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 JUNE 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 August 3, 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>
June 30, December 31,
1999 1998 (1)
=========== ============
(Unaudited)
<S> <C> <C>
ASSETS (pledged)
Current Assets:
Cash $ 1,306 $ 933
Accounts receivable, less allowance for doubtful accounts 32,983 27,574
Prepaid expenses and other current assets 1,901 2,944
----------- ----------
Total current assets 35,230 31,451
Property and equipment, net 6,902 5,937
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 114,657 112,840
Other, net 784 1,028
----------- ----------
Total assets $ 158,533 $151,256
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ 960 $ 727
Accounts payable 8,986 8,826
Accrued expenses and other current liabilities 9,546 6,798
Current portion of long-term debt, including related parties 89,377 3,779
----------- ----------
Total current liabilities 107,909 20,130
Long-term debt, including related parties 7,752 90,329
Other long-term liabilities 311 331
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 (8,352) (5,973)
----------- ----------
Total stockholders' equity 41,601 40,466
----------- ----------
Total liabilities and stockholders' equity $158,533 $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 Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
========== =========== ========== ============
<S> <C> <C> <C> <C>
Revenue $ 38,876 $ 25,812 $ 73,693 $ 46,497
Costs and expenses:
Operating expenses 23,347 14,366 43,927 25,765
General and administrative expenses 12,172 7,890 23,839 14,291
Depreciation and amortization 1,542 1,109 2,992 2,103
----------- ------------- ------------- ------------
37,061 23,365 70,758 42,159
Income from operations 1,815 2,447 2,935 4,338
Other income (expense):
Interest expense (2,534) (1,502) (4,615) (2,767)
Interest income 20 20 41 44
------------- ------------- ------------- ------------
(2,514) (1,482) (4,574) (2,723)
Income (loss) before provision for income taxes (699) 965 (1,639) 1,615
Provision for income taxes - 357 - 357
------------- ------------- ------------- ------------
Net income (loss) (699) 608 (1,639) 1,258
Dividends on preferred stock (375) (307) (740) (574)
------------- ------------- ------------- ------------
Net income (loss) applicable to common stockholders $ (1,074) $ 301 $ (2,379) $ 684
============= ============= ============= ============
Net income (loss) per common share:
Basic:
Weighted average common shares outstanding 5,173,767 4,197,383 5,327,090 3,991,871
============= ============= ============= ============
Net income (loss) $ (0.21) $ 0.07 $ (0.45) $ 0.17
Diluted:
Weighted average common shares outstanding 5,173,767 8,308,256 5,327,090 8,019,412
============= ============= ============= ============
Net income (loss) $ (0.21) $ 0.07 $ (0.45) $ 0.16
</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 Six Months Ended
June 30, June 30,
1999 1998
========== ============
Cash flows from operating activities:
<S> <C> <C>
Net Income (loss) $ (1,639) $ 1,258
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,992 2,103
Provision for deferred income taxes - 92
(Increase) decrease in assets:
Accounts receivable (5,402) (3,066)
Prepaid expenses and other current assets 1,041 (500)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses and other current liabilities 2,143 (1,777)
Other long-term liabilities (16) 45
------------ ----------
Net cash used in operating activities (881) (1,845)
------------ ----------
Cash flows from investing activities:
Purchase of property and equipment (1,829) (417)
Increase in other assets 4 (147)
Acquisition of businesses (1,938) (31,724)
------------ ----------
Net cash used in investing activities (3,763) (32,288)
------------ ----------
Cash flows from financing activities:
Bank overdraft 233 -
Proceeds from long-term debt 4,527 24,824
Principal payments on long-term debt (2,229) (1,493)
Proceeds from issuance of Series A convertible preferred stock, net - 7,500
Proceeds from issuance of Series C convertible preferred stock, net 2,486 -
Proceeds from exercise of employee stock options - 21
Proceeds from exercise of warrants, net - 3,905
------------ ----------
Net cash provided by financing activities 5,017 34,757
------------ ----------
Net increase (decrease) in cash (587) 624
Cash - beginning of period 933 116
------------ ----------
Cash - end of period $ 1,306 $ 740
============ ==========
Supplemental information:
Interest paid during the period $ 4,087 $ 2,748
============ ==========
Income taxes paid during the period $ - $ -
============ ==========
Preferred stock dividends accrued and unpaid $ 2,138 $ 724
============ ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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" (Statement 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 six months ended June 30, 1998. There were no reconciling items
for the three and six months ended June 30, 1999.
(Table on following page)
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three months Six Months
Ended Ended
June 30, June 30,
1998 1998
<S> <C> <C>
Numerator:
Net income - numerator for diluted income per share $608 $1,258
Less dividends on preferred stock (307) $(574)
----------- -----------
Numerator for basic income per share - income available
to common stockholders $301 $684
=========== ===========
Denominator:
Denominator for basic income per share - weighted average shares 4,197,383 3,991,871
Effect of dilutive securities - options, warrants,
and convertible preferred stock 4,110,873 4,027,541
----------- -----------
Denominator for diluted income per share - weighted average shares 8,308,256 8,019,412
=========== ===========
</TABLE>
Stock options to purchase 458,000 shares of common stock at exercise prices
ranging from $12.00 to $18.00 for the three and six months ended June 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 six months ended June 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 six
months ended June 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 six months ended
June 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 1,182,334 shares of common stock at exercise
prices ranging from $3.25 - $18.00 for the three months and six months ended
June 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 six months ended June 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 six months ended June 30,
1999 were not included in the computation of diluted earnings per share as their
effect would have been antidilutive.
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 six months ended June 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 six months
ended June 30, 1999 as their effect would have been antidilutive.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
(Dollars in Thousands, Except Share Data)
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. This statement establishes 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
On June 30, 1999, the Company acquired the assets and liabilities of
Mudrick-Witt Legal Video Services, Inc., a West Palm Beach, Florida based
videography agency through the exercise of an option agreement previously
entered into on July 17, 1998. The purchase price, inclusive of transaction
costs, consisted of $600 paid in cash in July, 1998, approximately $350 paid in
cash on June 30, 1999 and a promissory note in the amount of $400 which is
payable in two equal installments on October 1, 1999 and January 3, 2000. The
cost in excess of net identifiable assets acquired was approximately $1,347.
The current year cash portion of this acquisition was financed out of
working capital. If this acquisition had occurred on January 1, 1999 or 1998,
there would not have been a material impact on the Company's consolidated
results of operations for any of the periods presented. During the six months
ended June 30, 1999, the Company recorded approximately $919 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. & Jewelinski
Court Reporters, during the six months ended June 30, 1999 the Company issued
162,500 shares of common stock at an average recorded share price of $4.98.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
(Dollars in Thousands, Except Share Data)
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
During the six month period ended June 30, 1999, the Company issued
50,000 shares of common stock in connection with an acquisition.
During the six month period ended June 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 six months ended June 30, 1999:
Acquisitions:
Fair value of assets acquired $ 29
Liabilities assumed $ 172
Cash paid for acquisitions $ 1,938
Stock issued $ 1,028
Notes issued $ 450
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)
June 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
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1999:
Revenue $11,681 20,166 7,029 -- 38,876
Operating income 2,406 2,509 457 (3,557) 1,815
Identifiable assets 21,877 22,364 6,386 107,906 158,533
June 30, 1998:
Revenue 8,996 13,433 3,383 -- 25,812
Operating income 1,499 2,715 (44) (1,723) 2,447
Identifiable assets 13,184 13,878 1,747 103,383 132,192
- ---------------------------------------------------------------------------------------------------------------------------
Western Northeast Southeast
Six months ended Region Region Region Other Consolidated
- ----------------------------------------------------------------------------------------------------------------------------
June 30, 1999:
Revenue $ 22,057 38,293 13,343 -- 73,693
Operating income 4,231 4,160 1,062 (6,518) 2,935
Identifiable assets 21,877 22,364 6,386 107,906 158,533
June 30, 1998:
Revenue 17,359 22,849 6,289 -- 46,497
Operating income 3,044 4,439 634 (3,779) 4,338
Identifiable assets 13,184 13,878 1,747 103,383 132,192
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUE. Revenues increased by approximately $13,064, or 50.6%, to
$38,876 from $25,812 and $27,196, or 58.5% to $73,693 from $46,497 for the three
and six months ended June 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 second 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
$8,981, or 62.5%, to $23,347 from $14,366 and $18,162, or 70.5% to $43,927 from
$25,765 for the three and six months ended June 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 60.1%
and 59.6% for the three months and six months ended June 30, 1999 from 55.7% and
55.4% for the three and six months ended June 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 $4,282, or 54.3%, to $12,172 from $7,890 and
$9,548, or 66.8%, to $23,839 from $14,291 for the three and six months ended
June 30, 1999 and 1998, respectively. General and administrative expenses
included approximately $536 and $666 in costs consisting principally of employee
severance costs for the three and six months ended June 30, 1999, respectively.
These expenses were incurred to reduce ongoing operating costs. Excluding these
charges, general and administrative expenses, as a percentage of revenue,
decreased to 29.9% from 30.6% during the three months ended June 30, 1999 and
1998, respectively, but increased to 31.4% from 30.7% during the six months
ended June 30, 1999 and 1998, respectively. The overall increase was largely due
to expenses related to acquisitions completed after January 1, 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by approximately $433, or 39.0%, to $1,542 from $1,109 and $889, or 42.3%, to
$2,992 from $2,103 for the three and six months ended June 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 $632, or 25.8% to $1,815 from $2,447 and $1,403, or 32.3%, to
$2,935 from $4,338 for the three and six months ended June 30, 1999 and 1998,
respectively. Excluding the expenses related principally to severance costs of
$536 and $666 for the three and six months ended June 30, 1999 operating income
decreased by approximately $96, or 3.9% to $2,351 from $2,447 and $737, or 17.0%
to $3,601 from $4,338 for the three and six months ended June 30, 1999. As a
percentage of revenues, income from operations, before consideration of the
expenses related principally to severance costs, decreased to 6.0% and 4.9% for
the three and six months ended June 30, 1999 from 9.5% and 9.3% for the three
and six months ended June 30, 1998.
As with revenue, the Company recognized favorable trends in operating
income during the first two quarters of 1999. The Western Region recognized
operating income of $2,406 on revenues of $11,681 for the three months ended
June 30, 1999 compared to operating income of $1,825 on revenues of $10,376 for
the three months ended March 31, 1999. As a percentage of revenue, operating
income increased to 20.6% in the three months ended June 30, 1999 from 17.6% for
the three months ended March 31, 1999 in the Western Region.
The Northeast Region recognized operating income of $2,509 on
revenues of $20,166 for the three months ended June 30, 1999 compared to
operating income of $1,649 on revenues of $18,127 for the three months ended
March 31, 1999. As a percentage of revenue, operating income increased to 12.4%
in the three months ended June 30, 1999 from 9.1% for the three months ended
March 31, 1999 in the Northeast Region.
The Southeast Region recognized operating income of $457 on revenues
of $7,029 for the three months ended June 30, 1999 compared to operating income
of $605 on revenues of $6,314 for the three months ended March 31, 1999. As a
percentage of revenue, operating income decreased to 6.5% in the three months
ended June 30, 1999 from 9.6% for the three months ended March 31, 1999 in the
Southeast Region.
For the Company's court reporting services, earnings before interest,
taxes, depreciation and amortization (EBITDA) showed an increase of $1,011, or
30.2%, to $4,361 for the three months ended March 31, 1999 compared to $3,350
for the three months ended December 31, 1998. 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 increased to 17.0% for the three months ended
June 30, 1999 from 13.9% for the three months ended March 31, 1999 which also
showed an increase from 11.3% for the three months ended December, 31, 1998.
Average EBITDA for the six months ending June 30, 1999 was 15.5% for court
reporting services.
Permanent staffing operations also showed significant improvement. The
three months ended December 31, 1998 showed a loss before interest, taxes,
depreciation and amortization of $457. The three months ended March 31, 1999
also showed a negative EBITDA of $9, however this was an improvement of $448, or
98.0% compared to the three months ended December 31, 1998. During the
three months ended June 30, 1999, permanent staffing operations returned to
profitability showing an increase in permenant staffing EBITDA of approximately
$163, or 1,811.1%, to $154 compared to the three months ended March 31,
1999. As a percentage of permanent staffing revenue, EBITDA increased to 8.0%
for the three months ended June 30, 1999 from negative 1.0% for the three months
ended March 31, 1999 and negative 78.1% for the three months ended December 31,
1998. Average EBITDA for the six months ending June 30, 1999 was 4.3% for
permanent staffing.
OTHER EXPENSE, NET. Other expense, net, consisting primarily of
interest expense, increased by approximately $1,032, or 69.6%, to $2,514 from
$1,482 and $1,851, or 68.0%, to $4,574 from $2,723 for the three and six months
ended June 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 has been from bank borrowings
and equity investments by preferred shareholders which were used primarily for
repayment of debt, capital expenditures and working capital.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
OPERATING ACTIVITIES
Net cash used in operating activities totaled $881 for the six months
ended June 30, 1999 compared to $1,845 for the three months ended June 30, 1998
representing an decrease of $964. Decreased usage in the six months ended June
30, 1999 compared to the same period in 1998 was primarily due to increases in
accounts payables and in other current assets. These were partially offset by an
increase in accounts receivable which reflect the increases in revenue. The
Company's management has placed additional emphasis on cash management and
accounts receivable collection activities, which has had a positive impact on
the Company's cash flow.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $3,763 and $32,288 for
the six months ended June 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 June 30, 1999, however the Company expects
to make additional capital expenditures of between $800 and $1,000 in the last
two quarters of 1999, none of which is pursuant to a firm commitment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the six months ended
June 30, 1999 was $5,017 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 six months ended June 30, 1998, net cash provided
by financing activities was $34,757, 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. 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 June 30, 1999, the effective interest rate was 10.3%
and aggregate borrowings under the Credit Agreement were $82,742. 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 June 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, with principal and interest to be due and
payable on August 6, 1999. The payment date for principal and interest was
subsequently extended to October 6, 1999 by the preferred shareholder.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollars in Thousands, Except Share Data)
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 earn-outs 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 hopes to renegotiate the Credit
Agreement, or enter into a new 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.
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 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 October 1999. The Company
planned to replace its existing information system and did not accelerate the
replacement due to year 2000 issues. Testing of the new system commenced during
the first quarter of 1999 with completion expected during the third quarter of
1999. Costs incurred through June 30, 1999 in connection with the management
information system were approximately $950 compared to estimated costs of
$1,500. The Company is also currently in the process of assessing its non-IT
systems for year 2000 compliance.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Dollars in Thousands, Except Share Data)
The ability of third parties with whom 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 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). The Company's contingency plan also
includes some non-computerized backup systems, including manually scheduling and
sending 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 June 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 six months ended June
30, 1999 would have increased by approximately $159 and $318 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 -- None
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 12, 1999
By: /S/ DAVID A. WHITE
---------------------------
David A. White
Chief Executive Officer
By: /S/ STEVEN N. WELCH
---------------------------
Steven N. Welch
Chief Financial Officer
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