UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
[ ] 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 registrant 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 November 2, 1999 there were outstanding 5,334,479 shares of Common
Stock, $.02 par value.
<PAGE>
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II. Other information 16
Signatures 17
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998 (1)
=================== =================
(Unaudited)
ASSETS (pledged)
Current Assets:
<S> <C> <C>
Cash $ 1,661 $ 933
Accounts receivable, less allowance for doubtful accounts 34,235 27,574
Prepaid expenses and other current assets 2,577 2,944
------------------ -----------------
Total current assets 38,473 31,451
Property and equipment, net 5,969 5,937
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 114,443 112,840
Other, net 620 1,028
------------------ -----------------
Total assets $ 159,505 $ 151,256
================== =================
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 2,630 $ 727
Accounts payable 8,717 8,826
Accrued expenses and other current liabilities 12,343 6,798
Current portion of long-term debt, including related parties 86,689 3,779
------------------ -----------------
Total current liabilities 110,379 20,130
Long-term debt, including related parties 9,467 90,329
Other long-term liabilities 193 331
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized in series:
Series A convertible preferred stock 22,500 shares authorized;
22,500 and 22,500 shares issued and oustanding in 1999 and 1998,
respectively; $22,500 and $22,500 aggregate liquidation preference
in 1999 and 1998, respectively - -
Series C convertible preferred stock 2,500 shares authorized;
2,500 and 0 shares issued and oustanding in 1999 and 1998,
Respectively; $2,500 and $0 aggregate liquidation preference
in 1999 and 1998, respectively - -
Common stock, $.02 par value, 100,000,000 shares authorized,
5,426,229 and 5,213,729 shares issued in 1999 and 1998, respectively,
5,334,479 and 5,121,979 shares outstanding in 1999 and
1998, respectively 108 104
Additional paid-in capital 51,551 48,041
Treasury stock, at cost - 91,750 shares (550) (550)
Notes receivable - stockholder (1,156) (1,156)
Accumulated deficit (10,487) (5,973)
------------------ -----------------
Total stockholders' equity 39,466 40,466
------------------ -----------------
Total liabilities and stockholders' equity $ 159,505 $ 151,256
================== =================
(1) The balance sheet at December 31, 1998 is derived from audited financial statements at that date.
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 38,159 $ 32,038 $ 111,852 $ 78,535
Costs and expenses:
Operating expenses 23,398 18,475 67,325 44,240
General and administrative expenses 12,139 9,157 35,955 23,448
Depreciation and amortization 1,633 1,294 4,624 3,397
------------ ------------ ----------- -----------
37,170 28,926 107,904 71,085
Income from operations 989 3,112 3,948 7,450
Other income (expense):
Interest expense (2,736) (1,803) (7,351) (4,570)
Interest income 28 22 69 66
------------ ------------ ----------- -----------
(2,708) (1,781) (7,282) (4,504)
------------ ------------ ----------- -----------
Income (loss) before provision for
income taxes (1,719) 1,331 (3,334) 2,946
Provision for income taxes 41 503 65 860
------------ ------------ ----------- -----------
Net income (loss) (1,760) 828 (3,399) 2,086
------------ ------------ ----------- -----------
Dividends on preferred stock (375) (338) (1,115) (912)
------------ ------------ ----------- -----------
Net income (loss) applicable to
common stockholders $ (2,135) $ 490 $ (4,514) $ 1,174
============ ============ =========== ===========
Net income (loss) per common share:
Basic:
Weighted average common shares
outstanding 5,186,111 4,624,223 5,329,580 4,204,971
============ ============ =========== ===========
Net income (loss) $ (0.41) $ 0.11 $ (0.85) $ 0.28
Diluted:
Weighted average common shares
outstanding 5,186,111 9,050,030 5,329,580 8,264,691
============ ============ =========== ============
Net income (loss) $ (0.41) $ 0.09 $ (0.85) $ 0.25
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, September 30,
1999 1998
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) $ (3,399) $ 2,086
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 4,627 3,397
Provision for deferred income taxes 47 816
(Increase) decrease in assets:
Accounts receivable (6,655) (3,451)
Prepaid expenses and other current assets 366 (1,187)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and other
current liabilities 4,274 (110)
Other long-term liabilities (134) (12)
------------- --------------
Net cash (used) provided in operating activities (874) 1,539
------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (1,389) (684)
Increase in other assets 10 (713)
Acquisition of businesses (2,094) (45,167)
------------- --------------
Net cash used in investing activities (3,473) (46,564)
------------- --------------
Cash flows from financing activities:
Bank overdraft 1,903 -
Proceeds from long-term debt 4,627 37,198
Principal payments on long-term debt (3,940) (2,292)
Payments of deferred financing costs - (98)
Proceeds from issuance of Series A convertible
preferred stock, net - 7,500
Proceeds from issuance of Series C convertible
preferred stock, net 2,485 -
Proceeds from exercise of employee stock options - 21
Proceeds from exercise of warrants, net - 3,905
------------- --------------
Net cash provided by financing activities 5,075 46,234
------------- --------------
Net increase in cash 728 1,209
Cash - beginning of period 933 116
------------- --------------
Cash - end of period $ 1,661 $ 1,325
============= ==============
Supplemental information:
Interest paid during the period $ 4,087 $ 4,555
============= ==============
Income taxes paid during the period $ 68 $ -
============= ==============
Preferred stock dividends accrued and unpaid $ 2,513 $ 1,061
============= ==============
</TABLE>
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(Dollars in Thousands, Except 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 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, 1998.
The Company's stockholders voted to amend the Company's Certificate of
Incorporation on November 17, 1998 and effect a 1-for-2 reverse stock split of
all outstanding common stock and increase the par value of the Company's common
stock from $.01 to $.02 effective November 30, 1998. All share and per share
amounts have been restated to give effect to the reverse stock split.
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
Earnings per share was computed in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128). 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 securities. Common stock options, warrants and convertible
securities are excluded from the computation of net earnings per share if their
effect is anti-dilutive. 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. There were no reconciling
items for the three and nine months ended September 30, 1999.
(Table on following page)
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(Dollars in Thousands, Except Share Data)
<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 4,624,223 4,204,971
Effect of dilutive securities - options, warrants, and
convertible preferred stock 4,425,807 4,059,720
------------------- ---------------------
Denominator for diluted income per share - weighted average shares 9,050,030 8,264,691
=================== =====================
</TABLE>
Stock options to acquire 463,000 shares of common stock at exercise
prices ranging from $12.00 to $18.00 for the three and nine months ended
September 30, 1998 were not included in the computation of diluted earnings per
share because the exercise price of the options was greater than the average
market price of the common shares.
Debt convertible into 257,500 shares of common stock at exercise
prices ranging from $16.00 to $20.00 for the three and nine months ended
September 30, 1998 were not included in the computation of diluted earnings per
share as their effect would have been antidilutive.
A total of 47,500 shares of contingently issuable common stock were
not included in the computation of diluted earnings per share for the three and
nine months ended September 30, 1998 because at that date it was not certain
that the conditions would be satisfied.
Series B convertible preferred stock options to acquire 1,250,000
shares of common stock at an exercise price of $12.00 for the three and nine
months ended September 30, 1998 were not included in the computation of diluted
earnings per share because the average market price of common stock obtainable
upon conversion was less than the exercise price of the options.
Stock options to purchase 1,187,167 shares of common stock at exercise
prices ranging from $3.25 - $18.00 for the three months and nine months ended
September 30, 1999 were not included in the computation of diluted earnings per
share as their effect would have been antidilutive.
Warrants to purchase 354,500 shares of common stock at exercise prices
ranging from $5.80 - $9.00 for the three months and nine months ended September
30, 1999 were not included in the computation of diluted earnings per share as
their effect would have been antidilutive.
Debt convertible into 250,500 shares of common stock at exercise
prices ranging from $16.00 - $20.00 for the three months and nine months ended
September 30, 1999 were not included in the computation of diluted earnings per
share as their effect would have been antidilutive.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(Dollars in Thousands, Except Share Data)
A total of 35,000 shares of contingently issuable common stock were
not included in the computation of diluted earnings per share for the three
months and nine months ended September 30, 1999 as their effect would have been
antidilutive.
Preferred stock convertible into 4,000,000 shares of common stock at
conversion prices ranging from $6.00 - $10.00 per share were not included in the
computation of diluted earnings per share for the three months and nine months
ended September 30, 1999 as their effect would have been antidilutive.
NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, Statements of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and No. 137, "Accounting for Derivative Instruments and hedging
Activities - Deferral of Effective Date of FASB Statement No. 133", were issued
and are effective for all fiscal quarters of fiscal years beginning after June
15, 2000. These statements establish accounting and reporting standards for
derivative instruments and hedging activities.
The Company anticipates that the adoption of these statements will not
have a material effect on the financial position, results of operations or
liquidity of the Company.
NOTE D-- BUSINESS COMBINATIONS
During the nine months ended September 30, 1999, the Company recorded
approximately $2,374 related to modifications of the purchase price of various
acquisitions, due to working capital adjustments, earnouts, and other
settlements as required in the purchase agreements. The modifications were
recorded as a net increase to goodwill.
NOTE E-- STOCKHOLDERS' EQUITY
In connection with earnout agreements entered into as part of the
prior year acquisition of Gregory & Gregory Staffing Services, Inc. and
Jewelinski Court Reporters, during the nine months ended September 30, 1999 the
Company issued 162,500 shares of common stock at an average recorded share price
of $4.98. This was recorded as an increase to goodwill and is included in the
amount in Note D.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(Dollars in Thousands, Except Share Data)
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
During the nine-month period ended September 30, 1999, the Company
issued 50,000 shares of common stock in connection with an acquisition.
During the nine-month period ended September 30, 1999, the Company
issued 162,500 shares of common stock in connection with earnout provisions as
required under various purchase agreements.
Supplemental non-cash investing and financing
activities for the nine months ended September 30, 1999:
Acquisitions:
Fair value of assets acquired $ 29
Liabilities assumed $ 172
Cash paid for acquisitions $ 2,094
Stock issued $ 1,028
Notes issued $ 943
NOTE G - REPORTABLE SEGMENT DATA
The Company believes that all of its material operations are part of
the legal services industry, and it currently reports as a single industry
segment. The Company's reportable segments are geographically aligned business
units and include three regions within the United States, the Western region,
the Northeast region and the Southeast region. The Western region includes the
Company's operations in California, Colorado and Texas, the Northeast region
includes the Company's operations in Illinois, Michigan, New Jersey, New York,
Pennsylvania and Washington, D.C. and the Southeast Region includes the
Company's operations in Florida and Georgia.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
(Dollars in Thousands, Except Share Data)
The geographic reportable segments of the Company's revenues,
operating income and identifiable assets are summarized in the following table.
The "Other" column includes corporate related items and income and expense not
allocated to reportable segments.
<TABLE>
<CAPTION>
Western Northeast Southeast
Three months ended Region Region Region Other Consolidated
- ----------------------------- --------------- ------------------ ----------------- -------------- ------------------
September 30, 1999:
<S> <C> <C> <C> <C> <C>
Revenue $10,958 18,208 8,993 -- 38,159
Operating income 1,720 2,381 331 (3,443) 989
Identifiable assets 25,025 22,017 9,107 103,356 159,505
September 30, 1998:
Revenue 10,053 15,228 6,757 -- 32,038
Operating income 1,751 2,025 899 (1,563) 3,112
Identifiable assets 15,501 15,501 5,782 117,480 154,264
- ----------------------------- --------------- ------------------ ----------------- -------------- ------------------
Western Northeast Southeast
Nine months ended Region Region Region Other Consolidated
- ----------------------------- --------------- ------------------ ----------------- -------------- ------------------
September 30, 1999:
Revenue $33,015 52,957 25,880 -- 111,852
Operating income 5,951 5,851 2,083 (9,937) 3,948
Identifiable assets 25,025 22,017 9,107 103,356 159,505
September 30, 1998:
Revenue 27,437 35,140 15,958 -- 78,535
Operating income 4,795 5,892 2,106 (5,343) 7,450
Identifiable assets 15,501 15,501 5,782 117,480 154,264
No single customer accounted for as much as 10% of consolidated revenue in 1999 and 1998.
</TABLE>
<PAGE>
THIS REPORT ON FORM 10-Q 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 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INTRODUCTION
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.
Since 1993, the Company has pursued an aggressive acquisition
strategy, having acquired 46 court reporting companies, three permanent and
temporary staffing companies, and one videography company. Of these
acquisitions, three were acquired in 1996, 17 were acquired in 1997, 24 were
acquired in 1998, two during the first quarter of 1999, and one during the
second quarter of 1999. All but one of these acquisitions have been accounted
for using the purchase method, and a substantial portion of each acquisition's
purchase price is represented by goodwill. The Company will incur non-cash
charges as a result of the amortization of such assets over their lives.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUE. Revenues increased by approximately $6,121, or 19.1%, to
$38,159 from $32,038 and $33,317, or 42.4% to $111,852 from $78,535 for the
three and nine months ended September 30, 1999 and 1998, respectively. These
increases are primarily the result of acquisitions completed after January 1,
1998.
The Company has recognized strong sequential quarterly growth in
revenue between the fourth quarter of 1998 and the first quarter of 1999 and
even stronger growth between the first and third quarters of 1999. This is due
in part to seasonal fluctuations, particularly between fourth quarter, 1998 and
first quarter 1999, and management's shift in emphasis from growth through
acquisition to internal growth in 1999.
OPERATING EXPENSES. Operating expenses increased by approximately
$4,923, or 26.6%, to $23,398 from $18,475 and $23,085, or 52.2% to $67,325 from
$44,240 for the three and nine months ended September 30, 1999 and 1998
respectively. The significant portions of these increases were consistent with
the increases in revenue. Operating expenses as a percentage of revenues
increased to 61.3% and 60.2% for the three months and nine months ended
September 30, 1999 from 57.7% and 56.3% for the three and nine months ended
September 30, 1998. These increases are the result of higher operating expenses,
principally salaries, in the staffing businesses acquired during May 1998 as
compared to the court reporting business.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by approximately $2,982, or 32.6%, to $12,139 from $9,157 and
$12,507, or 53.3%, to $35,955 from $23,448 for the three and nine months ended
September 30, 1999 and 1998, respectively. General and administrative expenses
included approximately $1,160 and $1,826 in costs consisting principally of
employee severance costs for the three and nine months ended September 30, 1999,
respectively. These expenses were incurred to reduce ongoing operating costs.
Excluding these charges, general and administrative expenses, as a percentage of
revenue, increased slightly to 28.8% from 28.6% during the three months ended
September 30, 1999 and 1998, respectively, and 30.5% from 29.9% during the nine
months ended September 30, 1999 and 1998, respectively. The slight increases are
the result of management's commitment to controlling costs within the Company's
operating units.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by approximately $339, or 26.2%, to $1,633 from $1,294 and $1,227, or 36.1%, to
$4,624 from $3,397 for the three and nine months ended September 30, 1999 and
1998, respectively. This increase is primarily due to additional amortization
charges arising from the acquisitions completed after January 1, 1998. A
significant component of the amortization expense relates to the costs in excess
of fair value of net identifiable assets of acquired businesses (goodwill).
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INCOME FROM OPERATIONS. Income from operations decreased by
approximately $2,123, or 68.2% to $989 from $3,112 and $3,502, or 47.0%, to
$3,948 from $7,450 for the three and nine months ended September 30, 1999 and
1998, respectively. Excluding the expenses related principally to severance
costs of $1,160 and $1,826 for the three and nine months ended September 30,
1999, operating income decreased by approximately $963, or 30.9% to $2,149 from
$3,112 and $1,676, or 22.5% to $5,774 from $7,450 for the three and nine months
ended September 30, 1999. As a percentage of revenues, income from operations,
before consideration of the expenses related principally to severance costs,
decreased to 5.6% and 5.2% for the three and nine months ended September 30,
1999 from 9.7% and 9.5% for the three and nine months ended September 30, 1998.
The Western Region recognized operating income of $1,720 on revenues
of $10,958 for the three months ended September 30, 1999 compared to operating
income of $2,406 on revenues of $11,681 for the three months ended June 30,
1999. As a percentage of revenue, operating income decreased to 15.7% in the
three months ended September 30, 1999 from 20.6% for the three months ended June
30, 1999 in the Western Region.
The Northeast Region recognized operating income of $2,381 on revenues
of $18,208 for the three months ended September 30, 1999 compared to operating
income of $2,509 on revenues of $20,166 for the three months ended June 30,
1999. As a percentage of revenue, operating income increased to 13.1% in the
three months ended September 30, 1999 from 12.4% for the three months ended June
30, 1999 in the Northeast Region.
The Southeast Region recognized operating income of $331 on revenues
of $8,993 for the three months ended September 30, 1999 compared to operating
income of $457 on revenues of $7,029 for the three months ended June 30, 1999.
As a percentage of revenue, operating income decreased to 3.7% in the three
months ended September 30, 1999 from 6.5% for the three months ended June 30,
1999 in the Southeast Region.
For the Company's court reporting services, earnings before interest,
taxes, depreciation and amortization (EBITDA) showed a decrease of $1,064, or
19.5%, to $4,382 for the three months ended September 30, 1999 compared to
$5,445 for the three months ended June 30, 1999. EBITDA increased an additional
$1,084, or 24.9% to $5,445 for the three months ended June 30, 1999 compared to
the three months ended March 31, 1999. As a percentage of court reporting
revenue, court reporting EBITDA decreased to 14.2% for the three months ended
September 30, 1999 from 17.0% for the three months ended June 30, 1999 which
also showed an increase from 13.9% for the three months ended March, 31,
1999. Average EBITDA for the nine months ended September 30, 1999 was 15.2% for
court reporting services.
Permanent staffing continued its strong performance. EBITDA for the
three months ended September 30, 1999 showed an increase of $11 to $168 or 8.7%
of sales as compared to the three months ended September 30, 1998 of $157 or
6.9% of sales.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
OTHER EXPENSE, NET. Other expense, net, consisting primarily of
interest expense, increased by approximately $927, or 52.1%, to $2,708 from
$1,781 and $3,078, or 61.7%, to $7,282 from $4,504 for the three and nine months
ended September 30, 1999 and 1998, respectively. These increases are due to the
incurrence of additional debt to finance acquisitions and to fund working
capital.
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 during the six months ended June 30, 1999 was from bank borrowings and
equity investments by preferred shareholders which were used primarily for
repayment of debt, capital expenditures and working capital. Subsequent to June
30, 1999, the Company has met all of its financial obligations out of current
operating cash flow.
OPERATING ACTIVITIES
Net cash used in operating activities totaled $874 for the nine months
ended September 30, 1999 compared to $1,539 provided by operating activities for
the nine months ended September 30, 1998 representing a decrease of $2,413.
Increased usage in the nine months ended September 30, 1999 compared to the same
period in 1998 was primarily due to increases in accounts receivable.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $3,473 and $46,564 for
the nine months ended September 30, 1999 and 1998, respectively. The decrease is
due in large part to significant reduction in acquisition activities. The
Company continues to invest in capital equipment, principally to upgrade
facilities, computer systems and photocopy equipment. The Company had no
commitments for significant capital expenditures at September 30, 1999, however
the Company expects to make additional capital expenditures of between $200 and
$300 in the last quarter of 1999, none of which is pursuant to a firm
commitment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the nine months ended
September 30, 1999 was $5,075 and consisted primarily of proceeds from Credit
Agreement borrowings and the issuance of Series C convertible preferred stock
which were used to fund payments for capital expenditures, loan repayments and
for working capital. For the nine months ended September 30, 1998, net cash
provided by financing activities was $46,234, also provided by proceeds from the
Credit Agreement and issuance of Series A convertible preferred stock which were
used primarily for acquisitions.
The Company currently has a Credit Agreement with financial
institutions which, as amended, provides for borrowings up to $83,500 based on
operating cash flow as defined therein. The Credit Agreement expires January 3,
2000. Borrowings under the Credit Agreement bear interest at the prime rate,
plus specified margins. The payment of certain of the margins is deferred until
the maturity of the Credit Agreement, subject to certain conditions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Dollars in Thousands, Except Share Data)
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 covenants. At September 30, 1999, the effective
interest rate was 10.9% and aggregate borrowings under the Credit Agreement were
$82,842.
In connection with the Company's acquisition of Gregory & Gregory
Associates and Gregory & Gregory Staffing in August 1998, a preferred
stockholder guaranteed the repayment of a $2,500 over-advance made to the
Company under the Credit Agreement and received a fee of $125 in consideration
of such guaranty. In January 1999, $2,500 was paid pursuant to this guaranty and
2,500 shares of Series C convertible preferred stock were issued.
At September 30, 1999 the Company had approximately $12,232 of
indebtedness payable to sellers of various acquired businesses.
In February 1999, a preferred stockholder guaranteed $1,500 of an
over-advance made to the Company under the Credit Agreement and is entitled to
receive a fee of $75. In April 1999, $1,500 was paid pursuant to this guaranty.
The funds are evidenced by a subordinated promissory note with interest at the
rate of 18% per annum. The payment date for principal and interest is January 6,
2000.
FUTURE CAPITAL NEEDS
Because of additional emphasis on operating activities, cash
management and accounts receivable collection efforts, the Company believes that
cash from operations, augmented by available borrowings under its Credit
Agreement as amended, will be sufficient to fund its operations, planned capital
expenditures, payment of certain cash earn-outs and repayment of indebtedness to
certain former owners of acquired businesses through 1999. The payment of cash
earnouts and repayment of indebtedness is subject to approval by the Company's
lenders under the Credit Agreement and to the satisfaction of conditions
contained in the Credit Agreement. The Credit Agreement, as amended, expires on
January 3, 2000 and the Company is currently in the process of renegotiating its
Credit Agreement. However, there can be no assurance that the Company will be
able to generate sufficient cash flows from operations or that the terms
available for any future debt financing would be acceptable to the Company.
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
YEAR 2000 COMPLIANCE
The Company uses a significant number of computer software programs
and operating systems in its internal operations, including applications used in
financial business systems, sales and marketing, billing and various
administrative functions. The year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year
and impacts both information technology ("IT") and non-IT systems. Any of the
Company's computer programs that have time sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. The Company is
exposed to 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 elected to modify its
current management information system for scheduling, billing and paying
independent contractors to become year 2000 compliant. Initial testing and
analysis of the modifying patch has been completed, and has been installed in
all of the Company's reporting offices. The patch continues to undergo continued
detail testing, and final testing and implementation is scheduled to be
completed by December 15, 1999.
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 during 2000. The Company planned to replace its existing
information system and did not accelerate the replacement due to year 2000
issues. The Company is also currently in the process of assessing its non-IT
systems for year 2000 compliance.
The ability of third parties with which the Company transacts business
to adequately address their year 2000 compliance is beyond the Company's
control. 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 or
results of operations.
In the event of a delay in the implementation of the conversion patch
and the associated year 2000 compliance plan, the Company's contingency plan
includes some non-computerized backup systems, including manual scheduling and
issuance of invoices.
The Company's accounting system is presently 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 or results of operations. 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>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company is exposed to changes in interest rates as a result of its
bank Credit Agreement which is based on the London Inter-Bank Offered Rate and
the Prime Rate.
Based on the indebtedness outstanding under the Company's Credit
Agreement at September 30, 1999, a sensitivity analysis was performed using a
hypothetical 10% increase in interest rates. The analysis indicated that the
Company's interest expense and net loss for the three and nine months ended
September 30, 1999 would have increased by approximately $225 and $675
respectively. This amount does not include the effects of other events that
could affect interest rates, such as a downturn in overall economic activity, or
actions management could take to lessen the risk. This also does not take into
account any changes in the Company's financial structure that may result from
higher interest rates.
<PAGE>
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits-- None
(b) Reports on Form 8-K --
On September 22, 1999, the Company filed a report on Form
8-K reporting under Items 4 and 7 a change effective
September 16, 1999 in its independent accountants.
<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 15, 1999
By: /s/ Steven N. Welch
-------------------------
Steven N. Welch
Chief Executive Officer
Chief Financial Officer
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