UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from___________ to_____________
Commission file number: 1-11782
ESQUIRE COMMUNICATIONS LTD.
( Exact name of small business issuer as specified in its charter)
DELAWARE 13-3703760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
750 "B" STREET, SUITE 2350, SAN DIEGO, CA 92101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (800) 496-4969
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed from last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
At October 30, 1998 there were outstanding 9,493,957 shares of Common Stock,
$.01 par value.
Transitional small business format (check one):
Yes No X
<PAGE>
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other information 13
Signatures 14
<PAGE>
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share and Share Data)
September 30, December 31,
1998 1997
(Unaudited)
-------------- -----------
<S> <C> <C>
ASSETS (pledged)
Current Assets:
Cash $1,325 $116
Accounts receivable, less allowance for doubtful accounts 29,618 14,621
Prepaid expenses and other current assets 2,545 639
-------- -------
Total current assets 33,488 15,376
Property and equipment, net 4,760 3,056
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 113,622 62,763
Other, net 2,394 1,656
========== =========
Total assets $154,264 $82,851
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $6,494 $3,616
Accrued expenses and other current liabilities 11,228 5,727
Current portion of long-term debt 4,969 4,361
----------- ---------
Total current liabilities 22,691 13,704
Long-term debt 87,108 45,442
Other liabilities 1,043 165
----------- ---------
Total Liabilities 110,842 59,311
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000 shares;
Series A convertible preferred stock, authorized 22,500 and
15,000 shares; 22,500 and 15,000 shares issued and
outstanding, aggregate liquidation preference $22,500
and $15,000 in 1998 and 1997, respectively - -
Series B convertible preferred stock, authorized 5,000 and 0 shares;
0 shares issued and outstanding in 1998 and 1997 - -
Common stock, $.01 par value, 100,000,000 and 25,000,000 shares
authorized; 9,677,457 and 7,049,898 shares issued,
9,493,957 and 6,866,398 shares outstanding in 1998 and 1997, respectively 95 63
Additional paid-in capital 47,739 29,063
Treasury stock, at cost - 183,500 shares
in 1998 and 1997, respectively (550) (550)
Notes receivable (1,156) (1,156)
Accumulated deficit (2,706) (3,880)
----------- ----------
Total stockholders' equity 43,422 23,540
----------- -----------
Total liabilities and stockholders' equity $154,264 $82,851
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in Thousands, Except Share and Per Share Data)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenue $32,038 $13,618 $78,535 $34,956
Costs and expenses:
Operating expenses 18,475 7,342 44,240 19,772
General and administrative expenses 9,157 4,852 23,448 13,108
Depreciation and amortization 1,294 801 3,397 1,784
---------- ---------- --------- --------
28,926 12,995 71,085 34,664
Income from operations 3,112 623 7,450 292
Other income (expense):
Interest expense (1,803) (774) (4,570) (1,667)
Interest income 22 15 66 26
------------ ---------- --------- --------
(1,781) (759) (4,504) (1,641)
------------ ----------- --------- --------
Income (loss) before provision for income taxes 1,331 (136) 2,946 (1,349)
Provision for income taxes (benefit) 503 (10) 860 (434)
------------ ----------- --------- --------
Net income (loss) 828 (126) 2,086 (915)
Dividends on preferred stock (338) (159) (912) (398)
------------ ----------- --------- --------
Net income (loss) applicable to common stockholders $490 $(285) $1,174 $(1,313)
------------ ----------- --------- --------
Net income (loss) per common share:
Basic:
Weighted average common shares outstanding 9,248,445 6,036,652 8,409,942 5,877,609
============== =========== =========== ===========
Net income (loss) $ 0.05 $ (0.05) $ 0.14 $ (0.22)
Diluted:
Weighted average common shares outstanding 18,100,060 6,036,652 16,529,382 5,877,609
=============== =========== ============ ===========
Net income (loss) $ 0.05 $ (0.05) $0.13 $ (0.22)
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In Thousands)
For the Nine Months Ended
September 30, September 30,
1998 1997
============= =============
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $2,086 $ (915)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 3,397 1,784
Deferred income tax expense 816 25
(Increase) decrease in assets:
Accounts receivable (3,451) (205)
Prepaid expenses and other current assets (1,187) (406)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and other current liabilities (110) 879
Other long-term liabilities (12) (32)
--------- ----------
Net cash provided by operating activities 1,539 1,130
--------- ----------
Cash flows from investing activities:
Purchase of property and equipment (684) (465)
Increase in other assets (713) (322)
Acquisition of businesses (45,167) (25,981)
----------- ----------
Net cash used in investing activities (46,564) (26,768)
----------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 37,198 19,947
Principal payments on long-term debt (2,292) (1,169)
Payments of deferred financing costs (98) -
Proceeds from issuance of Series A convertible preferred stock, net 7,500 7,100
Proceeds from exercise of employee stock options 21 -
Proceeds from exercise of warrants, net 3,905 (175)
---------- ----------
Net cash provided by financing activities 46,234 25,703
---------- ----------
Net increase in cash 1,209 65
Cash - beginning of period 116 186
---------- ----------
Cash - end of period $ 1,325 $ 251
=========== ==========
Supplemental information:
Interest paid during the period $4,555 $1,653
========== ==========
Income taxes paid during the period $ - $ 52
========== ==========
Preferred stock dividends accrued and unpaid $1,061 $ 398
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. The results of operations
for the interim periods are not necessarily indicative of the results that may
be attained for an entire year. For further information, refer to the
consolidated 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 and nine month
periods ended September 30, 1997, with the historical financial statements of
Jurist for the three and nine month periods ended September 30, 1997.
The condensed consolidated financial statements include the accounts
of Esquire Communications Ltd. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
NOTE B--EARNINGS PER COMMON SHARE
During the year ended December 31, 1997 the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" (Statement 128).
As required by Statement 128, the Company must present basic earnings per share
and diluted earnings per share as defined. Accordingly basic earnings per share
has been computed based upon the weighted average number of shares outstanding
during the period and diluted earnings per share has been computed based upon
the weighted average number of shares plus the dilutive effects of common shares
contingently issuable from options, warrants and convertible preferred stock.
Common stock options, warrants and convertible preferred stock are excluded from
the computation of net earnings per share if their effect is anti-dilutive. All
prior period information has been restated to conform to the provisions of
Statement 128. The following table sets forth the computation of basic and
diluted earnings per share based on the requirements of Statement 128 for the
three and nine months ended September 30, 1998.
(Table on following page)
<PAGE>
<TABLE>
<CAPTION>
Three months Nine months
Ended Ended
September 30, September 30,
1998 1998
--------------- -------------
<S> <C> <C>
Numerator:
Net income - numerator for diluted income per share $828 $2,086
Less dividends on preferred stock $(338) $(912)
-------------- -----------
Numerator for basic income per share - income available to
common stockholders $490 $1,174
============== ===========
Denominator:
Denominator for basic income per share - weighted average shares 9,248,445 8,409,942
Effect of dilutive securities - options, warrants, and
convertible preferred stock 8,851,615 8,119,440
---------------- ---------------
Denominator for diluted income per share - weighted average
shares 18,100,060 16,529,382
================= ===============
</TABLE>
Stock options to purchase 1,663,751 shares of common stock at exercise prices
ranging from $2.64 - $9.00 for the nine months ended September 30, 1997 were not
included in the computation of diluted earnings per share as their effect would
have been antidilutive.
Stock options to purchase 926,000 shares of common stock at exercise prices
ranging from $6.25 - $9.00 for the three and nine month periods ended September
30, 1998 were not included in the computation of diluted earnings per share as
their exercise price exceeded the average market price of the common stock for
the three and nine month periods ended September 30, 1998.
Warrants to purchase 1,877,770 shares of common stock at exercise prices ranging
from $2.90 - $4.50 for the nine months ended September 30, 1997 were not
included in the computation of diluted earnings per share as their effect would
have been antidilutive.
Preferred stock convertible into 5,000,000 shares of common stock at the
conversion price of $3.00 per share and options to purchase 2,500,000 shares of
common stock at the conversion price of $3.00 per share were not included in the
computation of diluted earnings per share for the nine months ended September
30, 1997 as their effect would have been antidilutive.
Preferred stock options to purchase 1,250,000 shares of common stock at the
conversion price of $6.00 per share were not included in the computation of
diluted earnings per share for the three and nine month periods ended September
30, 1998 as their conversion price exceeded the average market price of the
common stock for the three and nine month periods ended September 30, 1998.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), was issued and is effective for fiscal years beginning after December
15,1997. Statement No. 131 establishes standards for segment reporting in
financial statements. The Company is in the process of implementing SFAS No. 131
and currently anticipates that its segments will be geographically based.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Retirement Benefits" ("SFAS No.
132"), was issued and is effective for fiscal years beginning after December 15,
1997. This statement standardizes disclosure requirements for pensions and other
post retirement benefits. It does not change the measurement or recognition
provisions for those benefit plans.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities.
The Company anticipates that the adoption of SFAS Nos. 131, 132 and
133 will not have a material effect on the financial position, results of
operations or liquidity of the Company.
NOTE D-- BUSINESS COMBINATIONS
On July 10, 1998, the Company acquired the assets and liabilities of
Cooksey-Regal Deposition Reporters, a court reporting agency based in
Sacramento, California. The purchase price, inclusive of associated costs,
consisted of cash in the amount of $350,000, a $250,000 promissory note payable
in 16 equal quarterly installments without interest and 10,000 unregistered
shares of the Company's common stock valued at $52,000. The acquisition,
accounted for under the purchase method of accounting, resulted in the inclusion
of the results of operations from the date of acquisition. The excess cost of
the Company's investment over the fair values of the acquired assets and
liabilities assumed approximated $697,000.
On July 17, 1998, the Company acquired the assets and liabilities of
Messenger & Associates, a court reporting agency based in Dallas, Texas. The
acquisition, accounted for under the purchase method of accounting, resulted in
the inclusion of the results of operations from the date of acquisition. The
purchase price, inclusive of associated costs, consisted of approximately
$240,000 in cash and a $88,000 promissory note payable in 12 equal quarterly
installments with interest at the rate of 7% per annum. The excess of the cost
of the Company's investment over the fair values of the assets acquired and
liabilities assumed approximated $368,000.
On July 17, 1998, the Company acquired the stock of Mudrick Witt
Professional Reporting, a court reporting agency based in Ft. Lauderdale,
Florida. The acquisition, accounted for under the purchase method of accounting,
resulted in the inclusion of the results of operations from the date of
acquisition. The purchase price, inclusive of associated costs, consisted of
approximately $2,950,000 in cash and 270,000 unregistered shares of the
Company's common stock valued at $1,404,000. The excess of the cost of the
Company's investment over the fair values of the assets acquired and liabilities
assumed approximated $4,191,000.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
On August 7, 1998, the Company acquired the stock of Phillips &
Associates, a court reporting agency based in Sacramento, California. 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 316,000 unregistered
shares of the Company's common stock valued at $1,612,000. The excess of the
cost of the Company's investment over the fair values of the assets acquired and
liabilities assumed approximated $1,202,000.
On August 28, 1998, the Company acquired the assets and liabilities of
Gregory & Gregory Associates, Inc. and Gregory & Gregory Staffing, Inc. a New
York, New York based permanent staffing agency and temporary legal staffing
agency. The acquisition, accounted for under the purchase method of accounting,
resulted in the inclusion of the results of operations from the date of
acquisition. The purchase price, inclusive of associated costs, consisted of
approximately $6,000,000 in cash, a $750,000 promissory note bearing interest at
6.5% with $450,000 payable on November 30, 1998 and the remainder payable in
three quarterly installments and 55,556 unregistered shares of the Company's
common stock valued at $238,000. The excess of the cost of the Company's
investment over the fair values of the assets acquired and liabilities assumed
approximated $7,164,000.
The cash portion of all of the above acquisitions, which approximated
$9,540,000, was financed by the proceeds from borrowings under the Company's
revolving credit agreement.
The following unaudited pro forma information assumes that the 1997
acquisitions of Nevill & Swinehart, Pelletier & Jones, Wolfe, Rosenberg &
Associates, Krauss, Katz & Ackerman, American Network Services, Inc. and Hyatt
Court Reporting occurred on January 1, 1997, and all acquisitions made during
the period January 1, 1998 through September 30, 1998 occurred on January 1,
1998. These results are not necessarily indicative of future operations, nor of
results that would have occurred had the acquisitions been consummated as of the
beginning of the periods presented.
September 30, September 30,
1998 1997
Revenue $ 101,336 $ 42,264
Net income (loss) applicable to
common stockholders $ 2,502 $ (531)
Net income (loss) per common
share - basic $ 0.30 $ (0.09)
Net income (loss) per common
share - diluted $ 0.21 $ (0.09)
NOTE E-- STOCKHOLDERS' EQUITY
In connection with the acquisition of Cooksey-Regal Deposition
Reporters, Mudrick Witt Professional Reporting, Phillips & Associates and
Gregory & Gregory during the quarter, the Company issued 651,556 shares of
common stock at an average recorded share price of $5.07.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
On August 26, 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 38,855
shares of common stock upon the exercise of 75,000 stock warrants issued on
January 9, 1998.
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
During the nine month period ended September 30, 1998, the Company
issued 144,238 shares of common stock in connection with a cashless exercise of
warrants.
During the nine month period ended September 30, 1998, the Company
issued 1,478,585 shares of common stock in connection with acquisitions.
Supplemental noncash investing and financing
activities for the nine months ended September 30, 1998:
Acquisitions:
Fair value of assets acquired $ 14,112
Liabilities assumed $ 8,859
Cash paid for acquisitions $ 45,167
Stock issued $ 6,009
Notes issued $ 6,526
Options issued $ 279
NOTE G - SUBSEQUENT EVENTS
Subsequent to September 30, 1998, the Company acquired substantially
all of the assets of Lieberman & Chaim, a Philadelphia, Pennsylvania based court
reporting agency for a purchase price of approximately $802,000, Mannion
Reporting, a Cranbury, New Jersey based court reporting agency for a purchase
price of approximately $250,000 and Precise/Verbatim Reporting, a Ft.
Lauderdale, Florida based court reporting agency for a purchase price of
approximately $619,000.
Effective October 31, 1998, the option to acquire 7,500 shares of
Series B preferred stock was converted into 750,000 shares of common stock of
the Company at the conversion price of $6.00 per share.
THIS REPORT ON FORM 10-QSB CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE OPERATIONS
AND FUTURE ECONOMIC PERFORMANCE AS WELL AS OTHER NON-HISTORICAL INFORMATION. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In 1997, the Company acquired 17 court reporting agencies
(collectively referred to as "1997 Acquisitions"). In the first three quarters
of 1998, the Company acquired 19 court reporting agencies and two staffing
agencies (collectively referred to as "1998 Acquisitions").
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUE. Revenue increased by approximately $18.4 million, or 135.3%,
to $32.0 million, and $43.6 million, or 124.7%, to $78.5 million for the three
and nine months ended September 30, 1998 from $13.6 million and $35.0 million
for the three and nine months ended September 30, 1997. This increase in revenue
was due primarily to the effect of acquisitions completed after June 30, 1997.
OPERATING EXPENSES. Operating expenses increased by approximately
$11.1 million, or 151.6%, to $18.5 million and $24.5 million, or 123.8%, to
$44.2 million for the three and nine months ended September 30, 1998 from $7.3
million and $19.8 million for the three and nine months ended September 30,
1997. Operating expenses as a percentage of revenue decreased to 56.3% for the
nine months ended September 30, 1998 from 56.6% for the nine months ended
September 30, 1997. This decrease was due primarily to the standardization of
the Company's pricing and direct court reporting costs and a greater share of
revenue generated in geographic areas with higher profit margins for the nine
months ended September 30, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expense increased by approximately $4.3 million, or 88.7%, to $9.2 million and
$10.3 million, or 78.9%, to $23.4 million for the three and nine months ended
September 30, 1998 from $4.9 million and $13.1 million for the three and nine
months ended September 30, 1997. This increase was largely due to expenses
related to the 1997 and 1998 Acquisitions consisting of payroll and occupancy
expenses, as well as increased sales compensation, marketing and promotional
expenses and administrative support expenses due to increased revenue levels.
General and administrative expenses as a percentage of revenue decreased to
28.6% and 29.9% for the three and nine months ended September 30, 1998 from
35.6% and 37.5% for the three and nine months ended September 30, 1997. This
decrease was due to the large number of tuck-in acquisitions completed in 1997
and the nine months ended September 30, 1998 (which allowed the Company to
operate the acquired businesses through its existing infrastructure), resulting
in a lower impact of corporate overhead as a percentage of revenue.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by approximately $493,000, or 61.5%, to $1.3 million and $1.6 million, or 90.4%,
to $3.4 million for the three and nine months ended September 30, 1998 from
$801,000 and $1.8 million for the three and nine months ended September 30,
1997. This increase was due primarily to additional amortization arising from
the 1997 and 1998 Acquisitions. A significant component of the amortization
expense relates to goodwill, which are the costs in excess of fair market value
of net tangible assets of acquired businesses.
INCOME FROM OPERATIONS. Income from operations increased by
approximately $2.5 million to $3.1 million and $7.2 million to $7.5 million for
the three and nine months ended September 30, 1998 from income from operations
of $623,000 and $292,000 for the three and nine months ended September 30, 1997.
Income from operations as a percentage of revenues increased to 9.7% and 9.5%
for the three and nine months ended September 30, 1998 from 4.6% and 0.8% for
the three and nine months ended September 30, 1997.
OTHER EXPENSE, NET. Other expense, net, consisting primarily of
interest expense, increased by approximately $1.0 million, to $1.8 million and
$2.9 million, to $4.5 million for the three and nine months ended September 30,
1998 from $759,000 and $1.6 million for the three and nine months ended
September 30, 1997 due to the incurrence of additional debt to finance
acquisitions and to fund working capital.
PROVISION FOR INCOME TAXES (BENEFIT). The Company offset a portion of
its current income tax expense by utilizing its deferred tax asset for the three
and nine months ended September 30, 1998, and recorded a tax expense of $503,000
and $860,000 for the three and nine months ended September 30, 1998 and recorded
a $10,000 and $434,000 tax benefit for the three and nine months ended September
30, 1997. The deferred tax asset relating to the net operating loss carryforward
was fully utilized during the nine months ended September 30, 1998.
Consequently, income tax expense, if any, in future periods will not be offset
by the deferred tax asset, thereby resulting in a higher effective income tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly
affected by acquisitions and, given the Company's acquisition strategy, may be
significantly affected for the foreseeable future. The Company's primary source
of cash in the past two years has been from bank borrowings and equity
investments from its investors which has been used primarily for acquisitions,
repayment of debt, capital expenditures and working capital.
OPERATING ACTIVITIES
Net cash provided by operating activities totaled $1.5 million and
$1.1 million for the nine months ended September 30, 1998 and September 30,
1997, respectively, representing an increase of $409,000. The increase in
operating cash flow in the nine months ended September 30, 1998 was due
primarily to an increase in net income, accounts receivable and prepaid
expenses.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $46.6 million and $26.8
million for the nine months ended September 30, 1998 and September 30, 1997,
respectively, and primarily has been used to fund payments for the 1997 and 1998
Acquisitions and investments in capital equipment. Net cash used to acquire
businesses was $45.2 million and $26.0 million for the nine months ended
September 30, 1998 and September 30, 1997, respectively. The Company continues
to invest in capital equipment, principally to upgrade facilities, computer
systems and photocopy equipment. At September 30, 1998, the Company had no
commitments to purchase equipment; however, the Company expects to make
additional capital expenditures of between $200,000 and $300,000 in the last
quarter of 1998, none of which is pursuant to a firm commitment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the nine months ended
September 30, 1998 and September 30, 1997 was $46.2 million and $25.7 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 the 1997 and 1998 Acquisitions and for working capital.
The Company currently has a three-year Credit Agreement with financial
institutions which, as amended, provides for borrowings up to $80.0 million
based on operating cash flow as defined therein and expires in December 1999.
Borrowings under the Credit Agreement bear interest at either the prime rate or
LIBOR, at the Company's election, plus the applicable margin rate. The
applicable margin varies on the basis of operating cash flow and the overall
leverage ratio as defined in the Credit Agreement. The Credit Agreement, which
is secured by substantially all the assets of the Company, restricts future
indebtedness, investments, distributions, acquisitions or sale of assets and
capital expenditures and also requires maintenance of certain financial ratios
and covenants. At September 30, 1998, the effective interest rate was 9.0% and
aggregate borrowings under the Credit Agreement were $77.3 million. Effective
August 27, 1998, the Company entered into a guaranty agreement ("Guaranty") with
a preferred stockholder, whereby the stockholder would guaranty up to $2,500,000
of advances in excess of the Company's operating cash flows through October 31,
1998. The Guaranty has been extended through the date of filing of this Form
10-QSB. If the preferred stockholder pays any amounts pursuant to the Guaranty,
the Company will issue to the preferred shareholder a number of shares of its
Series C convertible preferred stock equal to the total amount paid divided by
$1,000. The Series C preferred stock will contain rights and preferences
identical to those of the Series B preferred stock, except that the Series C
preferred stock will be junior to the Series B preferred stock and the initial
conversion price will be the greater of (i) the average of the closing prices on
the Nasdaq Stock Market of a share of common stock of the Company for the 20
consecutive business days ending on the date the preferred shareholder make
their payment or (ii) $5.00. During the fourth quarter of 1998, the Company
expects to reach the limit of available borrowings under its current Credit
Agreement, which would limit the Company's ability to continue to acquire legal
service organizations. The Company is currently considering various financing
alternatives, including the raising of equity through a secondary offering of
stock and/or increasing its current Credit Agreement.
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs
and operating systems in its internal operations, including applications used in
financial business systems, sales and marketing, billing and various
administrative functions. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year
end and impacts both information technology ("IT") and non-IT systems. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could cause
the Company to incur expenses and the risk and potential expense of any
disruptions that may be caused by the software's impaired functioning as the
year 2000 approaches and by the modification or replacement of such software,
including a temporary inability to integrate scheduling throughout the Company's
offices and to send correct invoices or engage in similar normal administrative
activities.
The Company has completed its identification of IT systems that are
not year 2000 compliant and is in the process of making appropriate responses to
address certain identified problem areas. The Company has hired an outside firm
to assist in developing a new management information system for scheduling,
billing and paying independent contractors that is designed to be Year 2000
compliant and it intends to implement the system by April 1999. The Company
planned to replace its existing information system and did not accelerate the
replacement due to year 2000 issues. Testing of all aspects of the new system is
expected to commence in the fourth quarter of 1998 and be completed during the
first quarter of 1999. Costs incurred through September 30, 1998 in connection
with the management information system were $400,000 and the total cost is
estimated to be $750,000. The Company is currently in the process of assessing
its non-IT systems for year 2000 compliance.
The ability of third parties with whom the Company transacts business
to address adequately their year 2000 compliance is beyond the Company's
control. At this time, the Company has begun to make inquiries of its major
third party vendors to determine their ability to be Year 2000 compliant. At
this time, the Company is unable to determine the extent to which it will be
dependent on third parties to identify or address year 2000 issues or the impact
of any year 2000 problems of such third parties on the Company's business,
financial condition, results of operations or ability to sustain growth.
In the event of a delay in the implementation of the new management
information system and the associated year 2000 compliance plan, the Company's
contingency plan is to modify its existing IT system. The Company has been
advised by the outside firm hired to assist in developing and implementing the
new management information system that this would take 90 days and the costs
would not be material (not to exceed $100,000). The Company's contingency plan
also includes some non-computerized backup systems, including manually
scheduling and sending invoices.
The Company's accounting system presently is Year 2000 compliant. The
Company has hired an outside firm to assist in implementing and installing a new
centralized accounting system which is also Year 2000 compliant.
The costs incurred by the Company, including the cost of the
replacement system, to address year 2000 compliance have not had, and are not
anticipated to have, a material adverse effect on the Company's business,
financial condition, results of operations or ability to sustain growth. These
costs, and the date on which the Company plans to complete the Year 2000
modification and testing processes, are based on management's best estimates,
which were derived using numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
<PAGE>
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-- None
(b) Reports on Form 8-K -- None
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 12, 1998
By: /S/ DAVID A. WHITE
--------------------------
David A. White
Chief Executive Officer
By: /S/ DAVID A. HIGSON
------------------------
David A. Higson
Executive Vice President,
Chief Financial Officer
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