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 March 31, 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 May 12, 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 SIX MONTHS ENDED MARCH 31, 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 March 31, 2000
[Unaudited] and September 30, 1999 2
Consolidated Statements of Operations for the three and six months
ended March 31, 2000 and 1999[Unaudited] 4
Consolidated Statements of Cash Flows for the six months
ended March 31, 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 10
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 15
<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 March 31, 2000, and for the
three month period 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
May 11, 2000
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
(Unaudited)
ASSETS:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $ 1,559 $ 580
Investments 495 849
Accounts Receivable - [ Net of Allowances of $320 14,963 11,416
and $280, Respectively ]
Other Current Assets 426 391
------- -------
Total Current Assets 17,443 13,236
------- -------
Property and Equipment:
Equipment 2,302 2,022
Furniture and Fixtures 806 797
Leasehold Improvements 1,146 1,103
------- -------
Totals - At Cost 4,254 3,922
Less: Accumulated Depreciation 1,975 1,659
------- -------
Property and Equipment - Net 2,279 2,263
------- -------
Other Assets:
Investments 584 686
Intangible Assets - [ Net of Accumulated
Amortization of $412 and $310, Respectively ] 1,360 1,444
Web Site Development Costs 236 0
Deferred Tax Asset 350 324
Due from Related Parties 111 135
Other Assets 267 260
------- -------
Total Other Assets 2,908 2,849
------- -------
Total Assets $22,630 $18,348
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY: (unaudited)
Current Liabilities:
<S> <C> <C>
Accrued Payroll and Commissions $ 6,937 $ 4,607
Accounts Payable and Accrued Expenses 1,642 1,276
Income Taxes Payable 628 1,417
Line of Credit 1,500 350
Term Loan Payable 500 500
Deferred Revenue 489 380
Other Current Liabilities 355 576
----------- -----------
Total Current Liabilities 12,051 9,106
----------- -----------
Long-Term Liabilities:
Term Loan Payable - Net of Current Portion 500 750
Deferred Credit 634 638
----------- -----------
Total Long Term Liabilities 1,134 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
March 31, 2000 and September 30, 1999, Respectively 5 5
Additional Paid-in Capital 7,428 7,428
Accumulated Other Comprehensive Income (12) (7)
Treasury Stock At Cost; 1,010,000 Common Shares
at March 31, 2000 and September 30, 1999, Respectively (2,248) (2,248)
Retained Earnings 4,272 2,676
----------- -----------
Total Stockholders' Equity 9,445 7,854
----------- -----------
Total Liabilities and Stockholders' Equity $ 22,630 $ 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 Six months ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 21,617 $ 12,779 $ 37,608 $ 24,295
----------- ----------- ----------- -----------
Operating Expenses:
Selling Expenses 16,295 10,164 28,788 19,561
General and Administrative 2,985 1,710 5,364 3,322
Depreciation and Amortization 225 172 417 337
----------- ----------- ----------- -----------
Total Operating Expenses 19,505 12,046 34,569 23,220
----------- ----------- ----------- -----------
Income from Operations 2,112 733 3,039 1,075
----------- ----------- ----------- -----------
Other Income [Expenses]
Interest and Dividend Income 24 21 59 47
Interest Expense (89) (87) (152) (163)
Realized Gain/(Loss) on Investments 1 (7) 2 (7)
----------- ----------- ----------- -----------
Total Other [Expenses] (64) (73) (91) (123)
----------- ----------- ----------- -----------
Income Before Income Tax Expense 2,048 660 2,948 952
Income Tax Expense 947 288 1,353 415
----------- ----------- ----------- -----------
Net Income $ 1,101 $ 372 $ 1,595 $ 537
=========== =========== =========== ===========
Basic Earnings Per Common Share $ 0.27 $ 0.08 $ 0.38 $ 0.11
=========== =========== =========== ===========
Diluted Earnings Per Common Share $ 0.24 $ 0.08 $ 0.35 $ 0.11
=========== =========== =========== ===========
Basic Weighted Average Shares 4,153,948 4,607,036 4,153,948 4,750,289
=========== =========== =========== ===========
Diluted Weighted Average Shares 4,612,060 4,893,878 4,576,527 4,993,393
=========== =========== =========== ===========
</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>
Six months ended
March 31,
2000 1999
---- ----
Operating Activities:
<S> <C> <C>
Net Income $ 1,595 $ 537
------- -------
Adjustments to Reconcile Net Income
to Net Cash Provided by [Used for] Operating Activities:
Depreciation and Amortization 418 337
Deferred Credit (4) 47
Net Realized (Gain)/Loss on Investments (2) 7
Deferred Taxes (26) (65)
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (3,547) (308)
Other Assets (37) (120)
Increase [Decrease] in:
Accounts Payable, Accrued Expenses, Accrued Payroll
and Commissions 2,696 (302)
Income Tax Payable (789) 401
Deferred Revenue 109 335
Other Liabilities (221) 93
------- -------
Total Adjustments ($1,403) $ 425
------- -------
Net Cash - Operating Activities $ 192 $ 962
------- -------
Investing Activities:
Capital Expenditures (332) (521)
Purchase of Investments (200) (399)
Proceeds from Sales of Investments 648 549
Acquisitions of and Additions to Trade Names (17) 0
Web Site Development Costs (236) 0
Cash Received from Related Parties 24 0
------- -------
Net Cash - Investing Activities ($ 113) ($ 371)
------- -------
</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>
Six months ended
March 31,
2000 1999
---- ----
Financing Activities:
<S> <C> <C>
Borrowings Under Term Loan and Line of Credit 5,125 239
Repayments Under Term Loan and Line of Credit (4,225) 0
Purchase of Treasury Stock and Warrants 0 (1,232)
------- -------
Net Cash - Financing Activities $ 900 ($ 993)
------- -------
Net Increase [Decrease] in Cash and Cash Equivalents 979 (402)
Cash and Cash Equivalents - Beginning of Periods 580 935
------- -------
Cash and Cash Equivalents - End of Periods $ 1,559 $ 533
======= =======
Supplemental Cash Flow Information:
Cash paid during the periods for:
Interest $ 151 $ 163
Income Taxes $ 2,157 $ 80
</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
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 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 of the accumulated net unrealized gains on available-for-sale
investments.
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]
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[3] Business Segments [Continued]
The Company evaluates performance based on the segments' profit from operations
before unallocated corporate overhead.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
Staffing Search Staffing Search
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Revenues $ 9,900 $11,700 $ 7,800 $ 5,000
Segment profit 956 1,939 591 616
Segment Assets 7,895 9,260 5,875 6,891
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 2000 March 31, 1999
Staffing Search Staffing Search
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Revenues $19,100 $18,500 $15,900 $8,400
Segment profit 1,375 2,787 754 787
</TABLE>
A reconciliation of combined segment profit to consolidated net income is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total profit for reportable segments $2,895 $1,207 $4,162 $1,541
Interest expense (89) (87) (152) (163)
Corporate overhead (758) (460) (1,062) (426)
Income tax expense (947) (288) (1,353) (415)
Net income 1,101 372 1,595 537
</TABLE>
8
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[4] Subsequent Event
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 alleges, 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 seeks, 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. The Company and the defendant directors have not yet responded to
the complaint.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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 51% of the Company's revenue for the six months ended March 31,
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 49% of the
Company's revenue for the six months ended March 31, 2000 (42% for the fiscal
year ended September 30, 1999).
On March 31, 2000, the Company entered into a definitive agreement
under which a management group would acquire, through a one-step cash merger,
all of the outstanding publicly held Common Stock at a price of $4.25 per share.
The transaction 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 merger price is fair from a financial point of view to
the holders of Common Stock (other than the members of the management group). In
light of the recent developments involving the Company discussed below under
"Results of Operations," including the substantial increase in the Company's
earnings for the three months ended March 31, 2000, in part the result of a
single transaction within the capital markets division, and the recent departure
of key personnel, the Special Committee and its financial advisor are currently
reassessing the merger terms. There can be no assurance that the proposed merger
will be consummated on its existing terms or on any revised terms that may be
agreed upon by the management group and the Special Committee.
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 Six Months Ended
March 31, March 31,
Statement of Operations Data: 2000 1999 2000 1999
- ----------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $21,617 $12,779 $37,608 $24,295
Income from Operations 2,112 733 3,039 1,075
Income Before Income Tax Expense 2,048 660 2,948 952
Income Tax Expense 947 288 1,353 415
Net Income 1,101 372 1,595 537
Basic Earnings Per Common Share $ 0.27 $ 0.08 $ 0.38 $ 0.11
Diluted Earnings Per Common Share $ 0.24 $ 0.08 $ 0.35 $ 0.11
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: March 31, 2000 September 30, 1999
- ------------------- -------------- ------------------
<S> <C> <C>
Working Capital $ 5,392 $ 4,130
Total Assets 22,630 18,348
Total Liabilities 13,185 10,494
Stockholders' Equity 9,445 7,854
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS [Continued]
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 $21.6 million for the three months ended March
31, 2000 from $12.8 million for the three months ended March 31, 1999, an
increase of $8.8 million or 69%. The increase comprised $2.1 million in
temporary staffing and consulting, and $6.7 million in executive search and full
time contingency and recruitment, and was the result of factors described below.
Revenue increased to $37.6 million for the six months ended March
31, 2000 from $24.3 million for the six months ended March 31, 1999, an increase
of $13.3 million or 55%. The increase comprised of $3.2 million in temporary
staffing and consulting, and $10.1 million in executive search and full time
contingency and recruitment, and was the result of factors further described
below.
Revenues from the Company's temporary staffing and consulting
business were $9.9 million and $19.1 for the three and six months ended March
31, 2000 respectively, compared to $7.8 million and $15.9 million for the same
periods in 1999, an increase of $2.1 million or 27% and $3.2 million or 21%,
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 6% decrease in
revenue for the six months ended March 31, 2000 compared to the same period in
1999. At the end of the period, several key personnel who supported the largest
customer of the information technology division left the Company's employ. The
Company understands that such personnel have entered into competition with the
Company. The Company anticipates that its information technology division will
be adversely affected by such departures, but is presently unable to determine
the extent of such effect.
Revenues from the Company's executive search and full time
contingency recruitment business were $11.7 million and $18.5 for the three and
six months ended March 31, 2000 compared to $5 million and $8.4 million for the
same periods in 1999, an increase of $6.7 million or 134% and $10.1 million or
120% respectively. All divisions within the executive search and full time
contingency recruitment business experienced increases in revenue for the six
months ended March 31, 2000 compared to the same period in 1999. The capital
markets, publishing and new media, banking and accounting divisions contributed
the largest increases in revenue during the six months ended March 31, 2000. The
Company believes the results were favorably impacted by the strong U.S. economy
and extraordinarily low unemployment rate. Revenues for the quarter ended March
31, 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 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 six months ended March 31, 2000
totaled $16.3 million (75% of revenues) and $28.8 million (77% of revenues)
compared with $10.1 million (80% of revenues) and $19.6 million (81% 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS [Continued]
General and Administrative expenses for the three and six months
ended March 31, 2000 were $3 million (14% of revenues) and $5.4 million (14% of
revenues) respectively compared to $1.7 million (14% of revenues) and $3.3
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 $150,000 of
expense relating to the development of its web site, which is expected to be
operational during the second quarter of 2000. In addition, included in general
and administrative expenses are approximately $630,000 of one-time charges
relating to the pending management buyout.
Depreciation and Amortization expense for the three and six months
ended March 31, 2000 totaled $225,000 and $417,000 respectively, compared to
$172,000 and $337,000 for the same periods in 1999. Depreciation expense
increased principally as a result of capital expenditures made during fiscal
1999. The amortization of intangible assets associated with certain acquisitions
also contributed to this increase.
Income from operations was $2,112,000 and $3,039,000 for the three
and six months ended March 31, 2000 respectively, compared to $733,000 and
$1,075,000 for the same periods in 1999. The increases are primarily due to the
factors mentioned in the first four paragraphs of this section. The impact of
the aforementioned transaction within the capital markets division as well as
the expenses relating to the pending management buyout were significant to
income from operations. These above referenced events resulted in an increase to
income from operations of approximately $570,000 for the six months ended March
31, 2000.
Income Tax Expense for the three and six months ended March 31, 2000
was $947,000 (46% effective tax rate) and $1,353,000 (46% effective tax rate)
respectively compared with $288,000 (44% effective tax rate) and $415,000 (44%
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 six months ended March 31, 2000 was
$1,101,000 and $1,595,000 respectively compared to $372,000 and $537,000 for the
same periods in 1999, due to the factors mentioned in the first four paragraphs
of this section.
Liquidity and Capital Resources
As of March 31, 2000 the Company's sources of liquidity included
approximately $2.1 million in cash and cash equivalents and short-term
investments. The Company's working capital was $5.4 million at March 31, 2000
compared to $4.1 million at September 30, 1999. The Company has available
$584,000 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 March 31, 2000 was 9%. At March 31, 2000, there were $1.5
million of borrowings under the working capital line of credit, and $1 million
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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS [Continued]
Net cash provided by operating activities for the six months ended March 31,
2000 was $192,000 compared to net cash provided by operating activities of
$962,000 for the same period in 1999. Net cash used by investing activities was
$113,000 for the six months ended March 31, 2000, which was primarily due to
capital expenditures of $332,000, purchase of investments of $200,000 and Web
Development costs of $236,000 offset by proceeds from sales of investments of
$648,000. Net cash provided in financing activities for the six months ended
March 31, 2000 was $900,000, 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.
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.
13
<PAGE>
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 $594,000 at March 31, 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 alleges, 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 seeks, 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. The Company and the defendant directors have not yet responded to
the complaint.
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 March 31, 2000, reporting
Item 5, Other Events, filed on April 3, 2000.
14
<PAGE>
THE SOLOMON-PAGE GROUP LTD.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
The Solomon-Page Group Ltd.
---------------------------
(Registrant)
Date: May 12, 2000 /s/ Lloyd B. Solomon
---------------------------------------
Lloyd B. Solomon, Chief Executive Officer
Date: May 12, 2000 /s/ Eric M. Davis
-----------------------------------------
Eric M. Davis, Chief Financial Officer
Vice President - Finance
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-Q for the six months ended March 31, 2000 and is qualified in
its entirety by reference to such Financial Statements and Notes, thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 1,559,000
<SECURITIES> 1,079,000
<RECEIVABLES> 15,283,000
<ALLOWANCES> 320,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,443,000
<PP&E> 2,279,000
<DEPRECIATION> 315,000
<TOTAL-ASSETS> 22,630,000
<CURRENT-LIABILITIES> 12,051,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 9,440,000
<TOTAL-LIABILITY-AND-EQUITY> 22,630,000
<SALES> 37,608,000
<TOTAL-REVENUES> 37,608,000
<CGS> 28,788,000
<TOTAL-COSTS> 34,569,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152,000
<INCOME-PRETAX> 2,948,000
<INCOME-TAX> 1,353,000
<INCOME-CONTINUING> 3,039,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,595,000
<EPS-BASIC> .38
<EPS-DILUTED> .35
</TABLE>
