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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 September 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)
33431
4950 Blue Lake Drive, Suite 300 Boca
Raton, Florida
(Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code 1 (800) 522-3447
2200 Clarendon Blvd., 11th Floor
Arlington, Virginia 22201
(Former address, if changed since last year)
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 November 1, 1999
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ACCESS WORLDWIDE COMMUNICATIONS, INC.
INDEX
Part I--Financial Information
Item 1. Financial Statements
Balance Sheets--September 30, 1999 and December 31, 1998............. 1
Statements of Operations--
Three Months Ended September 30, 1999 and September 30, 1998
Nine Months Ended September 30, 1999 and September 30, 1998.... 2
Statements of Cash Flows--Nine Months Ended September 30, 1999 and
September 30, 1998.................................................. 3
Notes to Financial Statements........................................ 4-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 7-11
Part II--Other Information..............................................
Item 3. Default by the Company upon its Senior Securities................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
Signature............................................................ 13
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCESS WORLDWIDE COMMUNICATIONS, INC.
BALANCE SHEETS
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,470,534 $ 1,912,219
Accounts receivable, net of allowance for
doubtful accounts of $859,920 and $184,801,
respectively..................................... 20,028,723 20,046,495
Billings in excess of costs....................... 109,596 240,287
Other assets...................................... 2,373,399 1,715,035
------------ ------------
Total current assets............................ 23,982,252 23,914,036
Property and equipment, net....................... 11,744,408 8,565,188
Other assets...................................... 458,585 917,197
Intangible assets, net............................ 71,323,110 71,025,795
------------ ------------
Total assets.................................... $107,508,355 $104,422,216
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses............. $ 5,219,615 $ 6,894,231
Accrued interest and other related party ex-
penses........................................... 102,819 8,516,293
Accrued salaries, wages and related benefits...... 1,770,827 2,007,827
Due to related parties............................ -- 42,303
Deferred revenue.................................. 3,061,915 1,998,486
Current portion of indebtedness................... 40,572,044 63,431
Current portion of indebtedness--related par-
ties............................................. 2,116,019 2,421,770
------------ ------------
Total current liabilities ...................... 52,843,239 21,944,341
Long-term portion of indebtedness.................. 30,718 25,609,170
Long-term portion of indebtedness--related par-
ties.............................................. 3,665,000 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 September 30,
1999 and December 31, 1998, respectively.......... 4,000,000 6,500,000
------------ ------------
Total liabilities and mandatorily redeemable
preferred stock................................ 60,538,957 58,291,821
------------ ------------
Stockholders' equity:
Common stock, $.01 par value: voting: 20,000,000
shares authorized; 9,528,478 and 9,043,185
shares issued at September 30, 1999 and December
31, 1998, respectively; 9,528,478 and 9,027,730
shares outstanding at September 30, 1999 and
December 31, 1998, respectively.................. 95,285 90,432
Additional paid-in capital........................ 62,932,032 58,490,848
Accumulated deficit............................... (16,057,919) (12,392,763)
Less: cost of treasury stock, 15,455 shares at
December 31, 1998................................ -- (52,530)
Deferred compensation............................. -- (5,592)
------------ ------------
Total stockholders' equity ..................... 46,969,398 46,130,395
------------ ------------
Total liabilities, mandatorily redeemable pre-
ferred stock and stockholders' equity.......... $107,508,355 $104,422,216
============ ============
The accompanying notes are an integral part of these financial statements.
1
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
------------------------ ------------------------
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenues................ $16,761,284 $16,380,945 $60,198,102 $47,397,255
Cost of revenues (exclu-
sive of depreciation).. 11,090,108 8,652,020 37,745,963 26,252,491
----------- ----------- ----------- ----------- ---
Gross profit........... 5,671,176 7,728,925 22,452,139 21,144,764
Selling, general and
administrative expenses
(selling, general and
administrative expenses
paid to related parties
are $214,465 and
$237,256 and $592,404
and $732,596,
respectively).......... 7,576,558 5,507,422 21,339,514 14,925,420
Amortization expense.... 660,710 411,582 2,478,977 1,185,447
Unusual charge.......... 1,016,353 -- 1,526,351 --
----------- ----------- ----------- -----------
(Loss) income from op-
erations.............. (3,582,445) 1,809,921 (2,892,703) 5,033,897
Interest income......... 46,131 26,295 97,686 118,377
Interest (expense)
income-related
parties................ (48,562) 111,844 (184,455) (528,229)
Interest (expense)...... (1,088,621) (21,475) (2,260,925) (55,807)
----------- ----------- ----------- -----------
(Loss) income before
income tax (benefit)
expense and
extraordinary charge.. (4,673,497) 1,926,585 (5,240,397) 4,568,238
Income tax (benefit) ex-
pense.................. (1,423,523) 845,151 (1,676,927) 2,010,025
----------- ----------- ----------- -----------
(Loss) income before
extraordinary charge.. (3,249,974) 1,081,434 (3,563,470) 2,558,213
Extraordinary charge on
extinguishment of debt
(net of applicable
income taxes of
$82,195)............... -- -- (101,686) --
----------- ----------- ----------- -----------
Net (loss) income...... $(3,249,974) $ 1,081,434 $(3,665,156) $ 2,558,213
=========== =========== =========== ===========
(Loss) earnings per
share of common stock
Basic:
(Loss) income before
extraordinary
charge............... $ (0.34) $ 0.12 $ (0.38) $ 0.30
Extraordinary charge.. $ -- $ -- $ (0.01) $ --
Net (loss) income..... $ (0.34) $ 0.12 $ (0.39) $ 0.30
Diluted:
(Loss) income before
extraordinary
charge............... $ (0.34) $ 0.12 $ (0.38) $ 0.30
Extraordinary charge.. $ -- $ -- $ (0.01) $ --
Net (loss) income..... $ (0.34) $ 0.12 $ (0.39) $ 0.30
The accompanying notes are an integral part of these financial statements.
2
ACCESS WORLDWIDE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- ------------
Cash flows from operating activities:
Net (loss) income................................. $(3,665,156) $ 2,558,213
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization................... 4,177,031 2,046,331
Provision for doubtful accounts................. 916,805 (110,592)
Extraordinary charge, net of applicable income
taxes.......................................... 101,686 --
Income tax effect of extraordinary charge....... 82,195 --
Interest expense on mandatorily redeemable
preferred stock................................ -- 96,001
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable............................. (899,033) (5,584,876)
Due to related parties and affiliates........... (194,909) (297,329)
Other assets.................................... (241,534) (1,388,257)
Accounts payable and accrued expenses........... (1,674,616) (334,572)
Accrued interest and related party expenses..... (8,413,476) (1,866,233)
Accrued salaries, wages and related benefits.... (237,000) 1,087,239
Deferred revenue................................ 1,063,429 174,983
----------- ------------
Net cash used in operating activities .......... (8,984,578) (3,619,092)
----------- ------------
Cash flows from investing activities:
Additions to property and equipment............... (4,877,297) (4,185,386)
Business acquisitions, net of cash acquired ...... (2,629,477) (726,241)
----------- ------------
Net cash used in investing activities........... (7,506,774) (4,911,627)
----------- ------------
Cash flows from financing activities:
Net borrowings (payments) under line of credit
facility......................................... 14,949,813 (4,030,000)
Proceeds from sale of common and preferred stock.. 4,498,567 45,335,050
Repurchase of mandatorily redeemable preferred
stock............................................ (2,500,000) --
Repayment of related party debt................... (879,061) (36,348,637)
Payments on capital lease......................... (19,652) (54,536)
Proceeds from notes payable....................... -- 5,500,000
Change in other assets related to deferred
issuance costs................................... -- (1,919,328)
Treasury stock purchases.......................... -- (362,500)
----------- ------------
Net cash provided by financing activities..... 16,049,667 8,120,049
----------- ------------
Net decrease in cash and cash equivalent...... (441,685) (410,670)
Cash and cash equivalents, beginning of period
............................................... 1,912,219 2,014,711
----------- ------------
Cash and cash equivalents, end of period........ $ 1,470,534 $ 1,604,041
=========== ============
The accompanying notes are an integral part of these financial statements.
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 a
complete set of 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 three and nine months ended September 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 September 30, 1998 statement of operations and cash flows to
conform with the September 30, 1999 presentation.
3. UNUSUAL CHARGE
In the second quarter of 1999, the Company approved a Corporate Plan (the
"Plan") to strengthen revenue growth, improve performance and increase
stockholder value. 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 were subsequently paid to approximately 22
employees. In addition, the Company engaged outside professionals to assist in
exploring strategic alternatives and incurred costs totaling $248,000. 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 costs of $200,000. These costs were recorded as an unusual charge
and included accounting, travel and legal expenses.
In the third quarter of 1999, the Company recorded an additional $867,000 in
severance accruals and $149,000 in costs relating to the restructuring of the
Company's Credit Facility.
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 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 (collectively,
the "Credit Facility"). 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 lending 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 mandatorily redeemable 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 collateralized by substantially all of the assets of
the Company and has certain financial covenants. Because of the operating
losses reported by the Company, the Company was not in compliance with certain
financial covenants of its Credit Facility at September 30, 1999. The Company
has been in ongoing negotiations with the Bank Group to restructure the Credit
Facility. Accordingly, the entire amount outstanding under the Credit Facility
remains classified as current portion of indebtedness as of September 30,
1999.
On September 28, 1999, the Company entered into a Forebearance Agreement
with the Bank Group. The Forebearance Agreement provides that the Bank Group
will (a) forebear exercising their right to stop making extensions of credit
and to accelerate the full outstanding balance on the Credit Facility as
allowed by the Credit Facility, (b) agree not to charge interest on the
outstanding balance on the Credit Facility at the full default rate
(approximately 11%), and (c) continue to make available to the Company draws
as provided under the Credit Facility. However, the Forebearance Agreement
limits the Company's ability to draw on its Credit Facility to $16 million
without prior consent of the Bank Group. The Forebearance Agreement expired on
November 8, 1999 and the Company is currently in negotiation with the Bank
Group to obtain an extension.
5. INCOME TAXES
The Company's effective tax rate of 32% in the first three quarters 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
------------------------------------------------------------------------
September 30, 1999 September 30, 1998
------------------------------------ -----------------------------------
(Loss) Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic................... ($3,249,974) 9,528,478 ($0.34) $1,081,434 9,015,685 $0.12
Effect of dilutive
securities:
Stock options......... -- -- -- -- 37,346 --
Earnout contingency... -- -- -- -- 55,422 --
----------- --------- ------ ---------- --------- -----
(Loss) earnings per
share of common stock--
dilutive............... ($3,249,974) 9,528,478 ($0.34) $1,081,434 9,108,453 $0.12
=========== ========= ====== ========== ========= =====
For the Nine Months Ended
------------------------------------------------------------------------
September 30, 1999 September 30, 1998
------------------------------------ -----------------------------------
(Loss) Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic................... ($3,665,156) 9,361,562 ($0.39) $2,558,213 8,517,525 $0.30
Effect of dilutive
securities:
Stock options......... -- -- -- -- 76,308 --
Earnout contingency... -- -- -- -- 60,854 --
----------- --------- ------ ---------- --------- -----
(Loss) earnings per
share of common stock--
dilutive............... ($3,665,156) 9,361,562 ($0.39) $2,558,213 8,654,687 $0.30
=========== ========= ====== ========== ========= =====
Since the effects of the stock options and earnout contingencies are anti-
dilutive for the three and nine month period ended September 30, 1999, these
effects have not been included in the calculation of dilutive EPS for 1999.
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 (losses) earnings and segments
used by the chief operating decision-maker of the Company:
For the three months ended September 30,
Pharmaceutical Consumer Other Segment Total Reconciliation Total
-------------- ----------- ---------- ------------- -------------- -----------
1999
Revenues................ $ 9,219,641 $ 6,481,332 $1,060,311 $16,761,284 $ -- $16,761,284
Gross profit............ 3,681,089 1,405,968 584,119 5,671,176 -- 5,671,176
Losses before income
taxes.................. (1,707,561) (1,251,963) (5,562) (2,965,086) (1,708,411) (4,673,497)
Depreciation expense.... 417,339 234,082 12,691 664,112 10,864 674,976
Amortization expense.... 671,909 84,641 21,795 778,345 (117,635) 660,710
1998
Revenues................ $ 7,897,305 $ 7,636,452 $ 844,188 $16,377,945 $ 3,000 $16,380,945
Gross profit............ 3,945,296 3,344,031 436,598 7,725,925 3,000 7,728,925
Earnings (losses) before
income taxes........... 1,367,992 1,391,494 12,748 2,772,234 (845,649) 1,926,585
Depreciation expense.... 196,370 134,560 9,441 340,371 7,077 347,448
Amortization expense.... 262,071 84,642 20,991 367,704 43,878 411,582
For the nine months ended September 30,
Pharmaceutical Consumer Other Segment Total Reconciliation Total
-------------- ----------- ---------- ------------- -------------- -----------
1999
Revenues................ $33,669,044 $23,327,274 $3,201,784 $60,198,102 $ -- $60,198,102
Gross profit............ 14,318,775 6,570,892 1,562,472 22,452,139 -- 22,452,139
Earnings (losses) before
income taxes........... 33,994 (1,967,884) (208,346) (2,142,236) (3,098,161) (5,240,397)
Depreciation expense.... 857,034 772,112 37,773 1,666,919 31,135 1,698,054
Amortization expense.... 2,012,877 253,924 65,385 2,332,186 146,791 2,478,977
1998
Revenues................ $22,919,176 $21,956,520 $2,518,559 $47,394,255 $ 3,000 $47,397,255
Gross profit............ 10,806,426 8,950,577 1,384,761 21,141,764 3,000 21,144,764
Earnings (losses) before
income taxes........... 3,367,786 3,608,430 160,813 7,137,029 (2,568,791) 4,568,238
Depreciation expense.... 484,167 332,767 26,400 843,334 17,550 860,884
Amortization expense.... 760,086 254,102 62,973 1,077,161 108,286 1,185,447
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to the Three Months Ended
September 30, 1998
Revenues for the Company increased $0.4 million, or 2.4%, to $16.8 million
for the three months ended September 30, 1999, compared to $16.4 million for
the three months ended September 30, 1998. Revenues for the Pharmaceutical
Segment increased $1.3 million, or 16.5%, to $9.2 million for the three months
ended September 30, 1999, compared to $7.9 million for the three months ended
September 30, 1998. In October of 1998, the Company acquired AM Medica
Communications, Inc. ("AM Medica"), a medical education services company. AM
Medica contributed $3 million in revenues for the three months ended September
30, 1999. These revenues were partially offset by a decrease of $1.7 million
in pharmaceutical teleservices revenues, which was primarily caused by the
sale of computer equipment for $1 million in 1998, which did not occur in
1999. The remaining decrease was due to a restructuring of the sales force
that supports the Company's pharmaceutical teleservices efforts, and some
performance bonuses earned in 1998, that did not occur in 1999. Revenues for
the Consumer Segment decreased $1.1 million, or 14.5%, to $6.5 million for the
three months ended September 30, 1999, compared to $7.6 million for the three
months ended September 30, 1998. Approximately, $1.8 million of the decrease
was primarily attributed to an overall reduction in production hours provided
by one of the Company's major clients and the renegotiation of contract terms
with the same client. The decrease was offset by an increase in revenues of
$0.7 million from new and existing clients.
Cost of revenues for the Company increased $2.4 million, or 27.6%, to $11.1
million for the three months ended September 30, 1999, compared to $8.7
million for the three months ended September 30, 1998. Cost of revenues as a
percentage of revenues increased to 66.1% for the three months ended September
30, 1999, from 53% for the three months ended September 30, 1998. Cost of
revenues as a percentage of revenues for the Pharmaceutical Segment increased
to 59.8% for the three months ended September 30, 1999, from 50.6% for the
three months ended September 30, 1998. Excluding AM Medica, the cost of
revenues as a percentage of revenues for the Pharmaceutical Segment increased
slightly to 51.6% for the three months ended September 30, 1999. Cost of
revenues as a percentage of revenues for the Consumer Segment increased to
78.5% for the three months ended September 30, 1999, compared to 56.6% for the
three months ended September 30, 1998. The increase in cost of revenues as a
percentage of revenues was primarily attributed to higher personnel turnover
which caused higher recruiting, training and floor management costs.
Management believes that another contributor to the increase was certain
inefficiencies which occurred during the expansion of the Consumer Segment in
late 1998 and early 1999. Management has made several changes to correct these
inefficiencies.
Selling, general and administrative expenses (including unusual charge) for
the Company increased $3.1 million, or 56.4%, to $8.6 million for the three
months ended September 30, 1999, compared to $5.5 million for the three months
ended September 30, 1998. Selling, general and administrative expenses
(including unusual charge) as a percentage of revenues for the Company
increased to 51.2% for the three months ended September 30, 1999, compared to
33.5% for the three months ended September 30, 1998. Selling, general and
administrative expenses as a percentage of revenues for the Pharmaceutical
Segment increased to 39.1% for the three months ended September 30, 1999,
compared to 29.1% for the three months ended September 30, 1998. Excluding AM
Medica, selling, general and administrative expenses as a percentage of
revenues increased to 51.6% for the three months ended September 30, 1999. The
increase was primarily due to an increase in reserves for bad debts resulting
from contract disputes and an increase in headcount to support customer
service. Selling, general and administrative expenses as a percentage of
revenues for the Consumer Segment increased to 40% for the three months ended
September 30, 1999, compared to 25% for the three months ended September 30,
1998. The increase was primarily attributed to additional personnel and higher
depreciation and leasing costs associated with the Plano, Texas and Rosslyn,
Virginia expansions.
7
Corporate expenses (including unusual charge) for the Company increased $1.0
million, or 111.1%, to $1.9 million for the three months ended September 30,
1999, compared to $0.9 million for the three months ended September 30, 1998.
Corporate expenses (including unusual charge) as a percentage of revenues for
the Company increased to 11.3% for the three months ended September 30, 1999,
compared to 5.5% for the three months ended September 30, 1998. The increase
was primarily attributed to $1 million in unusual charges which consisted of
$867,000 in severance costs and $149,000 in costs associated with
restructuring the Company's Credit Facility. Excluding the unusual charges
noted above, corporate expenses as a percentage of revenues for the Company
decreased slightly to 5.4%.
Amortization expense for the Company increased $0.3 million, or 75%, to $0.7
million for the three months ended September 30, 1999, compared to $0.4
million for the three months ended September 30, 1998. The increase was
primarily attributed to the amortization of goodwill related to the
acquisition of AM Medica.
Net interest expense for the Company increased $1.2 million, to $1.1 million
for the three months ended September 30, 1999, compared to ($0.1) million for
the three months ended September 30, 1998. The increase was primarily
attributed to draws made on the Credit Facility, to acquire AM Medica in
October of 1998 and to make required payments of contingent considerations
earned in 1998. In addition, interest expense increased due to the Company's
existing default on three of its loan covenants contained in its Credit
Facility agreement. The Company's interest rate increased to approximately
9.5% in the third quarter of 1999, from approximately 6.3% in the third
quarter of 1998.
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenues for the Company increased $12.8 million, or 27%, to $60.2 million
for the nine months ended September 30, 1999, compared to $47.4 million for
the nine months ended September 30, 1998. Revenues for the Pharmaceutical
Segment increased $10.8 million, or 47.2%, to $33.7 million for the nine
months ended September 30, 1999, compared to $22.9 million for the nine months
ended September 30, 1998. In October 1998, the Company acquired AM Medica
Communications, Inc., a medical education services company. AM Medica
contributed revenues of $13.5 million for the nine months ended September 30,
1999. These revenues were partially offset by a decrease of $2.7 million in
pharmaceutical telemarketing services revenues, which was primarily caused by
the sale of computer equipment for $1 million in 1998, which did not occur in
1999. The remaining decrease was attributed to a large client opening its own
call center, a restructuring of the sales force that supports the Company's
pharmaceutical teleservices efforts and some performance bonuses earned in
1998 that did not occur in 1999. Revenues for the Consumer Segment increased
$1.3 million, or 5.9%, to $23.3 million for the nine months ended September
30, 1999, compared to $22 million for the nine months ended September 30,
1998. The increase was primarily attributed to the addition of several new
accounts.
Cost of revenues for the Company increased $11.4 million, or 43.3%, to $37.7
million for the nine months ended September 30, 1999, compared to $26.3
million for the nine months ended September 30, 1998. Cost of revenues as a
percentage of revenues increased to 62.6% for the nine months ended September
30, 1999, from 55.5% for the nine months ended September 30, 1998. Cost of
revenues as a percentage of revenues for the Pharmaceutical Segment increased
to 57.6% for the nine months ended September 30, 1999, compared to 52.8% for
the nine months ended September 30, 1998. Excluding AM Medica, the cost of
revenues as a percentage of revenues for the Pharmaceutical Segment increased
slightly to 53% for the nine months ended September 30, 1999. Cost of revenues
as a percentage of revenues for the Consumer Segment increased to 72.1% for
the nine months ended September 30, 1999, compared to 59.1% for the nine
months ended September 30, 1998. The increase was primarily attributed to
costs incurred relative to the realignment of the Boca Raton operation and
higher personnel turnover which caused higher recruiting, training, overtime
and floor management costs.
8
Management believes that another contributor to the increase was certain
inefficiencies which occurred during the expansion of the Consumer Segment in
late 1998 and early 1999. Management has made several changes to correct these
inefficiencies.
Selling, general and administrative expenses (including unusual charge) for
the Company increased $7.9 million, or 52.7%, to $22.9 million for the nine
months ended September 30, 1999, compared to $15.0 million for the nine months
ended September 30, 1998. Selling, general and administrative expenses
(including unusual charge) as a percentage of revenues for the Company
increased to 38% for the nine months ended September 30, 1999, compared to
31.6% for the nine months ended September 30, 1998. Selling, general, and
administrative expenses (including unusual charge) as a percentage of revenues
for the Pharmaceutical Segment decreased to 26.7% for the nine months ended
September 30, 1999, compared to 28.4% for the nine months ended September 30,
1998. Excluding AM Medica, selling, general and administrative expenses as a
percentage of revenue increased to 37.6% for the nine months ended September
30, 1999. The increase was primarily attributable to an increase in reserves
for bad debts resulting from contract disputes and an increase in head count
to support customer services, sales and information technology. Selling,
general, and administrative expenses (including unusual charge) as a
percentage of revenues for the Consumer Segment increased to 35.6% for the
nine months ended September 30, 1999, compared to 23.2% for the nine months
ended September 30, 1998. The increase was primarily attributed to additional
personnel and higher depreciation and leasing costs associated with the Plano,
Texas and Rosslyn, Virginia expansions.
Corporate expenses (including unusual charge) for the Company increased $1.8
million, or 81.8%, to $4.0 million for the nine months ended September 30,
1999, compared to $2.2 million for the nine months ended September 30, 1998.
Corporate expenses (including unusual charge) as a percentage of revenues of
the Company increased to 6.6% for the nine months ended September 30, 1999,
compared to 4.6% for the nine months ended September 30, 1998. In the second
quarter of 1999, the Company engaged outside professionals to assist in
exploring strategic alternatives and incurred costs totaling $248,000 and
determined that certain acquisitions, which the Company was evaluating, would
not be completed and therefore wrote-off costs of $200,000. In the third
quarter of 1999, the Company recorded an additional $1 million of unusual
charges which consisted of $867,000 in severance costs and $149,000 in costs
associated with the restructuring of the Company's Credit Facility. Excluding
the unusual charges noted above, the corporate expenses as a percentage of
revenues for the Company decreased slightly to 4.3%.
Amortization expense for the Company increased $1.3 million, or 108%, to
$2.5 million for the nine months ended September 30, 1999, compared to $1.2
million for the nine months ended September 30, 1998. The increase was
primarily attributable to the amortization of goodwill related to the
acquisition of AM Medica and the amortization of goodwill on payments of
contingent consideration earned in 1998.
Net interest expense for the Company increased $1.8 million, to $2.3 million
for the nine months ended September 30, 1999, compared to $0.5 million for the
nine months ended September 30, 1998. The increase was primarily attributed to
draws made on the Credit Facility to acquire AM Medica in October of 1998 and
to make required payments of contingent consideration earned in 1998. In
addition, interest expense increased due to the Company's existing default on
three loan covenants contained in the Credit Facility agreement. The Company's
interest rate increased, as of June 1999, from 6.7% to 9.5%.
Liquidity and Capital Resources
The Company's working capital decreased $30.8 million, to ($28.8) million at
September 30, 1999, compared to $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, the
Company was not in compliance with certain financial covenants of the Credit
Facility. The Company has been in ongoing negotiations with the Bank Group,
that provided the Credit Facility, to restructure the Credit Facility. On
September 28, 1999, the Company entered into a Forebearance Agreement with the
Bank Group. The Forebearance Agreement provides that the Bank
9
Group will (a) forebear exercising their right to stop making extensions of
credit and to accelerate the full outstanding balance on the Credit Facility
as allowed by the Credit Facility, (b) agree not to charge interest on the
outstanding balance on the Credit Facility at the full default rate
(approximately 11%), and (c) continue to make available to the Company draws
as provided under the Credit Facility. However, the Forebearance Agreement
limits the Company's ability to draw on its Credit Facility to $16 million
without prior consent of the Bank Group. The Forebearance Agreement expired on
November 8, 1999 and the Company is currently in negotiation with the Bank
Group to obtain an extension.
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. Since
April 1999, the Company has not made any additional draws on the Credit
Facility and has been current on all its payments on the Credit Facility. As
of September 30, 1999, the Company had cash and cash equivalents of $1.5
million, compared to $1.9 million as of December 31, 1998.
Net cash used in operating activities was $9 million for the three quarters
ended September 30, 1999, compared to $3.6 million for the three quarters
ended September 30, 1998. The increase in cash used by operating activities
was primarily attributed to payments of contingent consideration earned in
1998 and a payment of interest on the Credit Facility.
The net cash used in investing activities was $7.5 million for the three
quarters ended September 30, 1999, compared to $4.9 million for the three
quarters ended September 30, 1998. The increase in cash used in investing
activities was primarily attributed to payments of contingent consideration
earned in 1998.
Net cash provided by financing activities was $16 million for the three
quarters ended September 30, 1999, compared to $8.1 million for the three
quarters ended September 30, 1998. Cash provided by financing activities
consisted of draws totalling $19.4 million as a result of proceeds from the
issuance of common stock and draws made on the Credit Facility to finance
payments of contingent consideration earned in 1998 and fund operations. This
was offset primarily by the repayments made on related party notes of $0.9
million and the redemption of 25,000 shares of the Company's mandatorily
redeemable 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
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 has executed a comprehensive risk-based plan
designed to make its computer systems, applications and facilities Year 2000
ready. The plan covered 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 has remediated and tested its critical systems that have been
identified as adversely affected.
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 $261,000 and estimates the total
cost of any required modifications, upgrades, or replacements of its internal
systems to be $300,000. 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,
10
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.
The Company has identified and resolved all known 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 in the event
that a critical internal system should fail. 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.
11
PART II OTHER INFORMATION
Item 3. Defaults by the Company upon its Senior Securities
As of September 30, 1999, the Company was in default of sections 7.9(a), (b)
and (d) of the Credit Facility's financial covenants; namely the Consolidated
Leverage Ratio, the Consolidated Fixed Charge Coverage 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.3 Employment Agreement between the Company and Michael Dinkins
10.4 Severance Arrangement/Closing Inducement between the Company and Richard Lyew
10.5 Severance Arrangement/Closing Inducement between the Company and Jack Hamerski
10.6 Severance Arrangement/Closing Inducement between the Company and Mary Sanchez
10.7 Severance Arrangement/Closing Inducement between the Company and Andrea Greenan
27 Financial Data Schedule
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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:
/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)
13