SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998 Commission File No. 0-27682
GLOBE BUSINESS RESOURCES, INC.
Incorporated under the IRS Employer
laws of Ohio Identification No. 31-1256641
11260 Chester Road
Suite 400
Cincinnati, OH 45246
Phone: (513) 771-8287
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
As of September 30, 1998, 4,556,437 shares of the Registrant's common
stock, no par value, were outstanding.
Page 1
GLOBE BUSINESS RESOURCES, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - 3
August 31, 1998 and February 28, 1998
Consolidated Statement of Income - 4
Three and six months ended
August 31, 1998 and 1997
Consolidated Statement of Cash Flows - 5
Six months ended August 31, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 16
Page 2
PART I - FINANCIAL INFORMATION
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
August 31, February 28,
1998 1998
------------- ------------
(Unaudited)
ASSETS:
Cash $ 615 $ 526
Trade accounts receivable, less allowance for
doubtful accounts of $689 and $609,
respectively 10,343 8,252
Other receivables 696 131
Prepaid expenses 4,498 2,038
Rental furniture, net 56,414 53,220
Property and equipment, net 8,082 7,743
Goodwill and other intangibles, less accumulated
amortization of $2,166 and $1,228, respectively 37,903 26,695
Note receivable from officer 100 100
Other, net 798 732
--------- ---------
Total assets $ 119,449 $ 99,437
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 6,574 $ 3,561
Customer deposits 2,434 2,027
Accrued compensation 2,515 2,061
Accrued taxes 889 325
Deferred income taxes 4,122 4,183
Accrued interest payable 1,575 1,121
Other accrued expenses 1,268 1,025
Debt 61,958 49,713
--------- ---------
Total liabilities 81,335 64,016
--------- ---------
Common stock and other shareholders' equity:
Common stock, no par, 15,000,000 shares
authorized, 4,556,025, and 4,548,399
shares issued and outstanding 21,501 21,492
Retained earnings 20,697 18,013
Fair market value in excess of historical cost of
acquired net assets attributable to related
party transactions (4,084) (4,084)
--------- ---------
Total common stock and other shareholders' equity 38,114 35,421
--------- ---------
Total liabilities and shareholders' equity $ 119,449 $ 99,437
========= =========
The accompanying notes are an integral part of these financial statements.
Page 3
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share data)
For the For the
three months ended, six months ended,
---------------------- ----------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Corporate housing sales $ 24,490 $ 9,390 $ 41,348 $ 16,464
Rental sales 11,123 12,282 22,478 23,600
Retail sales 4,063 3,414 8,732 7,214
-------- -------- -------- ---------
39,676 25,086 72,558 47,278
-------- -------- -------- ---------
Cost of revenues:
Cost of corporate housing
sales 16,684 6,758 28,666 11,590
Cost of rental sales 673 779 1,471 1,779
Cost of retail sales 2,446 2,138 5,280 4,553
Furniture depreciation
and disposals 2,501 2,140 4,850 4,310
------- -------- -------- ----------
22,304 11,815 40,267 22,232
------- -------- -------- ---------
Gross profit 17,372 13,271 32,291 25,046
Operating expenses:
Warehouse and delivery 2,869 2,489 5,445 4,779
Occupancy 1,878 1,730 3,732 3,397
Selling and advertising 2,953 2,166 5,587 4,477
General and administration 5,251 3,460 9,921 6,253
Amortization of intangible
assets 511 208 938 369
------- -------- -------- ---------
13,462 10,053 25,623 19,275
------- -------- -------- ---------
Operating income 3,910 3,218 6,668 5,771
Other expenses:
Interest expense 1,145 752 2,109 1,353
Other, net 35 29 66 75
------- -------- -------- ---------
1,180 781 2,175 1,428
Income before income taxes 2,730 2,437 4,493 4,343
Provision for income taxes 1,065 951 1,753 1,695
------- -------- -------- ---------
Net income $ 1,665 $ 1,486 $ 2,740 $ 2,648
======= ======== ======== =========
Earnings per common share:
Basic $ 0.37 $ 0.33 $ 0.60 $ 0.60
======= ======== ========= =========
Diluted $ 0.36 $ 0.33 $ 0.59 $ 0.59
======= ======== ========= =========
Weighted average number of
common shares outstanding:
Basic 4,556 4,443 4,553 4,442
Diluted 4,681 4,545 4,680 4,522
The accompanying notes are an integral part of these financial statements.
Page 4
GLOBE BUSINESS RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
For the six months ended,
--------------------------
August 31, August 31,
1998 1997
---------- ----------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,740 $ 2,648
Adjustments to reconcile net income to
net cash provided by operating activities:
Rental furniture depreciation 3,924 3,523
Other depreciation and amortization 1,963 1,023
Provision for losses on accounts receivable 324 255
Provision for deferred income taxes (61) 887
Gain on sale of property and equipment (6) (4)
Book value of furniture sales and rental buyouts 6,874 5,932
Changes in assets and liabilities:
Accounts receivable (3,049) (2,634)
Note receivable -- --
Other assets, net (32) (6)
Prepaid expenses (1,754) 127
Accounts payable 3,012 959
Customer deposits 345 144
Accrued compensation 333 (181)
Accrued taxes 564 279
Accrued interest payable 454 393
Other accrued expenses (55) 178
-------- --------
Net cash provided by operating activities 15,576 13,523
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to rental furniture (12,897) (12,132)
Purchases of property and equipment (1,354) (2,503)
Proceeds from disposition of property and equipment 6 7
Purchases of businesses, net of cash acquired (13,492) (5,432)
-------- --------
Net cash used in investing activities (27,737) (20,060)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on the revolving credit agreement 87,160 56,316
Repayments on the revolving credit agreement (74,543) (50,885)
Borrowings on the senior note -- --
Borrowings/(repayments) of other debt (150) 1,370
Principal payments under capital lease obligations (222) (211)
Exercise of common stock options 5 6
-------- --------
Net cash provided by financing activities 12,250 6,596
-------- --------
Net increase in cash 89 59
Cash at beginning of period 526 717
-------- --------
Cash at end of period $ 615 $ 776
======== ========
The accompanying notes are an integral part of these financial statements.
Page 5
GLOBE BUSINESS RESOURCES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Globe Business Resources, Inc., the
accompanying unaudited consolidated financial statements include all adjustments
considered necessary to present fairly its financial position as of August 31,
1998, and the results of its operations for the three and six months ended
August 31, 1998 and 1997 and its cash flows for the six months ended August 31,
1998 and 1997. All adjustments are of a normal recurring nature. Interim results
are not necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented in accordance
with the requirements of Form 10-Q, and do not contain certain information
included in the Company's audited consolidated financial statements and notes in
its Form 10-K for the fiscal year ended February 28, 1998.
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2 -- ACQUISITIONS
During the first six months of fiscal 1999, the Company completed three
asset acquisitions and settled certain contingent consideration on two fiscal
1998 acquisitions. These transactions were completed by payment of approximately
$13.5 million in cash and the assumption of certain liabilities. One of the
fiscal 1999 acquisitions operates in the rent-to-rent segment of the furniture
rental business. The remaining acquisitions, which include the June 1, 1998
purchase of Detroit-based Village Suites, operate in the corporate housing
business, providing short-term housing to transferring or temporarily assigned
corporate personnel, new hires, trainees and consultants. At their respective
dates of acquisition, these businesses maintained inventories totaling
approximately 1,000 leased housing units and had annual revenues in their most
recent fiscal year totaling approximately $18.0 million.
In accordance with APB No. 16, these acquisitions were accounted for using
the purchase method.
The purchase price allocation for the acquired businesses is as follows:
(Unaudited)
-----------
Cash, receivables and prepaids $ 637
Rental furniture 1,095
Property and equipment 10
Other assets 34
Goodwill and other intangibles 12,146
--------
13,922
Liabilities assumed (430)
--------
$ 13,492
========
Page 6
The following table sets forth certain Globe consolidated income statement
data on a pro forma basis, as if the fiscal 1999 acquisitions were completed at
the beginning of the periods indicated.
Six months ended August 31,
---------------------------
1998 1997
--------- ---------
Revenues $77,968 $56,549
Net income 3,074 2,982
Basic earnings per common share $ 0.68 $ 0.67
Diluted earnings per common share $ 0.66 $ 0.66
Weighted average number of common
shares outstanding:
Basic 4,553 4,442
Diluted 4,680 4,522
NOTE 3 -- EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", in the fourth
quarter of fiscal 1998. All earnings per share amounts for prior periods have
been restated to conform to this statement, which had no material effect on the
previously reported earnings per share.
For all periods presented, basic earnings per share was calculated by
dividing net income applicable to common stock by the weighted average number of
shares outstanding during the period.
For all periods presented, diluted earnings per share was calculated by
dividing net income applicable to common stock by the weighted average number of
shares and dilutive potential common shares outstanding during the period.
Potential common shares include outstanding stock options and contingently
issuable shares.
Page 7
The following table presents the calculation of basic and diluted earnings
per share for the periods indicated.
For the For the
three months ended, six months ended,
----------------------- --------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
---------- ---------- ---------- ---------
(Unaudited) (Unaudited)
Net income used to calculate basic
and diluted earnings per share $ 1,665 $ 1,486 $ 2,740 $ 2,648
======= ======= ======= =======
Weighted average common shares
used to calculate basic
earnings per share 4,556 4,443 4,553 4,442
======= ======= ======= =======
Basic earnings per common share $ 0.37 $ 0.33 $ 0.60 $ 0.60
======= ======= ======= =======
Shares used in the calculation
of diluted earnings
per share:
Weighted average common shares 4,556 4,443 4,553 4,442
Dilutive effect of assumed
exercise of options for the
purchase of common shares 53 77 55 63
Dilutive effect of assumed
issuance of contingently
issuable shares 72 25 72 17
------- ------ ------- ------
Weighted average common shares
used to calculate
diluted earnings per share 4,681 4,545 4,680 4,522
======== ====== ======= ======
Diluted earnings per common share $ 0.36 $ 0.33 $ 0.59 $ 0.59
======== ======= ======= ======
NOTE 4 -- RENTAL FURNITURE
Rental furniture consists of the following:
August 31, 1998 February 28, 1998
--------------- ------------------
(Unaudited)
Furniture on rental $ 45,815 $ 41,884
Furniture on hand 21,744 21,537
-------- --------
67,559 63,421
Accumulated depreciation (11,145) (10,201)
-------- --------
$ 56,414 $ 53,220
======== ========
Page 8
NOTE 5 -- DEBT
Outstanding debt consists of:
August 31, February 28,
1998 1998
------------ ------------
(Unaudited)
The Fifth Third Bank, PNC Bank and
Norwest Bank unsecured revolving note,
average interest of 7.39% $29,106 $ -
The Fifth Third Bank and PNC Bank unsecured
revolving note, average interest of 7.39% - 16,476
7.54% Senior Notes, unsecured, interest
payable semi-annually on March 1 and
September 1, due September 1, 2007 30,000 30,000
6.0% note payable to seller of acquired
business, payable in monthly installments,
due December 31, 2000 700 850
7.5% note payable to seller of acquired
business, payable in monthly installments,
due November 2, 1998 133 181
7.2% mortgage note payable to
The Fifth Third Bank, interest
payable in monthly installments,
due December 1, 2002 1,481 1,510
Capital lease obligations 538 696
------- -------
$61,958 $49,713
======= ========
The funds required for the fiscal 1999 acquisitions were derived from
borrowings under the Company's unsecured revolving Credit Agreement.
On May 14, 1998, the Company's $30 million unsecured revolving line of
credit with the Fifth Third Bank and PNC Bank was increased, by amendment, to a
$45 million unsecured revolving line of credit with The Fifth Third Bank, PNC
Bank and Norwest Bank. Interest rates, unused facility fees and other terms are
unchanged from the original revolving Credit Agreement. At August 31, 1998, the
revolving Credit Agreement provided a total unused credit facility of
approximately $15.9 million.
Page 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements beginning on page 3.
GENERAL
Globe is a major participant in the temporary relocation industry,
operating in both the corporate housing and rent-to-rent furniture businesses.
The corporate housing business provides short-term housing through an inventory
of leased housing units to temporarily assigned corporate personnel, new hires,
trainees and consultants. The rent-to-rent furniture business rents quality
office and residential furniture to a variety of corporate and individual
customers. Additionally, the Company sells residential and office furniture that
no longer meets its "showroom condition" standards for rental through its
clearance centers and offers new furniture for sale through its showrooms and
account executives.
The Company's fiscal year ends on February 28/29.
The discussions contained under Results of Operations and Liquidity and
Capital Resources include forward-looking information which is subject to risks
and qualifications including, but not limited to, those set forth in Exhibit 99.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
statement data as a percentage of total revenues and certain gross profit data
as a percentage of respective corporate housing, rental and retail sales
revenues.
For the For the
three months ended, six months ended,
---------------------- ----------------------
August 31, August 31, August 31, August 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Corporate housing sales 61.7% 37.4% 57.0% 34.8%
Rental sales 28.0% 49.0% 31.0% 49.9%
Retail sales 10.2% 13.6% 12.0% 15.3%
------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 100.0%
Gross profit:
Corporate housing sales 31.9% 28.0% 30.7% 29.6%
Rental sales 93.9% 93.7% 93.5% 92.5%
Retail sales 39.8% 37.4% 39.5% 36.9%
------ ------ ------ ------
Gross profit before
depreciation and disposals 50.1% 61.4% 51.2% 62.1%
Furniture depreciation
and disposals (6.3%) (8.5%) (6.7%) (9.1%)
------ ------ ------ ------
Combined gross profit 43.8% 52.9% 44.5% 53.0%
Operating expenses 32.6% 39.2% 34.0% 40.0%
Amortization of intangible
assets 1.3% 0.8% 1.3% 0.8%
------ ------ ------ ------
Operating income 9.9% 12.8% 9.2% 12.2%
Interest/other 3.0% 3.1% 3.0% 3.0%
------ ------ ------ ------
Income before taxes 6.9% 9.7% 6.2% 9.2%
====== ====== ====== ======
Page 10
IMPACT OF CORPORATE HOUSING ACQUISITIONS
Globe entered the corporate housing business in fiscal 1997 by making three
acquisitions. Seven additional corporate housing businesses were acquired in
fiscal 1998. Globe continued its corporate housing acquisition program during
the first two quarters of fiscal 1999 with the acquisitions of Feld Corporate
Housing in May 1998 and Village Suites in June 1998. All acquisitions to date
have been accounted for using the purchase method of accounting.
Corporate housing companies' assets consist primarily of accounts
receivable, customer deposits and some minor furniture and fixed asset balances.
Consequently, the purchase price for these businesses is allocated largely to
goodwill and other intangibles. Cost of goodwill and other intangibles related
to the corporate housing acquisitions approximates $38.8 million and is being
amortized on a straight-line basis over periods ranging from three to
thirty-five years, with a weighted average life of approximately twenty-three
years. Goodwill and intangibles amortization, which is a separate component of
operating expenses, reduced operating profit by $0.9 million, or 1.3% of
revenues, in the first six months of fiscal 1999 and $0.4 million, or 0.8% of
revenues, in the first six months of fiscal 1998.
The corporate housing business has a lower gross profit margin, as well as
lower operating expenses as a percentage of revenues, than the furniture rental
business. As a result, the Company's gross profit margin and operating expenses
as a percentage of revenues have been declining since the Company entered the
corporate housing business. Gross profit margin decreased to 44.5% in the first
six months of fiscal 1999 from 53.0% in the first six months of fiscal 1998,
resulting from the larger percentage of total revenues from corporate housing
(57.0% in the first six months of fiscal 1999 versus 34.8% in the comparable
period of fiscal 1998). Gross profit margin on rental sales in the first six
months of fiscal 1999 was 93.5%, versus 30.7% for corporate housing. Comparable
gross profit margins for the first six months of fiscal 1998 were 92.5% and
29.6%, respectively. Because the Company is integrating its furniture rental and
corporate housing operations, these gross profit percentages exclude furniture
depreciation and disposals which can no longer be separately identified. An
additional result of this integration is that operating expenses and, therefore,
operating margins for furniture rental and corporate housing cannot be
specifically identified. Combined operating expenses, excluding goodwill,
decreased to 34.0% of revenues in the first six months of fiscal 1999 from 40.0%
in the first six months of fiscal 1998, while the operating margin, including
goodwill, decreased to 9.2% of revenues in the first six months of fiscal 1999
from 12.2% of revenues in the first six months of fiscal 1998. The reduction in
operating margin is primarily the result of the increasing mix of corporate
housing revenues over the comparable periods, additions to the Company's
management team and related infrastructure spending to support the Company's
rapid growth, and greater amortization expenses. Excluding amortization
expenses, operating margins declined to 10.5% in the first six months of fiscal
1999 from 13.0% in the first six months of fiscal 1998.
Globe plans to continue its consolidation of corporate housing through
additional acquisitions, thereby capitalizing on the desire of many corporations
to have a corporate housing company that can meet their needs nationally. With
the acquisitions to date, Globe has expanded its presence into twenty-three
markets and is the market leader in nine of these markets, with annualized
corporate housing revenues of approximately $90 million. Globe is vying with two
other corporate housing companies for the number two position in the industry.
As Globe increases its presence in the corporate housing business some
competing corporate housing companies that are customers of Globe may transfer
their furniture rental business to other vendors. At the end of September 1998,
the Company's annualized revenues from these corporate housing companies
approximated $8.9 million.
Due to the significant impact of the corporate housing acquisitions on the
Company's operations and financial results, certain aspects of the Company's
historical results of operations and period-to-period comparisons will not be
indicative of future results.
Page 11
COMPARISON OF SECOND QUARTER FISCAL 1999 TO SECOND QUARTER FISCAL 1998
Total revenues of $39.7 million increased $14.6 million, or 58.2%, in the
second quarter of fiscal 1999, from $25.1 million in the second quarter of
fiscal 1998, primarily due to acquisitions. Excluding the corporate housing
operations and the impact of the elimination of revenues from acquired corporate
housing customers, total revenues increased 5.7% in the second quarter of fiscal
1999 when compared to the second quarter of fiscal 1998.
Corporate housing sales of $24.5 million in the second quarter of fiscal
1999 increased 160.8% from $9.4 million in the second quarter of fiscal 1998.
This increase was primarily caused by acquisitions which occurred after the
second quarter of fiscal 1998.
Rental sales of $11.1 million in the second quarter of fiscal 1999
decreased 9.4% from $12.3 million in the second quarter of fiscal 1998 largely
as a result of intercompany eliminations. Excluding the impact of these
eliminations, rental revenues increased 2.0%. The moderate increase is
attributable to a loss of business from some competing corporate housing
customers and a general slowdown in growth in the industry.
Retail sales of $4.1 million increased $0.7 million, or 19.0%, in the
second quarter of fiscal 1999 from $3.4 million in the second quarter of fiscal
1998, driven by increases of 46.5% in new office furniture sales and 7.8% in
clearance center revenues over the comparable prior year period.
Gross profit of $17.4 million in the second quarter of fiscal 1999
increased $4.1 million, or 30.9%, from $13.3 million in the second quarter of
fiscal 1998 and declined as a percentage of revenues to 43.8% from 52.9% over
the same period due to the higher mix of corporate housing revenues and the
lower margins associated with these revenues. Gross profit percent on corporate
housing, rental and retail sales revenues all improved during the second quarter
of fiscal 1999 versus the comparable prior year period.
Operating expenses of $13.5 million in the second quarter of fiscal 1999
increased 33.9% from $10.1 million in the second quarter of fiscal 1998 as a
result of acquisitions, as well as additions to the Company's management team
and related infrastructure spending to support the Company's rapid growth. As a
percentage of total revenues, these expenses declined to 33.9% from 40.1% over
the same period as a result of corporate housing's lower operating expenses as a
percent of revenues. The investment in management and infrastructure should
enable the Company to continue its acquisition strategy without incurring
significant additional overhead.
As a result of the changes in revenues, gross profit and operating expenses
discussed above, operating income increased 21.5% to $3.9 million, or 9.9% of
revenues in the second quarter of fiscal 1999, from $3.2 million, or 12.8% of
revenues in the second quarter of fiscal 1998.
Interest/other expense increased $0.4 million to $1.2 million in the second
quarter of fiscal 1999 from $0.8 million in the second quarter of fiscal 1998
and as a percentage of total revenues decreased to 3.0% from 3.1% over the same
period. The increased expense for fiscal 1999 was due primarily to higher debt
balances than in the comparable period of fiscal 1998. The debt increase was the
result of funding required for acquisitions.
Income before income taxes of $2.7 million in the second quarter of fiscal
1999 increased $0.3 million, or 12.0%, compared to the second quarter of fiscal
1998 and as a percentage of revenues decreased to 6.9% from 9.7% over the same
period.
The Company's effective tax rate, which includes federal, state and local
taxes, remained flat at approximately 39.0% in the second quarter of fiscal 1999
as compared to the second quarter of fiscal 1998.
COMPARISON OF SIX MONTHS ENDED AUGUST 31, 1998 TO
SIX MONTHS ENDED AUGUST 31, 1997
Total revenues of $72.6 million increased $25.3 million, or 53.5%, in the
first six months of fiscal 1999, from $47.3 million in the first six months of
fiscal 1998, primarily due to acquisitions.
Excluding the corporate housing operations and the impact of intercompany
eliminations, total revenues increased 8.4% in the first six months of fiscal
1999 compared to the first six months of fiscal 1998.
Page 12
Corporate housing sales of $41.3 million in the first six months of fiscal
1999 increased 151.1% from $16.5 million in the first quarter of fiscal 1998.
This increase was primarily caused by acquisitions.
Rental sales of $22.5 million in the first six months of fiscal 1999
decreased 4.8% from $23.6 million in the first six months of fiscal 1998 due to
intercompany eliminations. Excluding the impact of intercompany eliminations,
rental revenues increased a moderate 4.5%, reflecting the impact of a general
slowdown in growth in the industry and a loss of business from some competing
corporate housing customers.
Retail sales of $8.7 million increased $1.5 million, or 21.0%, in the first
six months of fiscal 1999 from $7.2 million in the first six months of fiscal
1998, driven by increases of 38.0% in new office furniture sales and 22.4% in
clearance center revenues versus the comparable prior year period.
Gross profit of $32.3 million in the first six months of fiscal 1999
increased $7.3 million, or 28.9%, from $25.0 million in the first six months of
fiscal 1998 and declined as a percentage of revenues to 44.5% from 53.0% over
the same period due to the higher mix of corporate housing revenues and the
lower margins associated with these revenues. Gross profit percent on corporate
housing, rental and retail sales revenues all improved versus the comparable
prior year period.
Operating expenses of $25.6 million in the first six months of fiscal 1999
increased 32.9% from $19.3 million in the first six months of fiscal 1998 as a
result of acquisitions, as well as additions to the Company's management team
and related infrastructure spending to support the Company's rapid growth. As a
percentage of total revenues, these expenses declined to 35.3% from 40.8% over
the same period as a result of corporate housing's lower operating expenses as a
percent of revenues. The investment in management and infrastructure should
enable the Company to continue its acquisition strategy without incurring
significant additional overhead.
As a result of the changes in revenues, gross profit and operating expenses
discussed above, operating income increased 15.5% to $6.7 million, or 9.2% of
revenues in the first six months of fiscal 1999, from $5.8 million, or 12.2% of
revenues in the first six months of fiscal 1998.
Interest/other expense increased $0.8 million to $2.2 million in the first
six months of fiscal 1999 from $1.4 million in the first six months of fiscal
1998 and remained flat at 3.0% of total revenues. The increased expense for
fiscal 1999 was due primarily to higher debt balances than in the comparable
period of fiscal 1998. The debt increase was the result of funding required for
acquisitions.
Income before income taxes of $4.5 million in the first six months of
fiscal 1999 increased $0.1 million, or 3.5%, compared to the first six months of
fiscal 1998 and as a percentage of revenues decreased to 6.2% from 9.2% over the
same period.
The Company's effective tax rate, which includes federal, state and local
taxes, remained flat at approximately 39.0% in the first six months of fiscal
1999 as compared to the first six months of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
On May 14, 1998, the Company's $30.0 million unsecured line of credit was
increased to $45.0 million. Interest rates for this revolving line of credit are
based on a leverage formula, which is currently the lesser of the prime rate
minus 25 basis points or LIBOR plus 150 basis points. At September 30, 1998, the
unused line of credit was $15.4 million, which is available for acquisitions and
general corporate purposes.
The term of the line of credit will expire on September 30, 2000, requiring
full payment of the then outstanding balance. The Company expects to have other
financing arrangements in place prior to this date.
Page 13
From March 1, 1998 through October 2, 1998 Globe used approximately $13.5
million from its lines of credit and assumed approximately $0.4 million of
certain liabilities in completing three acquisitions and settling certain
contingent consideration for two fiscal 1998 acquisitions. (See note 2 to the
consolidated financial statements for further discussion of these acquisitions.)
The Company's principal use of cash is for furniture purchases. The Company
purchases furniture to replace furniture which has been sold and to maintain
adequate levels of rental furniture to meet existing and new customer needs.
Furniture purchases were $12.9 million in the first six months of fiscal 1999
and $12.1 million in the first six months of fiscal 1998. The higher level of
purchases in the first six months of fiscal 1999 versus the prior year period
reflects the impact of the growth in the corporate housing business and the
ongoing replacement of furniture rented from third parties with company owned
furniture. As the Company's growth strategies are implemented, furniture
purchases are expected to increase.
Capital expenditures were $1.4 million and $2.5 million in the first six
months of fiscal 1999 and 1998, respectively. Expenditures for the first six
months of fiscal 1999 were largely attributable to continued development of
computer systems. The decrease from the prior year results from the completion
of construction of a showroom/warehouse facility in Indianapolis, Indiana during
fiscal 1998. Costs to further develop the computer systems, which are
anticipated to be approximately $1.0 million, will be incurred in the next 6-9
months and are expected to be financed through cash generated by operations.
In the first six months of fiscal 1999 and 1998, net cash provided by
operations was $15.6 million and $13.5 million, respectively, generating $1.3
million more cash than was necessary to fund investing activities (excluding
acquisitions) in the first six months of fiscal 1999 and $1.1 million less cash
than was necessary to fund investing activities (excluding acquisitions) in the
first six months of fiscal 1998. The improvement in cash flow in the first six
months of fiscal 1999 results from the growth of the corporate housing business,
which traditionally has a better cash flow than the furniture rental business.
Aside from acquisitions, furniture purchases, which have historically been
seasonally weighted to the first half of the fiscal year, are the primary reason
for use of the credit facilities. Any temporary cash deficiencies resulting from
these purchases will be funded via the line of credit. The Company expects cash
flow from operations plus the credit facilities to be sufficient to fund the
Company's needs for the foreseeable future, except for significant acquisitions
and any repurchases that may be made under the Company's authorized $3.0 million
stock repurchase program.
YEAR 2000
The Company has developed a Year 2000 Remediation Plan and is currently
evaluating the potential impact of the Year 2000 issue on both its information
technology systems and its non-information technology systems. The initial
phases of the plan consist of planning and assessment and involve developing
complete inventories of all hardware and software containing potential date
sensitivity, completing vendor and customer surveys and performing a series of
controlled tests to determine compliance. These phases are approximately 25%
complete. Preliminary results indicate that the Company's existing internal
financial and operational software is Year 2000 compliant, and that a moderate
number of our desktop computers will need to be replaced. The systems currently
under development have been designed to be Year 2000 compliant.
Globe expects to have the initial phases of the remediation plan completed
by February 28, 1999. Costs incurred to date and those anticipated to complete
the initial phases are immaterial to the Company's results of operations.
Based upon the results of the initial phases, Globe will develop a detailed
remediation and contingency plan. This plan will address such concerns as the
time required to replace equipment or software and contingency plans for
unforeseen Year 2000 failures, including the identification of alternate vendors
or financial institutions, as well as the financial resources necessary to
reasonably ensure compliance by the Year 2000. It is expected that this plan
will be completed by June 1, 1999. No material financial ramifications are
anticipated.
Page 14
While Globe is not aware of exposures related to the operations of
customers or vendors and it does not have a relationship with any third-party
vendor which is material to its operations, there can be no assurance that the
systems of other companies on which the Company relies will be converted in a
timely manner or that the failure to convert would not have an adverse impact on
Globe's operations. Costs associated with any such failure cannot be reasonably
estimated.
PART II
ITEM 1
LEGAL PROCEEDINGS
None
ITEM 2
CHANGES IN SECURITIES
None
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on July 14, 1998.
Each of the following matters was voted upon and approved by the Company's
shareholders as indicated below:
1. Elected the following directors:
a. David D. Hoguet, 4,418,979 votes for, 14,382 withheld
b. Blair D. Neller, 4,355,279 votes for, 78,082 withheld
c. Alvin Z. Meisel, 4,419,279 votes for, 14,082 withheld
d. William R. Griffin, 4,418,779 votes for, 14,582 withheld
e. Thomas C. Parise, 4,418,279 votes for, 15,082 withheld
2. Adopted the Globe 1998 Stock Option and Incentive Plan, 4,055,007 votes for,
375,909 votes against, 2,445 abstentions.
3. Ratified the appointment of PricewaterhouseCoopers LLP as independent public
accountants for fiscal 1999, 4,428,716 votes for, 2,750 votes against, 1,895
abstentions.
Page 15
ITEM 5
OTHER INFORMATION
A recent SEC rule change establishes new deadlines for shareholders who
desire to have proposals included in the Notice for the Shareholders' Meeting.
The form of Proxy for the Company's Annual Meeting of Shareholders grants
authority to the persons designated as proxies to vote in their discretion on
any matters that come before the meeting except those set forth in the Company's
Proxy Statement and except for matters as to which adequate notice is received.
In order for a notice to be deemed adequate for the 1999 Annual Shareholders'
Meeting, it must be received prior to April 21, 1999.
ITEM 6
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits:
10.5.1 Amendment to Credit Agreement among the Registrant, The
Fifth Third Bank, PNC Bank and Norwest Bank dated May 14,
1998.*
10.13 1998 Stock Option and Incentive Plan**
27 Financial Data Schedule
99 Safe Harbor Statement
* Incorporated by reference to the Company's Form 10-Q for the quarter
ended May 31, 1998.
** Incorporated by reference to the definitive proxy statement for the 1998
annual shareholders meeting.
(b) Reports on Form 8-K filed during the second quarter of 1999:
Form 8-K filed June 8, 1998 for the Village Suites acquisition.
Page 16
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.
Globe Business Resources, Inc.
By: /s/Sharon G. Kebe
---------------------------------
Sharon G. Kebe
Senior Vice President-Finance
and Treasurer (Principal Financial
Officer)
Signed: October 5, 1998
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