April 1998 $ 415 San Antonio
Atlantic Court Reporting............. April 1998 $ 800 Fort Lauderdale
Bright & Associates.................. May 1998 $ 1,460 Austin
Riggleman, Turk & Nelson............. May 1998 $ 1,065 Baltimore
A-L Associates(2)/A-L Attorneys on
Assignment(3)...................... May 1998 $11,701 New York City
Rubin Reporting...................... May 1998 $ 1,125 Chicago
Summit Reporting(4).................. June 1998 $ 2,039 Houston
Hamilton-Legato Deposition Centers... June 1998 $ 8,063 Michigan
Cooksey-Regal Deposition Reporters... July 1998 $ 753 Sacramento
Messenger and Associates............. July 1998 $ 659 Dallas
Mudrick Witt Professional
Reporting.......................... July 1998 $ 8,184 South Florida
Sandra S. Phillips and Associates.... July 1998 $ 2,280 Sacramento
</TABLE>
- ---------------
(1) Estimated trailing twelve months revenue at time of acquisition.
(2) Permanent staffing services.
(3) Temporary legal staffing services.
(4) Includes document retrieval business.
34
<PAGE> 36
LEGAL SUPPORT SERVICES OFFERED BY THE COMPANY
The Company provides court reporting, process service, permanent and
temporary placement of financial and legal personnel and document depository
services as described below.
COURT REPORTING. Court reporting is the verbatim transcription of the
spoken word into the written word, generally from sworn legal testimony. The
industry is divided into two distinct sectors: (i) the recording of proceedings
in court, or "official" court reporting and (ii) all other private sector court
reporting. Official court reporting is performed by civil servant court
reporters employed by local, state or federal courts. All other private sector
court reporting is performed outside the courtroom by free-lance court
reporters, who are self-employed or employees of, or have an independent
contractor relationship with, a court reporting agency. Through the use of
independent contractors, the Company provides court reporting services for legal
proceedings (typically civil proceedings) outside the courtroom and, to a lesser
extent, the recording of other events such as hearings, arbitrations, board
meetings, stockholders' meetings, conferences, conventions and media events. The
Company can provide its clients with a transcript in an electronic format
thereby enabling the client to search, store, index, annotate and manage the
transcribed information. Documents can be searched easily for relevant portions
of testimony and can be integrated into larger databases containing other
information pertaining to a particular proceeding.
Most states require court reporters to be licensed, which requires them to
attend a certified court reporting school and pass required examinations. Court
reporting requires a skilled professional capable of transcribing speech, which
generally approximates 200 words per minute, using shorthand symbols. Most of
the Company's court reporters use a computer-aided transcription ("CAT") system
for transcribing the spoken word into phonetic symbols. The shorthand notes,
which can be recorded in both paper and electronic form, are translated and
edited to produce a final transcript. CAT systems enable the computer to
interpret the shorthand symbols and translate them into English.
The Company believes that the services it provides through the following
technologies offer its clients significant value and its experience and
expertise in the use of such technologies gives it a competitive advantage over
court reporting firms that have not successfully integrated these technologies
into their regular service offerings. The Company's value-added services
include:
- Legal Video Services. The Company provides a staff of certified legal
video specialists using broadcast quality equipment to record
depositions, presentations and other events. The Company provides
editing, indexing and courtroom playback that enables the client to
search time-coded transcripts and retrieve key segments of testimony with
software that synchronizes the video with the text of the transcript.
Video has gained wider acceptance among legal professionals as a
strategic tool to impeach adverse witnesses.
- Realtime Transcription. The Company's court reporters provide instant
transcripts of testimony on lap-top computer monitors, which may be
located where the testimony is taking place, as well as at remote
locations. This system also allows attorneys to receive a transcript of
the testimony on diskette at the conclusion of the proceeding.
- Interactive Realtime Transcription. Interactive realtime transcription
enables an attorney to connect a computer to the court reporter's system
using specialized software which enables the attorney to review earlier
testimony and make notes during or immediately following the deposition.
- Text Search and Retrieval Programs. The Company uses specialized
software that enables the client to search, store, index and manage
transcripts and other documents to locate a word or portion of text
quickly and easily.
RECORDS RETRIEVAL. Records retrieval services are labor-intensive and
involve the preparation, handling, tracking and delivery of large numbers of
written documents from public or private sources, a significant portion of which
involves medical records acquired on behalf of insurance companies and their
counsel, for litigation or other legal proceedings.
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<PAGE> 37
PROCESS SERVICE. Process service includes the preparation and delivery of
written notices and subpoenas and the monitoring of the recipient's response.
PERMANENT AND TEMPORARY PLACEMENT OF FINANCIAL AND LEGAL
PROFESSIONALS. The Company provides permanent and temporary staffing of
financial and legal professionals as a result of the Company's May 1998
acquisition of a leading New York-based executive search firm. The Company's
permanent placement activities consist primarily of the recruitment and
placement of financial and legal professionals with financial services firms,
law firms and corporate legal departments. The Company is engaged and paid by
the hiring firm or corporation on either an exclusive or non-exclusive basis
pursuant to arrangements that may include a non-refundable retainer paid to the
Company or that entitle the Company to a fee contingent upon the successful
placement of a candidate with the client. Temporary attorney or paralegal
assignments may range from one day to more than a year and may involve one
professional or a team of professionals.
DOCUMENT DEPOSITORY SERVICES. The Company offers document depository
services which include document storage, archiving, indexing and retrieval of
documents in a hardcopy or digital format. The Company is able to quickly
retrieve specific documents on demand for use by its clients in various legal
proceedings.
CLIENT RELATIONSHIPS, SALES AND MARKETING
The Company believes that its clients purchase services based on a variety
of factors, the most important of which are the quality of the local service
provided, the strength of their relationship with the Company and price. The
Company's client base is comprised of more than 1,000 law firms, insurance
companies and corporations, including The Chase Manhattan Bank, Conrail,
Fireman's Fund Insurance Company, Ford Motor Company, O'Melveny & Myers, Otis
Elevator Company, Reliance Insurance and Skadden, Arps, Slate, Meagher & Flom
LLP. The Company has a broad client base, and no single client accounted for
more than 2.0% of the Company's revenue for 1997 or the three months ended March
31, 1998. Clients typically engage the Company for a single job, an entire
litigation matter or pursuant to a contractual relationship to provide ongoing
legal support services on a regional or nationwide basis.
The Company has developed sales and marketing strategies to expand its
business with local, regional and national accounts. As a cornerstone of this
strategy, the Company is currently implementing a new corporate identification
program through which it is transitioning the brand identity of each owned
operation from its original name at acquisition to the Esquire name. The program
involves the design and implementation of new letterhead and print materials and
is supported by an extensive advertising, public relations and direct marketing
campaign in each local market. The Company intends to continue to create
national awareness of and value in the Esquire brand, under which the Company
believes it will be able to more efficiently market a broad line of legal
support services. The marketing plan also focuses on converting satisfied local
clients to national clients, motivating light users of the Company's services to
increase their usage and cross-selling additional services to current clients.
The Company utilizes a national accounts sales team to market its services
to corporate law departments, insurance companies and large multi-state laws
firms in an effort to obtain exclusive or preferred provider status. To further
support this effort, the Company has developed and introduced the Corporate
Services Program to address the particular needs of these target accounts. The
Company currently has two dedicated national account managers and plans to add
at least two additional professionals to this team by the end of 1998. In May
1998, the Company entered into a two-year marketing alliance with the ACCA, the
largest national trade association for in-house corporate attorneys. Under this
agreement, ACCA, which has over 12,000 members, endorses the Company as a
preferred provider for court reporting services in return for the Company's
sponsorship of several association events and initiatives each year. This
alliance offers the Company access to ACCA members who manage corporate law
departments across the nation.
The Company's general managers and local sales staff target regional and
local accounts, permitting the Company to capitalize on the local expertise and
client relationships of its branch office employees. The Company currently
employs 16 local sales representatives and two national account representatives
and plans to add additional sales representatives in 1998. The Company also
views its network of independent court
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<PAGE> 38
reporters as a source of new business and has introduced an incentive program
designed to motivate court reporters to generate additional new and repeat
business. The Company solicits new business through personal sales
presentations, telemarketing, direct mail, referrals from existing clients and
advertising in a variety of local and national legal trade publications and
journals. The Company also participates in a number of legal trade shows.
Sales personnel are compensated with a competitive base salary and can earn
substantial commissions calculated as a function of gross profit from individual
jobs. Court reporters have the opportunity to earn similar commissions by
originating new business.
COMPETITION
The market for legal support services is highly competitive. The Company
competes with numerous local and regional court reporting and record retrieval
companies, and with the acquisition of A-L Associates and A-L Attorneys on
Assignment, the Company also competes with permanent and temporary legal
staffing companies, including national temporary staffing firms. There can be no
assurance that these businesses will continue to increase their outsourcing of
legal support and staffing services needs or that such businesses will not bring
in-house services that they currently outsource. Certain of the Company's
competitors in legal staffing have substantially greater resources and operate
in broader geographic areas than the Company. Many larger clients retain
multiple legal support and placement and staffing service providers, which
exposes the Company to continuous competition. The Company competes primarily on
the basis of quality, personal relationships with clients, reputation, breadth
and timeliness of service, geographic coverage and price.
The Company believes that further consolidation among legal support
services providers will continue during the next few years and that there will
be significant competition for attractive acquisition candidates. This
competition could lead to higher prices being paid for businesses. The Company
believes that it will have certain advantages in completing acquisitions,
including: (i) management's personal relationships with existing legal support
companies; (ii) its decentralized, entrepreneurial management strategy; (iii)
its greater size and scope of services; and (iv) its visibility and resources as
a public company. However, there can be no assurance that the Company's
acquisition program will be successful or that the Company will be able to
compete effectively for acquisitions.
INDEPENDENT CONTRACTORS
The Company provides court reporting services through the use of
independent contractors who are not employees of the Company. The Company has
active relationships with in excess of 1,000 independent contractors. The
Company does not pay federal or state employment taxes or withhold income taxes
with respect to these independent contractors or include such persons in the
Company's employee benefit plans. Independent court reporters are responsible
for purchasing and operating their own court reporting equipment. The use of
independent contractors as court reporters is a widespread practice in the court
reporting industry. In the event the Company were required to treat court
reporters as its employees, the Company could become responsible for the taxes
required to be paid or withheld and could incur additional costs associated with
employee benefits and other employee costs on both a current and retroactive
basis, which could have a material adverse effect on the Company's business,
financial condition, results of operations or ability to sustain growth.
EMPLOYEES
As of June 30, 1998, the Company had 552 full-time employees. Temporary
employees placed by the Company are the Company's employees while they are
working on assignments. Neither the Company's internal staff nor its temporary
employees are represented by a collective bargaining agreement. Hourly wages for
the Company's temporary employees are determined based on local market
conditions. The Company pays mandated costs of employment, including the
employer's share of social security taxes, federal and state unemployment taxes,
unemployment compensation insurance, general payroll expenses and workers'
compensation insurance. The Company offers access to various insurance programs
and benefits to its temporary employees. The Company believes its employee
relations are good.
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REGULATION
Court reporters in many states and attorneys in every state are subject to
licensure requirements and to the continuing oversight by their respective
regulatory bodies, many of whom have broad discretion in interpreting and
enforcing applicable laws and regulations. The conduct of court reporters is
also subject to ethical and other restrictions imposed by state laws and
regulations. While these regulations are not directly applicable to the Company,
they affect the Company's court reporting business. Legislation has been adopted
by several states, where the Company does not currently have Company-owned
operations and in Georgia, where the Company does have a Company-owned
operation, that prohibit the provision of services by a court reporter under any
agreement other than on a case-by-case basis. Legislation has also been enacted
or proposed in certain other states that prohibit a court reporter from being
employed by, or serving as an independent contractor for, a court reporting firm
unless a majority of the firm is owned by certified shorthand reporters. Any
such laws effectively prohibit the Company from providing court reporting
services in such states. The Company expects that there will continue to be
efforts to sponsor the adoption of similar prohibitions by legislative or
regulatory action or through the ethics codes governing the conduct of court
reporters. In addition, recent federal and state legislative proposals have
included limitations on the number and length of depositions or have proposed
the substitution of video tape recording for stenographic transcription of
certain legal proceedings.
In addition, attorneys are subject to significant regulation by committees
on legal ethics and professional responsibility of the various state and
national bar associations, who from time to time, examine and issue opinions
regarding attorney services, including the use of temporary attorneys through a
placement agency. These opinions have suggested that the payment of fees to
agencies that place temporary attorneys may constitute, in certain
circumstances, the improper splitting of legal fees with a non-lawyer. The
applicability of these opinions to the Company's business is uncertain, and
there can be no assurance that a state will not determine that the business as
conducted by the Company violates ethical or professional responsibility
regulations for attorneys. In addition, the practice of placing temporary
lawyers with a number of firms may raise conflict of interest issues under
applicable ethics codes, particularly when attorneys from the same placement
firm are placed with opposing parties, or law firms representing such parties,
in a lawsuit or business transaction.
The Company's growth strategy is based, in part, on the concept of bundling
various legal support services. Although the Company believes that its existing
operations, which include an integrated offering of legal support services in
one state, are in material compliance with applicable laws, the relationships
among various legal support services are unique, and many aspects of these
relationships have not been subject to judicial or regulatory interpretations.
The Company has not sought judicial or regulatory interpretations with respect
to the manner in which it conducts and plans to conduct its business. Changes in
these laws and regulations, particularly in the states from which the Company
derives most of its revenues, could have a material adverse effect on the
Company's business, financial conditions, results of operations or ability to
sustain growth.
PROPERTIES
The Company leases office space in all the locations where the Company
operates. The leases generally run for a term of five years and expire at
various dates ranging from October 31, 1998 through March 31, 2007, with annual
rents ranging from $22,600 to $377,000. The leases provide, among other things,
that the Company is responsible for its share of increases in certain utilities,
maintenance and property taxes over a base amount. The Company believes its
facilities are generally adequate for its needs and does not anticipate
difficulty replacing such facilities or locating additional facilities if needed
in the future.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Malcolm L. Elvey........................... 56 Chairman of the Board and Director
David A. White............................. 45 Chief Executive Officer and Director
David A. Higson............................ 50 Executive Vice President, Chief Financial Officer,
Secretary and Director
Cary A. Sarnoff............................ 51 Senior Vice President -- West Coast Operations,
Vice Chairman and Director
Carole L. Hughes........................... 50 Senior Vice President -- East Coast Operations
Gregory J. Mazares......................... 43 Senior Vice President -- Marketing, Sales and
Strategic Planning
William J. Forbes.......................... 48 Vice President -- Human Resources
Steven L. Wolkenstein...................... 39 Vice President and Treasurer
Mortimer R. Feinberg(1)(2)................. 75 Director
Gary L. Monroe............................. 44 Director
Joseph P. Nolan(1)(2)...................... 33 Director
Bruce V. Rauner............................ 42 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
MALCOLM L. ELVEY has served as Chairman of the Board of Directors of the
Company since its incorporation in 1993 and also served as Chief Executive
Officer of the Company until February 1997. Mr. Elvey is a Chartered Accountant
and has a Master of Business Administration from the University of Cape Town.
Mr. Elvey is also a director of Algol, a public company based in Italy.
DAVID A. WHITE has been Chief Executive Officer of the Company since
February 1997. He has also been an officer of Harlingwood & Company LLC
("Harlingwood") since January 1997. From 1992 to December 1996, Mr. White was
President of MedTrans ("MedTrans"), a division of Laidlaw, Inc., where he
successfully led the implementation of an acquisition program focused on
consolidating and improving profitability within the ambulance services
industry.
DAVID A. HIGSON has been Executive Vice President of the Company since
February 1998, Chief Financial Officer and Secretary since May 1997 and a
director since June 1998 and was Senior Vice President from May 1997 to February
1998. From June 1993 to April 1997, he was Senior Vice President-Administration
and Financial Operations of MedTrans where he successfully assisted in
implementing an acquisition program focused on consolidating and improving
profitability within the ambulance services industry.
CARY A. SARNOFF has been Vice Chairman of the Company since November 1994.
In June 1998, he was appointed to the additional position of Senior Vice
President of West Coast Operations for the Company. Prior thereto, Mr. Sarnoff
was President of Sarnoff Deposition Service, Inc. ("SDS"), a court reporting
firm acquired by the Company in 1994. Mr. Sarnoff has more than 25 years
experience in the court reporting industry.
CAROLE L. HUGHES was appointed Senior Vice President of East Coast
Operations for the Company in February 1998. From 1981 to November 1997, Ms.
Hughes was the Vice President and a principal shareholder of Jurist-Begley
Reporting Services (or its predecessor), a court reporting company in
Philadelphia, Pennsylvania, that was acquired by the Company in November 1997.
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<PAGE> 41
GREGORY J. MAZARES was appointed Senior Vice President, Marketing, Sales
and Strategic Planning of the Company in September 1997. For nine years prior
thereto, he was a senior executive in the litigation support field, including
the past four years as President of Litigation Sciences Inc., a litigation
support consulting company.
WILLIAM J. FORBES was appointed Vice President, Human Resources, of the
Company in May 1998. From July 1993 to April 1998, Mr. Forbes was director of
Human Resources of MedTrans, where he successfully implemented a human resources
program for the acquired companies. Mr. Forbes has more than 20 years experience
in human resources.
STEVEN L. WOLKENSTEIN was appointed Vice President and Treasurer of the
Company in September 1997. From April 1993 to August 1997, he was tax and
treasury/international finance manager for the Upper Deck Company, and for five
years prior thereto he was with KPMG Peat Marwick LLP, with his last position
being senior tax manager.
MORTIMER R. FEINBERG, PH.D., has served as a director of the Company since
its incorporation. He is the co-founder of BFS Psychological Associates, Inc., a
human resources consulting firm, and has served as Chairman of its Board of
Directors since 1960. Dr. Feinberg is Professor Emeritus, Baruch College, City
University of New York and is a frequent contributor to the Wall Street Journal
on human resources and other business topics.
GARY L. MONROE has served as a director of the Company since June 1998. Mr.
Monroe has been the Chairman of the Board of Lason, Inc. ("Lason"), an
integrated outsourcing services company, since 1998, Chief Executive Officer
since February 1996, President since April 1997 and a director since he joined
Lason in September 1995. From September 1995 to February 1996, Mr. Monroe served
as Executive Vice President of Lason. From May 1992 to September 1995, Mr.
Monroe served as President of Kodak Imaging Services, Inc., a subsidiary of
Eastman Kodak Co.
JOSEPH P. NOLAN has served as director of the Company since October 1996.
Mr. Nolan is a Principal of GTCR Golder Rauner, LLC and has been a Principal of
Golder, Thoma, Cressey, Rauner, Inc. ("GTCR Inc."), which is the general partner
of GTCR IV, L.P., a limited partnership which is the general partner of GTCR,
since July 1996. Mr. Nolan joined GTCR Inc. in February 1994. From May 1990 to
January 1994, Mr. Nolan served as Vice President Corporate Finance at Dean
Witter Reynolds Inc. Mr. Nolan is also a director of Lason and Province
Healthcare, Inc.
BRUCE V. RAUNER has served as director of the Company since October 1996.
Mr. Rauner is the Managing Principal of GTCR Golder Rauner, LLC and has been a
Principal of GTCR Inc. for more than five years prior to the date of this
Prospectus. Mr. Rauner is also a director of Lason, Polymer Group, Inc.,
Coinmach Laundry Corporation, Province Healthcare, Inc. and Metamor Worldwide,
Inc.
BOARD OF DIRECTORS
The Board of Directors currently has two committees, the Audit Committee
and the Compensation Committee. The Audit Committee, among other things,
recommends the accounting firm to be appointed as independent accountants to
audit the Company's financial statements, discusses the scope and results of the
audit with the independent accountants, reviews with management and the
independent accountants the Company's interim and year-end operating results,
considers the adequacy of the internal accounting controls and audit procedures
of the Company and reviews the non-audit services to be performed by the
independent accountants. The current members of the Audit Committee are Messrs.
Feinberg and Nolan.
The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's 1993
Stock Option Plan, as amended (the "Plan"). The current members of the
Compensation Committee are Messrs. Feinberg and Nolan.
All directors will hold office until the next annual meeting of
stockholders and until the election and qualification of their successors, or
until death, resignation or removal.
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<PAGE> 42
DIRECTOR COMPENSATION
Compensation for directors who are not officers of the Company is $1,250
per meeting, plus reimbursement for any out-of-pocket expenses incurred in
connection with attending such meetings.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company or accrued for services rendered in all capacities during
the fiscal year ended December 31, 1997, to the Company's Chief Executive
Officer and to each of the other most highly compensated executive officers of
the Company whose aggregate cash compensation exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------------- ----------------------------------------------
AWARDS PAYOUTS
---------- -------
OTHER RESTRICTED
NAME AND BASE ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(S) SARS PAYOUTS COMPENSATION
- ------------------ ---- -------- -------- ------------ ---------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Malcolm L. Elvey............. 1997 $200,043 -- -- -- 100,000 -- --
Chairman 1996 194,595 $115,000 -- -- 50,000 -- --
1995 166,431 -- -- -- -- -- --
David A. White............... 1997 174,791 -- -- -- 250,000 -- --
Chief Executive Officer(1)
Cary A. Sarnoff.............. 1997 191,675 -- -- -- 75,000 -- --
Vice Chairman 1996 190,436 -- -- -- 50,000 -- --
1995 160,629 -- -- -- -- -- --
David A. Higson.............. 1997 93,750 13,000 -- -- 125,000 -- --
Senior Vice President(2)
David J. Feldman............. 1997 229,890 -- -- -- -- -- --
President(3) 1996 188,927 358,665 -- -- 50,000 -- --
1995 161,335 238,543 -- -- -- -- --
Debra Neiderfer.............. 1997 183,175 20,000 -- -- -- -- --
Vice President(4) 1996 115,967 48,666 -- -- 5,000 -- --
1995 82,660 18,650 -- -- -- -- --
</TABLE>
- ---------------
(1) Amounts were paid to Harlingwood. See "Certain Relationships and Related
Transactions."
(2) Represents compensation for the partial year from May 15, 1997.
(3) Mr. Feldman resigned as President in May 1997.
(4) Ms. Neiderfer resigned as Vice President in February 1998.
EMPLOYMENT AND RELATED AGREEMENTS
Malcolm L. Elvey is employed by the Company under an employment agreement
which expires in May 1999 and is automatically renewable on a year-by-year basis
unless terminated by either party upon at least 60 days notice prior to the
renewal date. Mr. Elvey receives an annual salary of $203,187, which is subject
to cost of living increases. Mr. Elvey is also entitled to an annual bonus
ranging from 3% of pre-tax earnings of the Company in excess of $750,000 to 15%
of pre-tax earnings of the Company in excess of $2,500,000; provided, however,
that the bonus will not exceed 100% of Mr. Elvey's annual salary. In the event
the Company consummates any acquisitions, these pre-tax earnings levels are
increased by 70% of the net income before taxes of the acquired business,
excluding any extraordinary items of gain or loss (which amount is prorated for
the portion of any year in which the acquired business operations are
consolidated with the Company's). The employment agreement terminates upon the
death or permanent disability of Mr. Elvey or for cause. Cause is defined as a
material breach of the employment agreement by Mr. Elvey, his gross negligence
or willful misconduct in the performance of his duties, his dishonesty to the
Company, conviction
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<PAGE> 43
of a felony or excessive absenteeism unrelated to a disability. In addition, Mr.
Elvey has agreed not to compete with the Company for a period of two years
following the termination of his employment with the Company.
David A. White is employed under a one-year agreement which expires June
1999 at an annual salary of $250,000 and is automatically renewed on a
year-by-year basis unless terminated by either party upon at least 60 days
notice prior to the renewal date. If the agreement is not renewed by the
Company, the Company has agreed to pay to Mr. White six months of severance pay.
Mr. White's employment agreement contains termination provisions which are
substantially the same as those of Mr. Elvey's employment agreement. Mr. White
has agreed not to compete with the Company for a period of one year following
the termination of his employment with the Company.
In connection with the acquisition of SDS, on June 22, 1994, the Company
entered into an employment agreement with Cary A. Sarnoff which expires in June
1999 and is automatically renewed on a year-by-year basis unless terminated by
either party upon at least 60 days notice prior to the renewal date. Mr. Sarnoff
receives an annual salary at the rate of $196,467, which is subject to cost of
living increases. Mr. Sarnoff's employment agreement contains termination
provisions which are substantially the same as those of Mr. Elvey's employment
agreement. Mr. Sarnoff has agreed not to compete with the Company for a period
of two years following the termination of his employment with the Company.
David J. Feldman had been employed as President and Chief Operating Officer
of the Company from September 1993 until his resignation effective May 1, 1997.
Under his employment agreement, Mr. Feldman received an annual salary at the
rate of $229,890. Mr. Feldman was also entitled to receive an annual bonus of
4.25% of total annual revenues of the Company in excess of $4,200,000 and 5% of
total annual revenues of the Company in excess of $9,000,000, as adjusted for
subsequent acquisitions by the Company. During the first two years, Mr. Feldman
was entitled to a minimum bonus of $175,000 per year and during the third and
fourth years was entitled to a minimum bonus of $225,000 per year. In connection
with the resignation, the Company agreed to pay to Mr. Feldman the aggregate
amount of $641,035, payable as follows: (a) from May 1, 1997 through March 31,
1998, the amount of $22,185 per month; (b) for the period April 1, 1998 through
September 30, 1998, the amount of $6,000 per month; (c) on August 15, 1997, the
amount of $161,000; (d) on November 15, 1997, the amount of $150,000; and (e) on
May 1, 1997 through September 30, 1997, the amount of $100,000 per month. On May
1, 1997 through September 30, 1998, Mr. Feldman will be paid the amount of
$1,500 per month in connection with conducting monthly sales meetings. Mr.
Feldman has also agreed to make himself available to the Company through
September 30, 1998 for consulting services for which he will be entitled to
additional compensation at the rate of $2,000 per day (or portion thereof). All
heretofore unvested options to purchase Common Stock held by Mr. Feldman will
become vested on September 30, 1998 and will continue to be exercisable until
the first to occur of two years from his ceasing to be a director of the Company
or ten years from the respective dates the options were granted. Mr. Feldman has
agreed not to compete with the Company through September 30, 1998.
David A. Higson is employed under a one-year agreement which expires June
1999 at an annual salary of $175,000 and is automatically renewed on a
year-by-year basis unless terminated by either party upon at least 60 days
notice prior to the renewal date. If the agreement is not renewed by the
Company, the Company has agreed to pay to Mr. Higson six months of severance
pay. Mr. Higson's employment agreement contains termination provisions which are
substantially the same as those of Mr. Elvey's employment agreement. Mr. Higson
has agreed not to compete with the Company for a period of one year following
the termination of his employment with the Company.
Carole L. Hughes is employed under a three-year employment agreement which
expires November 2000 at an annual salary of $135,000. Ms. Hughes is also
entitled to a performance bonus of up to 50% of her annual salary if the Company
achieves financial and operating objectives agreed to by Ms. Hughes and the
Company, with Ms. Hughes to receive a minimum bonus of at least $60,000 for the
first year. Ms. Hughes' employment agreement contains termination provisions
which are substantially the same as those of Mr. Elvey's employment agreement.
Ms. Hughes has agreed not to compete with the Company for a period of two years
following the termination of her employment with the Company.
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<PAGE> 44
Gregory J. Mazares is employed under a two-year agreement which expires
August 31, 1999 at an annual salary of $150,000. Mr. Mazares received an initial
bonus of $50,000 and is entitled to an additional $50,000 bonus on September 1,
1998. In the event that Mr. Mazares' base salary is at a level greater than
$150,000 as of August 18, 1998, the amount of the bonus due to Mr. Mazares on
August 18, 1998 will be equal to $200,000 less Mr. Mazares' annual base salary
as of August 18, 1998. If the employment of Mr. Mazares is terminated by the
Company, the Company has agreed to pay to him $200,000 in severance payments,
payable in 12 equal monthly installments.
The Company has entered into change in control agreements with its key
executive officers, Messrs. Elvey, Forbes, Higson, Mazares, Sarnoff, White and
Wolkenstein and Ms. Hughes, which provide that if an executive's employment is
terminated within six months after a change in control of the Company, or the
executive terminates employment within such six month period of time, then the
executive shall be entitled to a lump sum severance payment and all of the
executive's options, if any, which are not then vested shall immediately vest.
The lump sum severance payment for Messrs. Higson and White is 150% of base
salary and bonus at the time of termination and for the other executives is 100%
of base salary and bonus at the time of termination. At June 1, 1998 and based
on salary levels currently in effect, in the event of a change in control,
Messrs. Elvey, Forbes, Higson, Mazares, Sarnoff, White and Wolkenstein and Ms.
Hughes would have been entitled to receive a lump sum of $203,187, $115,000,
$262,500, $200,000, $196,467, $375,000, $95,000 and $135,000, respectively. The
agreements have a one year term, but will be automatically renewed for
successive one year terms unless terminated at least 60 days prior to June 30th
of any year and prior to a "change in control." If the payments to be received
under the agreements would not be deductible for tax purposes by the Company as
the result of such payment constituting an excess parachute payment, the payment
would be reduced to an amount which would make the entire payment deductible for
tax purposes. As used in the agreements, change in control means a person or a
group of persons becomes the beneficial owner of more than 30% of the Company's
Common Stock, stockholders approve a merger of the Company into another entity
or a sale of substantially all the Company's assets or a change in the
composition of a majority of the members of the Board of Directors.
STOCK OPTION PLAN
The Plan was amended in June 1998, subject to stockholder approval, to
increase the number of options which may be granted thereunder from 2,000,000 to
3,500,000 shares of Common Stock. Both incentive stock options and nonqualified
stock options may be granted under the Plan.
The Plan is administered by the Compensation Committee of the Board of
Directors, which may grant options to key employees and directors of and
consultants and independent contractors to the Company. The term of each option
may not exceed ten years from the date of grant. The exercise price of an option
may not be less than 100% of the fair market value of a share of Common Stock at
the date of grant. The options generally vest in equal increments over a
three-year period, commencing one year following their issuance.
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<PAGE> 45
The table below sets forth information regarding the grant of stock options
made to the executive officers named in the Summary Compensation Table during
the fiscal year ended December 31, 1997.
OPTION/SAR GRANTS IN 1997 FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM ($)
OPTIONS/SARS EMPLOYEES IN BASE PRICE --------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE 5% 10%
- ---- ------------ ------------ ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Malcolm L. Elvey........ 100,000 14.33% $3.75 6/2007 $420,056 $862,923
David A. White(1)....... 150,000 21.49% $9.00 2/2007 0 447,936
100,000 14.33% $3.75 6/2007 407,128 823,624
David J. Feldman........ 0 -- -- -- 0 0
Cary A. Sarnoff......... 75,000 10.24% $3.75 6/2007 315,042 647,192
David A. Higson......... 100,000 14.33% $3.50 5/2007 448,288 897,747
25,000 3.58% $3.75 6/2007 105,014 215,731
Debra Neiderfer......... 0 -- -- -- 0 0
</TABLE>
- ---------------
(1) These options were granted to Harlingwood.
The table below sets forth information for the executive officers named in
the Summary Compensation Table concerning option exercises during 1997 and
outstanding options at December 31, 1997.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND DECEMBER 31, 1997 OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Malcolm L. Elvey............. 0 -- 141,666 133,334 $158,332 $191,668
David A. White(1)............ 100,000 $212,500 0 150,000 -- 0
David J. Feldman............. 0 -- 91,666 33,334 108,332 66,668
Cary A. Sarnoff.............. 0 -- 16,666 108,334 33,332 160,418
David A. Higson.............. 0 -- 0 125,000 -- 181,250
Debra Neiderfer.............. 0 -- 51,666 3,334 53,540 7,085
</TABLE>
- ---------------
(1) These options were granted to, and exercised by, Harlingwood.
44
<PAGE> 46
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since June 1994, the Company leased its Santa Ana, California office from
an affiliate of Cary A. Sarnoff. The lease expires in June 1999 and grants to
the Company an option to renew for five years. The Company believes the terms of
the lease are comparable to market terms. At December 31, 1997, Mr. Sarnoff no
longer had an interest in the premises.
For as long as The Sarnoff Trust owns 20% or more of the Common Stock
issued in connection with the acquisition of SDS, the Company has agreed to
nominate, recommend and use its best efforts to have Mr. Sarnoff elected as a
director of the Company.
On October 23, 1996, the Company entered into a Purchase Agreement, as
amended (the "Purchase Agreement"), pursuant to which the Company sold to GTCR
and Antares Leveraged Capital Corp. (collectively, the "Investors") 21,937.5 and
562.5 shares of Series A Convertible Preferred Stock, respectively, for an
aggregate purchase price of $22.5 million. In addition, in January 1998, the
Investors were given the further right on or prior to December 2, 1999 to
acquire up to 5,000 shares of Series B Convertible Preferred Stock at a price of
$1,000 per share. In June 1998, GTCR acquired an option to acquire up to an
additional 2,500 shares of Series B Convertible Preferred Stock at a price of
$1,000 per share, which stock is convertible into an aggregate of 416,667 shares
of Common Stock at a conversion price of $6.00 per share. Since this acquisition
occurred within six months of this Offering, pursuant to Section 16(b) under the
Exchange Act, GTCR has agreed to repay to the Company the difference, if any,
between the assumed public offering price of $8.00 per share (the mid-point of
the anticipated price range set forth on the cover page of this Prospectus) less
underwriting discounts and commissions and $6.00 per share, multiplied by
416,667.
The Series A Convertible 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% ($60.00) per annum. The holders of Series A Convertible Preferred Stock have
a liquidation preference of $1,000 per share, plus accrued dividends. Holders of
Series A Convertible Preferred Stock have the right to vote together with the
holders of Common Stock and are entitled to one vote for each whole share of
Common Stock into which the Series A Convertible Preferred Stock is convertible
(presently 333 1/3 votes per share). GTCR was granted various rights to ask for
registration under the Securities Act of any shares of Common Stock acquired by
it upon conversion of the Series A Convertible Preferred Stock. Without the
consent of the holders of a majority of the Series A Convertible Preferred
Stock, the Company may not take various actions, including paying dividends on
capital stock if there are any accrued but unpaid dividends on the Series A
Convertible Preferred Stock, issuing any equity securities which are senior to
or on a parity with the Series A Convertible Preferred Stock, merging with
another entity, selling or otherwise disposing of all or substantially all its
assets, or acquiring other entities. In addition, the Company may not issue in a
private offering any equity securities without first offering the holders of
Series A Convertible Preferred Stock the right to acquire their pro rata share.
In connection with the Purchase Agreement, the Investors and Malcolm L. Elvey,
Chairman of the Board of the Company, Cary A. Sarnoff, Vice Chairman of the
Company, David J. Feldman, former President of the Company, CMNY Capital L.P.
and Allied entered into a Stockholder's Agreement dated as of October 23, 1996,
as amended (the "Stockholder's Agreement"), pursuant to which (a) the parties
agreed to vote their shares to elect as directors four representatives
designated by management, two representatives designated by GTCR and four
representatives jointly designated by GTCR and management; provided, however,
that if they are unable to agree on such joint designees within 90 days, then
GTCR may elect the joint designees; (b) management granted to the other
stockholders rights of first refusal to acquire their shares if they desire to
sell the same, subject to exceptions for public sales and for transfers to
family members; and (c) if the Company's Board of Directors approves a sale of
the Company's assets or capital stock (whether by merger or otherwise), each
stockholder other than Allied and CMNY Capital L.P. agreed to consent to such
transaction.
The Series B Convertible Preferred Stock is identical to the Series A
Convertible Preferred Stock except that it is junior to the Series A Convertible
Preferred Stock, has a conversion price of $6.00 per share and has 166 2/3 votes
per share.
45
<PAGE> 47
Effective upon consummation of the Offering, the Series A Convertible
Preferred Stock will be converted into an aggregate of 7,500,000 shares of
Common Stock, options to acquire Series B Convertible Preferred Stock will be
terminated and the holders will be issued a number of shares of Common Stock
equal to $4.5 million divided by the assumed public offering price of $8.00 per
share (the mid-point of the anticipated price range set forth on the cover page
of this Prospectus) less underwriting discounts and commissions and the
Stockholders Agreement will be terminated.
SDS was a party to an agreement with Edward Sarnoff, the father of Cary
Sarnoff, pursuant to which SDS agreed to pay to Edward Sarnoff, in the event of
the sale of SDS, the amount of $1.0 million payable in equal monthly
installments over a period of five years. In connection with the Company's
acquisition of SDS, the Company assumed the obligations of SDS under this
agreement.
In February 1997, the Company entered into a management agreement with
Harlingwood, pursuant to which Harlingwood provided management services to the
Company. This agreement terminated effective upon the Company entering into an
employment agreement with Mr. White. Mr. White fulfilled Harlingwood's
obligations under the management agreement. In connection with the management
agreement, the Company granted options to Harlingwood to purchase 150,000 shares
of Common Stock at an exercise price of $9.00 per share and sold to Harlingwood
250,000 shares of Common Stock at a price of $3.125 per share, which purchase
price was paid by Harlingwood issuing to the Company a promissory note in the
principal amount of $781,250, bearing interest at the rate of 7% per annum. The
note is secured by a pledge of the shares and is payable in full on April 15,
2001. The shares and options vest 25% on February 13, 1998 and ratably over a
three year period of time subsequent thereto. On December 15, 1997, Harlingwood
exercised options to purchase 100,000 shares of Common Stock at a exercise price
of $3.75 per share and delivered to the Company in payment of the exercise price
a promissory note in the principal amount of $375,000, bearing interest at the
rate of 7% per annum. The note is secured by a pledge of the shares and is
payable in full on December 15, 2001. As the result of the foregoing, at
December 31, 1997, Harlingwood was indebted to the Company in the principal
amount of $1,156,250. In May 1998, the Company granted to Harlingwood options to
purchase 200,000 shares of Common Stock at an exercise price of $6.00 per share.
The Company has agreed to loan to Harlingwood any funds needed to pay the
exercise price in connection with the exercise of the options. During 1997, the
Company paid to Harlingwood $45,000 for services rendered in connection with an
acquisition.
The Company has engaged Harlingwood Partners, L.P., a partnership of which
Mr. White is a principal ("Harlingwood Partners"), to provide acquisition
services for acquisitions other than in the court reporting area. Harlingwood
Partners will be entitled to a fee of 1% of value of each completed transaction.
In connection with the acquisition of A-L Associates and A-L Attorneys on
Assignment in May 1998, Harlingwood Partners was paid a fee of $90,000.
46
<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock at June 30, 1998 by: (i) each of the
Company's Directors, (ii) each officer named in the Summary Compensation Table,
(iii) all directors and executive officers of the Company as a group, (iv) each
other person (including any "group," as that term is used in Section 13(d)(3) of
the Exchange Act) who is known by the Company to own beneficially 5% or more of
the Common Stock and (v) each of the Selling Stockholders. The Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares, except as noted below. The address of each person who is
known by the Company to own beneficially 5% or more of the Common Stock listed
below is 750 "B" Street, Suite 2350, San Diego, California 92101, unless
otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER THE
TO THE OFFERING(1) OFFERING(1)
-------------------- SHARES BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ ---------- -------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Malcolm L. Elvey(2)........................... 879,000 9.6% -- 879,000 3.5%
216 East 45th Street
New York, NY 10017
The Sarnoff Trust(3).......................... 750,000 8.5% -- 750,000 3.0%
2100 Broadway
Santa Ana, CA 92706
Allied Investment Corporation(4).............. 625,000 6.6% -- 312,500 1.3%
Allied Investment Corporation II
Allied Capital Corporation II
1666 K Street
Washington, DC 20006
CMNY Capital, L.P.(5)......................... 472,500 5.4% -- 472,500 1.9%
135 East 57th Street
New York, NY 10022
Mortimer R. Feinberg.......................... -- -- -- -- --
David J. Feldman(6)........................... 625,900 7.0% 200,000 425,900 1.7%
Gary L. Monroe................................ -- -- -- -- --
Golder, Thoma, Cressey, Rauner Fund IV,
L.P.(7)..................................... 7,312,426 45.4% 1,462,500 6,434,926 26.0%
Joseph P. Nolan(7)............................ -- -- -- -- --
Bruce V. Rauner(7)............................ -- -- -- -- --
Cary A. Sarnoff(8)............................ 957,780 10.6% -- 957,780 3.8%
Harlingwood & Company LLC(9).................. 700,000 7.6% -- 700,000 2.8%
David A. White(9)............................. 700,000 7.6% -- 700,000 2.8%
David A. Higson(10)........................... 300,000 3.3% -- 300,000 1.2%
Debra Neiderfer............................... 22,000 * -- 22,000 *
Carole L. Hughes(11).......................... 368,527 4.2% 100,000 268,527 1.1%
Kathryn Benavides(12)......................... 432,378 4.9% 100,000 332,378 1.3%
Robert Ackerman............................... 110,000 1.1% 100,000 10,000 *
Antares Leveraged Capital Corp.(13)........... 187,574 2.1% 37,500 165,074 *
John Begley................................... 186,852 2.1% 60,000 126,852 *
Marc I. Brody(12)............................. 321,586 3.6% 150,000 171,586 *
John C. Durham................................ 284,775 3.2% 75,500 209,275 *
Leonard Katz.................................. 135,000 1.1% 100,000 35,000 *
Harvey Krauss................................. 100,000 1.1% 60,000 40,000 *
Premier Auto Insurance Company................ 68,670 * 40,000 28,670 *
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER THE
TO THE OFFERING(1) OFFERING(1)
-------------------- SHARES BEING -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------ ---------- -------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
David N. Rainwater............................ 183,000 2.0% 61,000 122,000 *
All directors and executive officers as a
group (14) (12 persons)..................... 3,385,307 33.0% 100,000 3,285,307 12.6%
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") which generally attribute
beneficial ownership of securities to persons who possess sole or shared
voting power and/or investment power with respect to those securities.
Stock option information presented below includes all options held by the
persons indicated.
(2) Includes options to purchase 315,000 shares of the Company's Common Stock
granted to Mr. Elvey under the Plan.
(3) The Sarnoff Trust is a revocable trust of which Cary A. Sarnoff and his
wife, Michelle A. Sarnoff, are settlors, trustees and beneficiaries.
(4) These entities in the aggregate own warrants to purchase an aggregate of
625,000 shares of Common Stock at an exercise price of $2.90 per share,
subject to adjustment.
(5) Robert Davidoff and Edwin Marks are the general partners of CMNY Capital,
L.P. and may be deemed to control it.
(6) Includes options to purchase 125,000 shares of the Company's Common Stock
granted to Mr. Feldman under the Plan.
(7) GTCR is the direct owner of 21,937.50 shares of Series A Convertible
Preferred Stock which is convertible into 7,312,426 shares of Common Stock.
GTCR IV, L.P., a limited partnership, is the general partner of GTCR and
Golder, Thoma, Cressey, Rauner, Inc. is the general partner of GTCR IV,
L.P. As such, they may be deemed to be the indirect beneficial owners of
such securities. Messrs. Nolan and Rauner are principals of GTCR Inc. The
shares beneficially owned after the Offering include 585,000 shares of
Common Stock to be received upon conversion of the option to acquire Series
B Convertible Preferred Stock, which is based upon an assumed public
offering price of $8.00 per share (the mid-point of the anticipated price
range set forth on the cover page of this Prospectus).
(8) Includes shares owned by The Sarnoff Trust and options to purchase 200,000
shares of the Company's Common Stock granted to Mr. Sarnoff under the Plan.
See Note (3) above.
(9) Mr. White is an officer of Harlingwood. Includes 350,000 shares owned by
Harlingwood and options to purchase 350,000 shares of Common Stock owned by
Harlingwood.
(10) Consists of options to purchase 300,000 shares of the Company's Common
Stock granted to Mr. Higson under the Plan.
(11) Includes options to purchase 115,000 shares of Common Stock of the Company.
(12) Includes options to purchase 91,000 shares of Common Stock of the Company.
(13) The shares beneficially owned after the Offering include 15,000 shares of
Common Stock to be received upon conversion of the option to acquire Series
B Convertible Preferred Stock, which is based upon an assumed public
offering price of $8.00 per share (the mid-point of the anticipated price
range set forth on the cover page of this Prospectus).
(14) Includes options to purchase 1,460,000 shares of Common Stock of the
Company.
All of the Selling Stockholders, except for GTCR and Antares Leveraged
Capital Corp., were officers, employees or stockholders of court reporting
companies which have been acquired by the Company. The shares of Common Stock
owned by them which are included in the Offering were all issued to them
pursuant to the agreements under which their court reporting companies were so
acquired.
48
<PAGE> 50
Messrs. Ackerman, Katz and Krauss were the principals of Krauss, Katz &
Ackerman. In connection with the acquisition of this company, each of them
entered into employment agreements with the Company providing for their
employment by the Company for a five-year period expiring June 13, 2002, with
their compensation to be based on court reporting revenues generated by each of
them. Each of them continues to provide court reporting services to the Company.
Mr. Begley, Ms. Benavides, Ms. Hughes and Premier Auto Insurance Company
were all officers, stockholders and/or employees of Jurist-Begley Reporting
Services. In connection with the acquisition of this company, each of Mr. Begley
and Ms. Hughes entered into employment agreements with the Company. Mr. Begley's
employment agreement provides for a three-year term of employment to expire
November 7, 2000. Mr. Begley receives an annual salary, together with a
percentage of billings by the Company for court reporting services performed by
him. For a description of Ms. Hughes employment agreement, see
"Management -- Employment and Related Agreements."
Dr. Durham and Mr. Rainwater were stockholders of American Network
Services, Inc. In connection with the acquisition, Dr. Durham was employed by
the Company for six weeks after the acquisition. In addition, Dr. Durham and Mr.
Rainwater were paid severance consideration by the Company of $140,000 and
$125,000, respectively.
Mr. Brody was a principal of Brody & Geiser, a court reporting company
acquired by the Company. In connection with the acquisition agreement, Mr. Brody
entered into an employment agreement with the Company for a three-year period
which expires January 7, 2001. Mr. Brody receives an annual salary, together
with a percentage of the billings for court reporting services performed by him.
Mr. Feldman formerly was President of the Company. See
"Management -- Employment and Related Agreements."
Antares Leveraged Capital Corp. is the agent and a lender under the Credit
Agreement.
Reference is also made to "Certain Relationships and Related Transactions."
49
<PAGE> 51
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Company's
Certificate of Incorporation, as amended (the "Certificate of Incorporation")
and the Company's Bylaws, which are included as exhibits to the Registration
Statement of which this Prospectus forms a part and by the provisions of
applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Certificate of Incorporation, the Company has authority to
issue 100,000,000 shares of Common Stock, par value $.01 per share. In addition,
under the Certificate of Incorporation, the Board of Directors of the Company
has authority (without action by the stockholders) to issue 1,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), in one or
more classes or series and, within certain limitations, to determine the voting
rights (including the right to vote as a series on particular matters),
preferences as to dividends and in liquidation, and conversion and other rights
of each such series.
The rights of the holders of Common Stock discussed below are subject to
such rights as the Board of Directors may confer on the holders of Preferred
Stock; accordingly, rights conferred on holders of Preferred Stock that have
been issued and that may be issued in the future under the Certificate of
Incorporation may adversely affect the rights of holders of Common Stock.
COMMON STOCK
Voting Rights. Each holder of shares of Common Stock is entitled to attend
all special and annual meetings of the stockholders of the Company and,
share-for-share and without regard to class, together with the holders of all
other classes of stock entitled to attend such meetings and to vote (except any
class or series of stock having special voting rights), to cast one vote for
each outstanding share of Common Stock so held upon any matter or thing
(including, without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders.
Liquidation Rights. In the event of any dissolution, liquidation, or
winding up of the Company, whether voluntary or involuntary, the holders of the
Common Stock and holders of any class or series of stock entitled to participate
therewith, as to the distribution of assets in such event, shall become entitled
to participate in the distribution of any assets of the Company remaining after
the Company shall have paid, or provided for payment of, all debts and
liabilities of the Company and after the Company shall have paid, or set aside
for payment, to the holders of any class of stock having preference over the
Common Stock in the event of dissolution, liquidation or winding up the full
preferential amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith as to dividends but only when
and as declared by the Board of Directors.
Other. The Common Stock is not redeemable, does not have any conversion
rights and is not subject to call. Holders of Common Stock have no pre-emptive
right to maintain their respective percentage of ownership in future offers and
sales of stock by the Company.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors, from
time to time and without further stockholder action, to provide for the issuance
of up to 1,000,000 shares of Preferred Stock, in one or more series, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. The Company presently has authorized, issued and outstanding 22,500
shares of Series A Convertible Preferred Stock. The Company presently has
authorized 7,500 shares of Series B Convertible Preferred Stock, none of which
has been issued. Effective upon consummation of the Offering, the Series A
Convertible Preferred Stock will be converted into 7,500,000 shares of Common
Stock and the option to acquire Series B Convertible Preferred Stock will be
terminated and the holders will receive a number of shares of Common Stock equal
to $4.5 million divided by the assumed public offering price of $8.00 per share
(the mid-point of the anticipated price range set forth on the
50
<PAGE> 52
cover page of this Prospectus) less underwriting discounts and commissions. As
the result, no shares of any series of such preferred stock will be outstanding,
and there are no agreements or understandings for the issuance of any such
preferred stock. Because of its broad discretion with respect to the creation
and issuance of Preferred Stock without stockholder approval, the Board of
Directors could adversely affect the voting power of the holders of Common Stock
and, by issuing shares of Preferred Stock with certain voting, conversion and/or
redemption rights, could discourage any attempt to obtain control of the
Company.
REGISTRATION RIGHTS
The holders of approximately 13,307,277 shares of Common Stock (including
shares of Common Stock issuable upon exercise of options or warrants or
conversion of convertible securities) and their permitted transferees (the
"Holders") are entitled to certain rights with respect to the registration of
such shares under the Securities Act.
Registration Rights Granted in Connection with Capital Raising
Activities. In connection with its capital raising activities since May 1993,
the Company has granted registration rights to holders of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock and warrants to
purchase Common Stock. Pursuant to these registration rights agreements, the
Company is required to notify the Holders of the Company's intent to register
any of its Common Stock under the Securities Act and to allow such Holders an
opportunity to include their shares of Common Stock in the Company's
registration. The Company has complied with these notification requirements in
connection with the Offering. These "piggyback" registration rights are subject
to certain limitations and restrictions, including the right of the underwriters
of an underwritten offering to limit the number of shares offered in such
registration if such underwriter determines that the number of shares requested
to be registered cannot be underwritten. The Holders also have the right to
demand that the Company register for sale the shares of Common Stock owned by
them or which may be issued on conversion of the Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock or exercise of the warrants.
Notwithstanding the fact that the contractual rights described above still
exist, the Holders of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock, who upon consummation of the Offering will hold
only shares of Common Stock, may dispose of some or all of their shares of
Common Stock pursuant to Rule 144 under the Securities Act. See "Shares Eligible
for Future Sale."
Registration Rights Granted in Connection with Acquisitions. In connection
with acquisitions, the Company has granted to Holders certain demand and/or
piggy-back registration rights. The Holders of 4,806,767 shares have the right
to require the Company to register their shares of Common Stock owned by them
and to allow such Holders the opportunity to include their shares in the
Company's registration statement. The Company has complied with these
notification requirements in connection with the Offering. These piggy-back
registration rights are subject to the same limitations and restrictions
discussed above. The Holders who have owned their shares of Common Stock for at
least one year may dispose of some or all of these shares pursuant to Rule 144
under the Securities Act. See "Shares Eligible for Future Sale."
In each of the above instances, subject to certain limitations and
conditions, including provisions granting certain preferences, such
registrations may include securities sold for the account of the Company or
other stockholders, or both.
The Company is required to bear all the expenses relating to the sale of
the Holders' securities under registrations, except for underwriting discounts
and commissions, including the fees and expenses of the Holders' counsel and
filing fees related to the registration statement. The Company also is obligated
to indemnify the Holders whose shares are included in any of the Company's
registrations against certain losses and liabilities, including liabilities
under the Securities Act and state securities laws.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the DGCL. In
general, this statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stock-
51
<PAGE> 53
holder" for a period of three years after the person becomes an interested
stockholder, unless (i) prior to such time the transaction which resulted in the
stockholder becoming an interested stockholder was approved by the Company's
Board of Directors, or (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the commencement of the transaction, subject to certain exceptions, or (iii) at
or subsequent to such time, the business combination is approved by the
Company's Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of the holders of at least two-thirds of
the Company's outstanding voting stock not owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within the prior three years did own) 15% or more of the Company's voting stock.
Such provisions could render the Company more difficult to be acquired pursuant
to an unfriendly acquisition by a third party by making it more difficult for
such person to obtain control of the Company without the approval of the Board
of Directors.
The Company has included in its Certificate of Incorporation provisions to
eliminate the personal liability of its directors for monetary damages resulting
from breaches of their fiduciary duty to the extent permitted by the DGCL and to
indemnify its directors and officers to the fullest extent permitted by Section
145 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar for the Common Stock is
Continental Stock Transfer and Trust Company, New York, New York. The Company
acts as the transfer agent and registrar for all classes of Preferred Stock.
52
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
24,713,546 shares of Common Stock (26,220,521 shares if the Underwriters'
over-allotment option is exercised in full). The 10,046,500 shares sold in the
Offering (11,553,475 shares if the Underwriters' over-allotment option is
exercised in full) will immediately be freely tradable, except that any shares
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144, as described below. Of the remaining shares,
approximately 11,414,404 shares will be "restricted securities" as defined in
Rule 144 or are held by "affiliates" of the Company within the meaning of the
Securities Act and not covered by an effective registration statement and,
accordingly none of these securities may be sold unless they are registered
under the Securities Act or sold pursuant to an exemption from registration. See
"Description of Capital Stock -- Registration Rights."
In general, under Rule 144, a person who has beneficially owned shares for
at least one year, including an "affiliate," as that term is defined in the
Securities Act, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the then outstanding
shares of Common Stock (approximately 247,135 shares after the completion of the
Offering), or the average weekly trading volume during the four calendar weeks
preceding filing of notice of such sale, subject to certain requirements
concerning availability of public information, manner and notice of sale. Of the
11,414,404 "restricted securities," 464,725 shares of Common Stock will not be
subject to lock-up agreements (as described below) or to contractual resale
restrictions and will be eligible for sale under Rule 144 subject to certain
volume and other limitations during the 180-day period after the date of this
Prospectus.
The Company, its directors and executive officers, the Selling Stockholders
and certain other securityholders of the Company, owning upon completion of the
Offering, in the aggregate 10,305,145 shares of Common Stock have agreed that
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any other securities convertible into,
or exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this Prospectus
(the "Lock-Up Period"), without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except that during such
period, shares of Common Stock may be issued in connection with acquisitions
(including issuances of options, warrants and convertible notes in connection
therewith) and upon the exercise or conversion of employee stock options,
warrants and convertible notes outstanding on the date of this Prospectus, and
the Company may issue employee stock options which are exercisable after the
180th day after the date of this Prospectus. The Company will not grant
registration rights to any person where such rights are exercisable less than
180 days after the date of this Prospectus (and the persons acquiring such
securities in acquisition transactions that are not "restricted securities" (as
defined in Rule 144) shall execute and deliver to Prudential Securities
Incorporated lock-up agreements with respect to such securities). Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares subject to such lock-up
agreements. Upon expiration of the Lock-Up Period, 10,834,890 shares of Common
Stock that are "restricted securities" will be eligible for sale in the public
market subject to the limitations of Rule 144. Beginning in October 1998,
638,776 "restricted" shares of Common Stock not subject to lock-up agreements
from time to time will become available for public sale, subject to the
provisions of Rule 144 (including the volume restrictions).
Pursuant to certain contractual arrangements, the holders of an additional
544,687 shares of Common Stock are restricted from making any public sale of
such shares for a period of 180 days after the date of this Prospectus.
The Company has an effective registration statement covering an aggregate
of up to 2,000,000 shares available for issuance upon the exercise of options
granted under the Plan, including 1,789,718 shares subject to options which are
outstanding as of June 30, 1998. An additional 1,500,000 shares of Common Stock
are reserved for issuance under the Plan, subject to stockholder approval.
53
<PAGE> 55
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, BancAmerica Robertson Stephens and Janney Montgomery
Scott Inc. are acting as representatives (the "Representatives"), have severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company and the Selling Stockholders the number
of shares of Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
Prudential Securities Incorporated..........................
BancAmerica Robertson Stephens..............................
Janney Montgomery Scott Inc.................................
-----------
Total....................................................... 10,046,500
===========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company and
the Selling Stockholders that they propose to offer the Common Stock initially
at the public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may reallow a concession of $ per share to
certain other dealers. After the Offering, the public offering price and the
concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,506,975 additional shares
of Common Stock at the public offering price, less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to 10,046,500.
The Company, its directors and executive officers, the Selling Stockholders
and certain other securityholders of the Company have agreed that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any other securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company for a period of 180 days after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, except that during such period, shares of Common
Stock may be issued in connection with acquisitions (including issuances of
options, warrants and convertible notes in connection therewith) and upon the
exercise or conversion of employee stock options, warrants and convertible notes
outstanding on the date of this Prospectus (and the persons acquiring such
securities in acquisition transactions that are not "restricted securities" (as
defined in Rule 144) shall execute and deliver to Prudential Securities
Incorporated lock-up agreements with respect to such securities), and the
Company may issue employee stock options which are exercisable after the 180th
day after the date of this Prospectus. The Company will not grant registration
rights to any person where such rights are exercisable less than 180 days after
the date of this Prospectus. Prudential Securities Incorporated may, in its sole
discretion, at any time and without notice, release all or any portion of the
shares of Common Stock subject to such lock-up agreements.
54
<PAGE> 56
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
Prior to the Offering, there has been a relatively limited and sporadic
public market for the Company's Common Stock. See "Price Range of Common Stock."
Because trading in the Common Stock has been limited, there is no direct
relationship between the public offering price of the Common Stock in the
Offering and the current trading price of the Common Stock. Consequently, the
public offering price for the Common Stock will be determined by negotiations
among the Company, the Selling Stockholders and the Representatives. Among the
factors to be considered in such negotiations will be prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalization and state of development of other companies which the
Company and the Representatives of the Underwriters believe to be comparable to
the Company, estimates of the business potential of the Company, the present
state of the Company's development and other factors deemed relevant.
In connection with this Offering, certain Underwriters or their respective
affiliates who are qualified market makers on the Nasdaq SmallCap Market may
engage in passive market making transactions in the Common Stock of the Company
on Nasdaq in accordance with Rule 103 of Regulation M under the Exchange Act
during the business day prior to the pricing of the Offering before the
commencement of offers and sales of Common Stock. Passive market makers must
comply with applicable volume and price limitations and must be identified as
such. In general, a passive market maker must display its bid at a price not in
excess of the highest independent bid for such security, if all independent bids
are lowered below the passive market maker's bid, however, such bid must then be
lowered when certain purchase limits are exceeded.
In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 1,506,975 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to previously. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of the other Underwriters, the selling concession with
respect to the Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if any is undertaken, it may be discontinued at any time.
Prudential Securities Incorporated acted as the placement agent in 1996 in
connection with the sale of the Company's Series A Convertible Preferred Stock
for which it has received customary compensation, including the issuance of
warrants to purchase shares of Common Stock of the Company. Prudential
Securities Incorporated has exercised certain of its warrants and now holds
206,010 shares of Common Stock and warrants to purchase 75,000 shares of Common
Stock.
LEGAL MATTERS
Certain legal matters, including the legality of the issuance of the shares
of Common Stock, are being passed upon for the Company by Stroock & Stroock &
Lavan LLP, New York, New York. Certain legal matters relating to the Offering
will be passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
55
<PAGE> 57
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997 and for each of the years in the two-year period ended December
31, 1997, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the December 31, 1997
financial statements contains an explanatory paragraph that states that KPMG
Peat Marwick LLP also audited the combination of the consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1995, after restatement for the 1997 pooling-of-interests.
The consolidated financial statements of the Company for the year ended
December 31, 1995, not presented separately herein, have been referenced in the
Registration Statement in reliance upon the report of Freed Maxick Sachs &
Murphy, P.C., independent certified public accountants not presented separately
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of A&A Court Reporters, Inc. and Affiliate, Kerns
& Gradillas, Inc., A-L Associates, Inc. and Affiliate and Hamilton-Legato
Deposition Centers, Inc. as of and for the year ended December 31, 1997, have
been included herein and in the registration statement in reliance upon the
report of Freed Maxick Sachs & Murphy, P.C., independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company's principal executive offices are located at 750 "B" Street,
Suite 2350, San Diego, California 92101, telephone (800) 496-4969. The Company
is subject to the informational requirements of the Exchange Act. In accordance
with the Exchange Act, the Company files proxy statements, reports and other
information with the SEC. This filed material can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices in Chicago, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and in New York, 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material may
also be obtained by mail from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a
Web Site address which contains reports, proxy and information statements and
other information regarding the registrants that file electronically with the
SEC. The address of such site is http://www.sec.gov. Such materials can also be
inspected at the office of the Boston Stock Exchange, One Boston Place, Boston,
Massachusetts 02108 on which exchange the Company's Common Stock is listed.
The Company has filed with the SEC a Registration Statement on Form S-1
(together with any amendments thereto, the "Registration Statement") under the
Securities Act with respect to the registration of the Common Stock offered
herein. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the SEC. With respect
to statements contained in this Prospectus as to the contents of any contract or
documents referred to herein, reference is made to the copy of such documents
filed as an exhibit to the Registration Statement or such other documents, which
may be examined without charge at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of which may be obtained from the SEC as indicated above upon
payment of the fees prescribed by the SEC. Each such statement is qualified in
its entirety by such reference.
56
<PAGE> 58
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
Unaudited Pro Forma As Adjusted Condensed Consolidated
Financial Statements:..................................... F-3
Pro Forma As Adjusted Condensed Consolidated Balance
Sheet -- March 31, 1998................................ F-4
Pro Forma As Adjusted Condensed Consolidated Statement of
Income -- Year Ended
December 31, 1997...................................... F-5
Pro Forma As Adjusted Condensed Consolidated Statement of
Income -- Three Months Ended March 31, 1998............ F-6
Independent Auditors' Report................................ F-7
Independent Auditor's Report................................ F-8
Consolidated Financial Statements:
Balance Sheets -- December 31, 1996 and 1997.............. F-9
Statements of Operations -- Years ended December 31, 1995,
1996 and 1997.......................................... F-10
Statements of Stockholders' Equity -- Years ended December
31, 1995, 1996 and 1997................................ F-11
Statements of Cash Flows -- Years ended December 31, 1995,
1996 and 1997.......................................... F-12
Notes to Consolidated Financial Statements................ F-13
Condensed Consolidated Financial Statements:
Balance Sheets -- December 31, 1997 and March 31, 1998
(Unaudited)............................................ F-29
Statements of Operations -- Three Months Ended March 31,
1997 and 1998 (Unaudited).............................. F-30
Statements of Cash Flows -- Three Months Ended March 31,
1997 and 1998 (Unaudited).............................. F-31
Notes to Condensed Consolidated Financial Statements...... F-32
A&A COURT REPORTERS, INC. AND AFFILIATE
Independent Auditor's Report................................ F-36
Combined Financial Statements:
Balance Sheet -- December 31, 1997........................ F-37
Statement of Income -- Year ended December 31, 1997....... F-38
Statement of Stockholder's Equity -- Year ended December
31, 1997............................................... F-39
Statement of Cash Flows -- Year ended December 31, 1997... F-40
Notes to Combined Financial Statements...................... F-41
KERNS & GRADILLAS, INC.
Independent Auditor's Report................................ F-44
Financial Statements:
Balance Sheet -- December 31, 1997........................ F-45
Statement of Operations and Retained Earnings -- Year
ended December 31, 1997................................ F-46
Statement of Cash Flows -- Year ended December 31, 1997... F-47
Notes to Financial Statements............................... F-48
</TABLE>
F-1
<PAGE> 59
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
A-L ASSOCIATES, INC. AND AFFILIATE
Independent Auditor's Report................................ F-50
Combined Financial Statements:
Balance Sheet -- December 31, 1997........................ F-51
Statement of Income -- Year ended December 31, 1997....... F-52
Statement of Cash Flows -- Year ended December 31, 1997... F-53
Notes to Combined Financial Statements...................... F-54
Combined Financial Statements (Unaudited):
Balance Sheet -- March 31, 1998........................... F-58
Statement of Income -- Three Months Ended March 31,
1998................................................... F-59
Statement of Cash Flows -- Three Months Ended March 31,
1998................................................... F-60
Notes to Combined Financial Statements...................... F-61
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
Independent Auditor's Report................................ F-62
Financial Statements:
Balance Sheet -- December 31, 1997........................ F-63
Statement of Operations and Retained Earnings -- Year
ended December 31, 1997................................ F-64
Statement of Cash Flows -- Year ended December 31, 1997... F-65
Notes to Financial Statements............................... F-66
Financial Statements (Unaudited):
Balance Sheet -- March 31, 1998........................... F-70
Statement of Income and Retained Earnings -- Three Months
Ended March 31, 1998................................... F-71
Statement of Cash Flows -- Three Months Ended March 31,
1998................................................... F-72
Notes to Financial Statements............................... F-73
</TABLE>
F-2
<PAGE> 60
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma As Adjusted Condensed Consolidated Statements of
Income of Esquire Communication Ltd. and subsidiaries (the "Company") for the
year ended December 31, 1997 and three months ended March 31, 1998 have been
adjusted to give effect to (i) the consummation of the 17 acquisitions completed
in 1997 (collectively referred to as the "1997 Acquisitions") and the 20
acquisitions completed in 1998 (collectively referred to as the "1998
Acquisitions"); (ii) the accrual of dividends on the Series A Convertible
Preferred Stock; (iii) the sale by the Company of 3,000 shares of Series A
Convertible Preferred Stock; (iv) the exercise of certain warrants to purchase
529,502 shares of Common Stock at an exercise price of $4.56 per warrant; (v)
the sale of the 7,500,000 shares of Common Stock offered hereby by the Company
at an assumed public offering price of $8.00 per share (the mid-point of the
anticipated price range set forth on the cover page of this Prospectus) and the
application of the estimated net proceeds therefrom as follows, (a)
approximately $54.1 million to repay debt outstanding under the Credit
Agreement, (b) approximately $1.4 million to repurchase warrants to purchase
312,500 shares of Common Stock at a price equal to the assumed public offering
price of $8.00 per share (the mid-point of the anticipated price range set forth
on the cover page of this Prospectus) less underwriting discounts and
commissions minus the $2.90 exercise price and (c) $892,000 to pay accrued
dividends on the Series A Convertible Preferred Stock; (vi) the conversion of
the Company's Series A Convertible Preferred Stock and of the options to acquire
Series B Convertible Preferred Stock into shares of Common Stock; (vii) the
exercise of warrants by Allied to purchase an aggregate of 312,500 shares of
Common Stock and (viii) certain pro forma adjustments to the historical
financial statements as described in the notes. The Unaudited Pro Forma As
Adjusted Condensed Consolidated Balance Sheet of the Company at March 31, 1998
has been adjusted to give effect to (i) acquisitions completed subsequent to
March 31, 1998 and (ii) each of the adjustments set forth above, except for
clause (i) above.
Management believes that the assumptions used in preparing the Unaudited
Pro Forma As Adjusted Condensed Consolidated Financial Statements provide a
reasonable basis on which to present pro forma financial data. The allocation of
the purchase price of acquisitions subsequent to March 31, 1998 to the fair
market value of net assets acquired is based on preliminary estimates and may
change based on the completion of additional analysis. The Unaudited Pro Forma
Condensed As Adjusted Consolidated Financial Statements do not purport to be
indicative of the combined results of operations that actually would have
occurred if the transactions described above had been effected at the dates
indicated or to project future results of operations for any period. The
Unaudited Pro Forma As Adjusted Condensed Consolidated Financial Statements
should be read in conjunction with the Company's consolidated financial
statements and the financial statements for certain of the 1998 Acquisitions and
the related notes thereto included elsewhere in this Prospectus.
F-3
<PAGE> 61
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ESQUIRE
COMMUNICATIONS PRO FORMA OFFERING PRO FORMA
LTD. ACQUISITIONS(1) ADJUSTMENTS(2) ADJUSTMENTS(3) AS ADJUSTED
-------------- --------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash....................... $ 431 $ -- $ -- $ -- $ 431
Accounts receivable, net... 18,397 7,660 -- -- 26,057
Prepaid expenses and other
current assets........... 693 128 -- -- 821
-------- ------- -------- -------- --------
Total current assets..... 19,521 7,788 -- -- 27,309
Property and equipment, net... 3,531 1,067 -- -- 4,598
Other assets:
Costs in excess of fair
value of net identifiable
assets of acquired
businesses, net.......... 79,019 27,204 -- -- 106,223
Other assets, net.......... 1,192 70 -- -- 1,262
-------- ------- -------- -------- --------
$103,263 $36,129 $ -- $ -- $139,392
======== ======= ======== ======== ========
Liabilities and Stockholders'
Equity
Current liabilities:
Accounts payable.............. $ 3,862 $ 2,529 $ -- $ -- $ 6,391
Accrued expenses and other
current liabilities........ 6,041 3,232 475 (892) 8,856
Current portion of long term
debt....................... 3,226 1,118 -- -- 4,344
-------- ------- -------- -------- --------
Total current
liabilities.............. 13,129 6,879 475 (892) 19,591
Long-term debt................ 56,900 25,058 (4,906) (54,077) 22,975
Other liabilities............. 213 -- -- -- 213
Stockholders' equity:
Preferred Stock............ -- -- -- -- --
Common Stock............... 74 9 5 159 247
Additional paid-in
capital.................. 38,150 4,183 4,901 54,810 102,044
Treasury stock at cost..... (550) -- -- -- (550)
Notes receivable........... (1,156) -- -- -- (1,156)
Accumulated deficit........ (3,497) -- (475) -- (3,972)
-------- ------- -------- -------- --------
Total stockholders'
equity.............. 33,021 4,192 4,431 54,969 96,613
-------- ------- -------- -------- --------
$103,263 $36,129 $ -- $ -- $139,392
======== ======= ======== ======== ========
</TABLE>
- ---------------
(1) Gives effect to acquisitions completed subsequent to March 31, 1998 as if
they occurred on March 31, 1998.
(2) Gives effect to (i) the sale by the Company of 3,000 shares of Series A
Convertible Preferred Stock; (ii) the exercise of certain warrants to
purchase 529,502 shares of Common Stock at an exercise price of $4.56 per
warrant and (iii) the accrual of dividends on the Series A Convertible
Preferred Stock subsequent to March 31, 1998.
(3) Gives effect to (i) the sale of the 7,500,000 shares of Common Stock offered
hereby by the Company at an assumed public offering price of $8.00 per share
(the mid-point of the anticipated price range set forth on the cover page of
this Prospectus) and the application of the estimated net proceeds
therefrom; (ii) the conversion of the Company's Series A Convertible
Preferred Stock and of the options to acquire Series B Convertible Preferred
Stock into shares of Common Stock and (iii) the exercise of warrants by
Allied to purchase an aggregate of 312,500 shares of Common Stock.
F-4
<PAGE> 62
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ESQUIRE
COMMUNICATIONS 1997 1998 PRO FORMA OFFERING PRO FORMA
LTD. ACQUISITIONS(1) ACQUISITIONS(2) ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
-------------- --------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... $53,178 $19,871 $51,395 $ -- -- $124,444
Costs and expenses:
Operating expenses...... 30,284 10,714 33,661 -- -- 74,659
General & administrative
expenses.............. 20,046(3) 7,899 15,861 (7,304)(4) -- 36,502
Depreciation and
amortization.......... 2,522 149 426 1,673(5) -- 4,770
------- ------- ------- ------- ------ --------
Total costs and
expenses....... 52,852 18,762 49,948 (5,631) -- 115,931
------- ------- ------- ------- ------ --------
Income from operations.... 326 1,109 1,447 5,631 -- 8,513
Other expense (income),
net..................... 2,656 (12) (2) 395(6) (640)(6) 2,397
------- ------- ------- ------- ------ --------
Income before provision
for income taxes........ (2,330) 1,121 1,449 5,236 640 6,116
Provision for income
taxes(7)................ (932) 448 580 2,094 256 2,446
------- ------- ------- ------- ------ --------
Net income (loss)......... (1,398) 673 869 3,142 384 3,670
Dividends on preferred
stock................... (702) -- -- -- 702(8) --
------- ------- ------- ------- ------ --------
Net income (loss)
applicable to common
stockholders............ $(2,100) $ 673 $ 869 $ 3,142 $1,086 $ 3,670
======= ======= ======= ======= ====== ========
Net income per common
share (diluted)......... $ (0.38) $ 0.15
======= ========
Weighted average shares
outstanding (diluted)... 5,630,285 24,397,597
</TABLE>
- ---------------
(1) Gives effect to the 1997 Acquisitions as if they occurred on January 1,
1997.
(2) Gives effect to the 1998 Acquisitions as if they occurred on January 1,
1997.
(3) Includes approximately $1.3 million expense relating to an officer's
termination agreement and termination expenses relating to certain marketing
activities, as well as approximately $922,000 of costs incurred in
connection with an acquisition accounted for under the pooling of interests
method of accounting.
(4) Gives effect to pro forma reductions in compensation expense for the
difference between the actual compensation paid to certain owners of the
acquired companies and the compensation negotiated in conjunction with the
1997 Acquisitions and the 1998 Acquisitions.
(5) Gives effect to pro forma adjustments for the amortization of goodwill which
would have been recorded relating to the 1997 Acquisitions and the 1998
Acquisitions. Goodwill is amortized over a period of 40 years.
(6) Gives effect to (i) the net reduction in interest expense which would have
resulted from the reduction of indebtedness under the Credit Agreement from
the application of the net proceeds of the Offering and (ii) the increase in
interest expense resulting from notes issued in connection with the 1997
Acquisitions and the 1998 Acquisitions.
(7) Income taxes have been provided for at an assumed rate of 40%, assuming that
the amortization of goodwill is deductible for tax purposes.
(8) Reflects the reduction of dividends resulting from the conversion of the
Company's Series A Convertible Preferred Stock into shares of Common Stock
effective upon consummation of the Offering.
F-5
<PAGE> 63
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ESQUIRE
COMMUNICATIONS 1998 PRO FORMA OFFERING PRO FORMA
LTD. ACQUISITIONS(1) ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
-------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue........................... $20,685 $10,138 $ -- $ -- $30,823
Costs and expenses:
Operating expenses.............. 11,398 6,370 -- -- 17,768
General & administrative
expenses..................... 6,401 3,462 (1,034)(2) -- 8,829
Depreciation and amortization... 995 77 195(3) -- 1,267
------- ------- ------- ------ -------
Total costs and expenses.......... 18,794 9,909 (839) -- 27,864
------- ------- ------- ------ -------
Income from operations............ 1,891 229 839 2,959
Other expense (income) net........ 1,241 -- 70(4) (755)(4) 556
------- ------- ------- ------ -------
Income before provision for income
taxes........................... 650 229 769 755 2,403
Provision for income taxes(5)..... 260 92 308 302 962
------- ------- ------- ------ -------
Net income (loss)................. 390 137 461 453 1,441
Dividends on preferred stock...... (267) -- -- 267(6) --
------- ------- ------- ------ -------
Net income (loss) applicable to
common stockholders............. $ 123 $ 137 $ 461 $ 720 $ 1,441
======= ======= ======= ====== =======
Net income per common share
(diluted)....................... $ 0.01 $ 0.06
======= =======
Weighted average shares
outstanding (diluted)........... 16,181,092 25,604,595
</TABLE>
- ---------------
(1) Gives effect to the 1998 Acquisitions as if they occurred on January 1,
1998.
(2) Gives effect to pro forma reductions in compensation expense for the
difference between the actual compensation paid to certain owners of the
acquired companies and the compensation negotiated in conjunction with the
1998 Acquisitions.
(3) Gives effect to pro forma adjustments for the amortization of goodwill which
would have been recorded relating to the 1998 Acquisitions. Goodwill is
amortized over a period of 40 years.
(4) Gives effect to (i) the net reduction in interest expense which would have
resulted from the reduction of indebtedness under the Credit Agreement from
the application of the net proceeds of the Offering and (ii) the increase in
interest expense resulting from notes issued in connection with the 1998
Acquisitions.
(5) Income taxes have been provided for at an assumed rate of 40%, assuming that
the amortization of goodwill is deductible for tax purposes.
(6) Reflects the reduction of dividends resulting from the conversion of the
Company's Series A Convertible Preferred Stock into shares of Common Stock
effective upon consummation of the Offering.
F-6
<PAGE> 64
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Esquire Communications Ltd.:
We have audited the accompanying consolidated balance sheets of Esquire
Communications Ltd. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Esquire Communications Ltd. and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the years
in the two year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
We also audited the combination of the accompanying consolidated statements
of operations, stockholders' equity, and cash flows for the year ended December
31, 1995, after restatement for the 1997 pooling-of-interests; in our opinion,
such consolidated statements have been properly combined on the basis described
in Note 2 of the notes to the consolidated financial statements.
KPMG PEAT MARWICK LLP
San Diego, California
March 27, 1998
F-7
<PAGE> 65
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Esquire Communications Ltd.
We have audited the consolidated balance sheet of Esquire Communications
Ltd. and subsidiaries as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended (not presented separately herein). These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Esquire
Communications Ltd. and subsidiaries as of December 31, 1995, and the results of
their operations and their cash flows for the year ended December 31, 1995 in
conformity with generally accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
January 27, 1996
F-8
<PAGE> 66
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1997
-------- -------
(NOTE 2)
<S> <C> <C>
ASSETS (PLEDGED)
Current assets:
Cash...................................................... $ 186 $ 116
Accounts receivable, less allowance for doubtful accounts
of $380 in 1996 and $1,334 in 1997..................... 8,027 14,621
Prepaid expenses.......................................... 903 639
Deferred tax asset........................................ 102 --
------- -------
Total current assets.............................. 9,218 15,376
Property and equipment, net................................. 2,041 3,056
Cost in excess of fair value of net identifiable assets of
acquired businesses, less accumulated amortization of
$1,516 in 1996 and $2,878 in 1997......................... 19,681 62,763
Deferred tax asset.......................................... 38 --
Other assets, less accumulated amortization of $364 in 1996
and $714 in 1997.......................................... 856 1,656
------- -------
$31,834 $82,851
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,083 $ 3,616
Accrued expenses.......................................... 1,414 5,622
Unearned revenue.......................................... -- 105
Current portion of long-term debt, including related
parties................................................ 2,149 4,361
------- -------
Total current liabilities......................... 5,646 13,704
Long-term debt, including related parties................... 12,990 45,442
Other liabilities........................................... 267 165
------- -------
Total liabilities................................. 18,903 59,311
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized in series:
Series A convertible preferred stock 22,500 shares
authorized; 7,500 and 15,000 shares issued and
outstanding in 1996 and 1997, respectively; $7,500 and
$15,000 aggregate liquidation preference in 1996 and
1997, respectively.................................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized; 5,185,256 and 7,049,898 shares issued in
1996 and 1997, respectively; 4,751,756 and 6,866,398
shares outstanding in 1996 and 1997, respectively...... 43 63
Additional paid-in capital................................ 14,911 29,063
Treasury stock, at cost -- 433,500 shares in 1996 and
183,500 shares in 1997................................. (1,300) (550)
Notes receivable -- stockholder........................... -- (1,156)
Accumulated deficit....................................... (723) (3,880)
------- -------
Total stockholders' equity........................ 12,931 23,540
------- -------
Commitments and contingencies...............................
$31,834 $82,851
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 67
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(NOTE 2) (NOTE 2)
<S> <C> <C> <C>
Revenue................................................... $ 26,781 $ 29,501 $ 53,178
Costs and expenses:
Operating expenses...................................... 15,095 16,662 30,284
General and administrative expenses..................... 8,647 10,585 20,046
Depreciation and amortization........................... 1,051 1,198 2,522
--------- --------- ---------
Total costs and expenses.................................. 24,793 28,445 52,852
--------- --------- ---------
Income from operations.......................... 1,988 1,056 326
Other income (expense):
Interest expense........................................ (1,092) (1,225) (2,697)
Interest income......................................... 12 6 41
Other................................................... (13) 3 --
--------- --------- ---------
(1,093) (1,216) (2,656)
--------- --------- ---------
Income (loss) before provision for income taxes
and extraordinary item........................ 895 (160) (2,330)
Provision for income taxes................................ 574 216 125
--------- --------- ---------
Income (loss) before extraordinary item................... 321 (376) (2,455)
Extraordinary item -- loss on early extinguishment of
debt, net of tax benefit of $104........................ -- 157 --
--------- --------- ---------
Net income (loss)............................... 321 (533) (2,455)
Dividends on preferred stock.............................. -- (75) (702)
--------- --------- ---------
Net income (loss) applicable to common
stockholders.................................. $ 321 $ (608) $ (3,157)
========= ========= =========
Net income (loss) per common share:
Basic:
Net income (loss) before extraordinary item.......... $ 0.06 $ (0.09) $ (0.56)
Extraordinary item................................... -- (0.03) --
--------- --------- ---------
Net income (loss).................................... $ 0.06 $ (0.12) $ (0.56)
========= ========= =========
Weighted-average shares outstanding.................. 4,979,775 4,959,152 5,630,285
Diluted:
Net income (loss) before extraordinary item.......... $ 0.06 $ (0.09) $ (0.56)
Extraordinary item................................... -- (0.03) --
--------- --------- ---------
Net income (loss).................................... $ 0.06 $ (0.12) $ (0.56)
========= ========= =========
Weighted-average shares outstanding.................. 5,050,800 4,959,152 5,630,285
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 68
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A COMMON STOCK ADDITIONAL TOTAL
PREFERRED ------------------ PAID-IN TREASURY NOTES ACCUMULATED STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL STOCK RECEIVABLE DEFICIT EQUITY
--------- --------- ------ ---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994, as
previously reported......... $-- 4,049,900 $40 $ 7,491 $ -- $ -- $ (623) $ 6,908
Adjustment for pooling of
interests (note 2).......... -- 854,427 -- -- -- -- 187 187
-- --------- --- ------- ------- ------- ------- --------
Balance, December 31, 1994, as
restated.................... -- 4,904,327 40 7,491 -- -- (436) 7,095
Issuance of common stock in
connection with acquisition
of business................. -- 76,923 1 212 -- -- -- 213
Net income.................... -- -- -- -- -- -- 321 321
-- --------- --- ------- ------- ------- ------- --------
Balance, December 31, 1995.... -- 4,981,250 41 7,703 -- -- (115) 7,629
Issuance of common stock in
connection with acquisitions
of businesses............... -- 204,006 2 508 -- -- -- 510
Purchase of treasury stock.... -- (433,500) -- -- (1,300) -- -- (1,300)
Dividends on preferred
stock....................... -- -- -- -- -- -- (75) (75)
Issuance of 7,500 shares of
Series A convertible
preferred stock, net of
issuance costs.............. -- -- -- 6,700 -- -- -- 6,700
Net loss...................... -- -- -- -- -- -- (533) (533)
-- --------- --- ------- ------- ------- ------- --------
Balance, December 31, 1996.... -- 4,751,756 43 14,911 (1,300) -- (723) 12,931
Issuance of common stock in
connection with acquisitions
of businesses............... -- 1,356,000 14 5,680 -- -- -- 5,694
Issuance of common stock in
connection with warrant
exchange offering, net of
issuance costs.............. -- 184,896 2 (177) -- -- -- (175)
Exercise of non-employee
warrants.................... -- 153,081 2 224 -- -- -- 226
Exercise of employee stock
options..................... -- 70,665 1 278 -- -- -- 279
Reissuance of treasury stock
in connection with exercise
of employee stock options
for note receivable......... -- 250,000 -- 31 750 (781) -- --
Issuance of stock options to
non-employees............... -- -- -- 632 -- -- -- 632
Dividends on preferred
stock....................... -- -- -- -- -- -- (702) (702)
Exercise of employee stock
options for note
receivable.................. -- 100,000 1 374 -- (375) -- --
Issuance of 7,500 shares of
Series A convertible
preferred stock, net of
issuance costs.............. -- -- -- 7,110 -- -- -- 7,110
Net loss...................... -- -- -- -- -- -- (2,455) (2,455)
-- --------- --- ------- ------- ------- ------- --------
Balance, December 31, 1997.... $-- 6,866,398 $63 $29,063 $ (550) $(1,156) $(3,880) $ 23,540
== ========= === ======= ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 69
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(NOTE 2) (NOTE 2)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income......................................... $ 321 $ (533) $ (2,455)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,051 1,198 2,522
Commission expense related to grant of stock options... -- -- 329
Deferred income taxes.................................. 23 (168) 140
Extraordinary item..................................... -- 157 --
(Increase) decrease in assets:
Accounts receivable.................................. (613) (1,284) (2,815)
Prepaid expenses..................................... 7 (427) 205
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and unearned
revenue........................................... 122 845 1,753
Other long-term liabilities.......................... (6) 37 (95)
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 905 (175) (416)
------- ------- --------
Cash flows from investing activities:
Acquisitions of businesses................................ (642) (3,958) (34,866)
Increase in other assets.................................. (104) (314) (620)
Purchases of property and equipment....................... (273) (952) (737)
------- ------- --------
Net cash used in investing activities............. (1,019) (5,224) (36,223)
------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 8,218 31,846
Payment of preferred stock dividends...................... -- -- (627)
Principal payments on long-term debt...................... (822) (6,317) (1,552)
Repayment under bank line of credit, net.................. 1,100 (1,600) --
Deferred financing costs.................................. -- (287) (538)
Proceeds from exercise of employee stock options.......... -- -- 279
Proceeds from issuance of common stock warrants........... 6 -- --
Purchase of treasury stock................................ -- (1,300) --
Warrant exchange offering issuance costs.................. -- -- (175)
Proceeds from issuance of Series A preferred stock, net... -- 6,700 7,110
Proceeds from exercise of warrants, net................... -- -- 226
------- ------- --------
Net cash provided by financing activities......... 284 5,414 36,569
------- ------- --------
Net increase (decrease) in cash............................. 170 15 (70)
Cash at beginning of year................................... 1 171 186
------- ------- --------
Cash at end of year......................................... $ 171 $ 186 $ 116
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 70
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Principles of Consolidation and Description of Business
The accompanying consolidated financial statements include the financial
statements of Esquire Communications Ltd. and its subsidiaries, all of which are
wholly-owned (collectively, the Company). All significant intercompany accounts
and transactions have been eliminated.
The Company is a court reporting firm providing printed and computerized
transcripts, and video recordings of testimony from depositions to the legal
profession, primarily in the New York City metropolitan, Washington, D.C.,
Southern California, San Francisco, Philadelphia, Chicago, Fort Lauderdale,
Denver and San Antonio areas.
Revenue Recognition
Revenue and the related direct costs of court reporters and transcribers
are recognized when services rendered are billable, which generally occurs at
the time the final documents are transcribed and completed.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
both accelerated and straight-line methods over the estimated useful life of the
assets. Leasehold improvements are amortized over the shorter of the estimated
useful lives of the assets or lease terms. Maintenance and repairs are charged
to expense as incurred while improvements are capitalized.
Goodwill and Other Intangible Assets
The cost in excess of the fair values of net identifiable tangible and
intangible assets of acquired businesses, goodwill, is amortized using the
straight-line method over periods ranging from 25 to 40 years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
Other intangible assets consisting of customer lists, covenants not to
compete, and deferred financing costs, are amortized using the straight-line
method over the assets' respective estimated lives or terms, typically no more
than ten years.
Amortization expense for fiscal years 1995, 1996 and 1997 related to
intangible assets was $699, $824 and $1,824, respectively.
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-13
<PAGE> 71
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income (Loss) Per Common Share
In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128
supersedes Accounting Principles Board (APB) Opinion No. 15 and replaces primary
and fully diluted earnings per share (EPS) under APB Opinion No. 15 with basic
and diluted EPS. Unlike primary EPS, basic EPS excludes the dilutive effects of
options, warrants and other convertible securities. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of the
Company's net earnings per common share. Options, warrants and convertible
preferred stock with a dilutive effect of 19,869 and 5,434,432 shares were
excluded from the computations of net loss per common share for the years ended
December 31, 1996 and 1997, respectively, as their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted income
(loss) per share based on the requirements of SFAS No. 128:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
(NOTE 2) (NOTE 2)
<S> <C> <C> <C>
Numerator:
Net (loss) income............................ $ 321 $ (533) $ (2,455)
Less preferred stock dividends............... -- (75) (702)
---------- ---------- ----------
Numerator for basic and diluted income per
share -- income available to common
stockholders................................. $ 321 $ (608) $ (3,157)
========== ========== ==========
Denominator for basic income per share --
weighted-average shares...................... 4,979,775 4,959,152 5,630,285
Effect of dilutive securities -- warrants...... 71,025 -- --
---------- ---------- ----------
Denominator for dilutive income per share --
weighted-average shares...................... 5,050,800 4,959,152 5,630,285
========== ========== ==========
</TABLE>
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans in accordance with the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
the Company provides pro forma net income disclosures for employee stock option
grants made as if the Company had adopted the fair value method under SFAS No.
123 Accounting for Stock-Based Compensation.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows (undiscounted
and without interest charges) expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less selling costs.
F-14
<PAGE> 72
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, current maturities of
long-term debt, accounts payable and accrued expenses approximate their fair
value because of the short-term maturity of these instruments. The carrying
value of long-term debt approximates its fair value as such amounts bear rates
of interest which approximate the Company's current borrowing rate for
instruments with similar terms.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(2) BUSINESS COMBINATIONS
Purchase Business Combinations
1995 Acquisition
Effective January 27, 1995, the Company acquired the assets and liabilities
of Coleman, Haas, Martin & Schwab (CHMS), Inc., a California-based court
reporting company, and entered into consulting and noncompetition agreements for
the total consideration of $1,413 consisting of cash in the amount of $400,
promissory notes in the aggregate of $800 with interest at 9% payable monthly
over seven years, and 76,923 unregistered shares of the Company's common stock
valued at $213. In addition, the purchase agreement provided for an additional
$150 payment based upon the attainment of certain revenue in 1995. The principal
amount payable under one of the promissory notes is subject to adjustment based
upon revenue levels attained in 1995 and 1996. As a result, the principal
balance increased by approximately $143 in 1996. The acquisition, accounted for
under the purchase method of accounting, has resulted in the inclusion of the
results of operations of CHMS from the date of acquisition. The cost in excess
of fair value of net identifiable assets acquired was approximately $1,900.
1996 Acquisitions
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, which had an immaterial effect on the operating
results of the Company. The total purchase price inclusive of transaction costs,
consisted of $305 in cash, $315 estimated earn out and assumption of net
liabilities of $221. The cost in excess of fair value of net identifiable assets
acquired, including the estimated earn out, was approximately $841.
On October 28, 1996, the Company acquired the assets and liabilities of M&M
Reporting Referral Services, Inc. (M&M), a southern California-based court
reporting company. The purchase price, inclusive of transaction costs, consisted
of approximately $2,991 of cash, subordinated promissory notes in the aggregate
amount of $2,713 and 132,258 unregistered shares of the Company's common stock
valued at $309. The principal amount of one of the notes and the cash portion of
the purchase price were subject to revision based on the revenue derived from
M&M's business for 12 months commencing November 1, 1996, which is expected to
result in a decrease in one of the notes of $95. The Company will account for
the revision as an adjustment to goodwill. The subordinated promissory notes are
payable in equal quarterly installments over a period of five years, together
with interest at the rate of 9% per annum. The cost in excess of fair value of
net identifiable assets acquired was approximately $5,418.
F-15
<PAGE> 73
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 15, 1996, the Company acquired the assets and liabilities of
Sherry Roe & Associates, Inc. (SRA), a Washington, D.C.-based court reporting
company. The purchase price, inclusive of transaction costs, consisted of
approximately $656 of cash, subordinated promissory notes in the aggregate
amount of $530 and 71,748 unregistered shares of the Company's common stock
valued at $200. The principal amount of one of the notes and cash portion of the
purchase price are subject to revision based on the revenue derived from SRA's
business for 24 months commencing December 1, 1996. The Company will account for
any such revisions as an adjustment to goodwill when such contingencies are
resolved. The subordinated promissory notes are payable in equal quarterly
installments over a period of six years, together with interest at the rate of
8% per annum. The cost in excess of fair value of net identifiable assets
acquired was approximately $1,155.
1997 Acquisitions
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 noncompetition agreements
for an aggregate consideration of $2,560 consisting of cash in the amount of
$1,550, subordinated promissory notes and installment payments in the aggregate
amount of $735 payable in equal quarterly installments over a period of six
years, and 100,000 unregistered shares of the Company's common stock valued at
$220. The purchase price for these companies was amended on July 1, 1997, with
the issuance of additional subordinated promissory notes in the aggregate amount
of $1,500, payable in equal quarterly installments over a period of five years.
The cost in excess of fair value of net identifiable assets acquired was
approximately $3,663, and other intangible assets of approximately $375 were
recognized.
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 purchase price, inclusive of transaction costs, consisted of
approximately $6,046 paid in cash and liabilities discharged of $123. 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 revision as an adjustment to goodwill, when such contingencies are
resolved. The cost in excess of fair value of net identifiable assets acquired
was approximately $6,732.
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 purchase price, inclusive of transaction costs,
consisted of approximately $9,354 paid in cash and liabilities discharged of
$150. The purchase price was subject to an increase based upon the revenue
derived from KKA's business for the 36 months ending December 31, 1999. The
increase was payable in unregistered shares of the Company's common stock, up to
a maximum of 300,000 shares. In November 1997, the agreement with KKA was
amended to delete any increase to the purchase price, and the Company issued
300,000 unregistered shares of the Company's common stock valued at $1,560. The
Company accounted for the amendment as an adjustment to goodwill. The cost in
excess of fair value of net identifiable assets acquired was approximately
$10,719.
On June 18, 1997, the Company acquired the assets and liabilities of
American Network Services, Inc., a court reporting referral network, based in
Atlanta, Georgia. The purchase price, inclusive of transaction costs, consisted
of approximately $6,683 in cash and 750,000 unregistered shares of the Company's
common stock valued at $2,700. The cost in excess of fair value of net
identifiable assets acquired was approximately $9,750.
On August 29, 1997, the Company acquired substantially all the assets and
liabilities of Hyatt Court Reporting & Video, Inc., a Denver, Colorado-based
court reporting firm. The purchase price, inclusive of transaction costs,
consisted of $691 in cash and a promissory note in the principal amount of $100.
The promissory note is payable in equal quarterly installments over a period of
two years, without interest. The cost in excess of fair value of net
identifiable assets acquired was approximately $477, and other intangible assets
of approximately $300 were recognized.
F-16
<PAGE> 74
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 1, 1997, the Company acquired substantially all the assets and
liabilities of Kim Tindall & Associates, a San Antonio, Texas court reporting
firm. The purchase price, inclusive of transaction costs, consisted of $2,075 in
cash and 120,000 unregistered shares of the Company's common stock valued at
$660. The cost in excess of fair value of net identifiable assets acquired was
approximately $2,260.
On October 7, 1997 and effective October 15, 1997, the Company acquired
substantially all the assets and liabilities of five court reporting firms in
Fort Lauderdale, Florida, consisting of Associates/Certified Reporting, County
Reporting, Justice Reporting, Lauderdale Reporting and Merit Reporting. The
aggregate purchase price for the five companies, inclusive of transaction costs,
consisted of $3,590 in cash, 86,000 unregistered shares of the Company's common
stock valued at $554, and a $50,000 promissory note payable in 16 equal
quarterly installments, with interest at the rate of 8% per annum. The cost in
excess of fair value of net identifiable assets acquired was approximately
$4,429.
On October 9, 1997, the Company acquired substantially all the assets and
liabilities of Haynes & Harpster Court Reporters, a southern California court
reporting firm. The purchase price paid by the Company consisted of $400 in cash
and a promissory note in the principal amount of $175, payable in eight equal
quarterly installments without interest. The cost in excess of fair value of net
identifiable assets acquired was approximately $539.
On October 9, 1997, the Company acquired substantially all the assets and
liabilities of Cynthia Varelli, a Chicago, Illinois court reporting firm. The
purchase price paid, inclusive of transaction costs, consisted of $450 in cash,
$300 payable in twelve equal installments and two promissory notes in the
aggregate principal amount of $397, $297 payable on October 1, 1998, with the
balance payable in eight equal quarterly installments without interest. The cost
in excess of fair value of net identifiable assets acquired was approximately
$1,094.
In December 1997, the Company acquired substantially all the assets and
liabilities of Henry Jacobs & Associates and Affiliated Reporters (doing
business as Certified Reporting Company), two court reporting agencies based in
New York City. The aggregate purchase price, inclusive of transaction costs,
consisted of $3,735 in cash, a promissory note in the principal amount of $450
payable in 20 equal quarterly installments, together with interest at the rate
of 8% per annum, and a convertible promissory note in the principal amount of
$500 payable in three years, without interest. The cost in excess of fair value
of net identifiable assets acquired was approximately $4,642.
The following unaudited pro forma information assumes the 1997 Acquisitions
and the sale of preferred stock occurred on January 1, 1996, and the 1996
Acquisitions, the private placement of Series A convertible preferred stock, the
Company's repurchase of its common stock and the revolving loan credit agreement
and related repayment of certain existing debt, occurred on January 1, 1995.
These results are not necessarily indicative of future operations, nor of
results that would have occurred had the acquisitions and other transactions
been consummated as of the beginning of the periods presented.
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenue............................................... $27,683 $53,754 $63,756
Net (loss) income applicable to common stockholders... $ 97 $ 571 $(2,826)
Net (loss) income per common share -- basic........... $ 0.02 $ 0.12 $ (0.50)
Net (loss) income per common share -- diluted......... $ 0.02 $ 0.12 $ (0.50)
</TABLE>
1998 Acquisitions
Effective January 5, 1998, the Company acquired substantially all the
assets and liabilities of A&A Court Reporters, a court reporting agency based in
Houston, Texas. The purchase price paid by the Company consisted of $2,500 in
cash and 141,000 unregistered shares of the Company's common stock valued at
$1,199. The business combination is to be accounted for under the purchase
method, and the cost in excess of fair
F-17
<PAGE> 75
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of net identifiable assets acquired is expected to be approximately
$3,100. The Company borrowed approximately $2,500 under its revolving credit
agreement to finance the transaction.
On January 7, 1998, the Company acquired substantially all the assets and
liabilities of Brody & Geiser, a court reporting agency based in Northern New
Jersey. The purchase price paid by the Company consisted of $1,650 in cash and
227,586 unregistered shares of the Company's common stock valued at $1,650. The
business combination is to be accounted for under the purchase method, and the
cost in excess of fair value of net identifiable assets acquired is expected to
be approximately $2,600. The Company borrowed approximately $1,650 under its
revolving credit agreement to finance the transaction.
On January 16, 1998, the Company acquired substantially all the assets and
liabilities of Kerns & Gradillas, a southern California court reporting agency.
The purchase price paid by the Company consisted of $5,500 in cash, $1,300
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. The business combination is to be accounted for under the
purchase method, and the cost in excess of fair value of net identifiable assets
acquired is expected to be approximately $7,400. The Company borrowed
approximately $5,500 under its revolving credit agreement to finance the
transaction.
On February 12, 1998, the Company acquired substantially all the assets and
liabilities of Jewelinski Court Reporters, a southern California court reporting
agency. The purchase price paid by the Company consisted of $150 of cash and a
promissory note in the principal amount of $390 (subject to reduction) payable
in 24 equal monthly installments, without interest. The business combination is
to be accounted for under the purchase method, and the cost in excess of fair
value of net identifiable assets acquired is expected to be approximately $400.
The Company borrowed $150 under its revolving credit agreement to finance the
transaction.
On February 20, 1998, the Company acquired all the assets and liabilities
of Friedi, Wolff & Pastore, a Washington, D.C. court reporting agency. The
purchase price paid by the Company consisted of $600 of cash and 20,000
unregistered shares of the Company's common stock valued at $120. The business
combination is to be accounted for under the purchase method, and the cost in
excess of fair value of net identifiable assets acquired is expected to be
approximately $600. The Company borrowed $600 under its revolving credit
agreement to finance the transaction.
In March 1998, the Company acquired all the assets and liabilities of
VerbaVolant, a New York City court reporting agency, and all the assets of
McGuire's Reporting Service and Morrissy & Others, both Chicago court reporting
agencies. The aggregate purchase price paid by the Company for all three
acquisitions was $1,354 of cash, promissory notes in the aggregate principal
amount of $375, options to purchase 30,000 shares of the Company's common stock
and 18,000 unregistered shares of the Company's common stock valued at $108. The
business combination is to be accounted for under the purchase method, and the
cost in excess of fair value of net identifiable assets acquired is expected to
be approximately $1,937. The Company borrowed $1,354 under its revolving credit
agreement to finance the transactions.
Pooling of Interests Business Combination
On November 7, 1997, the Company acquired all the common stock of
Jurist-Begley Reporting Services, Inc., Jurist, Inc. and Aarons & Associates,
Inc. (collectively Jurist) in exchange for 854,427 shares of the Company's
common stock. Jurist is a Philadelphia, Pennsylvania-based court reporting
company.
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests, and accordingly, the accompanying consolidated
financial statements have been restated to include the results of Jurist for all
periods presented. The fiscal year-end of Jurist was conformed to the Company's.
F-18
<PAGE> 76
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue and (loss) income from continuing operations of the combining
companies for the periods preceding the acquisition are as follows (excluding
extraordinary item in 1996):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED YEAR ENDED 1997 THROUGH
DECEMBER 31, DECEMBER 31, NOVEMBER 6,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Esquire..................................... $20,692 $24,583 $37,010
Jurist...................................... 6,089 4,918 3,952
------- ------- -------
$26,781 $29,501 $40,962
======= ======= =======
Net (loss) income before extraordinary item:
Esquire..................................... $ 279 $ (309) $(1,475)
Jurist...................................... 42 (67) (511)
------- ------- -------
$ 321 $ (376) $(1,986)
======= ======= =======
</TABLE>
The combined financial results presented above, include adjustments made to
conform to the accounting policies of the two companies. In connection with the
merger, the Company recorded charges of $922 in the quarter ended December 31,
1997. These charges include legal, accounting and other fees.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997 DEPRECIABLE LIVES
------- ------- -----------------
<S> <C> <C> <C>
Office condominium............................... $ 203 $ 203 31 years
Equipment........................................ 2,712 4,495 5 to 7 years
Leasehold improvements........................... 861 1,002 5 to 10 years
------- -------
3,776 5,700
Less accumulated depreciation and amortization... (1,735) (2,644)
------- -------
$ 2,041 $ 3,056
======= =======
</TABLE>
Depreciation and amortization expense amounted to $327, $432 and $698 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-19
<PAGE> 77
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revolving loan agreement(A)................................. $ 8,218 $40,065
Promissory notes(B)......................................... 5,181 8,772
Contract obligation(C)...................................... 496 341
Other notes and obligations(D).............................. 390 125
Convertible note(E)......................................... -- 500
Loans payable(F)............................................ 730 --
Other loans payable(G)...................................... 124 --
------- -------
15,139 49,803
Less current portions....................................... (2,149) (4,361)
------- -------
$12,990 $45,442
======= =======
</TABLE>
- ---------------
(A) In December 1996, the Company entered into a three-year revolving loan
agreement with a financial institution which, as amended (Loan Agreement),
provides for borrowings up to $65,000 based on operating cash flows as
defined therein. Borrowings under the Loan Agreement bear interest at either
the prime rate or London Interbank Offered Rate (LIBOR), at the Company's
election, plus an applicable margin rate. The applicable margin varies on
the basis of operating cash flows and overall leverage ratio as defined in
the Loan Agreement. The effective rate at December 31, 1997 was 9.3%. 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
the maintenance of certain financial ratios and covenants. In addition,
substantially all other lenders to the Company have entered into a
subordination agreement with this financial institution.
(B) Promissory notes with former stockholders of acquired businesses are
generally payable in quarterly installments plus interest at rates ranging
from 8% to 10% through November 2002.
(C) Contract obligation -- an agreement with a former employee of an acquired
company, who is related to an officer/director of the Company, provides for
monthly payments of $9 through June 2002. The obligation is carried net of
imputed interest, at 8%, of $47 and $10 at December 31, 1996 and 1997,
respectively.
(D) Other notes and obligations -- outstanding amounts relate to various
equipment capital leases and are payable in aggregate monthly installments
with interest at 9% to 19% maturing through 1999.
(E) Convertible non-interest bearing promissory note with former stockholders of
acquired business, due in the year 2000. Note is convertible at any time and
at the option of the Company into shares of the Company's common stock at
the conversion price of $8.00 per share.
(F) Loans payable on demand to financial institution. Interest is payable
monthly at 1% above the prime rate. Loans were repaid during 1997.
(G) Loans payable to officers were repaid during 1997.
F-20
<PAGE> 78
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled annual principal payments of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................................. $ 4,361
1999............................................. 41,005
2000............................................. 2,267
2001............................................. 1,563
2002............................................. 606
Thereafter....................................... 1
-------
$49,803
=======
</TABLE>
Effective December 26, 1997, the Company entered into a guaranty agreement
(Guaranty) with a preferred stockholder, whereby the stockholder would guaranty
up to $1,000 of advances in excess of the Company's operating cash flows for a
period of 30 days, which was subsequently amended to expire on February 10,
1998. As of February 10, 1998, the Guaranty expired, and the Company was in
compliance with all financial ratios and covenants.
(5) STOCKHOLDERS' EQUITY
In May 1993, the Company completed an initial public offering of its
securities, comprised of 1,250,000 shares of common stock at a price of $4.00
per share and 1,250,000 warrants to purchase common stock at $0.10 per warrant.
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. If the warrants are called for redemption, they must
be exercised prior to such redemption or the right to purchase the applicable
shares of common stock is forfeited. As part of the initial public offering, the
underwriters exercised an overallotment and acquired an additional 187,500 of
warrants at $.09 per warrant, net of discount. In addition, they received a
purchase option (subject to certain antidilutive provisions) to acquire, until
May 18, 1998, 264,751 shares and warrants at a price of $2.64 and $.06,
respectively. The warrants are exercisable at an exercise price of $4.50 per
share.
In connection with the private placement of Debentures in 1994, the Company
issued warrants to the holders to acquire an aggregate of 625,000 shares of
common stock. The exercise price of the warrants is $2.90, subject to revision
under specified circumstances. The warrants expire in the year 2002.
In connection with the acquisition of Sarnoff Deposition Service, Inc.
(SDS) in June 1994, the Company issued 750,000 shares of common stock at a
recorded share price of $3.00. The Company granted warrants to acquire shares of
its common stock, at $4.50 per share, to its investment bankers in connection
with the SDS acquisition in addition to cash compensation. The warrants are
exercisable at any time prior to June 1999.
In connection with the acquisition of CHMS in January 1995, the Company
issued 76,923 shares of common stock at a recorded share price of $2.76.
On October 23, 1996, the Company completed a private placement of 7,500
shares of Series A convertible preferred stock (the Preferred Stock) or an
aggregate purchase price of $7,500, and entered into an agreement (the
Agreement) with the Preferred Stockholders. Under the Agreement, 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 antidilution 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
F-21
<PAGE> 79
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In connection with the 1996 Acquisitions, the Company issued 204,006 shares
of common stock valued at approximately $509.
In November 1996, the Company purchased 433,500 shares of its outstanding
common stock at $3.00 per share.
In connection with the 1997 Acquisitions, the Company issued 1,356,000
shares of common stock valued at $7,300.
On April 15, 1997, as provided for in the Management Agreement dated
February 13, 1997 between Esquire Communications Ltd., Harlingwood & Company,
LLC (Harlingwood) and David A. White, Harlingwood acquired 250,000 shares of
common stock at a price of $3.125 per share. Payment by Harlingwood was with a
promissory note, due on April 15, 2001, in the amount of $781. The note accrues
interest at the rate of 7% per annum, and the interest is payable on April 15,
2001. The amount due under the note is secured by a pledge of 250,000 shares of
common stock issued. The 250,000 common stock shares were issued out of the
Company's treasury stock.
On June 12, 1997, the Company completed an offer to exchange common stock
for any and all outstanding redeemable common stock purchase warrants
(Exchange). The Company offered to exchange one share of the Company's common
stock for each five warrants tendered. As a result of the Exchange, 184,896
shares of common stock were issued in exchange for 924,480 warrants which were
tendered.
On June 17 and 18, 1997, the Company's Preferred Stockholders exercised
their right to acquire an additional 7,500 shares of preferred stock at a price
of $1,000 per share. Under the Agreement, as amended, the Preferred Stockholders
have the right to acquire, prior to December 17, 1998, up to an additional 7,500
shares of Preferred Stock at a price of $1,000 per share.
On September 12, 1997, the Company sent a Notice of Redemption to the
registered holders of its Redeemable Common Stock Purchase Warrants that the
Company had exercised its rights, pursuant to the Warrant Agreement dated May
25, 1993, to redeem, on November 12, 1997 (the Redemption Date), all of the
warrants issued under the Warrant Agreement that were then outstanding. The
Redemption Date was subsequently extended until February 27, 1998. As of
December 31, 1997, 52,454 warrants were exercised at the exercise price of $4.50
per share.
On December 10, 1997, 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 100,627
shares of common stock upon the exercise of 187,500 stock warrants.
On June 16, 1997, in connection with the Preferred Stockholder acquiring an
additional 7,500 shares of preferred stock, the Company granted the Placement
Agent warrants to acquire 187,500 shares of common stock of the Company at an
exercise price of $3.00 per share. The warrants are exercisable at any time
prior to October 2001.
During 1997, stock options granted under the Company's stock option plan
(the Plan) were exercised at exercise prices ranging from $2.88 to $4.00 per
share, resulting in the issuance of 70,665 shares of common stock.
F-22
<PAGE> 80
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 15, 1997, Harlingwood exercised 100,000 stock options granted
under the Company's stock option plan at the exercise price of $3.75 per share,
resulting in the issuance of 100,000 shares of common stock. Payment by
Harlingwood was with a promissory note due on December 15, 2001 in the amount of
$375,000. The note accrues interest at the rate of 7% per annum, and the
interest is payable on December 15, 2001. The amount due under the note is
secured by a pledge of 100,000 shares of common stock.
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 common stock of
the Company at an exercise price of $3.00 per share. The warrants are
exercisable at any time prior to January 2003.
(6) STOCK OPTIONS AND WARRANTS
Stock Option Plan
In 1993, the Company adopted a stock option plan (the Plan) pursuant to
which the Company's Board of Directors may grant stock options to officers,
employees, directors, consultants and independent contractors of the Company.
The Plan authorizes grants of options to purchase up to 2,000,000 shares of
authorized but unissued common stock. Stock options are granted with an exercise
price equal to the stock's fair market value at the date of grant. Stock options
have ten-year terms and generally vest and become fully exercisable over a
three-year period, commencing one year from date of grant.
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $1.35, $1.03 and $1.19 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 1995 -- expected volatility of 20%, expected dividend yield of 0%,
risk-free interest rate of 6%, and an expected life of five years;
1996 -- expected volatility of 25%, expected dividend yield of 0%, risk-free
interest rate of 6%, and an expected life of five years; 1997 -- expected
volatility of 30%, expected dividend yield of 0%, risk-free interest rate of 6%,
and an expected life of five years.
F-23
<PAGE> 81
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income (loss) would have been adjusted to the pro
forma amounts indicated below (excluding extraordinary item in 1996):
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ -------
<S> <C> <C> <C>
Net (loss) income before extraordinary item applicable to
common stockholders:
As reported......................................... $ 321 $ (451) $(3,157)
Pro forma........................................... $ 307 $ (497) $(3,511)
Basic net (loss) income before extraordinary item per
common share:
As reported......................................... $0.06 $(0.09) $ (0.56)
Pro forma........................................... $0.06 $(0.10) $ (0.62)
Diluted net (loss) income before extraordinary item per
common share:
As reported......................................... $0.06 $(0.09) $ (0.56)
Pro forma........................................... $0.06 $(0.10) $ (0.62)
</TABLE>
Pro forma net (loss) income reflects only options granted in 1995, 1996 and
1997. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net (loss) income
amounts presented above because compensation cost is reflected over the options'
vesting period of three years, and compensation cost for options granted prior
to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1994................................ 514,817 $4.00
Granted................................................... 105,000 4.00
Exercised................................................. -- --
Forfeited................................................. (41,217) 4.00
Expired................................................... -- --
--------- -----
Balance at December 31, 1995................................ 578,600 4.00
Granted................................................... 170,000 2.99
Exercised................................................. -- --
Forfeited................................................. (20,100) 4.00
Expired................................................... -- --
--------- -----
Balance at December 31, 1996................................ 728,500 3.76
Granted................................................... 698,000 4.98
Exercised................................................. (170,665) 3.84
Forfeited................................................. (15,367) 4.00
Expired................................................... -- --
--------- -----
Balance at December 31, 1997................................ 1,240,468 $4.42
========= =====
</TABLE>
F-24
<PAGE> 82
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE EXERCISE
WEIGHTED-AVERAGE NUMBER OF OPTIONS PRICE OF OPTIONS
REMAINING CURRENTLY CURRENTLY
EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISABLE
- -------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
$2.87-$4.00 7.99 503,967 $3.88
$4.50-$6.25 9.68 -- --
$9.00 9.83 -- --
</TABLE>
At December 31, 1996, the number of options exercisable was 395,569, and
the weighted-average exercise price of those options was $4.00.
Options Granted Outside the Plan
During the year ended December 31, 1997, the Company granted 350,000 stock
options outside the Plan at a price range of $4.00 to $4.50 to non-employees.
The Company recognized $329 of commission expense to non-employees relating to
these options during the year ended December 31, 1997, and capitalized as
goodwill $303 of commission expense for options granted in connection with a
business acquisition accounted for as a purchase, using the Black-Scholes
option-pricing model. The Company determined that the per share weighted-average
fair value of stock options granted outside the Plan during the year ended
December 31, 1997 was $4.41 on the date of grant. The following weighted-average
assumptions were included in this method for 1997: no expected dividend yield;
volatility rate of 30.0%; risk-free interest rate of 6.0%; and an expected life
of five years. At December 31, 1997, all of the 350,000 options were
exercisable.
Warrants
At December 31, 1996 and 1997, the Company had outstanding 2,879,502 and
1,902,567 warrants, respectively, at exercise prices ranging from $2.64 to $4.50
per warrant. At December 31, 1996 and 1997, the weighted-average exercise price
of those warrants was $3.88 and $3.57, respectively, and the weighted-average
remaining contractual life of those warrants was 2.49 and 2.86 years,
respectively.
(7) PROFIT SHARING PLAN
In September 1995, the Company adopted a 401(k) savings plan covering all
eligible employees. The plan allows employees to voluntarily contribute up to
l5% of compensation. The Company may make discretionary matching contributions
prior to the end of each plan year. The current matching percentage is 10%. The
Company may also make discretionary additional contributions to the plan. The
Company's total contributions to the plan for 1995, 1996 and 1997 amounted to
$8, $12 and $15, respectively.
F-25
<PAGE> 83
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 1995,
1996 and 1997, excluding the income tax benefit of $104 attributed to the
extraordinary loss in 1996, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
(NOTE 2) (NOTE 2)
<S> <C> <C> <C>
Current tax expense:
Federal.............................................. $363 $ 284 $ --
State and city....................................... 188 100 (15)
---- ----- ----
Total current................................ 551 384 (15)
---- ----- ----
Deferred tax (benefit) expense:
Federal.............................................. 16 (135) 101
State and city....................................... 7 (33) 39
---- ----- ----
Total deferred............................... 23 (168) 140
---- ----- ----
Total income tax provision................... $574 $ 216 $125
==== ===== ====
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to income before income taxes for
the years ended December 31, 1995, 1996 and 1997 due to nondeductible expenses,
primarily goodwill amortization amounting to approximately $227, $230 and $434,
respectively.
Significant components of the Company's net deferred tax assets and
liabilities as of December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ------
<S> <C> <C>
Deferred tax assets:
Contract obligation....................................... $199 $ 169
Allowances and accrued expenses........................... 317 266
Net operating loss (NOL) carryforwards.................... -- 689
Tax credits............................................... 21 17
---- ------
Total gross deferred tax assets................... 537 1,141
Less valuation allowance.................................... -- (489)
---- ------
Net deferred tax assets........................... 537 652
---- ------
Deferred tax liabilities:
Depreciation and amortization............................. 282 652
Cash versus accrual accounting differences, net........... 115 --
---- ------
Total gross deferred tax liabilities.............. 397 652
---- ------
Net deferred tax asset............................ $140 $ --
==== ======
</TABLE>
The Company has approximately $1,700 in net operating loss carryforwards
which expire in 2013.
The Company has state minimum tax credit carryforwards of approximately
$17, which may be carried forward to reduce future year tax liabilities through
the year 2004.
The realization of deferred tax assets associated with the NOL and tax
credit carryforwards is dependent upon the generation of sufficient taxable
income prior to their expiration. Management believes that there is a risk that
certain of these NOL and tax credit carryforwards may expire unused and
accordingly, has
F-26
<PAGE> 84
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
established a valuation allowance against them. The increase in the valuation
allowance during 1997 was due to a reassessment of the Company's ability to
realize its net deferred tax asset in the future.
(9) COMMITMENTS
Employment Agreements
The chairman of the board entered into an employment agreement with a
five-year term through May 1998, which is renewable on a year to year basis
thereafter. The agreement provides for a base salary of $180 plus cost of living
increases, and an annual bonus based on a percentage of the pretax earnings of
the Company in excess of specified levels. No bonus was earned under the
agreement in each of the years ended December 31, 1995, 1996 and 1997.
In connection with the acquisition of David Feldman & Associates (USA) Ltd.
(DFA) in September 1993 and Sarnoff Deposition Service, Inc. in 1994, the
Company entered into employment and noncompetition agreements with the former
stockholders of each of the companies, which expire in September 1997 and June
1998, respectively. The agreements provide for an annual base salary of $180
plus cost of living increases for each individual. The DFA agreement also
provides for an annual bonus based on percentages of consolidated revenue in
excess of specified levels. Total bonus amounts earned under the DFA employment
agreement amounted to $359 for the year ended December 31, 1996.
Effective May 1, 1997, the Company reached an agreement with the former
stockholder of DFA, whereby the Company bought out the remaining term of the
employment agreement. Total compensation earned under the employment agreement
prior to termination amounted to $230. The Company recognized a $1,000 expense
related to the future costs associated with the termination agreement.
On February 13, 1997, the Company entered into a management agreement with
Harlingwood, whereby Harlingwood would provide the services of a Chief Executive
Officer. The agreement expires on February 13, 1998, and provides for an annual
management fee of $175. The agreement also provides for a bonus up to 50% of the
management fee based upon the achievement of financial and operational
objectives. Any bonus earned for 1997 was waived by Harlingwood. During 1997,
the Company paid $45 to Harlingwood for services rendered in connection with a
business acquisition.
LEASE COMMITMENTS
The Company is obligated under operating leases for office facilities which
expire through December 2005. The leases provide, among other things, that the
Company is responsible for its share of increases in certain utilities,
maintenance and property taxes over a base amount. In addition, the Company is
also obligated under various equipment and vehicle leases which expire through
September 1999. Total lease expense for 1995, 1996 and 1997 under the above
leases amounted to approximately $375, $720 and $1,641, respectively.
During 1996, the Company relocated its headquarters and recognized a $262
expense related to the net present value of future rental payments, net of
sublease income, pertaining to the vacated premises.
F-27
<PAGE> 85
ESQUIRE COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The anticipated future annual lease payments under operating leases at
December 31, 1997, inclusive of the base utility, maintenance and property tax
charges for the office facilities, are as follows:
<TABLE>
<S> <C>
1998............................................. $ 2,402
1999............................................. 2,181
2000............................................. 1,581
2001............................................. 1,319
2002............................................. 1,238
Thereafter....................................... 1,301
-------
$10,022
=======
</TABLE>
Future annual rental income under remaining noncancelable subleases is as
follows: 1998 -- $79, 1999 -- $79 and 2000 -- $13.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for the years ended December 31, 1995, 1996 and 1997 have
included:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Interest......................................... $1,097 $1,197 $2,687
Income taxes..................................... 283 1,011 78
</TABLE>
During 1997, $627 in preferred stock dividends were paid. At December 31,
1996 and 1997, accrued and unpaid preferred stock dividends were $75 and $150,
respectively.
During 1997, 350,000 shares of the Company's common stock were issued for
notes receivable of which 250,000 shares were issued from the Company's treasury
stock.
During 1996 and 1997, the Company issued 204,006 and 1,356,000 shares of
common stock, respectively, in connection with the acquisitions.
During 1997, the Company issued 100,627 shares of common stock in
connection with a cashless exercise of warrants.
During 1997, the Company issued 184,896 shares of common stock in
connection with a warrant exchange offering.
Supplemental noncash investing and financing activities:
<TABLE>
<CAPTION>
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
Acquisitions:
Fair value of assets acquired......................... $ 992 $ 1,525 $ 7,144
Liabilities assumed................................... (379) (988) (6,674)
Cash paid for acquisitions............................ 642 3,958 34,866
Stock issued.......................................... (213) (509) (5,694)
Notes issued.......................................... (943) (3,243) (4,707)
</TABLE>
F-28
<PAGE> 86
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997(1) 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS (PLEDGED)
Current assets:
Cash........................................................ $ 116 $ 431
Accounts receivable, less allowance for doubtful accounts... 14,621 18,397
Prepaid expenses and other current assets................... 639 693
------- --------
Total current assets................................... 15,376 19,521
Property and equipment, net................................. 3,056 3,531
Other assets:
Costs in excess of fair value of net identifiable assets of
acquired businesses, net.................................. 62,763 79,019
Other assets, net........................................... 1,656 1,192
------- --------
Total other assets..................................... 64,419 80,211
------- --------
$82,851 $103,263
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $ 3,616 $ 3,862
Accrued expenses and other current liabilities.............. 5,727 6,041
Current portion of long-term debt........................... 4,361 3,226
------- --------
Total current liabilities.............................. 13,704 13,129
Long-term debt.............................................. 45,442 56,900
Other liabilities........................................... 165 213
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized
in series:
Series A convertible preferred stock, authorized 15,000
and 22,500 shares, 15,000 and 19,500 shares issued and
outstanding, aggregate liquidation preference $15,000
and $19,500 in 1997 and 1998, respectively............. -- --
Series B convertible preferred stock, authorized 0 and
5,000 shares, 0 and 0 shares issued and outstanding in
1997 and 1998, respectively............................ -- --
Common stock, $.01 par value, 25,000,000 and 100,000,000
shares authorized, 7,049,898 and 8,201,431 shares issued,
respectively, 6,866,398 and 8,017,931 shares outstanding
in 1997 and 1998, respectively............................ 63 74
Additional paid-in capital.................................. 29,063 38,150
Treasury stock, at cost -- 183,500 shares in 1997 and 1998,
respectively.............................................. (550) (550)
Notes receivable............................................ (1,156) (1,156)
Accumulated deficit......................................... (3,880) (3,497)
------- --------
Total stockholders' equity........................ 23,540 33,021
------- --------
$82,851 $103,263
======= ========
</TABLE>
- ---------------
(1) The balance sheet at December 31, 1997 is derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
F-29
<PAGE> 87
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
1997 1998
----------- ------------
<S> <C> <C>
Revenue..................................................... $ 9,944 $ 20,685
Costs and expenses:
Operating expenses........................................ 5,836 11,399
General and administrative expenses....................... 3,486 6,401
Depreciation and amortization............................. 429 994
---------- -----------
Total costs and expenses.................................... 9,751 18,794
Income from operations...................................... 193 1,891
Other expense (income):
Interest expense.......................................... 370 1,265
Interest (income)......................................... -- (24)
Other (income)............................................ -- --
---------- -----------
370 1,241
---------- -----------
Income (loss) before provision for income taxes............. (177) 650
Provision for income taxes (benefit)........................ (9) --
---------- -----------
Net income (loss)........................................... (168) 650
Dividends on preferred stock................................ (113) (267)
---------- -----------
Net income (loss) applicable to common stockholders......... $ (281) $ 383
========== ===========
Net income (loss) per common share:
Basic:
Net income (loss)...................................... $ (0.06) $ 0.05
========== ===========
Weighted average common shares outstanding............. 4,851,756 7,568,151
Diluted:
Net income (loss)...................................... $ (0.06) $ 0.04
========== ===========
Weighted average common shares outstanding............. 4,851,756 16,181,092
</TABLE>
See notes to condensed consolidated financial statements.
F-30
<PAGE> 88
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
------------------------
MARCH 31, MARCH 31,
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss)......................................... $ (168) $ 650
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 429 994
Deferred income tax expense (benefit).................. 23 --
(Increase) decrease in assets:
Accounts receivable.................................. (1,020) (1,121)
Prepaid expenses and other current assets............ (265) (8)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses................ 146 (898)
Other long-term liabilities.......................... (70) 48
------- ---------
Net cash used in operating activities....................... (925) (335)
------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (219) (203)
Increase in other assets.................................. (160) (144)
Acquisition of businesses................................. (1,472) (13,758)
------- ---------
Net cash used in investing activities....................... (1,851) (14,105)
------- ---------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 3,024 14,741
Principal payments on long-term debt...................... (393) (6,487)
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................... 2,631 14,755
------- ---------
Net increase (decrease) in cash............................. (145) 315
Cash at beginning of period................................. 186 116
------- ---------
Cash at end of period....................................... $ 41 $ 431
======= =========
Supplemental information:
Interest paid during the period........................... $ 358 $ 1,244
======= =========
Income taxes paid during the period....................... $ 16 $ --
======= =========
Preferred stock dividends accrued and unpaid.............. $ 113 $ 417
======= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-31
<PAGE> 89
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 in accordance 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 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,
-----------------------------
1997 1998
----------- ------------
<S> <C> <C>
Numerator:
Net income (loss)...................................... $ (168) $ 650
Less preferred stock dividends......................... (113) (267)
---------- -----------
Numerator for basic and diluted income per share --
available to common stockholders....................... $ (281) $ 383
========== ===========
Denominator:
Denominator for basic income per share --
weighted average shares............................. 4,851,756 7,568,151
Effective of dilutive securities --
options, warrants and convertible preferred stock... -- 8,612,941
---------- -----------
Denominator for diluted income per share --
weighted average shares................................ 4,851,756 16,181,092
========== ===========
</TABLE>
F-32
<PAGE> 90
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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.
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 and 141,000 unregistered shares of the Company's common stock valued
at $1,199. 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.
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 paid in cash
and 227,586 unregistered shares of the Company's common stock valued at $1,650.
The excess of the cost of the Company's investment over the fair values of the
assets acquired and liabilities assumed approximated $2,842.
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
in cash, a $1,300 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. The
excess of the cost of the Company's investment over the fair values of the
assets acquired and liabilities assumed approximated $7,790.
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
in cash, a $390 promissory note payable in 24 equal monthly installments without
interest and 75,000 unregistered shares of the Company's common stock valued at
$450 (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.
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
in cash and 20,000 shares of the Company's common stock valued at $120. The
excess of the cost of the Company's investment over the fair values of the
tangible assets acquired and liabilities assumed approximated $639.
F-33
<PAGE> 91
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
in cash, promissory notes in the aggregate principal amount of $375, 18,000
shares of the Company's common stock valued at $108 and options to purchase
30,000 shares of the Company's common stock valued at $71. 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.
The cash portion of all of the above acquisitions, which approximated
$11,754, 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 $3.00 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, 1997 and 1998, accrued and unpaid preferred stock dividends
were $113 and $417, respectively.
F-34
<PAGE> 92
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Supplemental noncash investing and financing activities for the quarter
ended March 31, 1998:
<TABLE>
<S> <C>
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
</TABLE>
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, Atlantic Court Reporting, a Ft.
Lauderdale, Florida based court reporting agency with a purchase price of
approximately $700, Bright & Associates, an Austin, Texas based court reporting
agency with a purchase price of approximately $1,200 and Riggleman, Turk &
Nelson, a Baltimore, Maryland based court reporting agency with a purchase price
of approximately $850.
F-35
<PAGE> 93
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
A&A Court Reporters, Inc.
and Affiliate
We have audited the accompanying combined balance sheet of A&A Court
Reporters, Inc. and Affiliate as of December 31, 1997, and the related combined
statements of income, stockholder's equity and cash flows for the year then
ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of A&A Court Reporters,
Inc. and Affiliate, as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
July 2, 1998
F-36
<PAGE> 94
A&A COURT REPORTERS, INC. AND AFFILIATE
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 178,238
Marketable securities..................................... 505,190
Accounts receivable, net of allowance for doubtful
accounts of $55,500.................................... 504,155
Prepaid expenses.......................................... 20,865
----------
Total current assets.............................. 1,208,448
Property and equipment, net................................. 76,424
Other assets................................................ 48,405
----------
$1,333,277
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 80,442
Accrued expenses.......................................... 71,536
Deferred tax liability.................................... 14,781
----------
Total current liabilities......................... 166,759
Stockholder's equity........................................ 1,166,518
Commitments and contingencies............................... --
----------
$1,333,277
==========
</TABLE>
See accompanying notes.
F-37
<PAGE> 95
A&A COURT REPORTERS, INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues.................................................... $2,542,471
Costs and expenses:
Operating expenses........................................ 1,397,012
General and administrative expenses....................... 935,473
Depreciation expense...................................... 26,358
----------
2,358,843
----------
Income from operations...................................... 183,628
Other income (expense):
Interest income........................................... 29,949
Interest expense.......................................... (4,373)
Other..................................................... (1,209)
----------
24,367
----------
Income before provision for income taxes.................... 207,995
Provision for income taxes.................................. 13,151
----------
Net income.................................................. $ 194,844
==========
</TABLE>
See accompanying notes.
F-38
<PAGE> 96
A&A COURT REPORTERS, INC. AND AFFILIATE
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACCUMULATED
UNREALIZED
ADDITIONAL GAIN ON
COMMON PAID IN TREASURY RETAINED MARKETABLE
STOCK CAPITAL STOCK EARNINGS SECURITIES TOTAL
------ ---------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... $5,000 $11,071 $(20,000) $ 895,980 $16,198 $ 908,249
Net income...................... -- -- -- 194,844 -- 194,844
Change in accumulated unrealized
gains and losses, net of
income taxes.................. -- -- -- -- 63,425 63,425
------ ------- -------- ---------- ------- ----------
$5,000 $11,071 $(20,000) $1,090,824 $79,623 $1,166,518
====== ======= ======== ========== ======= ==========
</TABLE>
See accompanying notes.
F-39
<PAGE> 97
A&A COURT REPORTERS, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 194,844
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 26,358
Gain on sale of marketable securities.................. 1,005
Deferred income taxes.................................. 2,944
Increase in assets:
Accounts receivable.................................. (103,278)
Prepaid expenses..................................... (4,645)
Decrease in liabilities:
Accounts payable and accrued expenses................ (18,172)
---------
Net cash provided by operating activities.............. 99,056
---------
Cash flows from investing activities:
Purchase of marketable securities......................... (224,625)
Proceeds from sale of marketable securities............... 89,088
Purchase of property and equipment........................ (44,328)
---------
Net cash used in investing activities.................. (179,865)
---------
Net decrease in cash and cash equivalents................... (80,809)
Cash and cash equivalents -- beginning of year.............. 259,047
---------
Cash and cash equivalents -- end of year.................... $ 178,238
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 4,373
=========
Cash paid for income taxes................................ $ 3,273
=========
</TABLE>
See accompanying notes.
F-40
<PAGE> 98
A&A COURT REPORTERS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination and Description of Business -- The accompanying
combined financial statements include the financial statements of A&A Court
Reporters, Inc. and their affiliate, 8010 Woodway, Inc., d/b/a A&A Video
Specialties (collectively, the "Company"). All significant intercompany accounts
and transactions have been eliminated.
The Company is a court reporting firm providing printed and computerized
transcripts, and video recordings of testimony from depositions to the legal
profession, primarily in the Houston, Texas area.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Revenue Recognition -- Revenues and the related direct costs of court
reporters and transcribers are recognized when services rendered are billable,
which generally occurs at the time the final documents are transcribed and
completed.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is computed using both accelerated and straight-line methods over
the estimated useful life of the assets. Maintenance and repairs are charged to
expenses as incurred, while improvements are capitalized.
Income Taxes -- A&A Court Reporters, Inc. has elected to be taxed as an S
corporation for tax years beginning after 1986. The federal tax regulations
provide that, in lieu of corporate income tax, the stockholders are taxed on
their proportionate share of the A&A Court Reporters, Inc.'s taxable income.
Accordingly, no federal taxes have been provided for in the current year.
8010 Woodway, Inc., d/b/a A&A Video Specialties accounts for income taxes
in accordance with Statement of Financial Standard No. 109. This statement
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities.
Cash Equivalents -- The Company considers money market accounts and all
other highly liquid investments with a maturity of three months or less from the
date of purchase to be cash equivalents.
Other assets -- Other assets consist of artwork which is carried at its
original cost which is less than its fair market value at December 31, 1997.
Advertising costs -- Advertising costs are expensed as incurred.
Advertising expense for the year ended December 31, 1997 was $56,360.
Concentrations of Credit Risk -- The Company grants credit to substantially
all customers. The Company maintains adequate reserves for potential credit
losses, and such losses have been minimal and within management's estimates.
NOTE 2. -- MARKETABLE SECURITIES
Marketable securities consist of marketable equity and debt securities.
Management determines the proper classifications of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and reevaluates such designations as of each balance sheet date. Securities
designated as available-for-sale are stated at fair value, with unrealized gains
and losses reported in a separate component of shareholders' equity, net of
deferred taxes. Securities designated as held-to-maturity are stated at
amortized cost. Realized gains and losses on sales of investments, as determined
on an average cost method, are included
F-41
<PAGE> 99
A&A COURT REPORTERS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
in the combined statement of income. Marketable securities are available for
current operations and, as such, are classified as current assets.
Marketable equity securities have been classified as available-for-sale. As
of December 31, 1997, these securities have an aggregate fair market value of
$394,091 and a cost of $308,347. This difference represents gross unrealized
holding gains amounting to $94,155, offset by gross unrealized holding losses of
$8,411.
At December 31, 1997, the difference between cost and market value of
$85,744 (net of deferred taxes of $6,121, applicable to A&A Video Specialties)
was credited to a separate component of shareholder's equity called "Accumulated
unrealized gain on marketable securities."
Marketable debt securities have been classified as held-to-maturity. As of
December 31, 1997, these securities have an aggregate fair market value of
$112,907. The amortized cost amounted to $111,099.
The contractual maturities of debt securities held-to-maturity are as
follows:
<TABLE>
<CAPTION>
MARKET
COST VALUE
-------- --------
<S> <C> <C>
One year or less....................................... $ 96,709 $ 98,262
Between 1 and 5 years.................................. 14,390 14,645
-------- --------
$111,099 $112,907
======== ========
</TABLE>
NOTE 3. -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $167,263
Computer equipment and software............................. 234,729
Automobiles................................................. 88,937
Video equipment............................................. 94,563
--------
585,492
Less accumulated depreciation............................... 509,068
--------
--
--------
$ 76,424
========
</TABLE>
NOTE 4. -- COMMON STOCK
Stockholder's equity consists of the following:
<TABLE>
<CAPTION>
A&A COURT 8010 WOODWAY, INC.
Reporters, D/B/A A&A VIDEO
INC. SPECIALTIES TOTAL
---------- ------------------ ----------
<S> <C> <C> <C>
Common stock, $1 par value, 100,000 shares
authorized, 4,000 shares issued and 3,000 shares
outstanding...................................... $ 4,000 $ -- $ 4,000
Common stock, $1 par value, 1,000 shares
authorized, issued and outstanding............... -- 1,000 1,000
Additional paid in capital......................... -- 11,071 11,071
Treasury stock at cost, 1,000 shares............... (20,000) -- (20,000)
Retained earnings.................................. 791,748 299,076 1,090,824
Accumulated unrealized gain on marketable
securities....................................... 52,332 27,291 79,623
-------- -------- ----------
$828,080 $338,438 $1,166,518
======== ======== ==========
</TABLE>
F-42
<PAGE> 100
A&A COURT REPORTERS, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 6,121
State..................................................... 4,086
-------
Total current..................................... 10,207
-------
Deferred:
Federal................................................... 2,082
State..................................................... 862
-------
Total deferred.................................... 2,944
-------
Total........................................ $13,151
=======
</TABLE>
A&A Video Specialties has elected to be treated as a cash basis taxpayer.
Therefore, the future deductible and taxable temporary differences arise
primarily from the difference between the cash and accrual basis of accounting.
At December 31, 1997, the Company has a deferred tax liability of $14,781, net
of deferred tax assets of $1,130.
NOTE 6. -- COMMITMENTS
Lease Commitments -- The Company is obligated under an operating lease for
office facilities which expires July 2001. The lease provides, among other
things, that the Company is responsible for its share of utilities, maintenance
and property taxes over a base amount.
Total rent expense for 1997 amounted to $73,350. In addition, the Company
is also obligated under various equipment and vehicle leases which expire
through September 1999.
The anticipated future annual lease payments under operating leases
subsequent to December 31, 1997, inclusive of the base utility, maintenance and
property tax charges for the office facilities, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 57,116
1999........................................................ 55,454
2000........................................................ 48,644
2001........................................................ 28,686
--------
$189,900
========
</TABLE>
NOTE 7. -- SUBSEQUENT EVENT
On January 9, 1998, the assets and liabilities of the Company were acquired
by Esquire Communications Ltd. The gross purchase price of $3.699 million
consisted of cash in the amount of $2,500,000 and 141,000 restricted and
unregistered shares of Esquire's common stock valued at a discounted value of
$606,000.
F-43
<PAGE> 101
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Kerns & Gradillas, Inc.
We have audited the accompanying balance sheet of Kerns & Gradillas, Inc.
as of December 31, 1997, and the related statements of operations and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kerns & Gradillas, Inc., as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
July 2, 1998
F-44
<PAGE> 102
KERNS & GRADILLAS, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 8,739
Accounts receivable, less allowance for doubtful accounts
of $35,000............................................. 1,390,024
Prepaid expenses.......................................... 9,853
----------
Total current assets.............................. 1,408,616
Property and equipment, net................................. 169,039
Advances receivable......................................... 309,093
Deposits.................................................... 18,514
----------
$1,905,262
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand notes payable...................................... $ 550,662
Accounts payable.......................................... 545,832
Accrued expenses.......................................... 23,284
----------
Total current liabilities......................... 1,119,778
==========
Stockholders' equity:
Common stock, $120 par value, 75,000 shares authorized,
100 shares issued and outstanding...................... 12,000
Additional paid-in capital................................ 60,000
Retained earnings......................................... 713,484
----------
Total stockholders' equity........................ 785,484
----------
Commitments and contingencies............................... --
----------
$1,905,262
==========
</TABLE>
See accompanying notes.
F-45
<PAGE> 103
KERNS & GRADILLAS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues.................................................... $6,222,429
Cost and expenses:
Operating expenses........................................ 5,953,491
General and administrative expenses....................... 338,761
Depreciation expense...................................... 90,410
----------
6,382,662
----------
Loss from operations........................................ (160,233)
Other income (expense):
Interest expense.......................................... (55,924)
Other..................................................... 13,087
----------
(42,837)
----------
Net loss.................................................... (203,070)
Retained earnings -- beginning of year...................... 916,554
----------
Retained earnings -- end of year............................ $ 713,484
==========
</TABLE>
See accompanying notes.
F-46
<PAGE> 104
KERNS & GRADILLAS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $(203,070)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 90,410
(Increase) decrease in assets:
Accounts receivable.................................. (36,504)
Prepaid expenses..................................... (9,853)
Deposits............................................. 24,059
Increase in liabilities:
Accounts payable and accrued expenses.................. 50,363
---------
Net cash used in operating activities..................... (84,595)
---------
Cash flows from investing activities:
Increase in advances receivable........................... (97,154)
Purchases of property and equipment....................... (51,735)
---------
Net cash used in investing activities.................. (148,889)
---------
Cash flows from financing activities:
Net borrowings on demand notes............................ 192,580
---------
Net cash provided by financing activities.............. 192,580
---------
Net decrease in cash........................................ (40,904)
Cash -- beginning of year................................... 49,643
---------
Cash -- end of year......................................... $ 8,739
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 55,295
=========
Cash paid for income taxes................................ $ 800
=========
</TABLE>
See accompanying notes.
F-47
<PAGE> 105
KERNS & GRADILLAS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Kerns & Gradillas, Inc. (the "Company") is a
court reporting firm providing printed and computerized transcripts, and video
recordings of testimony from depositions to the legal profession, primarily in
southern California.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition -- Revenue and the related direct costs of court
reporters and transcribers are recognized when services rendered are billable,
which generally occurs at the time the final documents are transcribed and
completed.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed by accelerated methods over the estimated useful lives
of the assets. Maintenance and repairs are charged to expenses as incurred while
improvements are capitalized.
Income Taxes -- The Company has elected to be taxed as an S Corporation for
income tax reporting purposes. The tax regulations provide that, in lieu of
corporation income taxes, the stockholders are taxed on their proportionate
shares of the Company's taxable income; consequently, no federal income taxes
have been provided on current income. State tax regulations provide for a
limited franchise tax based on income.
Advertising Costs -- Advertising costs are expensed as incurred.
Advertising expense for the year ended December 31, 1997 was $19,186.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
accounts in financial institutions. Although the cash accounts exceed the
federally insured deposit amount, management does not anticipate nonperformance
by the financial institutions. Management reviews the financial viability of
these institutions on a periodic basis.
NOTE 2. -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 84,913
Computer and video equipment................................ 829,358
--------
914,271
Less accumulated depreciation............................... 745,232
--------
$169,039
========
</TABLE>
NOTE 3. -- ADVANCES RECEIVABLE
The Company has advanced $309,093 to stockholders and employees. The
advances are non-interest bearing and have no terms of repayment. Accordingly,
the amounts have been classified as long term on the accompanying financial
statements.
NOTE 4. -- DEMAND NOTES PAYABLE
The Company has a revolving line of credit agreement with a bank that
provides for borrowings of up to $750,000, of which $483,250 was outstanding at
December 31, 1997. Borrowings under the line bear interest at
F-48
<PAGE> 106
KERNS & GRADILLAS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
1.5% over a variable base index rate which was 9.5% at December 31, 1997, are
collateralized by substantially all assets of the Company, and matures in August
1998.
In addition, the Company has a demand promissory note agreement with the
same bank of which $67,412 was outstanding at December 31, 1997. The note
requires monthly principal payments of $1,667 through September 2001, plus
interest at 1.5% over a variable base index rate which was 9.25% at December 31,
1997. Borrowings under the demand note are collateralized by substantially all
assets of the Company. Future maturities under the demand note at December 31,
1997 are as follows:
<TABLE>
<S> <C>
1998............................................. $20,004
1999............................................. 20,004
2000............................................. 20,004
2001............................................. 7,400
-------
$67,412
=======
</TABLE>
NOTE 5. -- COMMITMENTS
Operating Lease Commitments -- The Company leases office space and
equipment under noncancelable operating leases. Rental expense charged to
operations for the operating leases amounted to approximately $348,000 for the
year ended December 31, 1997.
Aggregate future minimum lease payments under noncancelable operating
leases having remaining terms in excess of one year as of December 31, 1997 are:
<TABLE>
<S> <C>
1998.............................................. $274,337
1999.............................................. 206,300
2000.............................................. 8,528
2001.............................................. 8,221
2002.............................................. 2,671
--------
$500,057
========
</TABLE>
NOTE 6. -- SUBSEQUENT EVENT
On January 16, 1998, the assets and liabilities of the Company were
acquired by Esquire Communications Ltd. The purchase price of $8 million
consisted of $5,550,000 cash at closing, a convertible note due in three years
of $1,300,000 to be paid interest only, quarterly, at an interest rate of 7%,
and 171,429 restricted and unregistered shares of common stock of Esquire valued
at a discounted value of $960,000. The principal portion of the note can be
converted into Esquire's common stock at a price of $8 per share.
F-49
<PAGE> 107
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors of
A-L Associates, Inc. and Affiliate
We have audited the accompanying combined balance sheet of A-L Associates,
Inc. and Affiliate as of December 31, 1997, and the related combined statements
of income, and cash flows for the year then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of A-L Associates, Inc.
and Affiliate as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
June 26, 1998
F-50
<PAGE> 108
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 13,041
Accounts receivable, less allowance for doubtful accounts
of $27,000............................................. 2,695,890
Prepaid expenses and sundry receivables................... 73,234
----------
Total current assets.............................. 2,782,165
Property and equipment, net................................. 482,434
Other assets................................................ 38,560
----------
$3,303,159
==========
LIABILITIES AND EQUITY
Current liabilities:
Demand note payable....................................... $ 477,686
Accounts payable and accrued expenses..................... 326,481
Accrued commissions....................................... 1,433,034
Income taxes payable...................................... 17,224
Deferred tax liability.................................... 80,000
Current portion of long-term debt......................... 91,490
----------
Total current liabilities......................... 2,425,915
Long-term debt.............................................. 344,711
Deferred rent obligation.................................... 63,393
----------
Total liabilities................................. 2,834,019
Equity...................................................... 469,140
Commitments and contingencies............................... --
----------
$3,303,159
==========
</TABLE>
See accompanying notes.
F-51
<PAGE> 109
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues.................................................... $11,336,198
Cost of sales:
Operating expenses........................................ 7,094,376
General and administrative expenses....................... 3,976,046
Depreciation and amortization............................. 74,577
-----------
11,144,999
-----------
Income from operations...................................... 191,199
Other income (expense):
Interest income........................................... 12,834
Interest expense.......................................... (68,686)
Other..................................................... (12,037)
-----------
(67,889)
-----------
Income before provision for income taxes.................... 123,310
Provision for income taxes.................................. 70,000
-----------
Net income.................................................. $ 53,310
===========
</TABLE>
See accompanying notes.
F-52
<PAGE> 110
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 53,310
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 74,577
Loss on abandonment of leasehold improvements.......... 18,037
(Increase) decrease in assets:
Accounts receivable.................................. (581,790)
Prepaid expenses and sundry receivables.............. 52,525
Increase in liabilities:
Accounts payable and accrued expenses................ 386,259
Deferred rent obligation............................. 63,393
Income taxes payable................................. 2,480
---------
Net cash provided by operating activities.............. 68,791
---------
Cash flows from investing activities:
Purchases of property and equipment....................... (252,537)
Decrease in due from officer.............................. 75,000
Decrease in other assets.................................. (29,259)
---------
Net cash used in investing activities.................. (206,796)
---------
Cash flows from financing activities:
Net borrowings on demand note payable..................... 77,686
Borrowings from long-term debt............................ 250,000
Repayments of long-term debt.............................. (193,799)
Proceeds from issuance of common stock.................... 4
---------
Net cash provided by financing activities.............. 133,891
---------
Net decrease in cash........................................ (4,114)
Cash -- beginning of year................................... 17,155
---------
Cash -- end of year......................................... $ 13,041
=========
Schedule of noncash investing and financing activities:
Furniture and fixture acquired under capital lease........ $ 250,000
=========
Stock subscription receivable for common stock............ $ 300,000
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 67,224
=========
Cash paid for income taxes................................ $ 67,520
=========
</TABLE>
See accompanying notes.
F-53
<PAGE> 111
A-L ASSOCIATES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination and Description of Business -- The accompanying
combined financial statements include the financial statements of A-L
Associates, Inc. ("Associates") and A-L Attorneys on Assignment, LLC.
("Attorneys") (collectively, the "Company") which have common ownership. All
intercompany accounts and transactions have been eliminated.
Associates is an executive recruitment firm. Attorneys is a temporary
placement agency for attorneys. Both companies operate primarily in the New York
metropolitan area, servicing the needs of, among others, multi-national
corporations.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition -- Associates income is recognized when placements are
accepted, which may be prior to the actual date of employment. Clients are
billed at the start date of employment. Provision is made for allowances for
failure to complete stipulated employment periods. Attorneys income is
recognized upon services rendered.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed by the straight-line and accelerated methods over the
estimated useful lives of the assets. Depreciation expense for the year ended
December 31, 1997 totaled $74,427.
Income Taxes -- Associates has elected to be treated as an S Corporation
for federal and New York State income tax reporting purposes. The tax
regulations provide that, in lieu of corporate income taxes, the stockholders
are taxed on their proportionate share of the Company's taxable income;
accordingly, no federal and state income taxes have been provided for in the
current year. However, Associates is liable for New Jersey and New York City
corporate income taxes. The current tax provision is primarily attributed to New
York City corporate income taxes which are based upon an alternative tax base
that includes officers compensation.
Attorneys is a limited liability company and has elected to be taxed
similar to that of a partnership. Accordingly, the partners are taxed on their
proportionate share of the partnership's taxable income; accordingly, no federal
and state income taxes have been provided for the current year.
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 ("FAS109"). FAS109 requires the recognition of
deferred tax liabilities and assets for expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Deferred income taxes are attributable to the temporary
differences resulting from the use of the cash basis of accounting for tax
reporting.
Advertising Costs -- Advertising costs are expensed as incurred.
Advertising expense for the years ended December 31, 1997 totaled $45,410.
Concentration of Credit Risk -- Financial instruments subject to
concentrations of credit risk consist principally of cash accounts in financial
institutions. Although the accounts exceed the federally insured deposit amount,
management does not anticipate nonperformance by the financial institution. The
Company's revenues are generated substantially from two major customers, which
accounted for approximately 40% of revenues for the year ended December 31,
1997. At December 31, 1997, accounts receivable balances with these customers
comprised approximately 53% of accounts receivable.
Other Assets -- Other assets consists primarily of cash surrender value of
life insurance.
F-54
<PAGE> 112
A-L ASSOCIATES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Fixture and fixtures........................................ $321,125
Leasehold improvements...................................... 226,774
Computer equipment.......................................... 80,634
Office equipment............................................ 24,954
--------
653,487
Less accumulated depreciation............................... 171,053
--------
$482,434
========
</TABLE>
NOTE 3. -- DEMAND NOTE PAYABLE
Associates has a line of credit which provides for borrowings up to
$500,000. The line bears interest at the bank's prime rate plus 1% (9.5% at
December 31, 1997) and is secured by substantially all of the Company's assets,
securities in the amount of $200,000 owned by the stockholders, and personal
guarantees by the stockholders. The outstanding balance under this line of
credit at December 31, 1997 amounted to $477,686.
NOTE 4. -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Bank term loan(a)........................................... $216,667
Obligation under capital lease (Note 6)..................... 219,534
--------
436,201
Less: current portion....................................... 91,490
--------
$344,711
========
</TABLE>
- ---------------
(a) The term loan is due in monthly installments of $4,167 plus interest at the
bank's prime rate plus 1.5% (10% at December 31, 1997) and is secured by
substantially all of Associates assets, securities in the amount of $200,000
owned by the stockholders, and personal guarantees by the stockholders.
Scheduled annual principal payments of long-term debt subsequent to
December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 97,143
2000........................................................ 103,566
2001........................................................ 110,865
2002........................................................ 33,137
--------
$344,711
========
</TABLE>
NOTE 5. -- EQUITY
On January 1, 1997, Associates issued 4 shares of common stock for $4 to
the then sole stockholder. In addition, Associates entered into a stock purchase
agreement with a new stockholder which provided for the issuance of 100 shares
for $300,000. The amount is payable in three $100,000 installments, payable by
December 31, 1997, 1998 and 1999. At December 31, 1997, the first installment
has not been paid. The entire $300,000 stock subscription receivable has been
shown as a reduction of stockholder equity.
F-55
<PAGE> 113
A-L ASSOCIATES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The schedule of equity is as follows:
<TABLE>
<CAPTION>
ASSOCIATES ATTORNEYS TOTAL
---------- --------- ---------
<S> <C> <C> <C>
Common stock, $.01 par value, 200 shares
authorized, issued and outstanding.............. $ 2 $ -- $ 2
Member contributions.............................. 100 100
Additional paid in capital........................ 300,003 -- 300,003
Stock subscriptions receivable.................... (300,000) -- (300,000)
Retained earnings (deficit)....................... 471,606 (2,571) 469,035
--------- ------- ---------
Total equity...................................... $ 471,611 $(2,471) $ 469,140
========= ======= =========
</TABLE>
NOTE 6. -- COMMITMENTS AND CONTINGENCIES
Stock Redemption Agreement -- Associates has a stockholders' agreement,
effective January 1, 1997, which provides that under certain circumstances,
including death or disability of a stockholder, the Company is obligated to
purchase that stockholder's shares at a predetermined value and over a specified
period in accordance with the terms of the agreement. The Company has purchased
insurance to fund the purchase upon death of a stockholder.
Leases -- In April 1997, the Company entered into a lease for office space
expiring ten years thereafter. The lease provides for minimum monthly rentals of
$9,240 for the first sixteen months, $17,160 for the next sixty months, and
$18,216 for the remaining forty-four months, and additional rentals for
increases in real estate taxes and building operating expenses. The Company
expenses the increasing minimum rentals on a straight-line basis over the term
of the lease. The balance sheet at December 31, 1997 includes a deferred rental
obligation of $63,393 relating to the lease. The Company is contingently liable
under a bank letter of credit of $63,630 issued to the landlord in lieu of a
security deposit which expires May 1999. In addition, the Company leases office
equipment under operating lease agreements ranging from three to six years.
Rent expense for the year ended December 31, 1997 was $304,000.
During 1997, Associates also leased office furniture under a capital lease
expiring in March 2002. Furniture recorded under the capital lease of $250,000
is included in furniture and fixtures at December 31, 1997. Depreciation on this
asset charged to expense was $35,714 for 1997.
Minimum annual rental obligations under the lease for office space and
equipment leases and the present value of future minimum lease payments under
the capital lease are as follows:
<TABLE>
<CAPTION>
YEARS ENDING OFFICE SPACE AND CAPITAL
DECEMBER 31, EQUIPMENT LEASES LEASE
- ------------ ---------------- --------
<S> <C> <C>
1998.................................................... $ 165,397 $ 67,296
1999.................................................... 218,530 67,296
2000.................................................... 214,183 67,296
2001.................................................... 211,078 67,296
2002.................................................... 206,780 16,824
Thereafter.............................................. 938,784 --
---------- --------
Total minimum lease payments.............................. $1,954,752 286,008
==========
Less: amount representing interest........................ 66,474
--------
Present value of net minimum lease payments (Note 4)...... $219,534
========
</TABLE>
F-56
<PAGE> 114
A-L ASSOCIATES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Dispute -- Associates is involved in a dispute with another executive
recruitment firm who is claiming substantial damages in connection with an
agency agreement between the two parties. Although the company's counsel cannot
form an opinion on this matter, in the opinion of management, the claims of the
other party are without merit and management believes the Company has
meritorious defenses and/or counterclaims to the claims of the other party.
There has been no communication from the other party since March 1997, and
management believes that no further action is forthcoming.
NOTE 7. -- SUBSEQUENT EVENTS
On May 15, 1998, the Company's assets and liabilities were acquired by
Esquire Communications Ltd. for approximately $8.7 million consisting of
$7,500,000 cash at closing, 166,667 shares of restricted and unregistered stock,
valued at a discounted value of $733,335, and options to purchase 200,000 shares
of Esquire's common stock at $9.00 per share, valued at $440,000, which are
exercisable immediately and expire 10 years after closing.
F-57
<PAGE> 115
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 338,478
Accounts receivable, less allowance for doubtful accounts
of $27,000............................................. 2,941,821
Due from officers......................................... 48,536
Prepaid expenses and sundry receivables................... 117,630
----------
Total current assets.............................. 3,446,465
Property and equipment, net................................. 489,890
Other assets................................................ 38,495
----------
$3,974,850
==========
LIABILITIES AND EQUITY
Current liabilities:
Demand note payable....................................... $ 300,000
Accounts payable and accrued expenses..................... 695,002
Accrued commissions....................................... 1,530,019
Income taxes payable...................................... 58,000
Deferred tax liability.................................... 59,000
Current portion of long-term debt......................... 92,837
----------
Total current liabilities......................... 2,734,858
Long-term debt.............................................. 320,984
Deferred rent obligation.................................... 87,393
----------
Total liabilities................................. 3,143,235
Equity...................................................... 831,615
Commitments and contingencies............................... --
----------
$3,974,850
==========
</TABLE>
F-58
<PAGE> 116
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Revenues.................................................... $3,084,437
Cost of sales:
Operating expenses........................................ 1,719,836
General and administrative expenses....................... 929,640
Depreciation and amortization............................. 12,065
----------
2,661,541
----------
Income from operations...................................... 422,896
Other income (expense):
Interest expense.......................................... (24,000)
Interest income........................................... 579
----------
(23,421)
----------
Income before provision for income taxes.................... 399,475
Provision for income taxes.................................. 37,000
----------
Net income.................................................. $ 362,475
==========
</TABLE>
F-59
<PAGE> 117
A-L ASSOCIATES, INC. AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $362,475
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 12,065
Deferred tax benefit................................... (21,000)
Increase in assets:
Accounts receivable.................................. (245,931)
Prepaid expenses and sundry receivables.............. (44,396)
Increase in liabilities:
Accounts payable and accrued expenses................ 465,507
Deferred rent obligation............................. 24,000
Income taxes payable................................. 40,776
--------
Net cash provided by operating activities.............. 593,496
--------
Cash flows from investing activities:
Purchases of property and equipment....................... (19,457)
Increase in due from officer.............................. (48,536)
--------
Net cash used in investing activities.................. (67,993)
--------
Cash flows from financing activities:
Net payments on note payable.............................. (177,686)
Repayments of long-term debt.............................. (22,380)
--------
Net cash used in financing activities.................. (200,066)
--------
Net increase in cash........................................ 325,437
Cash -- beginning of period................................. 13,041
--------
Cash -- end of period....................................... $338,478
========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 24,000
========
Cash paid for income taxes................................ $ 36,103
========
</TABLE>
F-60
<PAGE> 118
A-L ASSOCIATES, INC. AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The accompanying unaudited financial statements of A-L Associates, Inc. and
Affiliate (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the Company's audited financial
statements as of and for the year ended December 31, 1997, which includes
footnotes.
NOTE 2. -- SALE OF BUSINESS
On May 15, 1998, the Company's assets and liabilities were acquired by
Esquire Communications Ltd. for approximately $8.7 million consisting of
$7,500,000 cash at closing, 166,667 shares of restricted and unregistered stock,
valued at a discounted value of $733,335, and options to purchase 200,000 shares
of Esquire's common stock at $9.00 per share, valued at $440,000, which are
exercisable immediately and expire 10 years after closing.
F-61
<PAGE> 119
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Hamilton-Legato Deposition Centers, Inc.
Troy, Michigan
We have audited the accompanying balance sheet of Hamilton-Legato
Deposition Centers, Inc. as of December 31, 1997, and the related statements of
operations and retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Hamilton-Legato
Deposition Centers, Inc. as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
July 2, 1998
F-62
<PAGE> 120
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 35,877
Accounts receivable, net of allowance for doubtful
accounts of $8,000..................................... 877,975
Prepaid expenses.......................................... 21,432
----------
Total current assets.............................. 935,284
Property and equipment, net................................. 427,769
Advances -- affiliate....................................... 85,000
Other assets, net........................................... 232,365
----------
$1,680,418
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Demand note payable....................................... $ 235,081
Accounts payable.......................................... 368,970
Accrued expenses.......................................... 107,876
Deferred tax liability.................................... 175,100
Current portion of long-term debt......................... 20,748
----------
Total current liabilities......................... 907,775
Long-term debt.............................................. 128,450
----------
Total liabilities................................. 1,036,225
Stockholder's equity:
Common stock, $1 par value, 50,000 shares authorized,
5,000 shares issued and outstanding.................... 5,000
Retained earnings......................................... 639,193
----------
Total stockholder's equity........................ 644,193
Commitments and contingencies............................... --
----------
$1,680,418
==========
</TABLE>
See accompanying notes.
F-63
<PAGE> 121
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues.................................................... $6,030,823
Costs and expenses:
Operating expenses........................................ 3,987,121
General and administrative................................ 2,038,863
Depreciation and amortization............................. 76,083
----------
6,102,067
----------
Loss from operations...................................... (71,244)
Other income (expense):
Interest income........................................... 2,601
Interest expense.......................................... (9,325)
----------
(6,724)
----------
Loss before income taxes.................................... (77,968)
Income tax benefit.......................................... 39,900
----------
Net loss.................................................... (38,068)
Retained earnings -- beginning of year...................... 677,261
----------
Retained earnings -- end of year............................ $ 639,193
==========
</TABLE>
See accompanying notes.
F-64
<PAGE> 122
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (38,068)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 76,083
Deferred income tax expense............................ 64,300
Increase in assets:
Accounts receivable.................................. (157,406)
Prepaid expenses..................................... (5,019)
Decrease in liabilities:
Accounts payable and accrued expenses................ (116,486)
---------
Net cash used in operating activities.................. (176,596)
---------
Cash flows from investing activities:
Purchase of other assets.................................. (125,000)
Purchases of property and equipment....................... (166,746)
Advances to affiliate..................................... (75,000)
---------
Net cash used in investing activities....................... (366,746)
---------
Cash flows from financing activities:
Net borrowings on demand note............................. 186,581
Principal payments on long-term debt...................... (4,676)
---------
Net cash provided by financing activities.............. 181,905
---------
Net decrease in cash........................................ (361,437)
Cash -- beginning of year................................... 397,314
---------
Cash -- end of year......................................... $ 35,877
---------
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 9,325
=========
Cash paid for income taxes................................ $ 15,000
=========
Supplemental noncash investing and financing activity:
Acquisition of consulting agreements through issuance of
long term debt......................................... $ 153,875
=========
</TABLE>
See accompanying notes.
F-65
<PAGE> 123
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- Hamilton-Legato Deposition Centers, Inc. (the
"Company") provides court reporting services primarily in the State of Michigan.
Fiscal Year -- The Company's normal fiscal reporting period ends May 31,
including for income tax reporting purposes. The accompanying financial
statements are as of and for the twelve month period ended December 31, 1997,
which are being issued in connection with the sale of the Company's operations
(see Note 10).
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition -- Revenues and the related direct costs of court
reporters and transcribers are recognized when services rendered are billable,
which generally occurs at the time the final documents are transcribed and
completed.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is computed using both accelerated and straight-line methods over
the estimated useful lives of the assets. Maintenance and repairs are charged to
expenses as incurred while improvements are capitalized.
Income Taxes -- The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Advertising -- The Company expenses advertising as incurred. Advertising
expense was $18,358 for the year ended December 31, 1997.
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentration of credit risk consist principally of trade
receivables. The Company's trade receivables are primarily due from customers in
the service industry.
NOTE 2. -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<S> <C>
Furniture and fixtures...................................... $ 596,510
Leasehold improvements...................................... 282,455
---------
878,965
Less accumulated depreciation............................... (451,196)
---------
$ 427,769
=========
</TABLE>
F-66
<PAGE> 124
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. -- OTHER ASSETS
Other assets consist of the following:
<TABLE>
<S> <C>
Goodwill.................................................... $ 56,679
Covenant not-to-compete..................................... 30,000
Consulting agreement........................................ 153,875
--------
240,554
Less: Accumulated amortization.............................. 8,189
--------
$232,365
========
</TABLE>
The goodwill is being amortized on the straight-line method over a period
of 15 years. The covenant not-to-compete and consulting agreement are being
amortized on a straight-line method over the life of the respective agreements
of five and six years, respectively.
NOTE 4. -- DEMAND NOTE PAYABLE
The Company has a line of credit available from a bank which provides for
aggregate borrowings and letters of credit of up to $300,000. Borrowings bear
interest at 9% and are secured by all assets of the Company. The credit line
expires on September 1, 1998. Amounts outstanding under this line of credit as
of December 31, 1997 were $235,081.
NOTE 5. -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Consulting agreements related to an acquired business -- due
in aggregate monthly payments of $2,778, including
interest imputed at 9%, through September 2003, secured by
all assets of the Company................................. $149,198
Current portion............................................. 20,748
--------
$128,450
========
</TABLE>
The consulting agreements also contain a clause that the consultants agree
not to solicit Company clients or compete with the Company within a specified
area for a period of six years through September 2003.
Annual maturities of long-term debt subsequent to 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 22,694
2000........................................................ 24,822
2001........................................................ 27,152
2002........................................................ 29,698
2003........................................................ 24,084
--------
$128,450
========
</TABLE>
NOTE 6. -- PENSION PLAN
The Company maintains a 401(k) profit sharing trust covering substantially
all employees upon completion of one year of service and attaining the age of
21. Employees can contribute up to 15% of gross compensation for which the
Company will match up to 4% of the employees portion. An employee is fully
vested after six years of service. In addition, the plan provides for a
discretionary contribution by the Company. Pension expense for 1997 amounted to
$3,697.
F-67
<PAGE> 125
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. -- RELATED PARTY TRANSACTIONS
The Company leases its Troy office building from an entity in which the
stockholders of the Company are also the owners, under a lease agreement which
expires on December 31, 2000. Rental expense for 1997 amounted to $133,900.
The Company made various advances to an entity in which one of the
stockholders of the Company is the sole owner. The advances which amounted to
$85,000 at December 31, 1997 are unsecured and non-interest bearing. The
advances are not anticipated to be repaid in 1998 and accordingly are classified
as long term on the accompanying financial statements. The loans were made to
cover the operating expenses of the related party. The total amount loaned to
the related entity in 1997 amounted to $75,000.
NOTE 8. -- INCOME TAXES
The income taxes provision (benefit) for the year ended December 31, 1997
is as follows:
<TABLE>
<S> <C>
Current tax benefit:
Federal................................................... $ (78,400)
State and city............................................ (25,800)
---------
Total current..................................... (104,200)
---------
Deferred tax expense:
Federal................................................... 42,866
State and city............................................ 21,434
---------
Total deferred.................................... 64,300
---------
Total............................................. $ (39,900)
=========
</TABLE>
Hamilton-Legato Deposition Centers, Inc. has elected to be treated as a
cash basis taxpayer. Therefore, the future deductible and taxable temporary
differences arise primarily from the difference between the cash and accrual
basis of accounting. At December 31, 1997, the Company has a deferred tax
liability of $175,100.
NOTE 9. -- COMMITMENTS
Lease Commitments -- The Company is obligated under operating leases for
office facilities which expire through December 2001. The leases provide, among
other things, that the Company is responsible for its share of increases in
certain utilities, maintenance and property taxes over a base amount. In
addition, the Company is also obligated under various equipment leases which
expire through October 2002. Total lease expense for 1997, under the above
leases amounted to $247,908.
The anticipated future annual lease payments under operating leases at
December 31, 1997, inclusive of the base utility, maintenance and property tax
charges for the office facilities, are as follows:
<TABLE>
<S> <C>
1998.............................................. $273,900
1999.............................................. $250,208
2000.............................................. $247,149
2001.............................................. $244,260
2002.............................................. $ 37,395
</TABLE>
Independent Contractor Agreement -- In connection with the acquisition of a
business, the Company entered into independent contractor agreements with the
two predecessor owners. The agreements which among other things specify
compensation rates, are for a period of five years through August 2002 and are
terminable by the Company only for good cause and may be terminated by the
contractor given 30 days notice.
F-68
<PAGE> 126
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. -- SUBSEQUENT EVENTS
On June 22, 1998, the Company's assets and liabilities were acquired by
Esquire Communications Ltd. The purchase price of $7.64 million consisted of
$4,840,000 cash at closing and a convertible note due in five years of
$2,800,000 to be paid interest only, quarterly, at an interest rate of 7%. The
principal portion of the note can be converted to Esquire's common stock at a
price of $10.00 per share.
F-69
<PAGE> 127
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
BALANCE SHEET
AS OF MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 252,393
Accounts receivable, net of allowance for doubtful
accounts of $8,000..................................... 793,211
Prepaid expenses.......................................... 18,032
----------
Total current assets.............................. 1,063,636
Property and equipment, net................................. 444,814
Advances -- affiliate....................................... 88,000
Other assets, net........................................... 245,181
----------
$1,841,631
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Demand note payable....................................... $ 228,081
Accounts payable.......................................... 596,651
Accrued expenses.......................................... 11,456
Income taxes payable...................................... 116,600
Deferred tax liability.................................... 70,100
Current portion of long-term debt......................... 21,218
----------
Total current liabilities......................... 1,044,106
Long-term debt.............................................. 122,966
----------
Total liabilities................................. 1,167,072
Stockholder's equity:
Common stock, $1 par value, 50,000 shares authorized,
5,000 shares issued and outstanding.................... 5,000
Retained earnings......................................... 669,559
----------
Total stockholder's equity........................ 674,559
Commitments and contingencies............................... --
----------
$1,841,631
==========
</TABLE>
F-70
<PAGE> 128
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Revenues.................................................... $1,708,074
Costs and expenses:
Operating expenses........................................ 1,044,193
General and administrative expenses....................... 578,403
Depreciation and amortization............................. 35,585
----------
1,658,181
----------
Income from operations.................................... 49,893
Other income (expense):
Interest income........................................... 894
Interest expense.......................................... (5,421)
----------
(4,527)
----------
Income before provision for income taxes.................... 45,366
Provision for income taxes.................................. 15,000
----------
Net income.................................................. 30,366
Retained earnings -- December 31, 1997...................... 639,193
----------
Retained earnings -- March 31, 1998......................... $ 669,559
==========
</TABLE>
F-71
<PAGE> 129
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 30,366
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 35,585
Deferred tax benefit................................... (105,000)
Decrease in assets:
Accounts receivable.................................. 84,764
Prepaid expenses..................................... 3,400
Increase in liabilities:
Accounts payable and accrued expenses.................. 247,861
---------
Net cash provided by operating activities.............. 296,976
---------
Cash flows from investing activities:
Purchase of other assets.................................. (20,000)
Advances to affiliate..................................... (3,000)
Purchases of property and equipment....................... (45,446)
---------
Net cash used in investing activities.................. (68,446)
---------
Cash flows from financing activities:
Net repayments on demand note............................. (7,000)
Principal payments on long-term debt...................... (5,014)
---------
Net cash used in financing activities.................. (12,014)
---------
Net increase in cash........................................ 216,516
Cash -- beginning of period................................. 35,877
---------
Cash -- end of period....................................... $ 252,393
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 5,421
=========
Cash paid for income taxes................................ $ --
=========
</TABLE>
F-72
<PAGE> 130
HAMILTON-LEGATO DEPOSITION CENTERS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. -- BASIS OF PRESENTATION
The accompanying unaudited financial statements of Hamilton-Legato
Deposition Centers, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the Company's audited
financial statements as of and for the year ended December 31, 1997, which
includes footnotes.
NOTE 2. -- SALE OF BUSINESS
On June 22, 1998, the Company's assets and liabilities were acquired by
Esquire Communications Ltd. The purchase price of $7.64 million consisted of
$4,840,000 cash at closing and a convertible note due in five years of
$2,800,000 to be paid interest only, quarterly, at an interest rate of 7%. The
principal portion of the note can be converted to Esquire's common stock at a
price of $10.00 per share.
F-73
<PAGE> 131
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 8
Use of Proceeds............................ 16
Dividend Policy............................ 16
Price Range of Common Stock................ 17
Capitalization............................. 18
Selected Consolidated Financial Data....... 19
Summary Pro Forma As Adjusted Financial
Information.............................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Business................................... 30
Management................................. 39
Certain Relationships and Related
Transactions............................. 45
Principal and Selling Stockholders......... 47
Description of Capital Stock............... 50
Shares Eligible for Future Sale............ 53
Underwriting............................... 54
Legal Matters.............................. 55
Experts.................................... 56
Available Information...................... 56
Index to Financial Statements.............. F-1
</TABLE>
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
10,046,500 Shares
[ESQUIRE COMMUNICATIONS LOGO]
Common Stock
-----------------------
P R O S P E C T U S
-----------------------
PRUDENTIAL SECURITIES INCORPORATED
BANCAMERICA ROBERTSON STEPHENS
JANNEY MONTGOMERY SCOTT INC.
, 1998
- ------------------------------------------------------------
- ------------------------------------------------------------
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee........................................ $22,580
NASD filing fee............................................. 8,155
Nasdaq filing fee........................................... *
Boston stock exchange filing fee............................ *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Printing expenses........................................... *
Accountants' fees and expenses.............................. *
Transfer Agent and Registrar fees........................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporate Law ("DGCL") provides that a
business corporation may indemnify directors and officers against liabilities
they may incur in such capacities provided certain standards are met, including
good faith and the reasonable belief that the particular action was in, or not
opposed to, the best interest of the corporation. Subsection (a) of Section 145
of the DGCL empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was unlawful.
Subsection (b) of Section 145 of the DGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted
under standards similar to those set forth above, except that no indemnification
may be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation, unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the DGCL further provides that, among other things, to the
extent that a director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to in Subsections (a) and (b)
of Section 145 of the DGCL, or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 of the DGCL shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that a corporation is empowered to purchase and maintain insurance on behalf
of a director or officer of the corporation against any
II-1
<PAGE> 133
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify against such liability under Section 145 of the DGCL.
The Bylaws of the Company provide for the mandatory indemnification of
directors and officers to the fullest extent permitted by law.
Section 102(b)(7) of the DGCL permits the Certificate of Incorporation of a
corporation to provide that a director shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (dealing with
unlawful stock purchases or redemptions), or (iv) for any transaction from which
the director derived an improper personal benefit.
The Certificate of Incorporation of the Company provides that the liability
of the Company's directors to the Company or to its stockholders shall be
eliminated to the fullest extent permitted by law.
The Company has a directors' and officers' liability insurance policy which
affords directors and officers insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
1. In connection with acquisitions of other businesses, the Company has
issued the following securities:
(a) October 1996 -- 132,258 shares of Common Stock on acquisition of
M&M Court Reporters:
(b) November 1996 -- 71,748 shares of Common Stock on acquisition of
Sherry Roe & Associates;
(c) December 1996 -- 100,000 shares of Common Stock on acquisition of
Nevill & Swinehart;
(d) June 1997 -- 300,000 shares of Common Stock on acquisition of
Krauss, Katz & Ackerman;
(e) June 1997 -- 750,000 shares of Common Stock on acquisition of
American Network Services;
(f) October 1997 -- an aggregate of 206,000 shares of Common Stock and
a note convertible into 62,500 shares of Common Stock on acquisition of
five court reporting companies;
(g) November 1997 -- 854,427 shares of Common Stock and options to
purchase 350,000 shares of Common Stock on acquisition of Jurist-Begley
Court Reporters;
(h) December 1997 -- 227,586 shares of Common Stock on acquisition of
Brody & Geiser;
(i) December 1997 -- 141,000 shares of Common Stock on acquisition of
A&A Court Reporters:
(j) December 1997 -- note convertible into 62,500 shares of Common
Stock on acquisition of Certified Reporting Company;
(k) January 1998 -- 171,429 shares of Common Stock and note
convertible into 162,500 shares of Common Stock on acquisition of Kerns &
Gradillas;
(l) February 1998 -- 20,000 shares of Common Stock on acquisition of
Friedli, Wolff & Pastore;
(m) March 1998 -- options to purchase 30,000 shares of Common Stock on
acquisition of VerbaVolant;
(n) April 1998 -- note convertible into 10,000 shares of Common Stock
in connection with acquisition of Pollock & Upshaw;
(o) May 1998 -- 82,347 shares of Common Stock on acquisition of three
court reporting companies;
II-2
<PAGE> 134
(p) May 1998 -- 166,667 shares of Common Stock and options to purchase
200,000 shares of Common Stock on acquisition of A-L Associates and A-L
Attorneys on Assignment;
(q) June 1998 -- 350,000 shares of Common Stock on acquisition of
Summit Reporting; and
(r) June 1998 -- note convertible into 280,000 shares of Common Stock
on acquisition of Hamilton-Legato Depositions Centers.
Between October 1996 and June 1998, the Company issued an aggregate of
22,500 shares of Series A Convertible Preferred Stock convertible into 7,500,000
shares of Common Stock to GTCR and Antares Leveraged Capital Corp. In connection
with these issuances, Prudential Securities Incorporated was issued warrants to
purchase an aggregate of 450,000 shares of Common Stock, 375,000 of which were
exercised to acquire 206,010 shares of Common Stock.
In February 1997, the Company sold 250,000 shares of Common Stock to
Harlingwood at a price of $3.125 per share.
The Company has granted stock options under the stock option plan.
All of the foregoing securities were issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
+1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.1 to Annual Report on
Form 10-KSB for the year ended December 31, 1997 ("1997
10-K")
3.2 By-Laws of the Company. Incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K reporting on an event
which occurred October 28, 1996 ("October 1996 8-K")
+5.1 Opinion of Stroock & Stroock & Lavan LLP
10.1 Employment Agreement dated as of March 1, 1993, between the
Company and Malcolm L. Elvey. Incorporated by reference to
Exhibit 10.1 to Registration Statement on Form SB-2 (File
No. 33-58814 ("SB"))
+10.2 Employment Agreement dated as of June 30, 1998, between the
Company and David A. White
10.3 Employment Agreement dated November 7, 1997, between the
Company and Carole L. Hughes. Incorporated by reference to
Exhibit 10.3 to 1997 10-K
10.4 Agreement dated as of May 1, 1997 by and between the Company
and David Feldman. Incorporated by reference to Exhibit 10.4
to 1997 10-K
10.5 Employment Agreement dated June 22, 1994 by and between the
Company and Cary A. Sarnoff. Incorporated by reference to
Exhibit 4 to Current Report on Form 8-K reporting on an
event which occurred on June 22, 1994.
10.6 Asset Purchase Agreement dated May 22, 1996, as amended,
among the Company, M&M Reporting Referral Service, Inc. and
the stockholders of M&M Reporting Referral Service, Inc.
Incorporated by reference to Exhibit 10.1 to October 1996
8-K
10.7 Purchase Agreement dated October 23, 1996 by and between the
Company, Golder, Thoma, Cressey, Rauner Fund IV, L.P.
("GTCR") and Antares Leveraged Capital Corp. (collectively
with GTCR, the "Investors"). Incorporated by reference to
Exhibit 10.4 to October 1996 8-K
</TABLE>
II-3
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.8 Stockholders Agreement dated October 23, 1996 by and between
the Investors, Malcolm L. Elvey, Cary A. Sarnoff, David J.
Feldman, CMNY Capital L.P. and Allied Investment
Corporation, Allied Investment Corporation II and Allied
Capital Corporation II. Incorporated by reference to Exhibit
10.5 to October 1996 8-K
10.9 Registration Agreement dated October 23, 1996 among the
Company and the Investors. Incorporated by reference to
Exhibit 10.6 to October 1996 8-K
10.10 Agreement dated October 23, 1996 among the Company, GTCR,
David J. Feldman, The Sarnoff Trust, Allied Investment
Corporation I, Allied Investment Corporation II and Allied
Capital Corporation II relating to registration rights.
Incorporated by reference to Exhibit 10.7 to October 1996
8-K
10.11 Credit Agreement dated as of December 24, 1996 by and among
Esquire Communications Ltd., as Borrower, Antares Leveraged
Capital Corp., as Agent and the Other Financial Institutions
Party thereto, as Lenders. Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
10.12 Asset Purchase Agreement dated as of May 28, 1997 among the
Company, Wolfe Rosenberg & Associates, Inc., M&M Computrans,
Seymour L. Wolfe and Fred R. Rosenberg. Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K
reporting on an event which occurred on May 28, 1997.
10.13 Asset Purchase Agreement dated as of June 13, 1997, among
the Company, Krauss, Katz & Ackerman, Inc., Harvey Krauss,
Leonard Katz and Robert Ackerman. Incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K reporting on
an event which occurred June 13, 1997 ("June 1997 8-K")
10.14 Asset Purchase Agreement dated as of June 18,1997, among the
Company, American Network Services, Inc., John C. Durham,
David Rainwater, William Bird and Jeff Johnson. Incorporated
by reference to Exhibit 10.2 to June 1997 8-K
10.15 Amendment No. 1 dated as of June 17, 1997 to Purchase
Agreement dated October 23, 1996, among Esquire, Golder,
Thoma, Cressey, Rauner Fund IV, L.P. and Antares Leveraged
Capital Corp. Incorporated by reference to Exhibit 10.3 to
June 1997 8-K
10.16 Amendment No. 2 dated as of January 8, 1998 to Purchase
Agreement dated October 23, 1996, among the Company, Golder,
Thoma, Cressey, Rauner Fund IV, L.P. and Antares Leveraged
Capital Corp. Incorporated by reference to Exhibit 10.16 to
1997 10-K
10.17 Employment Agreement dated September 1, 1997 between the
Company and Gregory J. Mazares. Incorporated by reference to
Exhibit 10.17 to 1997 10-K
10.18 Amendments No. 1 and No. 2 to Stockholder's Agreement dated
October 23, 1996, among Esquire and various stockholders of
Esquire. Incorporated by reference to Exhibit 10.4 to June
1997 8-K
*10.19 Agreement dated February 9, 1998 between the Company and
Harlingwood Partners, L.P.
+10.20 Employment Agreement dated June 30, 1998 between the Company
and David A. Higson
*10.21 Form of Change in Control Agreements between the Company and
each of its key executive officers, together with listing of
such officers
*21 Subsidiaries of the Registrant
+23.1 Consent of Stroock & Stroock & Lavan LLP (included as part
of Exhibit 5.1)
*23.2 Consent of KPMG Peat Marwick LLP
*23.3 Consent of Freed Maxick Sachs & Murphy, P.C.
</TABLE>
II-4
<PAGE> 136
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
*24.1 Powers of Attorney of Directors and Officers of Registrant
(included on signature page)
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed pursuant to Rules
424(b)(1), and 42(b)(4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement at the time it was declared effective, and
(2) for the purpose of determining any liability under the Securities Act, each
post-effective amendment, if any, that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 137
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on July 20, 1998.
ESQUIRE COMMUNICATIONS LTD.
By: /s/ DAVID A. WHITE
------------------------------------
David A. White
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Malcolm L. Elvey, David A. White, David A. Higson
and Steven L. Wolkenstein, and each of them, his true and lawful
attorneys-in-fact and agents with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) of and supplements to
this Registration Statement and any Registration Statement relating to any
offering made pursuant to this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto such attorney-in-fact
and agents and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, to all intents and purposes and as fully as they might or could do in
person, hereby ratifying and confirming all that such attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MALCOLM L. ELVEY Chairman of the Board and Director July 20, 1998
- ---------------------------------------------
(MALCOLM L. ELVEY)
/s/ DAVID A. WHITE Chief Executive Officer and Director July 20, 1998
- ---------------------------------------------
(DAVID A. WHITE)
/s/ DAVID A. HIGSON Chief Financial Officer, Chief July 20, 1998
- --------------------------------------------- Accounting Officer and Director
(DAVID A. HIGSON)
/s/ CARY A. SARNOFF Vice Chairman and Director July 20, 1998
- ---------------------------------------------
(CARY A. SARNOFF)
/s/ MORTIMER R. FEINBERG Director July 20, 1998
- ---------------------------------------------
(MORTIMER R. FEINBERG)
/s/ GARY L. MONROE Director July 20, 1998
- ---------------------------------------------
(GARY L. MONROE)
/s/ JOSEPH P. NOLAN Director July 20, 1998
- ---------------------------------------------
(JOSEPH P. NOLAN)
/s/ BRUCE V. RAUNER Director July 20, 1998
- ---------------------------------------------
(BRUCE V. RAUNER)
</TABLE>
II-6
<PAGE> 138
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
+1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of the Company, as amended.
Incorporated by reference to Exhibit 3.1 to Annual Report on
Form 10-KSB for the year ended December 31, 1997 ("1997
10-K")
3.2 By-Laws of the Company. Incorporated by reference to Exhibit
3.2 to the Current Report on Form 8-K reporting on an event
which occurred October 28, 1996 ("October 1996 8-K")
+5.1 Opinion of Stroock & Stroock & Lavan LLP
10.1 Employment Agreement dated as of March 1, 1993, between the
Company and Malcolm L. Elvey. Incorporated by reference to
Exhibit 10.1 to Registration Statement on Form SB-2 (File
No. 33-58814 ("SB"))
+10.2 Employment Agreement dated as of June 30, 1998, between the
Company and David A. White
10.3 Employment Agreement dated November 7, 1997, between the
Company and Carole L. Hughes. Incorporated by reference to
Exhibit 10.3 to 1997 10-K
10.4 Agreement dated as of May 1, 1997 by and between the Company
and David Feldman. Incorporated by reference to Exhibit 10.4
to 1997 10-K
10.5 Employment Agreement dated June 22, 1994 by and between the
Company and Cary A. Sarnoff. Incorporated by reference to
Exhibit 4 to Current Report on Form 8-K reporting on an
event which occurred on June 22, 1994.
10.6 Asset Purchase Agreement dated May 22, 1996, as amended,
among the Company, M&M Reporting Referral Service, Inc. and
the stockholders of M&M Reporting Referral Service, Inc.
Incorporated by reference to Exhibit 10.1 to October 1996
8-K
10.7 Purchase Agreement dated October 23, 1996 by and between the
Company, Golder, Thoma, Cressey, Rauner Fund IV, L.P.
("GTCR") and Antares Leveraged Capital Corp. (collectively
with GTCR, the "Investors"). Incorporated by reference to
Exhibit 10.4 to October 1996 8-K
10.8 Stockholders Agreement dated October 23, 1996 by and between
the Investors, Malcolm L. Elvey, Cary A. Sarnoff, David J.
Feldman, CMNY Capital L.P. and Allied Investment
Corporation, Allied Investment Corporation II and Allied
Capital Corporation II. Incorporated by reference to Exhibit
10.5 to October 1996 8-K
10.9 Registration Agreement dated October 23, 1996 among the
Company and the Investors. Incorporated by reference to
Exhibit 10.6 to October 1996 8-K
10.10 Agreement dated October 23, 1996 among the Company, GTCR,
David J. Feldman, The Sarnoff Trust, Allied Investment
Corporation I, Allied Investment Corporation II and Allied
Capital Corporation II relating to registration rights.
Incorporated by reference to Exhibit 10.7 to October 1996
8-K
10.11 Credit Agreement dated as of December 24, 1996 by and among
Esquire Communications Ltd., as Borrower, Antares Leveraged
Capital Corp., as Agent and the Other Financial Institutions
Party thereto, as Lenders. Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
10.12 Asset Purchase Agreement dated as of May 28, 1997 among the
Company, Wolfe Rosenberg & Associates, Inc., M&M Computrans,
Seymour L. Wolfe and Fred R. Rosenberg. Incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K
reporting on an event which occurred on May 28, 1997.
</TABLE>
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT
NO.
- -------
<S> <C>
10.13 Asset Purchase Agreement dated as of June 13, 1997, among
the Company, Krauss, Katz & Ackerman, Inc., Harvey Krauss,
Leonard Katz and Robert Ackerman. Incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K reporting on
an event which occurred June 13, 1997 ("June 1997 8-K")
10.14 Asset Purchase Agreement dated as of June 18,1997, among the
Company, American Network Services, Inc., John C. Durham,
David Rainwater, William Bird and Jeff Johnson. Incorporated
by reference to Exhibit 10.2 to June 1997 8-K
10.15 Amendment No. 1 dated as of June 17, 1997 to Purchase
Agreement dated October 23, 1996, among Esquire, Golder,
Thoma, Cressey, Rauner Fund IV, L.P. and Antares Leveraged
Capital Corp. Incorporated by reference to Exhibit 10.3 to
June 1997 8-K
10.16 Amendment No. 2 dated as of January 8, 1998 to Purchase
Agreement dated October 23, 1996, among the Company, Golder,
Thoma, Cressey, Rauner Fund IV, L.P. and Antares Leveraged
Capital Corp. Incorporated by reference to Exhibit 10.16 to
1997 10-K
10.17 Employment Agreement dated September 1, 1997 between the
Company and Gregory J. Mazares. Incorporated by reference to
Exhibit 10.17 to 1997 10-K
10.18 Amendments No. 1 and No. 2 to Stockholder's Agreement dated
October 23, 1996, among Esquire and various stockholders of
Esquire. Incorporated by reference to Exhibit 10.4 to June
1997 8-K
*10.19 Agreement dated February 9, 1998 between the Company and
Harlingwood Partners, L.P.
+10.20 Employment Agreement dated June 30, 1998 between the Company
and David A. Higson
*10.21 Form of Change in Control Agreements between the Company and
each of its key executive officers, together with listing of
such officers
*21 Subsidiaries of the Registrant
+23.1 Consent of Stroock & Stroock & Lavan LLP (included as part
of Exhibit 5.1)
*23.2 Consent of KPMG Peat Marwick LLP
*23.3 Consent of Freed Maxick Sachs & Murphy, P.C.
*24.1 Powers of Attorney of Directors and Officers of Registrant
(included on signature page)
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by amendment.
<PAGE> 1
EXHIBIT 10.19
H A R L I N G W O O D
February 9, 1998
PERSONAL & CONFIDENTIAL
Esquire Communications Ltd.
750 B Street, Suite 2350
San Diego, CA 92101
Attention: Mr. David A. Higson
Executive Vice President & CFO
Gentlemen:
This letter will confirm our understanding of the arrangements under which
Harlingwood Partners, LP ("Harlingwood"), is engaged by Esquire Communications
Ltd. ("Esquire") as exclusive financial advisor in connection with mergers or
acquisitions made by Esquire of companies not predominately engaged in the
business of providing court reporting services. The exclusive nature of this
engagement shall not preclude Esquire from pursuing acquisitions on its own
behalf of companies not introduced by Harlingwood ("Non-Harlingwood Deals"), in
which case no Transaction Fee shall be due Harlingwood.
During the term of our engagement Harlingwood anticipates providing
financial advice and assistance in connection with potential transactions,
including:
1. Identification of suitable target acquisitions;
2. Qualification of the target companies based upon Esquire's criteria
and the target companies' potential interest in a transaction;
3. Securing of the target companies' preliminary financial data,
including execution of confidentiality agreements;
4. Performing preliminary valuation analysis;
5. Assisting in the structuring, planning and negotiating of
transactions as needed, including the execution of letters of
intent.
Esquire agrees to pay Harlingwood a "Transaction Fee" equal to 1% of the
Transaction Value. The "Transaction Value" shall be defined as the total
consideration paid by Esquire for the company's common equity (or, in the case
of a purchase of assets, the consideration paid for the assets) plus the value
of any debt, capital lease, and preferred stock obligations of the Company
assumed, retired or defeased by Esquire in connection with the transaction. The
Transaction Fee in respect of any amounts to be paid by Esquire contingent upon
future events shall be paid upon actual payment thereof, except that amounts
held in escrow shall be deemed paid at closing.
<PAGE> 2
Esquire Communications Ltd.
February 9, 1998
Page 2
The Transaction Fee shall be paid by wire transfer upon the closing of
each transaction concurrently with consideration paid to the seller. Moreover,
Esquire agrees that a Transaction Fee shall be payable on all acquisitions made
by Esquire other than Non-Harlingwood Deals. Such obligation shall survive the
term of this Agreement.
In addition to our fee for professional services, Harlingwood will submit
out-of-pocket expenses for reimbursement by Esquire approximately monthly.
Generally these expenses include travel costs and document production, mailing
and other expenses of this type. Harlingwood shall not engage legal counsel or
other professionals on behalf of Esquire without its prior consent. Further,
Harlingwood shall obtain approval from Esquire before incurring any expense,
other than travel related expenses, that individually exceeds $1,500.
Esquire will indemnify and hold Harlingwood harmless from and against any
and all losses, claims, suits, expenses, damages or liabilities of whatsoever
nature or kind to which we may be subject, including counsel fees incurred by us
in connection with any claims or actions (whether or not resulting in any
liability and whether or not we are a defendant or party therein or thereto)
insofar as those losses, claims, suits, expenses, damages or liabilities arise
out of or pursuant to the services contemplated in this agreement and to the
extent such losses, claims, suits, expenses, damages or liabilities are not
caused by Harlingwood's gross negligence or willful misconduct. The indemnity
provided herein will survive the term of this agreement. The foregoing will be
in addition to any rights we may have at common law or otherwise.
Our services hereunder shall have an initial term of 12 months and may be
terminated at any time thereafter with or without cause by you or by us without
liability or continuing obligation to you or to us (except for any compensation
earned and expenses incurred by us to the date of termination and except, in the
case of termination by you, for our right to fees pursuant to this letter for
any transactions, other than Non-Harlingwood Deals, effected within one year of
such termination) and provided the indemnity provisions will remain operative
regardless of any such termination.
If the foregoing correctly reflects the terms of Harlingwood's engagement
by you, kindly sign and return the enclosed copy of this letter of agreement.
Very truly yours,
HARLINGWOOD PARTNERS, LP
By: /s/ Christopher T. Nguyen
--------------------------
Christopher T. Nguyen
Principal
<PAGE> 3
Esquire Communications Ltd.
February 9, 1998
Page 3
Accepted and Agreed:
ESQUIRE COMMUNICATIONS LTD.
By: /s/ David A. Higson
-------------------------------
David A. Higson
Executive Vice President & CFO
Date: February 9, 1998
-------------------------------
<PAGE> 1
Exhibit 10.21
Esquire Communications Ltd.
750 B Street
Suite 2350
San Diego, California 92101
June 30, 1998
Dear ____________:
Esquire Communications Ltd. (the "Corporation") considers it essential
to the best interests of its stockholders to foster the continuous employment of
key management personnel. In this connection, the Board of Directors of the
Corporation (the "Board") recognizes that the possibility of a change in control
of the Corporation exists and that such possibility, and the uncertainty and
questions which it may raise among management, may result in the departure or
distraction of management personnel to the detriment of the Corporation and its
stockholders.
The Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Corporation's management, including yourself, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Corporation.
In order to induce you to remain in the employ of the Corporation, the
Corporation agrees that you shall receive the severance benefits set forth in
this letter agreement (the "Agreement") in the event your employment with the
Corporation terminates or is terminated under the circumstances described below
subsequent to a "change in control of the Corporation", as such term is defined
in Section 2.
1. Term of Agreement. This Agreement shall commence on the date hereof,
and shall continue in effect through June 30, 1999; provided, however, that
commencing on June 30, 1999, and each June 30 thereafter, the term of this
Agreement shall automatically be extended for one additional year, unless not
later than 60 days prior to such June 30 the Corporation shall have given notice
that it does not wish to extend this Agreement; and provided, further, that if a
change in control of the Corporation shall have occurred during the original or
extended term of this Agreement, this Agreement shall continue in effect for a
period of not less than one year beyond the month in which such change in
control occurred.
<PAGE> 2
2. Change in Control. No benefits shall be payable hereunder unless
there shall have been a change in control of the Corporation, as set forth
below. For purposes of this Agreement, a "change in control of the Corporation"
shall be deemed to have occurred if
(a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), other than the Corporation, any existing director or officer
of the Corporation, any existing beneficial owner of more than 5% of the
Corporation's outstanding common stock, any trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation, or any corporation
owned, directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of stock of the
Corporation, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Corporation
representing 30% or more of the Common Stock of the Corporation;
(b) during any period of two consecutive years (not including
any period prior to the execution of this Agreement), individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Corporation to effect a transaction described in clause (a), (b) or (d) of this
Section) whose election by the Board or nomination for election by the
Corporation's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved
(hereinafter referred to as "Continuing Directors"), cease for any reason to
constitute at least a majority thereof;
(c) the stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the Corporation or such surviving entity outstanding immediately
after such merger or consolidation; or
(d) the stockholders of the Corporation approve a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the Corporation's
assets.
3. Termination Following Change in Control. (a) General. If any of the
events described in Section 2 constituting a change in control of the
Corporation shall have occurred, you shall be entitled to the benefits provided
in Section 4 upon the subsequent termination of your employment during the term
of this Agreement as set forth in Section 4 unless such termination is because
of your death or Disability.
(b) Disability. If, as a result of your incapacity due to
physical or mental illness, you shall have been absent from the full-time
performance of your duties with the Corporation for four (4) consecutive months,
and within thirty (30) days after written notice of
-2-
<PAGE> 3
termination is given you shall not have returned to the full-time performance of
your duties, your employment may be terminated for "Disability."
4. Compensation Upon Termination. Following a change in control of the
Corporation and if for any reason whatsoever (other than death or Disability)
your employment with the Corporation terminates or is terminated within six
months after the change in control (the "Termination Date") then you shall be
entitled to the following benefits:
(a) in lieu of any further salary payments to you for periods
subsequent to the Termination Date, the Corporation shall pay as severance pay
to you, no later than the fifth day following the Termination Date, a lump-sum
severance payment equal to ____% of the sum of (i) your annual salary rate in
effect as of the Termination Date or, if greater, such rate in effect
immediately prior to the change in control of the Corporation and (ii) any cash
bonus received by you or to which you were entitled during the calendar year
preceding the change in control.
(b) if you resort to any action or proceeding to recover any
amount which the Corporation has failed to pay to you under this Agreement and
if you are awarded or receive any amounts as the result of such action or
proceeding, the Corporation also shall pay or reimburse to you all legal fees
and expenses incurred by you in and with respect to such action or proceeding.
(c) for a twelve month period after the Termination Date, the
Corporation shall arrange to provide you with group health insurance benefits
substantially similar to those which you were receiving immediately prior to the
Termination Date (or, if better, such benefits in effect immediately prior to
the change in control of the Corporation); provided, however, if it is not so
obtainable upon reasonable terms, the Corporation shall pay to you in cash the
annual amount paid by the Corporation during the previous year of your
employment. Benefits otherwise receivable by you pursuant to this paragraph (c)
shall be reduced to the extent comparable benefits are actually received by you
during the twelve month period following the Termination Date, and any such
benefits actually received by you shall be reported to the Corporation.
(d) If the severance payment under this Agreement, either
alone or together with other payments which you have the right to receive from
the Corporation, would not be deductible (in whole or in part) by the
Corporation as a result of such payment constituting an excess parachute payment
as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), such severance payment shall be reduced to the largest amount as will
result in no portion not being fully deductible by the Corporation as the result
of Section 280G of the Code, which determination shall be made by the
Corporation's independent accountants and shall be conclusive and binding. This
provision may be waived by the Board of Directors of the Corporation in the
exercise of its discretion.
(e) Except as provided in Subsection (c) hereof, you shall not
be required to mitigate the amount of any payment provided for in this Section 4
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Section 4 be reduced by any compensation earned by
you as the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by you to the Corporation, or
otherwise.
-3-
<PAGE> 4
(f) All options which have been granted to you which are not
vested shall vest immediately on the Termination Date.
5. Successors; Binding Agreement. (a) The Corporation will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Corporation to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to perform
it if no such succession had taken place.
(b) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, heirs, distributees, devisees and legatees. If you should die
while any amount would still be payable to you hereunder if you had continued to
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to your devisee, legatee or other
designee or, if there is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Corporation shall be directed to the
attention of the Board with a copy to the Secretary of the Corporation, or to
such other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of New York without regard to its conflicts of law
principles. All references to sections of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Corporation under
Section 4 shall survive the expiration of the term of this Agreement.
8. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
-4-
<PAGE> 5
9. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted by JAMS/Endispute (or its successor) in New York, New York, in
accordance with its rules then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that you
shall be entitled to seek specific performance of your right to be paid until
the Termination Date during the pendency of any dispute or controversy arising
under or in connection with this Agreement.
11. Coordination with Employment Agreement. If applicable, the terms of
this Agreement shall be coordinated with and applied in conjunction with the
terms of your employment agreement with the Corporation. In general, it is the
intent of the parties that in the event of a change in control of the
Corporation the terms of this Agreement shall supersede and substitute for the
provisions of the employment agreement relating to any items of current
compensation during the term of this Agreement. Accordingly, benefits are
payable under this Agreement without regard for any obligation under any
agreement with or policy of the Corporation to refrain from competing with the
Corporation or entering into employment with or owning an interest in any firm
or business competing with the Corporation. Nothing in this Agreement shall be
construed to be a commitment or guarantee of future employment with the
Corporation. Except for circumstances relating to a change in control of the
Corporation as provided for herein, all terms and conditions of your employment
with the Corporation shall be governed by the terms of your employment
agreement, if any.
12. Entire Agreement. This Agreement sets forth the entire agreement of
the parties hereto in respect of the subject matter contained herein and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior agreement
of the parties hereto in respect of the subject matter contained herein is
hereby terminated and cancelled.
-5-
<PAGE> 6
If this letter sets forth our agreement on the subject matter hereof,
kindly sign and return to the Corporation the enclosed copy of this letter,
which will then constitute our agreement on this subject.
Sincerely,
Esquire Communications Ltd.
By______________________
Agreed to this _____ day of ____________ 1998.
____________________________
-6-
<PAGE> 7
SCHEDULE OF OFFICERS
Parties to Change in Control Agreement
Malcolm L. Elvey
David A. White
David A. Higson
Cary A. Sarnoff
Carole L. Hughes
Gregory J. Mazares
William J. Forbes
Steven L. Wolkenstein
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
---- -------------
<S> <C>
Esquire Deposition Services, Inc............................ Delaware
Esquire Document Retrieval Services, Inc.................... Delaware
Esq.Com CSD, Inc............................................ Delaware
Esq.Com Georgia, Inc........................................ Delaware
Esquire Staffing Services, Inc.............................. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Esquire Communications Ltd.:
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Our report dated March 27, 1998 contains an explanatory paragraph that states
that KPMG Peat Marwick LLP also audited the combination of the consolidated
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1995, after restatement for the 1997 pooling-of-interests.
KPMG Peat Marwick LLP
San Diego, California
July 20, 1998
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-1 (File No. 333-_____) of our report dated
January 27, 1996 related to the financial statements of Esquire Communications
Ltd., each of our reports dated July 2, 1998 for A & A Court Reporters, Inc. and
Affiliate, Kerns & Gradillas, Inc. and Hamilton-Legato Deposition Centers, Inc.
and our report dated June 26, 1998 for A-L Associates, Inc. and Affiliate. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
FREED MAXICK SACHS & MURPHY, P.C.
July 20, 1998
Buffalo, New York
