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, 1998
|_| 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
CULTURALACCESSWORLDWIDE, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 52-1309227
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2200 Clarendon Blvd., 11th Floor
Arlington, Virginia 22201
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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.
9,040,685 shares of Common Stock, $.01 par value, as of August 11, 1998
CULTURALACCESS WORLDWIDE, INC.
INDEX
Part I - Financial Information
Item 1. Financial Statements 1-4
Consolidated and Combined Balance Sheets -
June 30, 1998 and December 31, 1997 1
Consolidated and Combined Statements of Operations -
Three Months Ended June 30, 1998 and June 30, 1997
Six Months Ended June 30, 1998 and June 30, 1997 2
Consolidated and Combined Statements of Cash Flows -
Six Months Ended June 30, 1998 and June 30, 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II - Other Information 5-6
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CULTURALACCESSWORLDWIDE, INC.
BALANCE SHEETS (UNAUDITED)
COMBINED
CULTURALACCESS-
CONSOLIDATED WORLDWIDE, INC.
CULTURALACCESS- & TLM HOLDINGS
WORLDWIDE, INC. CORP.
DECEMBER 31,
JUNE 30, 1998 1997
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 2,035,141 $ 2,014,711
Accounts receivable, net of allowance for
doubtful accounts of $208,795 and $279,935,
respectively .................................... 11,945,237 8,077,462
Deferred issuance costs ........................... -- 1,350,594
Other assets ...................................... 1,792,015 941,686
------------ ------------
Total current assets ............................ 15,772,393 12,384,453
Property and equipment, net ....................... 6,385,072 4,171,806
Other assets ...................................... 358,736 265,110
Intangible assets, net ............................ 35,183,784 35,858,750
------------ ------------
Total assets .................................... $57,699,985 $ 52,680,119
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Amount due on line of credit facility ............. $ -- $ 5,810,000
Accounts payable and accrued expenses ............. 3,048,546 2,831,463
Accrued interest and other related party expenses . 1,407,677 2,974,661
Accrued salaries, wages and related benefits ...... 1,800,302 1,308,446
Due to related parties ............................ 144,145 471,925
Deferred revenue .................................. 671,807 666,082
Current portion of indebtedness ................... 75,689 69,940
Current portion of indebtedness -- related parties 707,832 3,203,819
------------ ------------
Total current liabilities ....................... 7,855,998 17,336,336
Long-term portion of indebtedness ................... 47,037 80,013
Long-term portion of indebtedness -- related parties 618,085 34,238,666
Mandatorily redeemable preferred stock, $.01 par
value: 8% cumulative, 2,000,000 shares
authorized, 65,000 shares and 36,000
shares issued and outstanding at
June 30, 1998 and December 31, 1997,
respectively ...................................... 6,689,444 3,888,000
------------ ------------
Total liabilities and mandatorily
redeemable preferred stock ..................... 15,210,564 55,543,015
------------ ------------
Common stockholders' equity (deficit):
Common stock, $.01 par value: voting: 20,000,000
shares authorized; 9,040,685 and 4,264,000
shares issued at June 30, 1998 and December
31, 1997, respectively; 9,038,185 and 4,261,500
shares outstanding at June 30, 1998 and
December 31, 1997, respectively ................. 89,723 42,640
Common stock, $.01 par value: non-voting:
500,000 shares authorized, issued and
outstanding at December 31, 1997 ................ -- 5,000
Additional paid-in capital ........................ 57,846,547 14,013,092
Accumulated deficit ............................... (15,436,816) (16,913,595)
Less: cost of treasury stock, 2,500 shares ........ (143) (143)
Deferred compensation ............................. (9,890) (9,890)
------------ ------------
Total common stockholders' equity (deficit) ..... 42,489,421 (2,862,896)
------------ ------------
Total liabilities, mandatorily redeemable
preferred stock and common stockholders'
equity (deficit) .............................. $ 57,699,985 $ 52,680,119
============ ============
1
CULTURALACCESSWORLDWIDE, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
COMBINED COMBINED
CULTURALACCESS- CULTURALACCESS-
CONSOLIDATED WORLDWIDE, INC. CONSOLIDATED WORLDWIDE, INC.
CULTURALACCESS- & TLM HOLDINGS CULTURALACCESS- & TLM HOLDINGS
WORLDWIDE, INC. CORP. WORLDWIDE, INC. CORP.
-------------------------------- --------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
-------------- --------------- -------------- --------------
Revenues ................................... $ 15,325,100 $ 8,063,002 $ 31,016,310 $ 15,025,350
Cost of revenues (exclusive of
depreciation) ............................ 8,490,713 4,766,270 17,600,471 8,830,651
------------ ------------ ------------ ------------
Gross profit ............................. 6,834,387 3,296,732 13,415,839 6,194,699
Selling, general and adminis-
trative expenses (selling,
general and administrative
expenses paid to related parties
are $243,829 and $86,427 and $495,340
and $93,625, respectively) ............... 4,678,243 1,909,624 9,482,406 3,301,232
Amortization expense ....................... 309,067 147,426 709,457 355,940
------------ ------------ ------------ ------------
Income from operations ................... 1,847,077 1,239,682 3,223,976 2,537,527
Interest income ............................ 40,999 19,168 92,082 37,274
Interest expense-related parties ........... (143,700) (526,170) (640,073) (1,121,853)
Interest expense ........................... (13,667) -- (34,332) --
Other income (expense)-related party ....... -- 2,977 -- (301,841)
Other (expense)............................. -- (158,608) -- (153,808)
------------ ------------ ------------ ------------
Income before income
taxes .................................. 1,730,709 577,049 2,641,653 997,299
Income tax expense ......................... 766,965 252,860 1,164,874 494,009
------------ ------------ ------------ ------------
Net income ............................... $ 963,744 $ 324,189 $ 1,476,779 $ 503,290
============ ============ ============ ============
Earnings per share of
common stock -- basic and
diluted .................................. $ 0.11 $ 0.07 $ 0.18 $ 0.11
============ ============ ============ ============
2
CULTURALACCESSWORLDWIDE, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
COMBINED
CULTURALACCESS-
CONSOLIDATED WORLDWIDE, INC.
CULTURALACCESS- & TLM HOLDINGS
WORLDWIDE, INC. CORP.
1998 1997
-------------- ---------------
Cash flows from operating activities:
Net income ............................................... $ 1,476,779 $ 503,290
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ........................... 1,287,301 537,474
Interest expense on mandatorily redeemable
preferred stock ....................................... 231,001 144,000
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable ..................................... (4,004,203) (3,146,197)
Due to related parties and affiliates ................... (302,224) 149,291
Other assets ............................................ (1,025,297) (327,458)
Accounts payable and accrued expenses ................... 216,679 1,698,944
Accrued interest and related party expenses ............. (1,838,788) 685,353
Accrued salaries, wages and related benefits ............ 490,468 (554,691)
Deferred revenue ........................................ 187,711 307,716
------------ ------------
Net cash (used in)
operating activities ................................. (3,280,573) (2,278)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment, net ................. (2,757,378) (486,098)
Use of letter of credit .................................. 15,000,000
Business acquisitions, net of cash
acquired ................................................ (97,055) (6,491,133)
------------ ------------
Net cash (used in) provided by investing activities .... (2,854,433) 8,022,769
------------ ------------
Cash flows from financing activities:
Change in other assets related to deferred
issuance costs........................................... (1,919,328) --
Payments on capital lease ................................ (35,895) (162,727)
Proceeds from notes payable - related
party ................................................... 5,500,000 1,150,000
Proceeds from sale of common and preferred
stock ................................................... 44,640,000 1,999,500
Borrowings under line of credit facility ................. 190,000 5,660,000
Repayments under line of credit facility ................. (6,000,000) (250,000)
Repayment of related party debt .......................... (36,219,341) (15,075,000)
------------ ------------
Net cash provided by (used in) financing
activities............................................ 6,155,436 (6,678,227)
------------ ------------
Net increase in cash ................................... 20,430 1,342,264
Cash and cash equivalents, beginning of
period .................................................. 2,014,711 300,387
------------ ------------
Cash and cash equivalents, end of period ................. $ 2,035,141 $ 1,642,651
============ ============
3
CULTURALACCESSWORLDWIDE, INC. AND TLM HOLDINGS CORP.
NOTES TO CONSOLIDATED 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 ("SEC"). 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, 1998 are not necessarily indicative of the results to be expected for
the year ending December 31, 1998.
2. INCOME TAXES
The Company's effective tax rate of 44% in the first half of 1998 differs
from the Federal Statutory rate due primarily to state income taxes,
non-deductible goodwill amortization, and non-deductible preferred stock
dividends.
3. EARNINGS PER COMMON SHARE
Earnings per common share are calculated as follows:
For the Three Months Ended
------------------------------------
June 30, 1998 June 30, 1997
------------------------------------ ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- --------- -------- --------- --------- --------
Basic ................................. $ 963,744 8,969,834 $ 0.11 $ 324,189 4,764,000 $ 0.07
Effect of dilutive securities:
Stock options ..................... -- 100,682 -- -- 6,528 --
Earnout contingency ............... -- 70,851 -- -- -- --
--------- --------- -------- --------- --------- --------
Earnings per share of common
stock - dilutive .................. $ 963,744 9,141,367 $ 0.11 $ 324,189 4,770,528 $ 0.07
========= ========= ======== ========= ========= ========
For the Six Months Ended
------------------------------------
June 30, 1998 June 30, 1997
------------------------------------ ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- --------- -------- --------- --------- --------
Basic $1,476,779 8,268,445 $0.18 $ 503,290 4,649,000 $ 0.11
Effect of dilutive securities
Stock options...................... -- 95,789 -- -- 3,264 --
Earnout contingency ............... -- 63,570 -- -- -- --
---------- --------- ----- --------- --------- --------
Earnings per share of common
stock - dilutive .................. $1,476,779 8,427,804 $0.18 $ 503,290 4,652,264 $ 0.11
========== ========= ===== ========= ========= ========
4
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues for the second quarter of 1998 increased $7.3 million, or 90.1%, to
$15.3 million compared to $8.1 million for the second quarter of 1997. In
September of 1997, the Company acquired substantially all of the assets of
Market Connections Group, Inc. ("MCG" previously known as Hispanic Market
Connections, Inc.). In October of 1997, the Company acquired substantially all
of the assets of Phoenix Marketing Group, Inc. ("Phoenix"). The combined
revenues for these two companies included in the results of operations for the
second quarter of 1998 is approximately $5.1 million, or 70.1% of the increase.
The remaining increase is due primarily to the expansion of services provided to
the Company's top ten clients.
Costs of revenues increased to $8.5 million for the second quarter of 1998, from
$4.8 million in the second quarter of 1997, an increase of $3.7 million. Cost of
revenues as a percentage of sales decreased to 55.4% for the second quarter of
1998, compared to 59.1% for the second quarter of 1997. This reduction was
primarily the result of the Company being able to better utilize its existing
work force despite substainally increased revenues.
Selling, general and administrative expenses, increased $2.8 million, to $4.7
million for the second quarter of 1998, from $1.9 million for the second quarter
of 1997. Selling, general and administrative expenses as a percentage of
revenues increased to 30.5% for the second quarter of 1998, from 23.7% for the
second quarter of 1997. Approximately 54.8% of the increase was due to the
acquisition of MCG and Phoenix which have a different cost structure than the
other businesses. In addition, approximately 7.9% of the increase is due to the
creation of a corporate infrastructure needed to support the Company's future
growth.
Amortization expense increased for the second quarter of 1998 to $309,000, from
$147,000 for the second quarter of 1997. The increase is due to the acquisitions
indicated above.
Net interest expense decreased from $507,000 for the second quarter of 1997, to
$116,000 for the second quarter of 1998, a decrease of $391,000. The decrease
is the result of paying off the debt incurred in acquiring all business units.
The proceeds from the initial public offering ("Offering") were used to reduce
borrowings.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the first half of 1998 increased $16 million, or 106%, to $31.0
million, compared to $15.0 million for the same period in 1997. Of this
increase, approximately $10.8 million, or 67.3%, resulted from the acquisitions
of MCG and Phoenix. In addition, approximately $4.9 million of the increase came
from additional services rendered to the Company's 1998 top ten clients.
Cost of revenues increased $8.8 million, to $17.6 million for the first half of
1998, from $8.8 million for the first half of 1997. Cost of revenues as a
percentage of sales declined to 56.7% for the first half of 1998, when compared
to 58.8% for the first half of 1997. The 2.1% decrease was due primarily to the
Company's ability to more effectively utilize its workforce.
Selling, general and administrative expenses increased $6.2 million, to
$9.5 million for the first half of 1998, from $3.3 million for the first half of
1997. Selling, general and administrative expenses as a percentage of revenues
increased to 30.6% for the first half of 1998, from 22.0% for the first half of
1997. Approximately 58.4% of the increase was due to the acquisition of MCG and
Phoenix which have a different cost structure than the other businesses.
Approximately 12.1% of the increase is due to the creation of a corporate
infrastructure needed to support the Company's future growth.
Amortization expense increased $354,000, to $710,000 for the first half of 1998,
from $356,000 for the first half of 1997, due to the acquisitions of MCG and
Phoenix which did not occur until the later part of 1997.
Net interest expense decreased $502,000, to $582,000 for the first half of 1998,
from $1.1 million for the first half of 1997, as proceeds from the Offering were
used to reduce borrowings.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $7.9 million, an increase
of $12.9 million from ($5.0) million at December 31, 1997. As described below,
substantially all of the Company's net working capital resulted from the
completion of its Offering in February 1998. The Company's primary sources of
liquidity as of June 1998 consist of cash and cash equivalents, accounts
receivable and borrowing availability under the Credit Facility (as defined in
the Company's Annual Report on Form 10-K).
The Company's accounts receivable turnover averaged 69 days for the period ended
June 30, 1998, and 58 days for the period ended December 31, 1997. The increase
was due largely to the timing of payments. A substantial portion of the
outstanding receivables were collected in July 1998.
Net cash used for operating activities during the first half of 1998 was $3.3
million, compared to $2,300 during the first half of 1997. Approximately $2.5
million of the increase in the cash used for operating activities for 1998 as
compared to 1997, was primarily the result of accrued interest paid on related
party debt. Approximately $858,000 of the increase in cash used for operating
activities is the result of increases in accounts receivable due to increased
sales and an increase in days sales outstanding.
The net cash used for investing activities during the first half of 1998 was
$2.9 million compared to the net cash provided from investing activities for the
first half of 1997 of $8.0 million. Cash utilized for capital expenditures
increased by $2.3 million due to the expansion of the Company's facilities, and
upgrading of computer systems. During the first half of 1997, the Company
used $6.5 million in investing activities to acquire TeleManagement Services
Inc. and received $15.0 million to repay borrowings incurred in connection with
the recapitalization of the Company on December 6, 1996.
On February 19, 1998, the Company raised net proceeds of $44.6 million in the
Offering. The Company expects to meet its short term liquidity requirements
through net cash provided by operations and borrowing under the Credit Facility
(as defined in the Company's Annual Report on Form 10-K). Management believes
that these sources of cash will be sufficient to meet the Company's operating
needs and planned capital expenditures for at least the next 12 months.
5
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 "Risk Factors" in the Prospectus in the Company's registration
statement on Form S-1 which lists important factors that could cause actual
results to differ materially from those discussed in this report.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.2 Employment Agreement between the Company and Mary Sanchez
27 Financial Data Schedule
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.
CULTURALACCESSWORLDWIDE, INC.
Date: __________ By: /s/ John Fitzgerald
-------------------------------
John Fizgerald, President and
Chief Executive Officer
(principal executive officer)
Date: __________ By: /s/ Michael Dinkins
-------------------------------
Michael Dinkins, Senior Vice
President of Finance and Administration
and Chief Financial Officer
(principal financial officer)
6