Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] 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 0-24928
The Solomon-Page Group Ltd.
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(Exact name of registrant as specified in its charter)
Delaware 51-0353012
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1140 Avenue of the Americas, New York, NY 10036
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 403-6100
N/A
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(Former name, former address and former fiscal year,
if changed since 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 for 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 / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At August 8, 2000, there were
outstanding 4,153,948 shares of the Registrant's Common Stock, $.001 par value.
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
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FORM 10-Q
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 2000
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INDEX
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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements Page Number
-----------
Independent Accountants Report 1
Consolidated Balance Sheets as of June 30, 2000
[Unaudited] and September 30, 1999 2
Consolidated Statements of Operations for the three
and nine months ended June 30, 2000 and 1999[Unaudited] 4
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2000 and 1999 [Unaudited] 5
Notes to Consolidated Financial Statements [Unaudited] 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures About 14
Market Risk
Part II: OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 16
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors of
The Solomon-Page Group Ltd.
We have reviewed the accompanying consolidated balance sheet,
consolidated statement of operations and consolidated statement of cash flows of
The Solomon-Page Group Ltd. and subsidiary as of June 30, 2000, and for the
three month and nine month periods then ended. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying consolidated financial statements for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of September 30, 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended [not presented herein]; and in our report
dated November 16, 1999, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of September 30, 1999, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
/S/ MOORE STEPHENS, P. C.
-------------------------
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 8, 2000
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
(Unaudited)
ASSETS:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 557 $ 580
Investments 695 849
Accounts Receivable - [ Net of Allowances of $400 15,816 11,416
and $280, Respectively ]
Other Current Assets 585 391
------- -------
Total Current Assets 17,653 13,236
------- -------
Property and Equipment:
Equipment 2,367 2,022
Furniture and Fixtures 811 797
Leasehold Improvements 1,148 1,103
------- -------
Totals - At Cost 4,326 3,922
Less: Accumulated Depreciation 2,110 1,659
------- -------
Property and Equipment - Net 2,216 2,263
------- -------
Other Assets:
Investments 683 686
Intangible Assets - [ Net of Accumulated
Amortization of $464 and $310, Respectively ] 1,324 1,444
Deferred Tax Asset 314 324
Due from Related Parties 111 135
Other Assets 721 260
------- -------
Total Other Assets 3,153 2,849
------- -------
Total Assets $23,022 $18,348
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY: (unaudited)
Current Liabilities:
<S> <C> <C>
Accrued Payroll and Commissions $ 6,707 $ 4,607
Accounts Payable and Accrued Expenses 1,702 1,276
Income Taxes Payable 1,209 1,417
Line of Credit 750 350
Term Loan Payable 500 500
Deferred Revenue 333 380
Other Current Liabilities 501 576
----------- -----------
Total Current Liabilities 11,702 9,106
----------- -----------
Long-Term Liabilities:
Term Loan Payable - Net of Current Portion 375 750
Deferred Credit 632 638
----------- -----------
Total Long Term Liabilities 1,007 1,388
----------- -----------
Commitments and Contingencies -- --
----------- -----------
Stockholders' Equity:
Preferred stock - $.001 par value; 2,000,000
shares authorized, none issued or outstanding -- --
Common stock - Par Value $.001 Per Share;
Authorized 20,000,000 Shares, 5,163,948
Shares Issued and 4,153,948 Shares Outstanding at
June 30, 2000 and September 30, 1999, Respectively 5 5
Additional Paid-in Capital 7,428 7,428
Accumulated Other Comprehensive Income (11) (7)
Treasury Stock At Cost; 1,010,000 Common Shares
at June 30, 2000 and September 30, 1999, Respectively (2,248) (2,248)
Retained Earnings 5,139 2,676
----------- -----------
Total Stockholders' Equity 10,313 7,854
----------- -----------
Total Liabilities and Stockholders' Equity $ 23,022 $ 18,348
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER
SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 20,523 $ 16,151 $ 58,131 $ 40,446
----------- ----------- ----------- -----------
Operating Expenses:
Selling Expenses 15,836 12,037 44,623 31,598
General and Administrative 2,853 2,175 8,218 5,497
Depreciation and Amortization 187 171 605 508
----------- ----------- ----------- -----------
Total Operating Expenses 18,876 14,383 53,446 37,603
----------- ----------- ----------- -----------
Income from Operations 1,647 1,768 4,685 2,843
----------- ----------- ----------- -----------
Other Income [Expenses]
Interest and Dividend Income 25 27 84 74
Interest Expense (48) (56) (199) (219)
Realized Gain/(Loss) on Investments 0 (10) 2 (17)
----------- ----------- ----------- -----------
Total Other [Expenses] (23) (39) (113) (162)
----------- ----------- ----------- -----------
Income Before Income Tax Expense 1,624 1,729 4,572 2,681
Income Tax Expense 756 800 2,109 1,215
----------- ----------- ----------- -----------
Net Income $ 868 $ 929 $ 2,463 $ 1,466
=========== =========== =========== ===========
Basic Earnings Per Common Share $ 0.21 $ 0.21 $ 0.59 $ 0.32
=========== =========== =========== ===========
Diluted Earnings Per Common Share $ 0.18 $ 0.20 $ 0.52 $ 0.30
=========== =========== =========== ===========
Basic Weighted Average Shares 4,153,948 4,405,941 4,153,948 4,636,186
=========== =========== =========== ===========
Diluted Weighted Average Shares 4,948,058 4,753,644 4,700,371 4,913,796
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
June 30,
2000 1999
---- ----
Operating Activities:
<S> <C> <C>
Net Income $ 2,463 $ 1,466
------- -------
Adjustments to Reconcile Net Income
to Net Cash Provided by [Used for] Operating Activities:
Depreciation and Amortization 605 508
Deferred Credit (6) 70
Net Realized (Gain)/Loss on Investments (2) 19
Deferred Taxes 10 (65)
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (4,400) (677)
Other Assets (655) (189)
Increase [Decrease] in:
Accounts Payable, Accrued Expenses, Accrued Payroll
and Commissions 2,526 1,690
Income Tax Payable (208) 548
Deferred Revenue (47) 368
Other Liabilities (75) 65
------- -------
Total Adjustments ($2,252) $ 2,337
------- -------
Net Cash - Operating Activities $ 211 $ 3,803
------- -------
Investing Activities:
Capital Expenditures (404) (542)
Purchase of Investments (494) (399)
Proceeds from Sales of Investments 648 549
Acquisitions of and Additions to Trade Names (33) 0
Cash Received from Related Parties 24 0
------- -------
Net Cash - Investing Activities ($ 259) ($ 392)
------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
June 30,
2000 1999
---- ----
Financing Activities:
<S> <C> <C>
Borrowings Under Term Loan and Line of Credit 7,000 3,114
Repayments Under Term Loan and Line of Credit (6,975) (4,839)
Purchase of Treasury Stock and Warrants 0 (1,752)
------- -------
Net Cash - Financing Activities $ 25 ($3,477)
------- -------
Net [Decrease] in Cash and Cash Equivalents (23) (66)
Cash and Cash Equivalents - Beginning of Periods 580 935
------- -------
Cash and Cash Equivalents - End of Periods $ 557 $ 869
======= =======
Supplemental Cash Flow Information:
Cash paid during the periods for:
Interest $ 182 $ 219
Income Taxes $ 2,373 $ 768
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Basis of Reporting
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. These unaudited financial statements include the accounts
of The Solomon-Page Group Ltd. and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
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, the accompanying unaudited consolidated financial
statements included in this Form 10-Q reflect all adjustments, consisting only
of normal recurring items, which are considered necessary for a fair
presentation of the results of operations for the periods presented. The results
of operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes for the fiscal year ended September 30,
1999 included in The Solomon-Page Group Ltd. Form 10-K.
[2] Summary of Significant Accounting Policies
Accumulated Other Comprehensive Income - The Company has adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," as of October 1, 1998. SFAS No. 130 establishes new rules for reporting
and display of comprehensive income and its components, however it has had no
material impact on the Company's net income or total stockholders' equity.
Accumulated other comprehensive income presented in the accompanying
consolidated balance sheets consists entirely of accumulated net of tax
unrealized losses on available-for-sale securities.
Reclassification - Certain prior period amounts have been reclassified to
conform to the current period presentation.
[3] Business Segments
Business Segments - The Company is a provider of staffing services organized
into two primary operating divisions: temporary staffing and consulting and
executive search and full-time contingency recruitment. The temporary staffing
and consulting division provides services to companies seeking personnel in the
information technology, accounting, human resources, legal and banking areas.
The executive search and full-time contingency recruitment division comprises
ten lines of business, including five industry, capital markets, publishing and
new media, healthcare, fashion services and banking, and five functional
information technology, accounting, human resources, legal and administrative
support.
7
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[3] Business Segments [Continued]
The Company evaluates performance based on the segments' profit from operations
before unallocated corporate overhead. (Amounts in Thousands)
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
Staffing Search Staffing Search
-------- ------ -------- ------
Revenues $10,868 $9,655 $8,412 $7,739
Segment profit 897 1,320 958 1,271
Segment Assets 9,750 8,586 7,175 6,622
Nine Months Ended Nine Months Ended
June 30, 2000 June 30, 1999
Staffing Search Staffing Search
-------- ------ -------- ------
Revenues $29,967 $28,164 $24,280 $16,166
Segment profit 2,160 4,018 1,697 2,074
A reconciliation of combined segment profit to consolidated net income is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, June 30, 1999
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total profit for reportable segments $2,217 $2,229 $6,178 $3,770
Interest expense (48) (56) (199) (219)
Corporate overhead (545) (444) (1,407) (870)
Income tax expense (756) (800) (2,109) (1,215)
Net income 868 929 2,463 1,466
</TABLE>
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The Company is a specialty niche provider of staffing services
organized into two primary operating divisions: temporary staffing/consulting
and executive search/full-time contingency recruitment. The temporary
staffing/consulting division provides services to companies seeking personnel in
the information technology, accounting, human resources, legal and banking areas
and generated 52% of the Company's revenue for the nine months ended June 30,
2000 (58% for the fiscal year ended September 30, 1999). The executive
search/full-time contingency recruitment division comprises ten lines of
business, including five industry (capital markets, publishing and new media,
healthcare, fashion services and banking), and five functional (information
technology, accounting, human resources, legal and administrative support). The
executive search/full-time contingency recruitment division generated 48% of the
Company's revenue for the nine months ended June 30, 2000 (42% for the fiscal
year ended September 30, 1999).
On June 28, 2000, the Company entered into an amended and restated
agreement under which a management group would acquire, through a one-step cash
merger, all of the outstanding publicly held Common Stock of the Company at a
price of $5.25 per share. Previously, the Company had entered into a similar
agreement under which the price to have been paid for the publicly held shares
of Common Stock was to be $4.25 per share. Following the announcement of the
original merger agreement, a stockholder of the Company, on behalf of a
purported class of the Company's stockholders, initiated litigation against the
Company and its directors in the Court of Chancery of the State of Delaware. The
plaintiff in the litigation sought, among other things, to enjoin the Company's
directors from proceeding with the previously announced merger agreement. In
light of additional financial data that became available to the Special
Committee of the Board of Directors subsequent to the execution of the original
agreement, the Special Committee consulted with its financial advisor and
requested that negotiations be reopened in respect of the $4.25 merger
consideration. After negotiations between the management group and the Special
Committee, the management group agreed to increase to $5.25 per share the price
to be paid for the publicly held shares.
The revised transaction, which is structured as a one-step cash merger,
was approved by the Company's Board of Directors (whose members include the
management group), acting upon the unanimous recommendation of a Special
Committee of the Board comprising two independent, unaffiliated directors. In
reaching its decision, the Special Committee was advised by its financial
advisor, Legg Mason Wood Walker, Incorporated, which rendered a written opinion
that the increased merger consideration is fair from a financial point of view
to the holders of common stock (other than the members of the management group).
It is expected that the proposed merger will be voted upon by the
Company's stockholders at a meeting of stockholders expected to be held in the
third or fourth quarter of the calendar year 2000.
Under the amended and restated agreement, the merger requires approval
both by the holders of 66 2/3% of the outstanding Common Stock and by the
holders of a majority of the outstanding Common Stock not owned by the
management group. In addition, completion of the merger is subject to the
receipt by the management group of financing to consummate the transaction and
other customary conditions. The management group has received a commitment
letter to provide all of the funds necessary to complete the proposed merger.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS [Continued]
Based upon the increase in the merger consideration and the requirement
that the merger be conditioned on the approval of the holders of a majority of
the outstanding Common Stock not owned by the management group, the parties to
the stockholder litigation have reached an agreement in principle to settle such
litigation. The Company and its directors have vigorously denied any wrongdoing
or liability in connection with the allegations made in the litigation and have
entered into the agreement in principle solely to eliminate the distraction,
burden and expense of further litigation. Final settlement of the litigation is
conditioned upon, among other things, the consummation of the merger, the
completion of confirmatory discovery, the execution of a stipulation of
settlement and court approval.
The following is a summary of the Company's consolidated financial and
operating data (amounts in thousands, except for per share amounts).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
Statement of Operations Data: 2000 1999 2000 1999
----------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $20,523 $16,151 $58,131 $40,446
Income from Operations 1,647 1,768 4,685 2,843
Income Before Income Tax Expense 1,624 1,729 4,572 2,681
Income Tax Expense 756 800 2,109 1,215
Net Income 868 929 2,463 1,466
Basic Earnings Per Common Share $0.21 $0.21 $0.59 $0.32
Diluted Earnings Per Common Share $0.18 $0.20 $0.52 $0.30
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: June 30, 2000 September 30, 1999
------------------- ------------- ------------------
<S> <C> <C>
Working Capital $5,951 $4,130
Total Assets 23,022 18,348
Total Liabilities 12,709 10,494
Stockholders' Equity 10,313 7,854
</TABLE>
Results of Operations
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this document.
Revenue increased to $20.5 million for the three months ended June 30,
2000 from $16.2 million for the three months ended June 30, 1999, an increase of
$4.3 million or 27%. The increase comprised $2.4 million in temporary staffing
and consulting, and $1.9 million in executive search and full time contingency
and recruitment, and was the result of factors described below.
Revenue increased to $58.1 million for the nine months ended June 30,
2000 from $40.4 million for the nine months ended June 30, 1999, an increase of
$17.7 million or 44%. The increase comprised $5.7 million in temporary staffing
and consulting, and $12 million in executive search and full time contingency
and recruitment, and was the result of factors further described below.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS [Continued]
Revenues from the Company's temporary staffing and consulting business
were $10.9 million and $30 million for the three and nine months ended June 30,
2000 respectively, compared to $8.5 million and $24.3 million for the same
periods in 1999, an increase of $2.4 million or 28% and $5.7 million or 23%,
respectively. The temporary staffing and consulting business experienced
increases in revenue within the accounting and human resources divisions
compared to the prior period. In addition, the Company's expansion to provide
temporary staffing to companies seeking personnel in the legal and banking
fields, which commenced operations during 1999, contributed to the increase in
revenue. The information technology division experienced a 2% decrease in
revenue for the nine months ended June 30, 2000 compared to the same period in
1999.
Revenues from the Company's executive search and full time contingency
recruitment business were $9.6 million and $28.1 for the three and nine months
ended June 30, 2000 respectively, compared to $7.7 million and $16.1 million for
the same periods in 1999, an increase of $1.9 million or 25% and $12 million or
75% respectively. All divisions within the executive search and full time
contingency recruitment business experienced increases in revenue for the nine
months ended June 30, 2000 compared to the same period in 1999.
The capital markets, publishing and new media, banking information
technology and accounting divisions contributed the largest increases in revenue
during the nine months ended June 30, 2000. The Company believes the results
were favorably impacted by the strong U.S. economy and extraordinarily low
unemployment rate. Revenues for the nine months ended June 30, 2000 were
favorably impacted by a single transaction within the capital markets division
that resulted in $3.05 million in revenue for the Company. The transaction
resulted in more than seven times the amount of revenue produced by any single
previous transaction by the Company. The Company believes that the magnitude of
the transaction is non-recurring and it does not anticipate any similar large
transaction or any increase in revenues related to this transaction or the
customer from which the revenue was derived.
Selling expenses for the three and nine months ended June 30, 2000
totaled $15.9 million (77% of revenues) and $44.6 million (77% of revenues)
compared with $12 million (75% of revenues) and $31.6 million (78% of revenues)
for the same periods in 1999. The increase in selling expense is primarily the
result of increased commissions earned by personnel within the executive search
and full time contingency recruitment business related to increases in revenue.
In addition, compensation expenses of temporary personnel as well as increases
in employee benefits contributed to the increase in selling expenses.
General and Administrative expenses for the three and nine months ended
June 30, 2000 were $2.9 million (14% of revenues) and $8.2 million (14% of
revenues) respectively compared to $2.2 million (13% of revenues) and $5.5
million (14% of revenues) for the same periods in 1999. The increase is
primarily a result of additional infrastructure costs, which include additional
office space and the hiring of support personnel within corporate accounting,
information systems and administration. The Company has incurred $180,000 of
expense relating to the development of its web site, which became operational
during July of 2000. In addition, included in general and administrative
expenses are approximately $950,000 of one-time charges relating to the pending
management buyout, of which, $320,000 of expenses were incurred during the three
months ended June 30, 2000.
Depreciation and Amortization expense for the three and nine months
ended June 30, 2000 totaled $187,000 and $605,000 respectively, compared to
$171,000 and $508,000 for the same periods in 1999. Depreciation expense
increased principally as a result of capital expenditures made during fiscal
2000. The amortization of intangible assets associated with certain acquisitions
also contributed to this increase.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS [Continued]
Income from operations was $1,647,000 and $4,685,000 for the three and
nine months ended June 30, 2000 respectively, compared to $1,768,000 and
$2,843,000 for the same periods in 1999. The impact of the aforementioned
transaction within the capital markets division as well as the expenses relating
to the pending management buyout had a significant effect on income from
operations. These above referenced events resulted in an increase to income from
operations of approximately $250,000 for the nine months ended June 30, 2000.
Income Tax Expense for the three and nine months ended June 30, 2000
was $756,000 (47% effective tax rate) and $2,109,000 (46% effective tax rate)
respectively compared with $800,000 (46% effective tax rate) and $1,215,000 (45%
effective tax rate) for the same periods in 1999. The increase in the Company's
effective tax rate was due to an increase in certain non-deductible expenses,
including a portion of meals, entertainment and premiums on key person life
insurance policies.
Net income for the three and nine months ended June 30, 2000 was
$868,000 and $2,463,000 respectively compared to $929,000 and $1,466,000 for the
same periods in 1999, due to the above mentioned factors.
Liquidity and Capital Resources
As of June 30, 2000 the Company's sources of liquidity included
approximately $1.3 million in cash and cash equivalents and short-term
investments. The Company's working capital was $5.95 million at June 30, 2000
compared to $4.1 million at September 30, 1999. The Company has available
$683,000 of long-term investments as a source of liquidity if required.
In February 1999, the Company entered into a $6.5 million credit
facility agreement with The Dime Savings Bank. The facility agreement consists
of a $5 million working capital line of credit and a term loan of $1.5 million,
which are collateralized by all of the Company's assets. The agreement provides
for borrowings under the working capital line of credit at 1% above the Dime
Reference Rate and expires on February 28, 2002. The term loan shall be paid in
12 quarterly installments commencing May 31, 1999 and ending on February 28,
2002 and bears interest at 1.25% above the Dime Reference Rate. The Dime
Reference Rate at June 30, 2000 was 9.5%. At June 30, 2000, there was $750,000
of borrowings under the working capital line of credit, and $875,000 was
outstanding under the term loan. The credit facility agreement contains various
covenants among, which are minimum working capital and tangible net worth
requirements and a provision restricting payment of dividends in excess of 50%
of net profits.
Net cash provided by operating activities for the nine months ended
June 30, 2000 was $211,000 compared to net cash provided by operating activities
of $3,803,000 for the same period in 1999. Net cash used by investing activities
was $259,000 for the nine months ended June 30, 2000, which was primarily due to
capital expenditures of $404,000, and purchase of investments of $494,000 offset
by proceeds from sales of investments of $648,000. Net cash provided in
financing activities for the nine months ended June 30, 2000 was $25,000, which
was due to borrowings under the line of credit.
The Company believes that its current cash position and investment
balances, together with financing available under its working capital facility
will be sufficient to support current working capital requirements for the next
twelve months.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS [Continued]
Year 2000 Compliance
Prior to January 1, 2000, there was a great deal of concern regarding
the ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally and
the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems.
To date the Company has not experienced such problems, nor has the
Company incurred material costs or expenses relating to the Year 2000 issue,
either on its own account or in ensuring that its key vendors, suppliers or
customers were Year 2000 compliant. Computer experts have warned, however, that
there may still be residual consequences of the change in centuries. Any such
residual consequences could result in information technology system and software
failure, the corruption or loss of data contained in the Company's internal
information system, and failures affecting the Company's key vendors, suppliers
and customers. This in turn may lead to legal action, and may otherwise also
have a material adverse effect on the Company's business, results of operations
or financial condition.
Impact of Inflation
Inflation has not been a major factor in the Company's business since
inception. There can be no assurances that this will continue.
New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statements No. 133." This statement defers for one year
the effective date of FASB Statement No. 133, "Accounting Derivative Instruments
and Hedging Activities." The rule now will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999.
This statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. This statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
SFAS No. 133 will be on the earnings and financial position of the Company.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Certain financial instruments held by the Company, such as cash, cash
equivalents and accounts receivable arising in the ordinary course of business,
may subject the Company to concentrations of credit risk.
While the Company seeks to place its cash and cash equivalents with
high credit-quality financial institutions, the Company is still exposed to
credit risk for uninsured amounts held by such institutions. Such uninsured
amounts subject to credit risk totaled approximately $100,000 at June 30, 2000.
The Company does not expect its exposure to such credit risk to cause a material
adverse effect on its financial condition or results of operation.
The Company believes that credit risk related to accounts receivable is
limited due to the large number of Fortune 1000 companies comprising the
Company's customer base and the diversified industries in which the Company
operates. While the Company does not require collateral on accounts receivable
or other financial instruments, it does not believe that its exposure to credit
risk relating to its accounts receivable will result in a material adverse
effect on its financial condition or results of operations.
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
On March 31, 2000, the Company announced that it had entered into a
definitive agreement under which a Management Group would acquire, through a
one-step cash merger (the "Merger"), all of the outstanding publicly held Common
Stock at a price of $4.25 per share. On April 7, 2000, William Straub,
purportedly a stockholder of the Company, filed a class action complaint against
the Company and each of the Company's directors in the Court of Chancery of the
State of Delaware in and for New Castle County. The complaint alleged, among
other things, that: (i) the Merger is in furtherance of a wrongful plan to take
private the Company in a transaction that is inherently unfair to them and is a
product of the Management Group's conflict of interest, and (ii) the defendants
have violated their duty of fair dealing, as well as their fiduciary duties to
the stockholders of the Company. The complaint sought, among other things, a
judgement (i) certifying that the lawsuit may be maintained as a class actions,
(ii) granting preliminary and permanent injunctive relief against the
consummation of the Merger, (iii) in the event the Merger is consummated,
rescinding the Merger or awarding rescissory damages to the members of the
purported class, (iv) ordering the defendants to pay to the members of the
purported class damages suffered and to be suffered by them as a result of these
alleged wrongs, and (v) awarding the plaintiff costs, including counsel fees and
expert fees.
On June 28, 2000, the parties to the lawsuit reached an agreement in
principle to settle the matter, which has been set forth in a memorandum of
understanding. In connection with the agreement in principle, (i) the parties
agreed to amend the original merger agreement to increase the merger
consideration from a right to receive $4.25 per share in cash to a right to
receive $5.25 per share in cash; (ii) the parties agreed to amend the original
merger agreement to provide that the merger will be conditioned upon the
favorable vote of the holders of at least a majority of the shares of common
stock that are not owned, directly or indirectly, by any member of the
management group (iii)the parties will agree upon a stipulation of settlement,
which will expressly provide, among other things, that the defendants have
denied and continue to deny that they committed any violations of law, and that
the defendants settled the matter to eliminate the distraction, burden and
expense of further litigation; and (iv) the plaintiffs' counsel will apply to
the appropriate Delaware state court for an award of attorneys' fees and
expenses in an aggregate amount not to exceed $125,000, and the Company and the
other defendants will not object to this application. The settlement
contemplated by the agreement in principle is subject to, among other things,
execution of a final stipulation of settlement, the closing of the merger
contemplated by the merger agreement, and final court approval.
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Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
27 Financial Data Schedule
(B) Reports on Form 8-K: Current report on Form 8-K dated June 28,
2000, filed on June 30, 2000, reporting under Item 5 thereof the
execution of the amended and restated merger agreement.
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THE SOLOMON-PAGE GROUP LTD.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
The Solomon-Page Group Ltd.
-------------------------------------
(Registrant)
Date: August 8, 2000 /s/ Lloyd B. Solomon
-------------------------------------
Lloyd B. Solomon, Chief Executive Officer
Date: August 8, 2000 /s/ Eric M. Davis
----------------------------------------
Eric M. Davis, Chief Financial Officer
Vice President - Finance
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