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 ending June 30, 2006
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: 0-23489
Access Worldwide Communications, Inc.
(Exact name of registrant as specified in its charter)
| | |
Delaware | | 52-1309227 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
1820 N. Fort Myer Drive, Suite 300 Arlington, Virginia | | 22209 |
(Address of principal executive offices) | | (Zip Code) |
(703) 292-5210
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
None. | | None. |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
Class | | Outstanding at August 10, 2006 |
Common Stock, $0.01 par value per share | | 17,340,065 shares |
ACCESS WORLDWIDE COMMUNICATIONS, INC.
INDEX
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | June 30, 2006 (Unaudited) | | | December 31, 2005 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 474,489 | | | $ | 1,755,926 | |
Restricted cash | | | 805,000 | | | | 314,000 | |
Accounts receivable, net of allowance for doubtful accounts of $124,301 and $61,994, respectively | | | 8,658,191 | | | | 7,297,583 | |
Unbilled receivables | | | 291,138 | | | | 228,083 | |
Other assets, net | | | 1,032,452 | | | | 785,257 | |
| | | | | | | | |
Total current assets | | | 11,261,270 | | | | 10,380,849 | |
Property and equipment, net | | | 4,400,816 | | | | 5,025,158 | |
Restricted cash | | | 343,000 | | | | 466,000 | |
Other assets, net | | | 291,116 | | | | 390,822 | |
| | | | | | | | |
Total assets | | $ | 16,296,202 | | | $ | 16,262,829 | |
| | | | | | | | |
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS’ DEFICIT | | | | | | | | |
Current liabilities: | | | | | | | | |
Current portion of indebtedness | | $ | 5,587,020 | | | $ | 4,876,381 | |
Current portion of indebtedness - related parties | | | 2,352,334 | | | | 352,334 | |
Accounts payable | | | 1,041,656 | | | | 1,878,856 | |
Accrued expenses | | | 1,621,312 | | | | 2,204,267 | |
Grants payable | | | — | | | | 80,000 | |
Accrued salaries, wages and related benefits | | | 834,139 | | | | 736,797 | |
Customer deposits | | | 1,169,463 | | | | 1,084,378 | |
Convertible Notes, net | | | 1,976,385 | | | | 1,768,584 | |
Deferred revenue | | | 1,003,102 | | | | 1,435,619 | |
Accrued interest and other related party expenses | | | 60,568 | | | | 59,512 | |
| | | | | | | | |
Total current liabilities | | | 15,645,979 | | | | 14,476,728 | |
Long-term portion of indebtedness | | | 468,754 | | | | 669,441 | |
Other long-term liabilities | | | 763,004 | | | | 796,418 | |
Convertible Notes, net | | | 3,047,430 | | | | 1,380,564 | |
Mandatorily redeemable preferred stock, $.01 par value: 1,000,000 shares authorized, 40,000 shares issued and outstanding | | | 4,000,000 | | | | 4,000,000 | |
| | | | | | | | |
Total liabilities | | | 23,925,167 | | | | 21,323,151 | |
| | | | | | | | |
Commitments and contingencies | | | | | | | | |
Common stockholders’ deficit: | | | | | | | | |
Common stock, $.01 par value: voting: 40,000,000 shares authorized; 17,340,065 and 16,616,219 shares issued and outstanding, respectively | | | 173,401 | | | | 166,162 | |
Additional paid-in capital | | | 70,644,624 | | | | 70,389,446 | |
Accumulated deficit | | | (78,446,990 | ) | | | (75,602,730 | ) |
Deferred compensation | | | — | | | | (13,200 | ) |
| | | | | | | | |
Total common stockholders’ deficit | | | (7,628,965 | ) | | | (5,060,322 | ) |
| | | | | | | | |
Total liabilities, mandatorily redeemable preferred stock and common stockholders’ deficit | | $ | 16,296,202 | | | $ | 16,262,829 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
1
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
Revenues | | $ | 9,755,920 | | | $ | 9,535,225 | | | $ | 19,745,315 | | | $ | 19,886,019 | |
Cost of revenues | | | 5,823,494 | | | | 5,593,618 | | | | 11,593,193 | | | | 11,103,091 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 3,932,426 | | | | 3,941,607 | | | | 8,152,122 | | | | 8,782,928 | |
Selling, general and administrative expenses | | | 5,085,716 | | | | 4,192,145 | | | | 10,009,000 | | | | 9,214,489 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | (1,153,290 | ) | | | (250,538 | ) | | | (1,856,878 | ) | | | (431,561 | ) |
Interest income | | | 27,561 | | | | 6,609 | | | | 46,630 | | | | 13,111 | |
Interest expense—related parties | | | (48,385 | ) | | | (22,112 | ) | | | (71,323 | ) | | | (45,875 | ) |
Interest expense | | | (498,899 | ) | | | (424,411 | ) | | | (962,689 | ) | | | (796,008 | ) |
| | | | | | | | | | | | | | | | |
Net loss | | $ | (1,673,013 | ) | | $ | (690,452 | ) | | $ | (2,844,260 | ) | | $ | (1,260,333 | ) |
| | | | | | | | | | | | | | | | |
Basic loss per share of common stock | | $ | (0.10 | ) | | $ | (0.06 | ) | | $ | (0.17 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | 17,350,507 | | | | 11,286,219 | | | | 17,119,773 | | | | 11,064,969 | |
| | | | | | | | | | | | | | | | |
Diluted loss per share of common stock | | $ | (0.10 | ) | | $ | (0.06 | ) | | $ | (0.17 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding | | | 17,350,507 | | | | 11,286,219 | | | | 17,119,773 | | | | 11,064,969 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
2
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS’ DEFICIT
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2006
| | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | | Accumulated Deficit | | | Deferred Compensation | | | Total | |
| | Shares | | Amount | | | | |
Balance, December 31, 2005 | | 16,616,219 | | $ | 166,162 | | $ | 70,389,446 | | | $ | (75,602,730 | ) | | $ | (13,200 | ) | | $ | (5,060,322 | ) |
Common stock warrants exercised | | 548,879 | | | 5,489 | | | — | | | | — | | | | — | | | | 5,489 | |
Common stock issued for services | | 125,820 | | | 1,258 | | | 99,992 | | | | — | | | | — | | | | 101,250 | |
Common stock issued to pay accrued bonus | | 49,147 | | | 492 | | | 24,082 | | | | — | | | | — | | | | 24,574 | |
Reversal of intrinsic value of deferred compensation | | — | | | — | | | (13,200 | ) | | | — | | | | 13,200 | | | | — | |
Share based compensation expense | | — | | | — | | | 60,304 | | | | — | | | | — | | | | 60,304 | |
Value of warrant issued in connection with note payable to related party | | — | | | — | | | 84,000 | | | | — | | | | — | | | | 84,000 | |
Net loss | | — | | | — | | | — | | | | (2,844,260 | ) | | | — | | | | (2,844,260 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2006 | | 17,340,065 | | $ | 173,401 | | $ | 70,644,624 | | | $ | (78,446,990 | ) | | $ | — | | | $ | (7,628,965 | ) |
| | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
3
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
| | | | | | | | |
| | 2006 | | | 2005 | |
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (2,844,260 | ) | | $ | (1,260,333 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization | | | 805,282 | | | | 641,611 | |
Amortization of deferred financing costs | | | 67,349 | | | | 41,504 | |
Amortization of deferred compensation | | | 5,250 | | | | 6,800 | |
Accretion of discount on Convertible Notes | | | 374,667 | | | | 356,027 | |
Provision for (recovery of) doubtful accounts | | | 62,307 | | | | (266,801 | ) |
Share based compensation expense | | | 60,304 | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (1,422,915 | ) | | | (1,103,045 | ) |
Unbilled receivables | | | (63,055 | ) | | | (1,170,806 | ) |
Other assets | | | 3,912 | | | | (537,177 | ) |
Accounts payable, grants payable and accrued expenses | | | (1,432,319 | ) | | | (1,813,504 | ) |
Accrued salaries, wages and related benefits | | | 121,916 | | | | (110,633 | ) |
Accrued interest and related party expenses | | | 1,056 | | | | 88,009 | |
Deferred revenue and customer deposits | | | (347,432 | ) | | | 1,395,626 | |
| | | | | | | | |
Net cash used in operating activities | | | (4,607,938 | ) | | | (3,732,722 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Additions to property and equipment | | | (180,940 | ) | | | (704,053 | ) |
(Increase) decrease in restricted cash | | | (368,000 | ) | | | 122,000 | |
| | | | | | | | |
Net cash used in investing activities | | | (548,940 | ) | | | (582,053 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Borrowings (payments) under capital leases | | | (175,024 | ) | | | 9,149 | |
Proceeds from issuance of common stock | | | — | | | | 1,000,000 | |
Proceeds from exercise of common stock options and warrants | | | 5,489 | | | | 7,370 | |
Net borrowings under Debt Agreement | | | 631,691 | | | | 3,063,483 | |
Proceeds from insurance financing, net | | | 53,285 | | | | 82,268 | |
Borrowings under note payable to related party | | | 2,000,000 | | | | — | |
Proceeds from issuance of Convertible Notes | | | 1,500,000 | | | | — | |
Loan origination fees | | | (140,000 | ) | | | — | |
| | | | | | | | |
Net cash provided by financing activities | | | 3,875,441 | | | | 4,162,270 | |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (1,281,437 | ) | | | (152,505 | ) |
Cash and cash equivalents, beginning of period | | | 1,755,926 | | | | 2,570,546 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 474,489 | | | $ | 2,418,041 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
4
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION, LIQUIDITY AND GOING CONCERN CONSIDERATIONS
Through our outsourced marketing services, we provide a variety of sales, education and communication programs to clients in the medical, pharmaceutical, telecommunications, financial, insurance and consumer products industries through our operating subsidiaries in two business segments – Pharmaceutical Services and Business Services. Please refer toNote 8regarding our business segments.
In our opinion, these financial statements reflect all normal, recurring adjustments necessary to provide a fair presentation of our financial position, results of operations and cash flows for the periods presented. These interim financial statements are condensed, and thus, do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for presentation of a complete set of financial statements. The balance sheet as of December 31, 2005 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
These interim results are not necessarily indicative of the results that should be expected for the full year. For a better understanding of Access Worldwide Communications, Inc. and our financial statements, the condensed interim financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2005, which are included in our 2005 Annual Report on Form 10-K, filed on April 17, 2006.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business; and, as a consequence, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern. At June 30, 2006, we had an accumulated deficit of $78.4 million, and we had recurring losses from operations of $1.9 million for the six months ended June 30, 2006.
Our focus continues to be on our business development team building our revenue pipeline. We continue to see improvements in the revenue pipeline and believe that building a more robust pipeline is an achievable task for the current business development team.
On August 3, 2006, we closed on a transaction selling our TMS Professional Markets Group division (“TMS”) for $10.5 million. SeeNote 9. The net proceeds from this transaction were used to repay the $5.3 million total amounts due under our Debt Agreement, as hereinafter defined, and $0.4 million under a subordinated promissory note with a former owner of TMS. The remaining funds will be used to fund operations. In addition, we are in the process of restructuring our $2.0 million subordinated unsecured note from one of our board members, and our $2.1 million Convertible Debt I, both of which mature during October 2006 (collectively “Current Loans”).
Our primary sources of liquidity consist of cash and cash equivalents. Our ultimate ability to continue as a going concern will depend on achieving or exceeding our planned revenues and restructuring our Current Loans, while managing costs to enable us to become profitable. Our current 2006 Operating Plan projects that cash available from planned revenue, combined with our cash and cash equivalents, and a restructuring or renegotiation of our Current Loans, will be adequate to defer the requirement for new funding for the next twelve months.
It is possible that we will not achieve profitable operations in the near term and therefore it is possible our operations will continue to consume cash in the foreseeable future. There can be no assurances that we will succeed in achieving our planned revenues and goals. Failure to do so in the near term will have a material adverse effect on our business, prospects, financial condition and operating results and our ability to continue as a going concern.
2. RESTRICTED CASH
We have obtained a letter of credit (“Letter of Credit”) in the amount of $834,000 issued to the landlord of our Maryland communication center. The Letter of Credit was collateralized by a certificate of deposit in the same amount. Therefore, such certificate of deposit is classified as restricted cash of $466,000 and $589,000 in the accompanying consolidated balance sheets at June 30, 2006 and December 31, 2005, respectively.
5
The amount of the Letter of Credit and restricted cash will be reduced on each anniversary of the lease agreement through May 2011. The balance of the Letter of Credit will be reduced to the amount shown on each anniversary date as follows:
| | | |
May 2007 | | $ | 343,000 |
May 2008 through 2010 | | | 221,000 |
Additionally, the Fifth Amendment to the Debt Agreement required that $1.6 million of the proceeds from Convertible Debt IV be maintained in a deposit account (the “Deposit Account”) with Merrill Lynch subject to permitted monthly scheduled withdrawals between March 2006 and September 2006 to fund our working capital and operations. The Deposit Account was pledged as collateral under the Debt Agreement and is subject to an Account Control Agreement between the Company, Capital Source, and Merrill Lynch. At June 30, 2006, the restricted balance in the Deposit Account was $682,000.
3. STOCK-BASED COMPENSATION
We maintain incentive stock plans that provide for grants of stock options and restricted stock awards to our directors, officers and key employees. The stock plans are described more fully below.
Pro Forma Information Under SFAS No. 123 for Periods Prior to Fiscal 2006
The table below illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to options granted in the second quarter of 2005 for the three and six months ended June 30, 2005.
| | | | | | | | |
| | June 30, 2005 | |
| | Three Months | | | Six Months | |
Net loss, as reported | | $ | (690,452 | ) | | $ | (1,260,333 | ) |
Add: stock-based employee compensation expense included in reported net loss, net of related tax effect | | | 1,650 | | | | 3,300 | |
Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effect | | | (38,243 | ) | | | (71,803 | ) |
| | | | | | | | |
Pro forma net loss | | $ | (727,045 | ) | | $ | (1,328,836 | ) |
| | | | | | | | |
Loss per share: | | | | | | | | |
Basic – as reported | | $ | (0.06 | ) | | $ | (0.11 | ) |
Basic – pro forma | | $ | (0.06 | ) | | $ | (0.12 | ) |
Diluted – as reported | | $ | (0.06 | ) | | $ | (0.11 | ) |
Diluted – pro forma | | $ | (0.06 | ) | | $ | (0.12 | ) |
Valuation and Expense Information under SFAS No. 123R
The adoption of SFAS No. 123R had a negligible impact on our net loss for the first and second quarters of 2006. Accordingly, the adoption of SFAS No. 123R did not have an effect on loss per share for the first or second quarters of 2006. We recorded share based compensation costs of approximately $20,300 and $40,000 for the first and second quarters of 2006, respectively.
As required by SFAS No. 123R, we now estimate forfeitures of employee stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined for three groups of employees-directors, senior management and all other employees, based on historical experience. Estimated forfeitures are now adjusted to actual forfeiture experience as needed. The effect of actual forfeitures during the first quarter of 2006 was $11,020 and the estimated forfeiture rate for the quarter ended March 31, 2006 was 8%. Likewise, the effect of actual forfeitures during the second quarter of 2006 was zero and the estimated forfeiture rate for the quarter ended June 30, 2006 was 8%.
In connection with the adoption of SFAS No. 123R, we estimate the fair value of each stock option on the date of grant using a Black-Scholes-Merton option-pricing formula, applying the following assumptions, and amortize that value to expense over the option’s vesting period using the straight-line attribution approach:
| | | |
| | June 30, 2006 | |
Expected term (in years) | | 6.5 | |
Risk-free interest rate | | 5.10 | % |
Expected volatility | | 105 | % |
Expected dividend yield | | 0 | % |
6
Expected Term:The expected term represents the period over which the share-based awards are expected to be outstanding. It has been determined using the “simplified method” described in the SEC’s Staff Accounting Bulletin No. 107, which is based on a calculation to arrive at the midpoint between the vesting date and the end of the contractual term.
Risk-Free Interest Rate:We based the risk-free interest rate used in our assumptions on the implied yield currently available on U.S. Treasury 5 year constant maturity issues with a remaining term equivalent to the stock option award’s expected term.
Expected Volatility:The volatility factor used in our assumptions is based on the historical price of our stock over the most recent period commensurate with the expected term of the stock option award.
Expected Dividend Yield: We do not intend to pay dividends on our common stock for the foreseeable future. Accordingly, we use a dividend yield of zero in our assumptions.
Incentive Stock Plans
We maintain an incentive stock plan that provides for the grants of stock options to our directors, officers and key employees. As of June 30, 2006, there were 359,930 shares of common stock reserved for issuance under our stock option plan. Under the stock option plan, stock options must be granted at an option price equal to the closing market price of the stock on the date of the stock option was awarded. Options granted under the plan become exercisable over three or five years, as determined by the Stock Option Committee, in equal annual installments after the date of grant. All options granted expire ten years from the date of grant.
A summary of option activity under our stock plans as of June 30, 2006 and the changes during the second quarter of 2006 is presented below:
| | | | | | | |
Options | | Number of Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term |
Outstanding at March 31, 2006 | | 1,569,070 | | $ | 0.66 | | |
Granted | | — | | | — | | |
Exercised | | — | | | — | | |
Forfeited or expired | | — | | | — | | |
Outstanding at June 30, 2006 | | 1,569,070 | | | 0.66 | | 7.3 |
| | | | | | | |
Exercisable at June 30, 2006 | | 755,656 | | $ | 0.69 | | 3.1 |
| | | | | | | |
There were no stock options granted or exercised during the second quarter of 2006. As of June 30, 2006, there was approximately $291,000 of total unrecognized share based compensation cost related to the stock options granted under our stock plans. That cost is expected to be recognized over a weighted-average period of 7.3 years.
4. LOSS PER COMMON SHARE
The information required to compute net loss per basic and diluted share is as follows:
| | | | |
2006: | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
Weighted average number of common shares outstanding – basic | | 17,350,507 | | 17,119,773 |
| | | | |
Weighted average number of common and common equivalent shares outstanding – dilutive* | | 17,350,507 | | 17,119,773 |
| | | | |
| | |
2005: | | For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
Weighted average number of common shares outstanding – basic | | 11,286,219 | | 11,064,969 |
| | | | |
Weighted average number of common and common equivalent shares outstanding – dilutive* | | 11,286,219 | | 11,064,969 |
| | | | |
* | Since the effects of the stock options, warrants, and Convertible Notes are anti-dilutive for the three and six months ended June 30, 2006, and 2005, these effects have not been included in the calculation of dilutive earnings per share. |
7
5. INDEBTEDNESS
Our borrowings consist of the following:
| | | | | | | | |
| | June 30, 2006 | | | December 31, 2005 | |
Revolving Credit, Term Loan and Security Agreement (collectively the “Debt Agreement”) | | $ | 5,086,079 | | | $ | 4,454,388 | |
6% subordinated promissory note due to former stockholder of TeleManagement Services (“TMS”); interest at default rate of 10% per year. Principal and interest payments restricted per subordination agreement to the Debt Agreement | | | 352,334 | | | | 352,334 | |
Subordinated unsecured promissory note payable to related party | | | 2,000,000 | | | | — | |
Deferred Financing | | | 83,928 | | | | 30,643 | |
Capital leases payable in monthly installments through May 2010 | | | 885,767 | | | | 1,060,791 | |
| | | | | | | | |
| | | 8,408,108 | | | | 5,898,156 | |
Less: current portion | | | (7,939,354 | ) | | | (5,228,715 | ) |
| | | | | | | | |
| | $ | 468,754 | | | $ | 669,441 | |
| | | | | | | | |
We paid cash of approximately $589,000 and $312,000 for interest on our borrowings during the first half of 2006 and 2005, respectively. Additional information regarding our long-term debt structure can be found in our 2005 Annual Report on Form 10-K, filed on April 17, 2006.
On May 18, 2006, we entered into the Sixth Amendment to our Debt Agreement which provided an overadvance of $1.5 million (the “Overadvance”), with interest at the greater of 11.75%, or the prime rate (as defined) plus 3.75%. The Sixth Amendment required: (i) the personal guarantee of amounts outstanding under our Debt Agreement by Shawkat Raslan, our CEO; (ii) the delay of any scheduled withdrawals of restricted cash from the Deposit Account during the period the Overadvance was outstanding; and (iii) certain additional covenants including periodic cash flow reporting to Capital Source. The Overadvance matured upon the execution of the unsecured subordinated loan agreement with Charles Weil, a member of our board of directors and a stockholder of the Company, who provided us with a subordinated unsecured loan of $2.0 million on May 24, 2006 (the “Note”). The Note matures four months from the June 12, 2006 issuance date, and has no stated interest associated with it. However, under the terms of the Note, the Company issued a warrant (the “Holder Warrant”) to purchase 200,000 shares of the Company’s common stock to Mr. Weil. The Holder Warrant was fully vested upon issuance of the Note, has an exercise price of $0.01 per share,and a term of ten years. The Company has estimated the fair value of the Holder Warrant at $84,000 using a Black-Scholes pricing model, which has been recorded as a loan origination fee, and is being amortized to interest expense over the four month term of the Note. In addition, should the Note not be repaid at its original maturity date, an additional Holder Warrant, with the same terms as the original Holder Warrant, is required to be issued for each additional four month term that the Note remains outstanding. The proceeds from the Note were used to repay the Overadvance and to fund continuing operations.
As of June 30, 2006, we were not in compliance with our financial covenants contained in our Debt Agreement. However, Capital Source chose not to call the loan and continued to provide funds to the Company in accordance with the terms of the Debt Agreement though August 1, 2006. On August 7, 2006, Access repaid the total amounts due under the terms of the Debt Agreement of $5.3 million, including an early termination fee of $1.0 million, with the funds received from the sale of TMS, which was completed on August 3, 2006. SeeNote 9.
6. CONVERTIBLE NOTES
At June 30, 2006 and December 31, 2005, the balance of our debt discounts associated with our $5.75 million Convertible Notes is approximately $0.73 million and $1.10 million, respectively. We accreted approximately $375,000 and $356,000 of the debt discount as interest expense during the first half of 2006 and 2005, respectively. Additional information regarding our Convertible Notes can be found in our 2005 Annual Report on Form 10-K, filed on April 17, 2006.
7. INCOME TAXES
The effective tax rate used by us for the six month periods ended June 30, 2006 and 2005 differs from the federal statutory rate primarily due to the valuation allowance recorded in connection with the Company’s deferred tax assets.
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8. SEGMENTS
Our reportable segments are strategic business units that offer different products and services to different industries in the United States and the Philippines.
Our reportable segments are as follows:
| • | | Pharmaceutical Services Segment—provides outsourced services to the medical and pharmaceutical industry. The Pharmaceutical Services Segment consists of two business units: TMS and AM Medica Group. |
| • | | Business Services Segment—provides business and consumer and multilingual telemarketing services to the telecommunications, consumer products, insurance and financial services industries. The Business Services Segment consists of two business units: TelAc and AWWC Philippines. |
We evaluate the performance of our segments and allocate resources based on gross margin, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and net income (loss). The tables below present information about our reportable segments for our continuing operations used by our chief operating decision-maker as of and for the three and six months ended June 30, 2006 and 2005.
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Pharmaceutical | | | Business | | | Segment Total | | | Reconciliation | | | Total | |
Revenues | | | | | | | | | | | | | | | | | | | | | | |
Three months ended | | 2006 | | $ | 3,486,227 | | | $ | 6,269,693 | | | $ | 9,755,920 | | | $ | — | | | $ | 9,755,920 | |
| | 2005 | | | 6,247,995 | | | | 3,287,230 | | | | 9,535,225 | | | | — | | | | 9,535,225 | |
Six months ended | | 2006 | | | 8,366,914 | | | | 11,378,401 | | | | 19,745,315 | | | | — | | | | 19,745,315 | |
| | 2005 | | | 13,032,084 | | | | 6,853,935 | | | | 19,886,019 | | | | — | | | | 19,886,019 | |
Gross profit | | | | | | | | | | | | | | | | | | | | | | |
Three months ended | | 2006 | | | 1,627,021 | | | | 2,305,405 | | | | 3,932,426 | | | | — | | | | 3,932,426 | |
| | 2005 | | | 2,887,613 | | | | 1,053,994 | | | | 3,941,607 | | | | — | | | | 3,941,607 | |
Six months ended | | 2006 | | | 3,819,424 | | | | 4,332,698 | | | | 8,152,122 | | | | — | | | | 8,152,122 | |
| | 2005 | | | 6,356,424 | | | | 2,426,504 | | | | 8,782,928 | | | | — | | | | 8,782,928 | |
Operating (loss) income | | | | | | | | | | | | | | | | | | | | | | |
Three months ended | | 2006 | | | (141,135 | ) | | | (329,711 | ) | | | (470,846 | ) | | | (682,444 | ) | | | (1,153,290 | ) |
| | 2005 | | | 1,821,826 | | | | (591,647 | ) | | | 1,230,179 | | | | (1,480,717 | ) | | | (250,538 | ) |
Six months ended | | 2006 | | | 139,677 | | | | (766,354 | ) | | | (626,677 | ) | | | (1,230,201 | ) | | | (1,856,878 | ) |
| | 2005 | | | 2,444,216 | | | | (1,493,315 | ) | | | 950,901 | | | | (1,382,462 | ) | | | (431,561 | ) |
EBITDA(1) | | | | | | | | | | | | | | | | | | | | | | |
Three months ended | | 2006 | | | (20,923 | ) | | | (56,694 | ) | | | (77,617 | ) | | | (677,456 | ) | | | (755,073 | ) |
| | 2005 | | | 1,948,760 | | | | (405,041 | ) | | | 1,543,719 | | | | (1,475,629 | ) | | | 68,090 | |
Six months ended | | 2006 | | | 402,744 | | | | (234,339 | ) | | | 168,405 | | | | (1,220,001 | ) | | | (1,051,596 | ) |
| | 2005 | | | 2,712,053 | | | | (1,128,811 | ) | | | 1,583,242 | | | | (1,373,192 | ) | | | 210,050 | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | |
Three months ended | | 2006 | | | 120,212 | | | | 273,017 | | | | 393,229 | | | | 4,988 | | | | 398,217 | |
| | 2005 | | | 126,934 | | | | 186,606 | | | | 313,540 | | | | 5,088 | | | | 318,628 | |
Six months ended | | 2006 | | | 263,067 | | | | 532,015 | | | | 795,082 | | | | 10,200 | | | | 805,282 | |
| | 2005 | | | 267,837 | | | | 364,504 | | | | 632,341 | | | | 9,270 | | | | 641,611 | |
(1) | We believe that earnings before interest, income taxes, depreciation and amortization (EBITDA) is a useful financial metric to assess our operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between us and our competitors. We believe that EBITDA will provide investors with a useful tool for assessing the comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures. The use of EBITDA has certain limitations. Our presentation of EBITDA may be different from the presentation used by other companies and therefore comparability may be limited. Depreciation expense for various long-term assets, interest expense, income taxes and other items have been and will be incurred and are not reflected in the presentation of EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation, interest and income tax expense, capital expenditures and other items both in our reconciliations to the |
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GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term EBITDA is not defined under accounting principles generally accepted in the United States, or U.S. GAAP, and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating performance, you should not consider this data in isolation, or as a substitute for, our net loss, loss from operations or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as we do. A reconciliation of net loss, the most directly comparable U.S. GAAP measure, to EBITDA for each of the respective periods indicated is as follows:
| | | | | | | | |
Three Months Ended June 30, | | 2006 | | | 2005 | |
Net loss | | $ | (1,673,013 | ) | | $ | (690,452 | ) |
Interest expense, net | | | 519,723 | | | | 439,914 | |
Depreciation and amortization expense | | | 398,217 | | | | 318,628 | |
| | | | | | | | |
EBITDA | | $ | (755,073 | ) | | $ | 68,090 | |
| | |
Six Months Ended June 30, | | 2006 | | | 2005 | |
Net loss | | $ | (2,844,260 | ) | | $ | (1,260,333 | ) |
Interest expense, net | | | 987,382 | | | | 828,772 | |
Depreciation and amortization expense | | | 805,282 | | | | 641,611 | |
| | | | | | | | |
EBITDA | | $ | (1,051,596 | ) | | $ | 210,050 | |
9. SUBSEQUENT EVENT
On June 20, 2006, at a meeting of our Board of Directors (the “Board”), the Board approved the asset purchase agreement dated June 20, 2006, (the “Asset Purchase Agreement”), selling all or substantially all the assets of TMS, pursuant to a majority consent of the Company’s outstanding shareholders. Following receipt of consents from a majority of the Company’s shareholders, we completed the sale of substantially all the assets of TMS for cash of $10.5 million on August 2, 2006, less $0.4 million for the settlement of a subordinated note with the former owner of the TMS division, and a $0.8 million holdback for the working capital settlement in 90 days, as defined in the Asset Purchase Agreement. $5.3 million of the net proceeds were used to pay Capital Source all amounts due under the terms of the Debt Agreement, including a $1.0 million early termination fee, and to obtain releases for restrictions on our lockbox systems and Merrill Lynch account. The remaining portion will be used to fund continuing operations as we work on restructuring our finance structure.
Going forward, the operations and cash flows of our TMS division will be eliminated from the ongoing operations of the Company in the disposal transaction, and the Company will not have any significant continuing involvement in the operations of TMS after the disposal transaction. As such, this disposal plan will qualify for treatment as discontinued operations in accordance with FASB Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(“SFAS No. 144”). Therefore, the operating results of the TMS division will not be included in our results from continuing operations; instead, the results will be recorded as discontinued operations in our consolidated financial statements included in our Form 10-Q for the period ending September 30, 2006.
The assets and liabilities of discontinued operations are considered assets held for sale and liabilities associated with assets held for sale, respectively. TMS’s major classes of assets and liabilities as of June 30, 2006 and revenues and operating income for the six months ended June 30, 2006 are as follows:
| | | |
| | As of June 30, 2006 |
Current assets | | $ | 3,371,478 |
Property and equipment, net | | | 1,102,102 |
Other non-current assets | | | 46,177 |
| | | |
Total assets | | $ | 4,519,757 |
| | | |
Current liabilities | | $ | 2,461,704 |
Other non-current liabilities | | | 183,637 |
| | | |
Total liabilities | | $ | 2,645,341 |
| | | |
| |
| | For the Six Months Ended June 30, 2006 |
Revenues | | | 7,893,959 |
Operating income | | | 279,200 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Disclosure Concerning Forward-Looking Statements
In December 1995, the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) was enacted by the United States Congress. The Reform Act, as amended, contains certain amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934. These amendments provide protection from liability in private lawsuits for “forward-looking” statements made by public companies. We choose to take advantage of the “safe harbor” provisions of the Reform Act.
This Quarterly Report on Form 10-Q contains both historical information and other information. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution the reader that, with the exception of information that is clearly historical, all the information contained in this Quarterly Report on Form 10-Q should be considered to be “forward-looking statements” as referred to in the Reform Act. Without limitation, when we use the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “project,” “probably,” “should,” “will” and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.
Forward-looking information involves risks and uncertainties. This information is based on various factors and assumptions about future events that may or may not actually come true. As a result, our operations and financial results in the future could differ substantially from those we have discussed in the forward-looking statements in this Quarterly Report and other documents that have been filed or furnished with the Securities and Exchange Commission. In particular, various economic and competitive factors, including those outside our control, such as the following, could cause our actual results during the remainder of fiscal 2006 and in future years to differ materially from those expressed in any forward-looking statement made in this Quarterly Report on Form 10-Q:
| • | | Risks associated with our Debt Agreement, including rising interest rates; |
| • | | Competition from other third-party providers and those of our clients and prospects who may decide to do the work that we do in-house; |
| • | | Our ability to remain as a going concern; |
| • | | Industry consolidation which reduces the number of clients that we are able to serve; |
| • | | Potential consumer saturation reducing the need for our services; |
| • | | Certain needs for our growth; |
| • | | Our dependence on the continuation of the trend toward outsourcing; |
| • | | Dependence on the industries we serve; |
| • | | The effect of changes in a drug’s life cycle; |
| • | | Our ability and our clients’ ability to comply with state, federal and industry regulations; |
| • | | Reliance on a limited number of major clients; |
| • | | The effects of possible contract cancellations; |
| • | | Reliance on technology; |
| • | | Reliance on key personnel and recent changes in management; |
| • | | Reliance on our labor force; |
| • | | The possible impact of terrorist activity or attacks, war and other international conflicts, and a downturn in the US economy; |
| • | | The effects of an interruption of our business; |
| • | | The volatility of our stock price; |
| • | | Risks associated with our stock trading on the OTC Bulletin Board; |
| • | | Our inability to successfully operate our communication center in the Philippines; |
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| • | | Risk associated with executing our expansion strategy in the Philippines; and |
| • | | Risk associated with managing the net proceeds from the TMS transaction. |
In addition, under the heading “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K, we describe various estimates and assumptions that we make that affect the reported amounts of assets, liabilities, sales and expenses as well as the disclosure of contingent assets and liabilities. Future revisions to these estimates and assumptions may cause these amounts, when reported, to differ materially from those expressed in any forward-looking statement made in this Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements attributable to Access Worldwide Communications, Inc. and our subsidiaries are expressly qualified in their entirety by the foregoing factors.
Results of Operations
Overview
Established in 1983, Access Worldwide Communications, Inc. (“Access Worldwide,” “Access,” “we,” “our,” “us” or the “Company” refers to Access Worldwide and/or, as the context requires, one or more of our subsidiaries) is an outsourced marketing services company that provides a variety of sales, education and communication programs to clients in the medical, pharmaceutical, telecommunications, financial services, insurance and consumer products industries. We provide services through the following two business segments:
| • | | Pharmaceutical Services Segment, which consists of our medical education business, AM Medica Group (“AMG”), and our pharmaceutical communication business, TMS Professional Markets Group (“TMS”) provides medical education, medical publishing, product detailing, physician and pharmacist profiling, patient education, disease management, pharmacy stocking, and clinical trial recruitment to the pharmaceutical and medical industries. |
| • | | Business Services Segment, which consists of our multilingual communication business, TelAc Teleservices Group (“TelAc”) and our offshore communication business Access Worldwide (AWWC) Philippines, Inc. (the “Access Philippines”) provides telemarketing services including inbound and outbound programs to clients in the telecommunications, financial and, legal services, insurance and consumer products industries. |
Overall
The following is a tabular presentation of our revenue, gross profit and SG&A by operating segment for the three and six months ended June 30, 2006 and 2005.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in millions) | | 2006 | | 2005 | | 2006 | | 2005 |
Revenue | | | | | | | | | | | | |
Pharmaceutical Segment | | $ | 3.5 | | $ | 6.2 | | $ | 8.4 | | $ | 13.0 |
Business Services Segment | | | 6.3 | | | 3.3 | | | 11.4 | | | 6.9 |
| | | | | | | | | | | | |
Total Revenue | | $ | 9.8 | | $ | 9.5 | | $ | 19.8 | | $ | 19.9 |
| | | | | | | | | | | | |
Gross Profit | | | | | | | | | | | | |
Pharmaceutical Segment | | $ | 1.6 | | $ | 2.9 | | $ | 3.8 | | $ | 6.4 |
Business Services Segment | | | 2.3 | | | 1.0 | | | 4.3 | | | 2.4 |
| | | | | | | | | | | | |
Total Gross Profit | | $ | 3.9 | | $ | 3.9 | | $ | 8.1 | | $ | 8.8 |
| | | | | | | | | | | | |
SG&A | | | | | | | | | | | | |
Pharmaceutical Segment | | $ | 1.8 | | $ | 1.1 | | $ | 3.7 | | $ | 3.9 |
Business Services Segment | | | 2.6 | | | 1.6 | | | 5.1 | | | 3.9 |
Other | | | 0.7 | | | 1.5 | | | 1.2 | | | 1.4 |
| | | | | | | | | | | | |
Total SG&A | | $ | 5.1 | | $ | 4.2 | | $ | 10.0 | | $ | 9.2 |
| | | | | | | | | | | | |
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On August 3, 2006 we completed a transaction to sell substantially all of the assets of our TMS division for cash of $10.5 million. For the three and six month periods ended June 30, 2006, revenue of the TMS division was $3.5 million and $7.9 million, respectively, and TMS’s operating (loss) income, excluding Corporate overhead allocation, was $(5.4) thousand and $279.2 thousand, respectively. The revenues and operating losses/ income of TMS are included in the Pharmaceutical Segment information above.
Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
Pharmaceutical Services
Revenues for the Pharmaceutical Services (“Pharmaceutical”) Segment decreased 43.5% in the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The decrease was due to a reduction of revenue of $1.6 million in our medical education business. This reduction was caused primarily by a decrease in work being performed for three significant customers at our medical education division, which accounted for a loss in revenue of approximately $1.4 million when compared quarter over quarter. The further reduction was caused by a decrease in revenue of $1.1 million in our pharmaceutical communication business, which was primarily the result of a change in programs for two significant customers. One of these customers replaced an inbound program, which was in place in the second quarter of 2005 and ended in August 2005, with another similar program that has not shared the same success, thus causing a decrease in revenue. The other customer has two large programs, which previously had teleservice representatives dedicated to their programs only, but now utilize our shared pool of representatives that serve more than one client at a time. This change was requested by the customer due to budget cut-backs and has decreased the amount per billable hour that we charge the customer for these programs.
Gross profit as a percentage of revenues for the Pharmaceutical Segment for the three months ended June 30, 2006 decreased to 45.7%, compared to 46.8% for the three months ended June 30, 2005. The increase was primarily attributed to programs completed in the current quarter by our medical education division for which the related expenses came in under budget.
Selling, general and administrative expenses as a percentage of revenues for the Pharmaceutical Segment increased to 51.4% for the three months ended June 30, 2006, compared to 17.7% for the three months ended June 30, 2005. The increase was primarily attributed to the decrease in revenues, along with management’s restricted ability to further reduce overhead expenditures without the risk of severely impacting its business needs. In addition, the increase is partially attributable to the favorable settlement of our litigation of MTI for $0.4 million and a net recovery from an insurance claim for flood damages at our Florida location of $0.2 million during the quarter ended June 30, 2005.
Business Services
Revenues for the Business Services (“Business”) Segment increased 90.9% for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The increase was primarily attributed to a $2.0 million increase in revenues domestically due to the acquisition of two significant new customers and from increased programs with two existing customers, along with the revenue generated in our Philippines communication center of $1.0 million that had not yet begun generating revenue as of the second quarter of 2005.
Gross profit as a percentage of revenues for the Business Segment increased to 36.5% for the three months ended June 30, 2006, from 30.3% for the three months ended June 30, 2005. The increase was primarily attributed to the $0.7 million gross profit contribution from the Philippines communication center.
Selling, general and administrative expenses as a percentage of revenues for the Business Segment decreased 7.2% for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The decrease was primarily attributed to the increase in revenues generated from the Philippines and domestic communication centers.
Interest Expense
Our net interest expense increased slightly to $0.5 million for the three months ended June 30, 2006, compared to $0.4 million for the three months ended June 30, 2005, due primarily to the accretion of the discount on Convertible Notes and the additional interest on Convertible Note IV which was issued during March 2006.
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Pharmaceutical Services
Revenues for the Pharmaceutical Segment decreased 35.4% in the six months ended June 30, 2006, compared to the six months ended June 30, 2005. The decrease was due to a reduction of revenue of $2.7 million in our medical education business. This reduction was caused primarily by a decrease in work being performed for significant customers along with
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programs not being awarded from potential customers at our medical education division. The further reduction was caused by a decrease in revenue of $1.9 million in our pharmaceutical communication business, which was primarily the result of a change in programs for two significant customers.
Gross profit as a percentage of revenues for the Pharmaceutical Segment for the six months ended June 30, 2006 decreased to 45.2%, compared to 49.2% for the six months ended June 30, 2005. The decrease was primarily attributed to a decrease in the first quarter of 2006 in outbound and pharmacy programs being performed at our pharmaceutical communication business, which generally have a higher margin.
Selling, general and administrative expenses as a percentage of revenues for the Pharmaceutical Segment increased to 44.0% for the six months ended June 30, 2006, compared to 30.0% for the six months ended June 30, 2005. The increase was primarily attributed to the decrease in revenues, along with the increase in certain overhead expenditures including management payroll, facilities rent and utilities. In addition, the increase is partially attributable to the favorable settlement of our litigation of MTI for $0.4 million and a net recovery from an insurance claim for flood damages at our Florida location of $0.2 million during the quarter ended June 30, 2005.
Business Services
Revenues for the Business Segment increased 65.2% in the six months ended June 30, 2006, compared to the six months ended June 30, 2005. The increase was primarily attributed to a $2.7 million increase in revenues domestically due to the acquisition of two significant new customers and from increased programs with two existing customers, along with the revenue generated in our Philippines communication center of $1.8 million that did not begin generating revenue until September of 2005.
Gross profit as a percentage of revenues for the Business Segment increased to 37.7% for the six months ended June 30, 2006, from 34.8% for the six months ended June 30, 2005. The increase was primarily attributed to the $1.1 million gross profit contribution from the Philippines communication center.
Selling, general and administrative expenses as a percentage of revenues for the Business Segment decreased 11.8% for the six months ended June 30, 2006, compared to the six months ended June 30, 2005. The decrease was primarily attributed to the increase in revenues generated from the Philippines and domestic communication centers.
Interest Expense
Our net interest expense increased to $1.0 million for the six months ended June 30, 2006, compared to $0.8 million for the six months ended June 30, 2005 due primarily to the accretion of the discount on Convertible Notes and the additional interest on Convertible Note IV issued in March 2006.
Liquidity and Capital Resources
At June 30, 2006, we had an accumulated deficit of $78.4 million, and we had recurring losses from operations of $1.2 million and $1.9 million for the three and six months ended June 30, 2006, respectively.
Our focus continues to be on our business development team building our revenue pipeline. We continue to see improvements in the revenue pipeline and believe that building a more robust pipeline is an achievable task for the current business development team.
On August 3, 2006, we closed on a transaction to sell substantially all of the assets of TMS for cash of $10.5 million, subject to a $0.8 million hold back for working capital adjustments. The net proceeds from this transaction were used to pay $5.3 million to Capital Source, representing all amounts due under our Debt Agreement, and $0.4 million to settle a subordinated promissory note with a former owner of the division. The remaining funds will be used to fund operations. In addition, we are in the process of restructuring our $2.0 million subordinated unsecured note from one of our board members, and our $2.1 million Convertible Debt I, both of which mature during October 2006.
Our primary sources of liquidity consist of cash and cash equivalents. Our ultimate ability to continue as a going concern will depend on achieving or exceeding our planned revenues and restructuring our Current Loans, while managing costs to enable us to become profitable. Our current 2006 Operating Plan projects that cash available from planned revenue, combined with our cash and cash equivalents, and a restructuring or renegotiation of our Current Loans, will be adequate to defer the requirement for new funding for the next twelve months.
It is possible that we will not achieve profitable operations in the near term and therefore it is possible our operations will continue to consume cash in the foreseeable future. There can be no assurances that we will succeed in achieving our planned revenues and goals. Failure to do so in the near term will have a material adverse effect on our business, prospects, financial condition and operating results and our ability to continue as a going concern.
At June 30, 2006 and December 31, 2005, we had negative working capital of $4.3 million and $4.1 million, respectively. Cash and cash equivalents were $0.5 million at June 30, 2006, excluding $0.7 million of restricted cash under the terms of our Debt Agreement, compared to $1.8 million at December 31, 2005. The $0.7 million of restricted cash was released to us during August 2006 upon repayment of our Debt Agreement.
Net cash used in operating activities during the six months ended June 30, 2006 was $4.6 million, compared to net cash used in operating activities during the same period of 2005 of $3.7 million. The net increase was primarily due to the change in deferred revenue of $(1.6) million due to certain pharmaceutical customers requesting to be pre-billed at the end of the first half of 2005 for services not yet fully performed under our contracts, while such similar requests were not made at the end of the first half of 2006.
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Net cash used in investing activities during the six months ended June 30, 2006 of $0.5 million did not change significantly in total compared to the $0.5 million used during the same period of 2005. However, additions to property and equipment decreased from $0.7 million in 2005 to $0.2 million in 2006 due to purchases made in 2005 for our operation in the Philippines. In addition, restricted cash increased by $0.5 million from the 2005 period to the 2006 period as a result of amendments to our Debt Agreement in 2006.
Net cash provided by financing activities was $3.9 million for the six months ended June 30, 2006, compared to net cash provided by financing activities of $4.2 million for the same period of 2005. The decrease was primarily due to less borrowings under our Debt Agreement of $2.4 million along with the receipt of proceeds of $1.0 million for common stock subscriptions in the first half of 2005 that were not received in the first half of 2006, offset by $2.0 million of proceeds from related party borrowings in May 2006, and $1.5 million of proceeds from Convertible Note IV issued in March 2006.
Credit Facility and Debt Agreement
On May 18, 2006, we entered into the Sixth Amendment to our Debt Agreement which provided an Overadvance of $1.5 million. In conjunction with the Sixth Amendment we received an executed commitment letter from Charles Weil, a member of our board of directors and stockholder of the Company, to provide us with a subordinated unsecured loan of $2.0 million, which was issued on June 12, 2006. The proceeds from this subordinated unsecured loan were received on May 24, 2006 and were used to repay the Overadvance and fund operations.
On June 20, 2006, at a meeting of our Board of Directors (the “Board”), the Board approved the asset purchase agreement dated June 20, 2006, (the “Asset Purchase Agreement”), selling all or substantially all the assets of TMS, pursuant to a majority consent of the Company’s outstanding shareholders. We received majority shareholder consent on August 2, 2006, and on August 3, 2006, we completed the sale of substantially all the assets of TMS for cash of $10.5 million less the settlement of a subordinated note with the former owner of the TMS division, and a $0.8 million holdback for the working capital settlement in 90 days (as defined in the Asset Purchase Agreement). $5.3 million of the net proceeds were used to pay Capital Source all amounts due under our Debt Agreement, including a $1.0 million early termination fee, and to obtain releases for restrictions on our lockbox systems and Merrill Lynch account. The remaining portion will be used to fund continuing operations as we work on restructuring our finance structure.
We expect that we will not be able to repay our $2.0 million subordinated unsecured loan from one of our board members or our $2.1 million Convertible Debt I on their maturity dates which occur during October 2006. Therefore we have begun discussions in an attempt to restructure or renegotiate the unsecured loan and Convertible Debt I; however until we do so, the holder of the unsecured loan will continue to receive additional warrants under the terms of the loan agreement and we will continue to pay interest on Convertible Debt I.
Contractual Obligations and Off Balance Sheet Arrangements
The following is a chart of the Company’s approximate contractual cash payment obligations, which have been aggregated to facilitate a basic understanding of the Company’s liquidity as of June 30, 2006:
| | | | | | | | | | | | | | | |
| | Payments Due by Period |
| | Total | | 1 year | | 2-4 years | | 5 years | | After 5 years |
Long-term debt | | $ | 7,438,000 | | $ | 7,438,000 | | $ | — | | $ | — | | $ | — |
Convertible debt | | | 5,750,000 | | | 2,100,000 | | | 3,650,000 | | | — | | | — |
Capital lease obligations | | | 886,000 | | | 417,000 | | | 469,000 | | | — | | | — |
Operating leases | | | 7,845,000 | | | 2,664,000 | | | 4,464,000 | | | 717,000 | | | — |
Insurance Financing | | | 84,000 | | | 84,000 | | | — | | | — | | | — |
| | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 22,003,000 | | $ | 12,703,000 | | $ | 8,583,000 | | $ | 717,000 | | $ | — |
| | | | | | | | | | | | | | | |
The Company has no off-balance sheet arrangements. The debt and lease obligations in the table above do not include accrued interest.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of doing business, we are exposed to market risk from changes in interest rates and are subject to interest rate risk on our Debt Agreement caused by changes in interest rates. Our ability to limit our exposure to market risk
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and interest rate risk is restricted as a result of our current cash management arrangements under the Debt Agreement. Accordingly, we are unable to enter into any derivative or similar transactions that could limit our exposure to market risk and interest rate risks. Our Debt Agreement provided for an interest rate of the greater of 7.0% or prime plus 2.75%. The prime rate is the prime rate published by theWall Street Journal. A one percent change in the prime interest rate would result in a pre-tax impact to us on earnings of approximately $0.05 million.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for recording, processing and summarizing the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. Our management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2006, identified in connection with the evaluation referred to above, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II–OTHER INFORMATION
ITEM 1A. RISK FACTORS
During the period covered by this Report, there have been no material changes from the Company’s risk factors as previously disclosed in the Company’s Form 10-K for the year ended December 31, 2005.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 24 2006, the Company held an annual meeting of the stockholders of the Common Stock to vote on the following matters: (1) to elect seven persons to the Company’s Board of Directors, and (2) to ratify the selection of BDO Seidman, LLP as the independent registered public accounting firm for the fiscal year ending December 31, 2006.
The following table sets forth the votes for, against or withheld with respect to the election of the directors (Total shares outstanding on the record date were — 17,183,039.):
| | | | |
Director Nominee | | Votes Cast For | | Votes Withheld |
Michael Dornemann | | 10,967,294 | | 3,327 |
Shawkat Raslan | | 10,966,074 | | 4,547 |
Orhan Sadik-Khan | | 10,967,294 | | 3,327 |
Frederick Thorne | | 10,967,294 | | 3,327 |
Carl Tiedemann | | 10,967,294 | | 3,327 |
Charles Henri Weil | | 10,967,294 | | 3,327 |
Alfonso Yuchengco, III | | 10,967,294 | | 3,327 |
With respect to the ratification of the selection of BDO Seidman, LLP as the independent registered public accounting firm, 10,967,996 votes were cast for this matter (63.83% of outstanding), 1,401 votes were cast against this matter (0.01% of outstanding) and there were 1,225 (0.01% of outstanding) abstentions.
ITEM 6. EXHIBITS
| | |
Exhibit No. | | Exhibit Description |
| |
10(fffff) | | Subordinated Note, dated June 12, 2006, by and between Company and Charles Henri Weil (incorporated by reference to Exhibit 99.1 to the Company’s 8-K filed on June 15, 2006). |
| |
10(ggggg) | | Warrant Certificate, dated June 12, 2006, by and between Company and Charles Henri Weil (incorporated by reference to Exhibit 99.2 to the Company’s 8-K filed on June 15, 2006). |
| |
10(hhhhh) | | Subordination Agreement, dated June 12, 2006, by and among CapitalSource Finance, LLC, the Company, and Charles Henri Weil (incorporated by reference to Exhibit 99.3 to the Company’s 8-K filed on June 15, 2006). |
| |
10(iiiii) | | Asset Purchase Agreement, dated June 20, 2006, by and among, Access Worldwide, Telemanagement Services, Inc. and TMS Professional Markets Group, LLC (incorporated by reference to Exhibit 99.1 to the Company’s 8-K filed on June 22, 2006). |
| |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| |
32.1 | | Section 1350 Certification of Chief Executive Officer |
| |
32.2 | | Section 1350 Certification of Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
| | ACCESS WORLDWIDE COMMUNICATIONS, INC. |
| | |
Date: August 14, 2006 | | By: | | /s/ SHAWKAT RASLAN |
| | | | Shawkat Raslan, Chairman of the Board, President and Chief Executive Officer (principal executive officer) |
| | |
Date: August 14, 2006 | | By: | | /s/ RICHARD A. LYEW |
| | | | Richard A. Lyew, Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |
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Exhibit Index
| | |
Exhibit Number | | Description |
| |
10(fffff) | | Subordinated Note, dated June 12, 2006, by and between Company and Charles Henri Weil (incorporated by reference to Exhibit 99.1 to the Company’s 8-K filed on June 15, 2006). |
| |
10(ggggg) | | Warrant Certificate, dated June 12, 2006, by and between Company and Charles Henri Weil (incorporated by reference to Exhibit 99.2 to the Company’s 8-K filed on June 15, 2006). |
| |
10(hhhhh) | | Subordination Agreement, dated June 12, 2006, by and among CapitalSource Finance, LLC, the Company, and Charles Henri Weil (incorporated by reference to Exhibit 99.3 to the Company’s 8-K filed on June 15, 2006). |
| |
10(iiiii) | | Asset Purchase Agreement, dated June 20, 2006, by and among, Access Worldwide, Telemanagement Services, Inc. and TMS Professional Markets Group, LLC (incorporated by reference to Exhibit 99.1 to the Company’s 8-K filed on June 22, 2006). |
| |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| |
32.1 | | Section 1350 Certification of Chief Executive Officer |
| |
32.2 | | Section 1350 Certification of Chief Financial Officer |
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