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 MARCH 31, 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 May 6, 1999 there were outstanding 5,334,479 shares of Common Stock, $.02 par
value.
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 14
Part II. Other information 15
Signatures 16
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998 (1)
========== ===========
(Unaudited)
ASSETS (pledged)
Current Assets:
<S> <C> <C>
Cash $952 $933
Accounts receivable, less allowance for doubtful accounts 30,543 27,574
Prepaid expenses and other current assets 2,172 2,944
------------ ------------
Total current assets 33,667 31,451
Property and equipment, net 6,210 5,937
Other assets:
Costs in excess of fair value of net identifiable
assets of acquired businesses, net 112,577 112,840
Other, net 1,118 1,028
------------ ------------
Total assets $153,572 $151,256
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ - $ 727
Accounts payable 8,984 8,826
Accrued expenses and other current liabilities 7,710 6,798
Current portion of long-term debt, including related parties 85,601 3,779
------------ ------------
Total current liabilities 102,295 20,130
Long-term debt, including related parties 9,130 90,329
Other long-term liabilities 316 331
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,
5,263,729 and 5,213,729 shares issued, respectively,
5,171,979 and 5,121,979 shares outstanding in 1999 and 1998, respectively 105 104
Additional paid-in capital 50,710 48,041
Treasury stock, at cost - 91,750 shares (550) (550)
Notes receivable - stockholder (1,156) (1,156)
Accumulated deficit (7,278) (5,973)
------------ ------------
Total stockholders' equity 41,831 40,466
------------ ------------
Total liabilities and stockholders' equity $153,572 $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
March 31, March 31,
1999 1998
========== ==========
<S> <C> <C>
Revenues $34,817 $20,685
Costs and expenses:
Operating expenses 20,581 11,399
General and administrative expenses 11,649 6,401
Depreciation and amortization 1,449 994
------------ -------------
33,679 18,794
Income from operations 1,138 1,891
Other income (expense):
Interest expense (2,081) (1,265)
Interest income 21 24
(2,060) (1,241)
------------ -------------
Income (loss) before provision for income taxes (922) 650
Provision for income taxes 18 0
------------ -------------
Net income (loss) (940) 650
Dividends on preferred stock (365) (267)
------------ -------------
Net income (loss) applicable to common stockholders $(1,305) $383
============ =============
Net income (loss) per common share:
Basic:
Weighted average common shares outstanding 5,321,424 3,784,076
============ =============
Net income (loss) $(0.25) $0.10
Diluted:
Weighted average common shares outstanding 5,321,424 8,188,602
============ =============
Net income (loss) $(0.25) $0.08
</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 Three Months Ended
March 31, March 31,
1999 1998
=========== ==========
Cash flows from operating activities:
<S> <C> <C>
Net Income (loss) $(940) $650
Adjustments to reconcile net income (loss) to net cash
used in operating activities,
excluding effect of business acquisitions:
Depreciation and amortization 1,449 994
(Increase) decrease in assets:
Accounts receivable (2,963) (1,121)
Prepaid expenses and other current assets 772 (8)
Increase (decrease) in liabilities:
Accounts payable, accrued expenses, and other current liabilities 656 (898)
Other long-term liabilities (15) 48
--------------- -------------
Net cash used in operating activities (1,039) (335)
--------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (673) (203)
Increase in other assets (178) (144)
Acquisitions of businesses (259) (13,758)
--------------- -------------
Net cash used in investing activities (1,110) (14,105)
Cash flows from financing activities:
Bank overdraft (727) -
Proceeds from long-term debt 1,166 14,741
Principal payments on long-term debt (771) (6,487)
Proceeds from issuance of Series A convertible preferred stock, net - 4,500
Proceeds from issuance of Series C convertible preferred stock, net 2,500 -
Proceeds from exercise of employee stock options - 5
Proceeds from exercise of warrants, net - 1,996
--------------- -------------
Net cash provided by financing activities 2,168 14,755
Net increase in cash 17 315
Cash - beginning of period 933 116
--------------- -------------
Cash - end of period $952 $431
=============== =============
Supplemental information:
Interest paid during the period $1,975 $1,244
=============== =============
Income taxes paid during the period $16 $ -
=============== =============
Preferred stock dividends accrued and unpaid $ 365 $417
=============== =============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31,1999
(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 months ended March 31, 1998.
(Table on following page)
<PAGE>
<TABLE>
<CAPTION>
Three months
Ended
March 31,1998
Numerator:
<S> <C>
Net income (loss) - numerator for diluted income per share $650
Less dividends on preferred stock $(267)
Numerator for basic income per share - income available to common stockholders
$383
=================
Denominator:
Denominator for basic income per share - weighted average shares 3,784,076
Effect of dilutive securities - options, warrants, and convertible
preferred stock 4,404,526
Denominator for diluted income per share - weighted average shares 8,188,602
==================
</TABLE>
Stock options to purchase 1,214,734 shares of common stock at exercise prices
ranging from $3.25 - $18.00 for the three months ended March 31, 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 ended March 31, 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 ended March 31, 1999 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 months ended
March 31, 1999 as their effect would have been antidilutive.
Preferred stock convertible into 4,000,000 shares of common stock at conversion
prices ranging from $3.00 - $10.00 per share were not included in the
computation of diluted earnings per share for the three months ended March 31,
1999 as their effect would have been antidilutive.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
(Dollars in Thousands, Except Share Data)
NOTE C--RECENT ACCOUNTING PRONOUNCEMENTS
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 No. 133 will not
have a material effect on the financial position, results of operations or
liquidity of the Company.
NOTE D-- BUSINESS COMBINATIONS
On January 1, 1999 the Company acquired all of the outstanding common
stock of CAT-LINKS, Inc., a court reporting software development company from an
officer/director of the Company. The purchase price paid, inclusive of
transaction costs, consisted of $60 paid in cash and 50,000 unregistered shares
of the Company's common stock valued at $170. The cost in excess of fair value
of net identifiable assets was approximately $379.
Effective January 1, 1999 the Company acquired all the assets and
liabilities of LawTek, Inc., a Florida based court reporting agency. The
purchase price, inclusive of transaction costs, consisted of approximately $10
paid in cash and a promissory note in the amount of $50 which is payable in five
equal monthly installments, beginning February 28, 1999 with interest at the
rate of 7% per annum. The cost in excess of net identifiable assets acquired was
approximately $58.
The cash portion of the above acquisitions, which approximated $70,
was financed out of working capital. If CAT-LINKS, Inc. and LawTek, Inc. had
been acquired on January 1, 1999 or 1998, these acquisitions would not have had
a material impact on the Company's consolidated results of operations for any of
the periods presented. During the three months ended March 31, 1999, the Company
recorded approximately $189 related to modifications of the purchase price of
various acquisitions, due to working capital adjustments as required in the
purchase agreements. The modifications were recorded as a net increase to
goodwill.
NOTE E-- STOCKHOLDERS' EQUITY
In connection with the acquisition of CAT-LINKS, Inc. on January 1,
1999, the Company issued 50,000 shares of common stock at a recorded share price
of $4.25.
In January 1999, in connection with an acquisition in August 1998, a
preferred stockholder guaranteed the repayment of a $2,500 over-advance made to
the Company under the Loan Agreement. On January 26, 1999, preferred
stockholders paid $2,500 pursuant to the guaranty and the Company issued 2,500
shares of the Company's Series C convertible preferred stock. The Series C
convertible preferred stock is identical to the Series A convertible preferred
stock, except that it has a conversion price of $10.00 per share and has 100
votes per share.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
(Dollars in Thousands, Except Share Data)
NOTE F--SUPPLEMENTAL CASH FLOW INFORMATION
During the quarter ended March 31, 1999, the Company issued 50,000
shares of common stock in connection with an acquisition.
Supplemental noncash investing and financing
activities for the quarter ended March 31, 1999:
Acquisitions:
Fair value of assets acquired $ 26
Liabilities assumed $ 172
Cash paid for acquisitions $ 259
Stock issued $ 170
Notes issued $ 50
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.
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
March 31, 1999:
<S> <C> <C> <C> <C>
Revenue $ 10,376 18,127 6,314 -- 34,817
Operating income 1,825 1,649 10 (2,346) 1,138
Identifiable assets 18,812 19,160 3,912 111,688 153,572
--
March 31, 1998:
Revenue 6,692 11,010 2,983 -- 20,685
Operating income 1,533 1,725 143 (1,510) 1,891
Identifiable assets 11,368 5,100 2,723 84,072 103,263
</TABLE>
No single customer accounted for as much as 10% of consolidated revenue in 1999
and 1998.
<PAGE>
ESQUIRE COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
(Dollars in Thousands, Except Share Data)
NOTE H - SUBSEQUENT EVENTS
The Company's Credit Agreement with financial institutions was amended
in April 1999 to provide for borrowings up to $80,800 through May 31, 1999 and
$83,500 thereafter based on operating cash flow as defined therein. 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.
<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 and three permanent and
temporary staffing companies. Of these acquisitions, three were acquired in
1996, 17 were acquired in 1997, 24 were acquired in 1998, and two were acquired
during the first 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 ENDED MARCH 31, 1999 AND 1998
REVENUE. Revenues increased by approximately$14,132, or 68.3%, to
$34,817 from $20,685 for the three months ended March 31, 1999 and 1998,
respectively. Substantially all of the increase was due to the effect of
acquisitions completed after January 1, 1998.
OPERATING EXPENSES. Operating expenses increased by approximately
$9,182, or 80.5%, from $11,399 to $20,581 for the three months ended March 31,
1999 and 1998 respectively. The increase was consistent with the increase in
revenue. Operating expenses as a percentage of revenues, increased from to 59.1%
for the three months ended March 31, 1999 from 55.1% for the three months ended
March 31, 1998. The increase is the result of higher operating expenses,
principally salaries, in the staffing businesses acquired subsequent to March
31, 1998 as compared to the court reporting business.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased by approximately $5,248, or 82% to $11,649 from $6,401 for the three
months ended March 31, 1999 and 1998, respectively. General and administrative
expense as a percentage of revenue increased to 33.5% from 30.9% for the three
months ended March 31, 1999 and 1998, respectively. The 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 $455 or 45.8% to $1,449 from $994 for the three months ended
March 31, 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 cost in excess of fair value of net identifiable assets of acquired
businesses (goodwill).
INCOME FROM OPERATIONS. Income from operations decreased by
approximately $753 to $1,138 from $1,891 for the three months ended March 31,
1999 and 1998, respectively. Income from operations as a percentage of revenues
decreased to 3.3% for the three months ended March 31, 1999 from 9.1% for the
three months ended March 31, 1998.
OTHER EXPENSE, NET. Other expense, net, consisting primarily of
interest expense, increased by approximately $819 to $2,060 from $1,241 for the
three months ended March 31, 1999 and 1998, respectively. The increase is due to
the incurrence of additional debt to finance acquisitions and to fund working
capital.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 three months ended March 31, 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.
OPERATING ACTIVITIES
Net cash used in operating activities totaled $1,039 for the three
months ended March 31, 1999 compared to $335 for the three months ended March
31, 1998 representing an increase of $704. Increased usage in the three months
ended March 31, 1999 compared to the same period in 1998 was primarily due to an
increase in accounts receivable.
INVESTING ACTIVITIES
Net cash used in investing activities totaled $1,110 and $14,105 for
the three months ended March 31, 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 March 31, 1999, however the
Company expects to make additional capital expenditures of between $800 and
$1,000 in the last three quarters of 1999, none of which is pursuant to a firm
commitment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the three months ended
March 31, 1999 was $2,168 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 three months ended March 31, 1998, net cash
provided by financing activities was $14,755, 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 $80,800 through
May 31, 1999 and $83,500 thereafter 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
March 31, 1999, the effective interest rate was 9.7% and aggregate borrowings
under the Credit Agreement were $80,882. 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 March 31, 1999 the Company had approximately $12,566 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.
FUTURE CAPITAL NEEDS
The Company believes that available borrowings under its Credit
Agreement, as amended, and cash from operations, 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 Credit Agreement, as amended, expires on January 3, 2000 and
the Company expects 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 or equity 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 all aspects of the new system
has commenced during the first quarter of 1999 with completion expected during
the third quarter of 1999. Costs incurred through March 31, 1999 in connection
with the management information system were approximately $600 compared to
estimated costs of $1,000. The Company is also 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 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
assumption 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
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 March 31, 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 months ended March 31, 1999 would have
increased by approximately $127. 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 risk. This also
does not take into account any changes in the Company's financial structure that
may result from higher interest rates.
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.
May 12, 1998
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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