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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, 1999
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23489
Access Worldwide Communications, Inc.
----------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 52-1309227
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2200 Clarendon Blvd., 12th Floor 22201
Arlington, Virginia (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code 1 (800) 522-3447
Securities registered pursuant to Section 12(b) of the Act:
Title of each class. Name of each exchange on which registered.
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Title of Class
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 as the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
9,528,478 shares of Common Stock, $.01 par value, as of August 10, 1999
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ACCESS WORLDWIDE COMMUNICATIONS, INC.
INDEX
Page
----
Part I--Financial Information
Item 1. Financial Statements.............................................. 1-6
Balance Sheets--June 30, 1999 and December 31, 1998..................... 1
Statements of Operations--
Three Months Ended June 30, 1999 and June 30, 1998
Six Months Ended June 30, 1999 and June 30, 1998....................... 2
Statements of Cash Flows--Six Months Ended June 30, 1999 and
June 30, 1998.......................................................... 3
Notes to Financial Statements........................................... 4-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 7-12
Part II--Other Information
Item 3. Defaults by the Company upon its Senior Securities................ 13
Item 4. Submission of Matters to a Vote of Security Holders............... 13
Item 6. Exhibits and Reports on Form 8-K.................................. 13
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCESS WORLDWIDE COMMUNICATIONS, INC.
BALANCE SHEETS
June 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 3,186,755 $ 1,912,219
Accounts receivable, net of allowance for
doubtful accounts of $624,621 and $184,801,
respectively................................... 19,214,973 20,046,495
Billings in excess of costs..................... 279,028 240,287
Other assets.................................... 2,357,675 1,715,035
------------ ------------
Total current assets.......................... 25,038,431 23,914,036
Property and equipment, net..................... 11,479,356 8,565,188
Other assets.................................... 596,203 917,197
Intangible assets, net.......................... 72,101,457 71,025,795
------------ ------------
Total assets ................................. $109,215,447 $104,422,216
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........... $ 5,840,987 $ 6,894,231
Accrued interest and other related party
expenses ...................................... 79,032 8,516,293
Accrued salaries, wages and related benefits.... 1,272,279 2,007,827
Due to related parties ......................... -- 42,303
Deferred revenue................................ 1,412,079 1,998,486
Current portion of indebtedness................. 40,575,413 63,431
Current portion of indebtedness -- related
parties........................................ 2,116,019 2,421,770
------------ ------------
Total current liabilities..................... 51,295,809 21,944,341
Long-term portion of indebtedness................ -- 25,609,170
Long-term portion of indebtedness -- related
parties......................................... 3,705,000 4,238,310
Mandatorily redeemable preferred stock, $.01 par
value: 8% cumulative as of February 10, 1998,
2,000,000 shares authorized, 40,000 and 65,000
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively............. 4,000,000 6,500,000
------------ ------------
Total liabilities and mandatorily redeemable
preferred stock.............................. 59,000,809 58,291,821
------------ ------------
Common stockholders' equity:
Common stock, $.01 par value: voting:
20,000,000 shares authorized; 9,528,478 and
9,043,185 shares issued at June 30, 1999 and
December 31, 1998, respectively; 9,528,478 and
9,027,730 shares outstanding at June 30, 1999
and December 31, 1998, respectively............ 95,285 90,432
Additional paid-in capital...................... 62,932,032 58,490,848
Accumulated deficit ............................ (12,807,945) (12,392,763)
Less: cost of treasury stock, 15,455 shares at
December 31, 1998.............................. -- (52,530)
Deferred compensation........................... (4,734) (5,592)
------------ ------------
Total common stockholders' equity............. 50,214,638 46,130,395
------------ ------------
Total liabilities, mandatorily redeemable
preferred stock and common stockholders'
equity....................................... $109,215,447 $104,422,216
============ ============
1
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues.................. $20,693,796 $15,325,100 $43,436,818 $31,016,310
Cost of revenues
(exclusive of
depreciation)............ 12,272,071 8,490,713 26,655,855 17,600,471
----------- ----------- ----------- -----------
Gross profit............. 8,421,725 6,834,387 16,780,963 13,415,839
Selling, general and
administrative expenses
(selling, general and
administrative expenses
paid to related parties
are $170,616 and $243,829
and $377,939 and
$495,340, respectively).. 7,047,390 4,639,183 13,762,956 9,417,998
Amortization expense...... 832,161 348,127 1,818,267 773,865
Unusual charge............ 509,998 -- 509,998 --
----------- ----------- ----------- -----------
Income from operations... 32,176 1,847,077 689,742 3,223,976
Interest income........... 17,643 40,999 51,555 92,082
Interest expense--related
parties.................. (61,666) (143,700) (135,893) (640,073)
Interest expense.......... (748,438) (13,667) (1,172,304) (34,332)
----------- ----------- ----------- -----------
(Loss) income before
income tax (benefit)
expense and
extraordinary charge.... (760,285) 1,730,709 (566,900) 2,641,653
Income tax (benefit)
expense.................. (339,847) 766,965 (253,404) 1,164,874
----------- ----------- ----------- -----------
(Loss) income before
extraordinary charge.... (420,438) 963,744 (313,496) 1,476,779
Extraordinary charge on
extinguishment of debt
(net of applicable income
taxes of $82,195)........ -- -- (101,686)
----------- ----------- ----------- -----------
Net (loss) income......... $ (420,438) $ 963,744 $ (415,182) $ 1,476,779
=========== =========== =========== ===========
(Loss) earnings per share
of common stock
Basic:
(Loss) income before
extraordinary charge... $ (0.04) $ 0.11 $ (0.03) $ 0.18
Extraordinary charge.... $ -- $ -- $ (0.01) $ --
Net (loss) income....... $ (0.04) $ 0.11 $ (0.04) $ 0.18
Diluted:
(Loss) income before
extraordinary charge... $ (0.04) $ 0.11 $ (0.03) $ 0.18
Extraordinary charge.... $ -- $ -- $ (0.01) $ --
Net (loss) income....... $ (0.04) $ 0.11 $ (0.04) $ 0.18
2
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
1999 1998
----------- ------------
Cash flows from operating activities:
Net (loss) income................................. $ (415,182) $ 1,476,779
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization................... 2,841,345 1,287,301
Extraordinary charge, net of applicable income
taxes.......................................... 101,686 --
Income tax effect of extraordinary charge....... 82,195 --
Interest expense on mandatorily redeemable
preferred stock................................ -- 231,001
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable ............................ 831,522 (4,004,203)
Due to related parties and affiliates........... (169,263) (302,224)
Other assets.................................... (598,707) (1,025,297)
Accounts payable and accrued expenses........... (1,135,439) 216,679
Accrued interest and related party expenses..... (8,437,261) (1,838,788)
Accrued salaries, wages and related benefits.... (735,548) 490,468
Deferred revenue................................ (586,407) 187,711
----------- ------------
Net cash used in operating activities .......... (8,221,059) (3,280,573)
----------- ------------
Cash flows from investing activities:
Additions to property and equipment, net.......... (3,937,246) (2,757,378)
Business acquisitions, net of cash acquired....... (2,629,477) (97,055)
----------- ------------
Net cash used in investing activities........... (6,566,723) (2,854,433)
----------- ------------
Cash flows from financing activities:
Change in other assets related to deferred
issuance costs................................... -- (1,919,328)
Payments on capital lease......................... (47,001) (35,895)
Proceeds from notes payable....................... -- 5,500,000
Proceeds from sale of common and preferred stock
................................................. 4,498,567 44,640,000
Net borrowings (payments) under line of credit
facility......................................... 14,949,813 (5,810,000)
Repayment of related party debt................... (839,061) (36,219,341)
Repurchase of preferred stock..................... (2,500,000) --
----------- ------------
Net cash provided by financing activities....... 16,062,318 6,155,436
----------- ------------
Net increase in cash............................ 1,274,536 20,430
Cash and cash equivalents, beginning of period ... 1,912,219 2,014,711
----------- ------------
Cash and cash equivalents, end of period.......... $ 3,186,755 $ 2,035,141
=========== ============
3
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the financial
statements and footnotes included in the Company's Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts included in the financial statements.
In the opinion of management, all adjustments necessary for a fair
presentation of this interim financial information have been included. Such
adjustments consisted only of normal recurring items. The results of
operations for the six months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31,
1999.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 1998 balance
sheet and the June 30, 1998 income statement to conform with the June 30, 1999
presentation.
3. UNUSUAL CHARGE
In the second quarter of 1999, the Company approved a Corporate Plan (the
"Plan"). The Plan included among other things, the consolidation of TMS
Professional Markets Group ("TMS") and TelAc Teleservices Group ("TelAc"). As
a result of the consolidation, an unusual charge of $62,000 was recorded for
severance accruals which will be paid to approximately 22 employees. In
addition, the Company engaged outside professionals to assist in exploring
strategic alternatives and incurred costs totaling $247,607. These costs were
recorded as an unusual charge and included legal and consulting fees. Lastly,
the Company determined that certain acquisitions which the Company was
evaluating would not be completed and therefore the Company wrote-off the
costs of $200,391. These costs were recorded as an unusual charge and included
accounting, travel and legal expenses.
4. EXTINGUISHMENT OF LINE OF CREDIT
On March 12, 1999, the Company received from a syndicate of financial
institutions (including Bank of America formerly NationsBank, N.A.) (the "Bank
Group"), which was arranged by NationsBanc Montgomery Securities LLC, (i) a
revolving credit facility (the "Credit Facility") of $40,000,000, with a
sublimit of $5,000,000 for the issuance of standby letters of credit and a
sublimit of $5,000,000 for swingline loans, and (ii) a term loan facility of
$25,000,000. All of the foregoing bears interest at formula rates ranging from
either (i) the higher of (a) the Federal Funds Rate plus 0.50% and (b) the
prime leading rate charged by NationsBank, N.A. from time to time, plus an
applicable margin ranging from 0.0% to 1.0% or (ii) LIBOR, plus an applicable
margin ranging from 1.25% to 2.50%. The Company is required to pay a
commitment fee on the unused portions of the Credit Facility.
On March 12, 1999, $28,288,089 of the Credit Facility was used to extinguish
the Company's $30,000,000 committed line of credit obtained from NationsBank
on January 20, 1998. The Company recognized an extraordinary after-tax charge
of $101,686 or $0.01 per share as a result of the extinguishment of the
$30,000,000 committed line of credit obtained from NationsBank on January 20,
1998 and the related write-off of deferred financing fees. In addition,
$2,500,000 of the Credit Facility was used to redeem 25,000 shares of the
Company's preferred stock Series 1998 at a price of $100 per share. No gain or
loss was recorded on the redemption of shares.
4
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Credit Facility is secured by substantially all of the assets of the
Company and has certain financial covenants. Because of the operating losses
reported by the Company for the quarter and period ended June 30, 1999, the
Company was not in compliance with certain financial covenants of the Credit
Facility. The Company is engaged in ongoing negotiations with the Bank Group,
that provided the Credit Facility, to obtain a waiver of the violated
covenants and restructure the Credit Facility. As of June 30, 1999, the
Company is current on all of its payments on the Credit Facility however, if
the negotiations with the Bank Group are not successful, the Company will need
to find other sources of financing to continue to operate. The Company is
exploring further options to ensure access to adequate working capital.
Accordingly, the entire amount outstanding under the Credit Facility has been
reclassified as current portion of indebtedness as of June 30, 1999.
5. INCOME TAXES
The Company's effective tax rate of 44.7% in the first half of 1999 differs
from the Federal statutory rate due primarily to meals and entertainment,
officers' life insurance and non-deductible goodwill amortization.
6. (LOSS) EARNINGS PER COMMON SHARE
(Loss) earnings per common share are calculated as follows:
For the Three Months Ended
-----------------------------------------------------------------------
June 30, 1999 June 30, 1998
----------------------------------- -----------------------------------
(Loss) Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic................... ($420,438) 9,528,478 ($0.04) $ 963,744 8,969,834 $0.11
Effect of dilutive
securities:
Stock options......... -- 54,924 -- -- 100,682 --
Earnout contingency... -- -- -- -- 70,851 --
--------- --------- ------ ---------- --------- -----
(Loss) earnings per
share of common stock--
dilutive............... ($420,438) 9,583,402 ($0.04) $ 963,744 9,141,367 $0.11
========= ========= ====== ========== ========= =====
For the Six Months Ended
-----------------------------------------------------------------------
June 30, 1999 June 30, 1998
----------------------------------- -----------------------------------
(Loss) Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic................... ($415,182) 9,278,104 ($0.04) $1,476,779 8,268,445 $0.18
Effect of dilutive
securities:
Stock options......... -- 104,649 -- -- 95,789 --
Earnout contingency... -- 250,374 -- -- 63,570 --
--------- --------- ------ ---------- --------- -----
(Loss) earnings per
share of common stock--
dilutive............... ($415,182) 9,633,127 ($0.04) $1,476,779 8,427,804 $0.18
========= ========= ====== ========== ========= =====
5
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. SEGMENTS
In accordance with Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information, the
Company's reportable segments are strategic business units that offer different
products and services to different industries throughout the United States.
The table below presents information about net earnings (losses) and segments
used by the chief operating decision-maker of the Company:
For the three months ended June 30,
Pharmaceutical Consumer Other Segment Total Reconciliation Total
-------------- ----------- ---------- ------------- -------------- -----------
1999
Revenues................ $11,984,311 $ 7,835,489 $ 873,996 $20,693,796 $ -- $20,693,796
Gross Profit............ 5,480,531 2,541,114 400,080 8,421,725 -- 8,421,725
Earnings (losses) before
income taxes........... 2,107,676 (650,027) (139,011) 1,318,638 (1,286,462) 32,176
Depreciation expense.... 217,471 309,718 12,638 539,827 10,882 550,709
Amortization expense.... 680,372 84,641 21,795 786,808 45,353 832,161
1998
Revenues................ $ 7,238,855 $ 7,151,741 $ 934,504 $15,325,100 $ -- $15,325,100
Gross Profit............ 3,383,662 2,898,013 552,712 6,834,387 -- 6,834,387
Earnings (losses) before
income taxes........... 1,396,440 1,075,594 156,688 2,628,722 (781,645) 1,847,077
Depreciation expense.... 120,530 116,573 8,926 246,029 7,059 253,088
Amortization expense.... 203,435 84,640 20,991 309,066 39,061 348,127
For the six months ended June 30,
Pharmaceutical Consumer Other Segment Total Reconciliation Total
-------------- ----------- ---------- ------------- -------------- -----------
1999
Revenues................ $24,449,403 $16,845,942 $2,141,473 $43,436,818 $ -- $43,436,818
Gross profit............ 10,637,686 5,164,924 978,353 16,780,963 -- 16,780,963
Earnings (losses) before
income taxes........... 3,927,100 (735,007) (117,802) 3,074,291 (2,384,549) 689,742
Depreciation expense.... 419,423 558,301 25,082 1,002,806 20,272 1,023,078
Amortization expense.... 1,340,967 169,282 43,566 1,553,815 264,452 1,818,267
1998
Revenues................ $15,021,871 $14,320,068 $1,674,371 $31,016,310 $ -- $31,016,310
Gross profit............ 6,861,130 5,606,546 948,163 13,415,839 -- 13,415,839
Earnings (losses) before
income taxes........... 2,207,204 2,193,824 168,415 4,569,443 (1,345,467) 3,223,976
Depreciation expense.... 276,912 208,680 16,959 502,551 10,885 513,436
Amortization expense.... 498,015 169,459 41,982 709,456 64,409 773,865
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Revenues for the Company increased $5.4 million, or 35.3%, to $20.7 million
for the three months ended June 30, 1999, compared to $15.3 million for the
three months ended June 30, 1998. Revenues for the Pharmaceutical Segment
increased $4.8 million, or 66.7%, to $12.0 million for the three months ended
June 30, 1999, compared to $7.2 million for the three months ended June 30,
1998. In October of 1998, the Company acquired substantially all of the assets
of AM Medica Communications ("AM Medica"). The acquisition of AM Medica
contributed additional revenues of approximately $5.4 million for the three
months ended June 30, 1999. These additional revenues were offset by a
decrease of approximately $0.6 million in pharmaceutical telemarketing
services revenues driven primarily by soft market acceptance for one of the
Company's products and changes to the sales force that supports the Company's
telemarketing efforts. Revenues for the Consumer Segment increased $0.6
million, or 8.3%, to $7.8 million for the three months ended June 30, 1999,
compared to $7.2 million for the three months ended June 30, 1998. The
increase in the Consumer Segment is primarily the result of the addition of
several new accounts.
Cost of revenues for the Company increased $3.8 million, or 44.7%, to $12.3
million for the three months ended June 30, 1999, compared to $8.5 million for
the three months ended June 30, 1998. Cost of revenues as a percentage of
revenues increased to 59.4% for the three months ended June 30, 1999, from
55.6% for the three months ended June 30, 1998. Cost of revenues as a
percentage of revenues for the Pharmaceutical Segment remained at 54.2% for
the three months ended June 30, 1999, compared to the three months ended June
30, 1998. Excluding AM Medica, the cost of revenues as a percentage of
revenues for the Pharmaceutical Segment decreased to 50% for the three months
ended June 30, 1999. The decrease is primarily attributable to changes in the
mix of the services provided by the Company's sales force, which was partially
offset by stable pharmaceutical telemarketing labor costs compared to lower
revenues. Cost of revenues as a percentage of revenues for the Consumer
Segment increased to 67.9% for the three months ended June 30, 1999, compared
to 59.7% for the three months ended June 30, 1998. The increase is primarily
due to the start up of the Boca Raton Consumer operation ("Boca Raton
Consumer"), which was closed at the end of the second quarter, and TelAc's
higher labor, training and overtime costs incurred due to technical system
issues.
Selling, general and administrative expenses (including unusual charge) for
the Company increased $3 million, or 65.2%, to $7.6 million for the three
months ended June 30, 1999, compared to $4.6 million for the three months
ended June 30, 1998. Selling, general and administrative expenses (including
unusual charge) as a percentage of revenues for the Company increased to 36.7%
for the three months ended June 30, 1999, compared to 30.1% for the three
months ended June 30, 1998. Selling, general and administrative expenses
(including unusual charge) as a percentage of revenues for the Pharmaceutical
Segment decreased to 22.5% for the three months ended June 30, 1999, compared
to 25% for the three months ended June 30, 1998. The acquisition of AM Medica
resulted in a decrease of 10.8 percentage points in selling, general and
administrative expenses (including unusual charge) as a percentage of
revenues. Therefore, excluding AM Medica, selling, general and administrative
expense (including unusual charge) as a percentage of revenues increased to
33.3% for the three months ended June 30, 1999. The increase was primarily due
to an increase in reserve for bad debts, and additions to the sales force and
information systems structure. Selling, general and administrative expenses
(including unusual charge) as a percentage of revenues for the Consumer
Segment increased to 39.7% for the three months ended June 30, 1999, compared
to 23.6% for the three months ended June 30, 1998. The start up of the Boca
Raton Consumer operation, which was closed at the end of the second quarter,
increased the selling, general and administrative expenses (including unusual
charge) as a percentage of revenues by 6.8 percentage points. Approximately,
4.7 percentage points of the increase is attributable to higher depreciation
and leasing costs associated with the Texas and Rosslyn, Virginia expansions
and an increase in the allowance for bad debts.
7
In the second quarter of 1999, the Company approved a Corporate Plan (the
"Plan") to strengthen revenue growth, improve performance and increase
shareholder value. The Plan included the following:
. The closing of the New York City business development office, the
subleasing of a portion of the Rosslyn facility and the relocation of
the Corporate Headquarter Offices to the Boca Raton facility,
. The reassignment of key corporate personnel to more effectively oversee
the Company,
. The appointment of an additional board member with extensive
Pharmaceutical experience,
. The consolidating of TMS Professional Markets Group ("TMS") and TelAc
Teleservices Group ("TelAc") into one operating division with one
integrated management team,
. The consolidating and streamlining of management information systems,
finance and management reporting systems and human resources policies
and procedures inclusive of employee utilization to gain efficiencies
and effectiveness,
. The reduction of head count as a result of the closing of the Boca
Consumer operation,
. The acceleration of the integration of the Company's Pharmaceutical
services.
. The refocus on the core businesses and exploration of alternatives for
the non-core businesses,
. The continuing commitment to actively seek and create opportunities to
cross-sell and collaborate on shared client assignments between
divisions.
. The continuing commitment by management to develop new products such as
internet-based services.
The decision to consolidate TMS and TelAc and streamline management
information systems, finance and management reporting systems and human
resources, was based on the Company's past efforts to actively seek and create
opportunities to cross-sell and collaborate on shared client assignments. In
the early stages of collaboration between TMS and TelAc, it became apparent
that the operational integration of these two divisions was not seamless, and
was in fact causing barriers to the effective leveraging of each divisions'
capabilities and relationships. Operational differences existed in management
information systems, financial and management reporting systems and human
resources policies and procedures inclusive of personnel utilization.
These differences, coupled with related profitability challenges had a
negative impact on the Company's First and Second Quarter performances.
As of June 30, 1999, unusual charges of $45,000 and $17,000 were recorded in
the Consumer and Pharmaceutical Segments, respectively. These unusual charges
represent severance accruals for approximately 22 employees. These employees
will be paid severance over the period ending September 1999 and the future
pre-tax cashflow will be approximately $62,000.
Corporate expenses (including unusual charge) as a percentage of revenues
increased to 5.8% for the three months ended June 30, 1999, compared to 4.6%
for the three months ended June 30, 1998. Approximately, 1.9 percentage points
of the increase is attributed to an unusual charge recorded by the Company.
The Company engaged outside professionals to assist in exploring strategic
alternatives and incurred costs totaling $247,607. These costs were recorded
as an unusual charge and included legal and consulting fees. Lastly, the
Company determined that certain acquisitions, which the Company was
evaluating, would not be completed and therefore the Company wrote-off the
costs of $200,391. These costs were recorded as an unusual charge and included
accounting, travel and legal fees. Excluding the unusual charges noted above,
the corporate expenses as a percentage of revenues decreased to 3.9% of
revenues as the Company continued to leverage its revenue growth.
Amortization expense for the Company increased $0.5 million, or 166.7%, to
$0.8 million for the three months ended June 30, 1999, compared to $0.3
million for the three months ended June 30, 1998. Amortization expense for the
Pharmaceutical Segment increased to $0.7 million for the three months ended
June 30, 1999, compared to $0.2 million for the three months ended June 30,
1998. The increase primarily is driven by the acquisition of AM Medica in
October of 1998. Amortization for the Consumer Segment did not change from the
prior quarter amount of $0.09 million.
8
Net interest expense for the Company was $0.8 million for the three months
ended June 30, 1999, compared to $0.1 million for the three months ended June
30, 1998. The increase is primarily the result of the acquisition of AM Medica
in October of 1998 and the payment of the 1998 earnouts through a draw on the
Credit Facility.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues for the Company increased $12.4 million, or 40%, to $43.4 million
for the six months ended June 30, 1999, compared to $31.0 million for the six
months ended June 30, 1998. Revenues for the Pharmaceutical Segment increased
$9.4 million, or 62.6%, to $24.4 million for the six months ended June 30,
1999, compared to $15.0 million for the six months ended June 30, 1998. In
October of 1998, the Company acquired substantially all of the assets of AM
Medica. The acquisition of AM Medica contributed additional revenues of
approximately $10.5 million for the six months ended June 30, 1999. These
additional revenues were offset by a decrease of approximately $1.1 million in
pharmaceutical telemarketing services revenues due to soft market acceptance
for one of the Company's products and changes to the sales force that supports
the Company's telemarketing efforts. Revenues for the Consumer Segment
increased $2.5 million, or 17.5%, to $16.8 million for the six months ended
June 30, 1999, compared to $14.3 million for the six months ended June 30,
1998. The increase in the Consumer Segment is primarily the result of the
addition of several new accounts.
Cost of revenues for the Company increased $9.1 million, or 51.7%, to $26.7
million for the six months ended June 30, 1999, compared to $17.6 million for
the six months ended June 30, 1998. Cost of revenues as a percentage of
revenues increased to 61.5% for the six months ended June 30, 1999, from 56.8%
for the six months ended June 30, 1998. Cost of revenues as a percentage of
revenues for the Pharmaceutical Segment increased to 56.6% for the six months
ended June 30, 1999, compared to 54.7% for the six months ended June 30, 1998.
Approximately, 3 percentage points of the increase was the result of the
acquisition of AM Medica, which has a different cost structure than the other
businesses within the Pharmaceutical Segment. Therefore, excluding the impact
of AM Medica, the cost of revenues as a percentage of revenues for the
Pharmaceutical Segment decreased to 53.6% for the six months ended June 30,
1999. Cost of revenues as a percentage of revenues for the Consumer Segment
increased to 69.6% for the six months ended June 30, 1999, compared to 60.8%
for the six months ended June 30, 1998. The increase was primarily due to the
start up of the Boca Raton Consumer operation, which was closed at the end of
the second quarter and TelAc's higher labor, training and overtime costs
incurred due to technical systems issues.
Selling, general and administrative expenses (including unusual charges) for
the Company increased $4.9 million, or 52.1%, to $14.3 million for the six
months ended June 30, 1999, compared to $9.4 million for the six months ended
June 30, 1998. Selling, general and administrative expenses (including unusual
charge) as a percentage of revenues for the Company increased to 32.9% for the
six months ended June 30, 1999, compared to 30.3% for the six months ended
June 30, 1998. Selling, general, and administrative expenses (including
unusual charge) as a percentage of revenues for the Pharmaceutical Segment
decreased to 22.1% for the six months ended June 30, 1999, compared to 28% for
the six months ended June 30, 1998. The acquisition of AM Medica resulted in a
decrease of 9.3 percentage points in selling, general and administrative
expenses (including unusual charge) as a percentage of revenues. The increase
for the other operating units within the Pharmaceutical Segment is primarily
attributable to the increase in compensation of sales and information
technology staff, and the increase in the allowance for bad debts. Selling,
general, and administrative expenses (including unusual charge) as a
percentage of revenues for the Consumer Segment increased to 33.9% for the six
months ended June 30, 1999 compared to 22.4% for the six months ended June 30,
1998. The start up of the Boca Raton Consumer operation, which was closed at
the end of the second quarter, increased the selling, general and
administrative expenses (including unusual charge) as a percentage of revenues
by 4.1 percentage points. The balance of the increase is attributable to
higher depreciation, higher leasing costs associated with the Texas and
Virginia expansions, and the increase in the allowance for bad debts. These
additional costs represent the following increases as a percentage of
revenues, respectively; 2.1, 2.6, and 1.5 percentage points. (See the Three
Months Ended June 30, 1999 Compared to the Three Months Ended June 30, 1998
for the discussion on the Corporate Plan).
9
As of June 30, 1999, unusual charges of $45,000 and $17,000 were recorded in
the Consumer and Pharmaceutical Segment, respectively. These unusual charges
represent severance accruals for approximately 22 employees. These employees
will be paid severance over the period ending September 1999 and the future
pre-tax cashflow will be approximately $62,000.
Corporate expenses (including unusual charges) as a percentage of revenues
increased to 4.8% for the six months ended June 30, 1999, compared to 4.2% for
the six months ended June 30, 1998. Approximately, 1 percentage point of the
increase is attributed to an unusual charge recorded by the Company. The
Company engaged outside professionals to assist in exploring strategic
alternatives and incurred costs totaling $247,607. These costs were recorded
as an unusual charge and included legal and consulting fees. Lastly, the
Company determined that certain acquisitions, which the Company was
evaluating, would not be completed and therefore the Company wrote-off the
costs of $200,391. These costs were recorded as an unusual charge and included
accounting, travel and legal fees. Excluding the unusual charges noted above,
the corporate expenses as a percentage of revenues decreased slightly to 3.9%
of revenues.
Amortization expense for the Company increased $1.0 million, or 125%, to
$1.8 million for the six months ended June 30, 1999, compared to $0.8 million
for the six months ended June 30, 1998. Amortization expense for the
Pharmaceutical Segment increased to $1.3 million for the six months ended June
30, 1999, compared to $0.5 million for the six months ended June 30, 1998. The
increase is primarily attributable to the acquisition of AM Medica in October
of 1998 and contingent payments made to the former shareholders of acquired
companies in the Pharmaceutical Segment resulting in an increase in goodwill,
and a corresponding increase in amortization expense. Amortization expense for
the Consumer Segment did not change from the prior period amount of $0.02
million. Amortization expense for Corporate increased to $0.3 million for the
six months ended June 30, 1999, compared to $0.06 million for the six months
ended June 30, 1998. The increase is primarily attributed to the amortization
of loan origination fees relating to the Company's Credit Facility.
Net interest expense for the Company was $1.3 million for the six months
ended June 30, 1999, compared to $0.6 million for the six months ended June
30, 1998. The increase is primarily due to the acquisition of AM Medica in
October of 1998 and funding of 1998 earnout payments.
Liquidity and Capital Resources
At June 30, 1999, the Company had working capital of ($26.3) million, a
decrease of $28.2 million from $2.0 million at December 31, 1998. The decrease
in working capital is primarily attributed to the reclassification of the
Company's long-term portion of indebtedness to current portion of
indebtedness. Because of the operating losses reported by the Company for the
quarter and period ended June 30, 1999, the Company was not in compliance with
certain financial covenants of the Credit Facility. The Company is engaged in
ongoing negotiations with the Bank Group, that provided the Credit Facility,
to obtain a waiver of the violated covenants and restructure the Credit
Facility. As of June 30, 1999, the Company is current on all of its payments
on the Credit Facility however, if the negotiations with the Bank Group are
not successful, the Company will need to find other sources of financing to
continue to operate. The Company is exploring further options to ensure access
to adequate working capital. Importantly, the Company's core pharmaceutical
business units in medical education and meetings management, sample
fulfillment, database management, direct mail, and sales automation have
maintained their earnings performance. The Company has discontinued the Boca
Raton Consumer operation that contributed to the Company's earnings
disappointment in the Second Quarter of 1999. To achieve further improvements
in earnings performance, the Company has made progress toward the
consolidation of its TMS and TelAc operations into a single operating unit
that integrates finance, human resources and management information systems
functions. The Company has streamlined its service locations, closing the
aforementioned consumer operation in Boca Raton and the Company's New York
City business development office. In addition, the Company has sub-leased a
portion of its Rosslyn, Virginia facility, and will vacate its Corporate
Headquarters Offices, absorbing the remaining corporate staff into other
facilities. The Company's new Corporate Headquarters will be located in the
Boca Raton facility, where most of the finance and administration staff is
already based. Management believes that its Corporate Plan which includes
10
the items discussed above will position the Company to return to historical
earnings performance levels. As of June 30, 1999, the Company had cash and
cash equivalents of $3.2 million compared, to $2.0 million as of December 31,
1998.
Net cash used in operating activities during the first half of 1999 was $8.2
million, compared to $3.3 million during the first half of 1998. The increase
in the cash used by operating activities for 1999 was primarily the result of
the 1998 contingent payments made to former shareholders of acquired companies
in the second quarter of 1999.
The net cash used in investing activities during the first half of 1999 was
$6.6 million, compared to $2.9 million during the first half of 1998. Cash
utilized for capital expenditures increased to $1.2 million, due to the
expansion of the Company's facilities and the upgrade of computers and
telephone systems. In addition, the Company made payments of approximately
$2.5 million of additional purchase price due to the former shareholders of
acquired companies.
Net cash provided by financing activities was $16.1 million for the first
half of 1999, compared to $6.2 million for the first half of 1998. $20.8
million of cash provided by financing activities is due to draws made on the
Credit Facility in order to finance the contingent purchase price payments and
fund operations. On February 23, 1999, the Board of Directors authorized the
Company to redeem 25,000 shares of the Company's preferred stock, Series 1998,
at an aggregate price of $2.5 million. In addition, during 1998, the proceeds
received from the initial public offering were used to retire the credit
facility and long term related party debt.
Year 2000 Issue
As a rapidly growing outsourced marketing services company, the Company is
dependent on computer systems and applications to conduct its business. Some
computer systems and applications include programming code in which calendar
year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are commonly referred to as the "Millennium Bug" or "Year 2000
Problem."
The Company has developed and is executing a comprehensive risk-based plan
designed to make its computer systems, applications and facilities Year 2000
ready. The plan covers four stages including (i) identification, (ii)
assessment, (iii) remediation, and (iv) testing.
The Company has completed the process of identifying and assessing all of
the major computers, software applications, and related equipment used in
connection with its internal operations that must be modified, upgraded, or
replaced to minimize the possibility of a material disruption to its business.
The Company is currently in the process of remediating and testing of its
major systems that have been identified as adversely affected, and expects to
complete these processes before the end of the third quarter of 1999.
In addition to computers and related systems, the operation of office
equipment, such as fax machines, photocopiers, telephone switches, security
systems, elevators and other common devices may be affected by the Year 2000
Problem. The Company continues to assess the potential effects of, and cost of
remediating, the Year 2000 Problem on its office equipment.
The Company has incurred costs to date of $194,000 and estimates the total
cost of any required modifications, upgrades, or replacements of its internal
systems to be $272,000. While the estimated cost of these efforts is not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect. The estimated
cost will be monitored and will be revised as additional information becomes
available.
The Company is continuing its communication with its major clients and
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Problems. There can be no assurance that these clients and suppliers will
resolve any or all Year 2000 Problems with their systems before the occurrence
of a material disruption to the business of the Company. Any failure of these
clients and suppliers to resolve Year 2000 Problems with their systems in a
timely manner could have a material adverse effect on the Company's business,
financial condition, and results of operations.
11
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business operations. However, since the
number of devices that could be affected and the interactions among these
devices are numerous, management believes that it is not possible to determine
with complete certainty that all Year 2000 Problems affecting the Company have
been identified or corrected.
The Company is developing contingency plans to be implemented as part of its
efforts to identify and correct Year 2000 Problems affecting its internal
systems. The Company expects to complete its contingency plans by the end of
the third quarter of 1999. Depending on the systems affected, these plans
could include accelerated replacement of affected equipment or software, short
to medium-term use of backup equipment and software, increased work hours for
Company personnel or use of contract personnel to correct on an accelerated
schedule any Year 2000 Problems that arise or to provide manual workarounds
for information systems, and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
effect on the Company's financial condition and results of operations.
The discussion of the Company's efforts, and management's expectations,
related to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
Risk Factors That May Affect Future Results
This report contains certain forward-looking statements which are based on
management's current views and assumptions. These statements are qualified by
reference to "Forward-Looking Statements" in the Company's Annual Report on
Form 10-K, as well as other SEC filings which list important factors that
could cause actual results to differ materially from those discussed in this
report.
12
PART II OTHER INFORMATION
Item 3. Defaults by the Company upon its Senior Securities
As of June 30, 1999, the Company was in default of sections 7.9(a) and (d)
of the Credit Facility's financial covenants; namely the Consolidated Leverage
Ratio and the Consolidated Senior Funded Debt to Adjusted EBITA ratio,
respectively. See Note 4 to the Notes to the Financial Statements elsewhere in
this report.
Item 4. Submission of Matters to a Vote of Security Holders
On May 25, 1999, the Company held its 1999 Annual Meeting of Stockholders.
At the Annual Meeting, the following matters were submitted to a vote of
stockholders:
1. The following seven individuals, constituting the full Board of
Directors of the Company, were nominated and elected to serve as the
Directors of the Company:
Peter D. Bewley For: 7,499,584
Withhold Authority: 250,000
Liam S. Donohue For: 7,499,584
Withhold Authority: 250,000
Lee H. Edelstein For: 7,499,584
Withhold Authority: 250,000
John W. Fitzgerald* For: 7,499,584
Withhold Authority: 250,000
John H. Foster* For: 7,499,584
Withhold Authority: 250,000
Stephen F. Nagy For: 7,499,584
Withhold Authority: 250,000
Shawkat Raslan For: 7,499,584
Withhold Authority: 250,000
2. The holders of 4,933,782 shares of common stock voted in favor of, the
holders of 1,172,706 shares of common stock voted against, and the holders
of 16,000 shares of common stock abstained, with respect to approval of an
amendment to the Company's 1997 Stock Option Plan to increase the number of
shares of common stock authorized for issuance over the term of the Stock
Option Plan by an additional 500,000 shares.
3. The holders of 7,746,479 shares of common stock voted in favor of, and
the holders of 3,605 shares of common stock voted against, with respect to
the ratification of the selection of PricewaterhouseCoopers, LLP,
independent certified public accountants, to serve as independent
accountants for the Company.
* Subsequent to the 1999 Annual Meeting of Shareholders, Michael
Dinkins, President and Chief Executive Officer of the Company, and
Douglas Rebak, President of the Phoenix Marketing Group of the
Company, were elected as Directors of the Company to fill vacancies
caused by the resignations of John W. Fitzgerald and John H. Foster.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
13
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:
/s/ Michael Dinkins
By: ________________________________
Michael Dinkins, President and
Chief Executive Officer
(principal executive officer)
Date:
/s/ Richard Lyew
By: ________________________________
Richard Lyew, Vice President and
Corporate Controller (principal
financial and accounting officer)
14