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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, 2002
[_] 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)
4950 Communication Avenue, Suite 300 33431
Boca Raton, Florida (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (561) 226-5000
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.
9,740,001 shares of Common Stock, $.01 par value, as of August 9, 2002
ACCESS WORLDWIDE COMMUNICATIONS, INC.
INDEX
Pages
Part I--Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) and December 31, 2001 ................... 1
Consolidated Statement of Operations (unaudited) - Three and Six Months
Ended June 30, 2002 and June 30, 2001 .......................................................... 2
Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2002
and June 30, 2001 .............................................................................. 3
Notes to Consolidated Financial Statements. ..................................................... 4-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 12
Part II--Other Information
Item 1. Legal Proceedings. ........................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders. ......................................... 13
Item 6. Exhibits and Reports on Form 8-K ............................................................. 14
Signatures ................................................................................... 14
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
2002 December 31,
(Unaudited) 2001
----------- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,642,622 $ 3,373,422
Accounts receivable, net of allowance for doubtful accounts of
$113,064 and $80,723, respectively .................................. 12,804,825 15,358,920
Unbilled receivables .................................................... 3,507,709 3,795,943
Other assets, net ....................................................... 2,096,483 2,286,600
------------ ------------
Total current assets ................................................ 20,051,639 24,814,885
Property and equipment, net .................................................. 4,703,233 10,114,449
Intangible assets, net ....................................................... 9,183,968 21,420,624
Other assets, net ............................................................ 53,677 1,181,570
------------ ------------
Total assets ........................................................ $ 33,992,517 $ 57,531,528
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of indebtedness ......................................... $ 14,806 $ 30,471,375
Current portion of indebtedness - related parties ....................... 1,637,742 1,543,079
Accounts payable and accrued expenses ................................... 11,882,374 10,215,514
Accrued interest and other related party expenses ....................... 31,400 32,253
Accrued salaries, wages and related benefits ............................ 2,151,536 2,573,213
Deferred revenue ........................................................ 2,012,490 2,635,890
Warrant payable ......................................................... -- 1,321,326
------------ ------------
Total current liabilities ........................................... 17,730,348 48,792,650
Long-term portion of indebtedness ............................................ 4,731,032 3,951,973
Long-term portion of indebtedness-- related parties .......................... 880,751 1,724,292
Other long-term liabilities .................................................. 345,638 350,405
Mandatorily redeemable preferred stock, $.01 par value:
2,000,000 shares authorized, 40,000 shares issued and outstanding ......... 4,000,000 4,000,000
------------ ------------
Total liabilities and mandatorily redeemable preferred stock ........ 27,687,769 58,819,320
------------ ------------
Commitments and contingencies
Common stockholders' equity (deficit):
Common stock, $.01 par value: voting: 20,000,000 shares authorized;
9,740,001 shares issued and outstanding ................................ 97,400 97,400
Additional paid-in capital .............................................. 63,636,632 63,636,069
Accumulated deficit ..................................................... (57,429,284) (65,021,261)
------------ ------------
Total common stockholders' equity (deficit) ......................... 6,304,748 (1,287,792)
------------ ------------
Total liabilities, mandatorily redeemable preferred stock and
common stockholders' equity (deficit) ............................... $ 33,992,517 $ 57,531,528
============ ============
The accompanying notes are an integral part of these financial statements.
1
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Revenues .................................................... $14,945,422 $16,696,202 $24,264,076 $30,010,564
Cost of revenues ............................................ 9,800,887 11,623,677 15,625,563 20,819,852
----------- ----------- ----------- -----------
Gross profit .............................................. 5,144,535 5,072,525 8,638,513 9,190,712
Selling, general and administrative expenses (selling,
general and administrative expenses paid to related
parties are $125,950 and $188,928 and $188,925
and $377,850, respectively) ............................... 4,132,856 3,625,670 8,567,500 7,570,114
Amortization expense ........................................ 60,532 532,490 121,068 1,066,040
----------- ----------- ----------- -----------
Income (loss) from operations ............................ 951,147 914,365 (50,055) 554,558
Interest income ............................................. 11,146 13,349 16,657 27,784
Interest income--related parties ............................ -- 346,747 197,484 701,769
Interest expense--related parties ........................... (76,929) (125,572) (164,465) (244,077)
Interest expense ............................................ (144,499) (1,126,993) (294,023) (2,402,733)
----------- ----------- ----------- -----------
Income (loss) before income tax expense (benefit) ........ 740,865 21,896 (294,402) (1,362,699)
Income tax expense (benefit) ................................ -- 118,481 -- (316,282)
----------- ----------- ----------- -----------
Income (loss) from continuing operations ................. 740,865 (96,585) (294,402) (1,046,417)
----------- ----------- ----------- -----------
Discontinued operations (Note 8):
Income (loss) from discontinued operations, net of
income tax (benefit) expense of $(32,313) and
$(35,221) and $(107,873) and $88,218,
respectively .......................................... 32,313 22,192 (467,838) 291,870
(Loss) gain on disposal of segments, net of income tax
expense of $233,070 and $1,549,180 for the three
and six month periods ended June 30, 2002,
respectively .......................................... (355,570) -- 8,354,217 --
----------- ----------- ----------- -----------
(323,257) 22,192 7,886,379 291,870
----------- ----------- ----------- -----------
Net income (loss) ........................................... $ 417,608 $ (74,393) $ 7,591,977 $ (754,547)
=========== =========== =========== ===========
Basic earnings (loss) per share of common stock:
Continuing operations ................................. $ 0.08 $ (0.01) $ (0.03) $ (0.11)
Discontinued operations ............................... (0.03) 0.00 0.81 0.03
Net income (loss) ..................................... $ 0.04 $ (0.01) $ 0.78 $ (0.08)
Weighted average common stock outstanding ............. 9,740,001 9,740,001 9,740,001 9,740,001
Diluted earnings (loss) per share of common stock:
Continuing operations ................................. $ 0.08 $ (0.01) $ (0.03) $ (0.11)
Discontinued operations ............................... (0.03) 0.00 0.81 0.03
Net income (loss) ..................................... $ 0.04 $ (0.01) $ 0.78 $ (0.08)
Weighted average common stock outstanding ............. 9,800,463 9,740,001 9,740,001 9,740,001
The accompanying notes are an integral part of these financial statements.
2
ACCESS WORLDWIDE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) .......................................................... $ 7,591,977 $ (754,547)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ......................................... 910,825 1,769,128
Amortization of deferred financing costs .............................. 187,095 282,404
Gain on disposition of discontinued operations ........................ (9,903,397) --
Changes in discontinued operations .................................... (694,922) 2,009,783
Allowance for doubtful accounts ....................................... 77,074 113,297
Changes in operating assets and liabilities
Accounts receivables .................................................. (3,135,460) (6,976,503)
Unbilled receivables .................................................. 201,444 (1,940,652)
Other assets .......................................................... 2,099,094 (140,949)
Accounts payable and accrued expenses ................................. (316,622) 7,018,051
Accrued interest and other related party expenses ..................... (851) (714,376)
Accrued salaries, wages and related benefits .......................... 710,713 (664,762)
Deferred revenue ...................................................... (179,370) (467,003)
------------ ------------
Net cash used in operating activities .................................. (2,452,400) (466,129)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment, net ................................... (433,945) (665,468)
Additions to property and equipment from discontinued operations, net ...... (267,830) (874,253)
Net proceeds from sale of discontinued operations .......................... 31,705,728 --
------------ ------------
Net cash provided by (used in) investing activities .................... 31,003,953 (1,539,721)
------------ ------------
Cash flows from financing activities:
Loan origination fees ...................................................... -- (101,496)
Payments on capital leases ................................................. (13,705) (16,780)
Net (payments) borrowings under Credit Facility ............................ (29,545,973) 1,441,182
Payment of deferred financing costs ........................................ 26,203 --
Payments on related party debt ............................................. (748,878) (664,983)
------------ ------------
Net cash (used in) provided by financing activities .................... (30,282,353) 657,923
------------ ------------
Net decrease in cash and cash equivalents .............................. (1,730,800) (1,347,927)
Cash and cash equivalents, beginning of period ................................ 3,373,422 1,926,140
------------ ------------
Cash and cash equivalents, end of period ...................................... $ 1,642,622 $ 578,213
============ ============
The accompanying notes are an integral part of these financial statements.
3
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Access
Worldwide Communication, Inc. ("Access Worldwide", "we", "our", "us", or the
"Company") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, we do not include therein all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for a complete set of consolidated financial statements. For further
information, refer to our consolidated financial statements and footnotes
included in our Annual Report on Form 10-K.
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect reported amounts
included in the consolidated financial statements. In our opinion, 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,
2002 are not necessarily indicative of the results to be expected for the year
ending December 31, 2002.
2. RECLASSIFICATIONS
Certain reclassifications have been made to the June 30, 2001
consolidated financial statements to conform to the June 30, 2002 presentation.
Such reclassifications did not change our net loss or total common stockholders'
equity as previously reported.
3. INCOME TAXES
The effective tax rate used by us to record the income tax expense for
the six months ended June 30, 2002 differs from the federal statutory rate
primarily due to a change in the New Jersey Corporation Business Tax law, the
new law defers the utilization of net operating losses (these "losses")
generated in 2001 and prior years. These losses cannot be used in 2002 or 2003
but instead are to be carried forward to 2004 and beyond. The impact of this
change was $195,559 after federal benefit on discontinued operations. The
effective tax rate for the six months ended June 30, 2001 differs from the
federal statutory tax rate due primarily to state income taxes and
non-deductible goodwill amortization.
4. SEVERANCE ACCRUAL
During the first quarter of 2002, we recorded a severance accrual of
$957,436 to accrue salaries, wages and related benefits, for certain management
employees, as the Company realigned its management team to reflect its existing
business subsequent to the sale of its Phoenix Marketing Group ("Phoenix") and
its Cultural Access Group ("CAG") divisions (see Note 8). Such amount was
included in selling, general and administrative expenses for the three months
ended March 31, 2002 and the six months ended June 30, 2002.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB" or the
"Board") issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), Business Combinations, and No. 142 ("SFAS 142"), Goodwill and Other
Intangible Assets, collectively referred to as the "Standards". SFAS 141
supersedes Accounting Principles Board Opinion ("APB") No. 16, Business
Combinations. The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
(2) provide specific criteria for the initial recognition and measurement of
intangible assets apart from goodwill, and (3) require that unamortized negative
goodwill be written off immediately as an extraordinary gain instead of being
deferred and amortized. SFAS 141 also requires that, we reclassify the carrying
amounts of certain intangible assets into or out of goodwill, based on certain
criteria. SFAS 142 supersedes APB 17, Intangible Assets, and is effective for
fiscal years beginning after December 15, 2001.
4
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) - (Continued)
5. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS 142 requires that goodwill be tested annually for impairment using
a two-step process. The first step is to identify a potential impairment and, in
transition, this step must be measured as of the beginning of the fiscal year.
However, a company has six months from the date of adoption to complete the
first step. The second step of the goodwill impairment test measures the amount
of the impairment loss (measured as of the beginning of the year of adoption),
if any, and must be completed by the end of our fiscal year. Intangible assets
deemed to have an indefinite life will be tested for impairment using a one-step
process, which compares the fair value to the carrying amount of the asset as of
the beginning of the fiscal year, and pursuant to the requirements be completed
by the end of the second quarter of 2002. Any impairment loss resulting from the
transitional impairment tests would be reflected as the cumulative effect of a
change in accounting principle. The second step of the transitional goodwill
impairment test must be completed prior to the end of the year of initial
application.
Effective January 1, 2002, we adopted SFAS 141, which had no effect on
our accounting for prior business combinations.
Effective January 1, 2002, we adopted SFAS 142 which required companies
to stop amortizing goodwill and required an annual, or when events or
circumstances dictate a more frequent, impairment review of goodwill.
Accordingly, we no longer record amortization expense on goodwill as of January
1, 2002. Assuming the Company adopted the provision of SFAS 142 effective
January 1, 2001 and ceased amortization of goodwill, we would have reported net
(loss) income and basic and diluted (loss) income per share, on a proforma basis
as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
As Reported Proforma As Reported Proforma
Continuing operations $ (96,585) $ (342,654) $(1,046,417) $ (175,253)
Discontinued operations 22,192 301,457 291,870 211,146
----------- ------------ ----------- ------------
Net (loss) income (74,393) (41,197) (754,547) 35,893
=========== ============ =========== ============
Basic and diluted (loss) income
per share of common stock:
Continuing operations $ (0.01) $ (0.04) $ (0.11) $ (0.02)
Discontinued operations $ 0.00 $ 0.03 $ 0.03 $ 0.02
Net (loss) income $ (0.01) $ 0.00 $ (0.08) $ 0.00
Weighted average common
stock outstanding 9,740,001 9,740,001 9,740,001 9,740,001
During the three months ended June 30, 2002, we completed the transitional
impairment test of our existing goodwill as of January 1, 2002 and determined
that such goodwill was not impaired.
In October 2001, the Board issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses (i)
the recognition and measurement of the impairment of long-lived assets to be
held and used and (ii) the measurement of long-lived assets to be disposed of by
sale. In addition, SFAS 144 supersedes the accounting and reporting provisions
of APB No. 30 ("APB 30"), Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for segments of a business to be
disposed of. However, SFAS 144 retains APB 30's requirement that entities report
discontinued operations separately from continuing operations and extends that
reporting requirement to "a component of an entity" that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as "held for sale". SFAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company implemented SFAS 144 in the first quarter
of 2002 (see Note 8).
In addition, in May 2002, the Board issued SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections ("SFAS 145"). SFAS 145 rescinds the automatic treatment of
gains or losses from extinguishment of debt as extraordinary unless they meet
the criteria for extraordinary items as outlined in APB Opinion No. 30,
Reporting the Results of Operations, Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS 145 also requires sale-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions and makes various technical corrections to existing
pronouncements. The provisions of SFAS 145 related to the rescission of FASB
Statement 4 are effective for fiscal years beginning after May 15, 2002, with
early adoption encouraged. All other provisions of SFAS 145 are effective for
transactions occurring after May 15, 2002, with early adoption encouraged. We do
not anticipate that adoption of SFAS 145 will have a material effect on our
earnings or financial position.
5
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) - (Continued)
6. EARNINGS (LOSSES) PER COMMON SHARE
The computation of weighted average number of common and common equivalent
shares used in the calculation of basic and diluted earnings (losses) per share
is as follows:
For the Three Months For the Six months
Ended June 30, Ended June 30,
Shares Shares
------ ------
2002:
Weighted average number of common shares
outstanding - basic 9,740,001 9,740,001
Effects of dilutive securities:
Stock options 60,462 --
--------- ---------
Weighted average number of common and common
equivalent shares outstanding - dilutive* 9,800,463 9,740,001
========= =========
2001:
Weighted average number of common shares
outstanding - basic 9,740,001 9,740,001
========= =========
Weighted average number of common and common
equivalent shares outstanding - dilutive* 9,740,001 9,740,001
========= =========
The computation of earnings (losses) per share was calculated based on the
separate components in our statements of operations, including net income
(loss), loss from continuing operations and income from discontinued operations.
Differences in total are attributed to rounding.
* Since the effect of the stock options are anti-dilutive for both the three
and six months ended June 30, 2001 and the six months ended June 30, 2002,
the effect has not been included in the calculation of dilutive earnings
(losses) per common share. The effect of stock issued pursuant to earn-out
contingencies have not been included for any of the periods presented as
such earn-out contingencies have not been met.
7. COMMITMENTS AND CONTINGENCIES
We are involved in legal actions arising in the ordinary course of our
business. We believe that the ultimate resolution of these matters will not have
a material adverse effect on our financial position, results of operation or
cash flow except as described below.
On May 29, 2001, Douglas Rebak and Joseph Macaluso filed suit against the
Company in Federal District Court for the district of New Jersey. The lawsuit
seeks enforcement of an alleged amendment to an earn-out agreement between the
Company and Messrs. Rebak and Macaluso relating to our acquisition of Phoenix in
1997. Messrs. Rebak and Macaluso were two primary shareholders of Phoenix prior
to the acquisition and became officers of the Company after Phoenix became a
subsidiary of Access Worldwide. The suit alleges that we agreed to amend the
earn-out agreement. The lawsuit seeks actual damages of $850,000 plus additional
unspecified punitive damages. We have denied the allegations of the complaint,
and intend to defend vigorously. While we believe the claims have no legal
basis, we cannot provide assurances as to the outcome of the litigation.
8. DISCONTINUED OPERATIONS
In accordance with SFAS 144, we have reclassified as discontinued
operations, the operations of our (a) CAG division, which provided in-language,
in-culture market research services and consulting services to Fortune 500
companies in a variety of industries, and which was sold on January 31, 2002 to
LuminaAmericas, Inc., a provider of integrated marketing solutions for the
US-Hispanic and Latin America markets, for $1.2 million in cash, plus the
assumption of certain liabilities, and (b) Phoenix, which provided
pharmaceutical sample distribution services, and which was sold on February 25,
2002 to Express Scripts, Inc., a pharmacy benefit management company, for $33.0
million in cash, plus the assumption of certain liabilities. We realized a net
gain of $8.4 million on the disposal of the segments, net of income tax
(benefit) expense, and expenses incurred in connection with the transactions.
6
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) - (Continued)
8. DISCONTINUED OPERATIONS (Continued)
During the second quarter of 2002, we agreed to the final working capital
settlement in connection with the sale of our CAG division and paid $122,500 to
LuminaAmericas Inc. Such amount reduced the gain originally recorded on the
disposal of segments during the three month period ended March 31, 2002. In
addition, during the second quarter of 2002, the New Jersey Corporation Business
Tax authority changed its tax law regarding the utilization of net operating
losses. The new law defers the utilization of net operating losses (these
"losses") generated in 2001 and prior years. These losses cannot be used in 2002
or 2003 but instead are carried to 2004 and beyond. This change resulted in an
increase in income taxes expense of $195,559, after federal benefit, on
discontinued operations, which was recorded by the Company during the three
month period ended June 30, 2002.
In addition to the classification of the gain on the disposal of the
segments as discontinued operations, we reclassified the (loss) income from the
operations of the segments, net of the related income tax (benefit) expense, for
the period from January 1, 2002 until the date of the transactions and for the
six month period ended June 30, 2002 and the three and six month periods ended
June 30, 2001 to discontinued operations in the accompanying statements of
operations. Revenues and operating (loss) income for these two divisions were:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
CAG
Revenues $-- $1,215,430 $ 358,008 $ 2,035,133
Operating loss -- (170,809) (370,998) (334,803)
Phoenix
Revenues -- 7,017,013 4,207,194 14,790,707
Operating income (loss) -- 495,269 (7,189) 1,396,918
9. INDEBTEDNESS
On January 29, 2002, we entered into a purchase and sale agreement for CAG,
which closed on January 31, 2002. The sale of Phoenix was approved by the
stockholders and the Bank Group on February 22, 2002, and closed shortly
thereafter (see Note 8). On February 22, 2002, we repaid approximately $28.9
million outstanding pursuant to the Credit Facility from the net proceeds of
these transactions and executed the Fifth Amendment and Waiver Agreement (the
"Fifth Amendment"). The Fifth Amendment (a) provided that the Bank Group waive
the "Acknowledged Events of Default" under the Credit Facility and amended
certain provisions of the Credit Facility and its accompanying amendments,
including requiring us to meet new financial covenants, and (b) limited the
revolving committed amount, as defined in the Fifth Amendment.
On April 5, 2002, we entered into the Sixth Amendment and Waiver Agreement
(the "Sixth Amendment") to the Credit Facility, which amends certain provisions
of the Credit Facility, as amended, including requiring us to pay an additional
$1.5 million from the remaining Phoenix transaction proceeds, to repay such
amount outstanding under the Credit Facility and limiting the revolving
committed amount thereunder to (i) $5.5 million through May 31, 2002; (ii) $6.5
million from June 1, 2002 though March 31, 2003, and (iii) $5.7 million from
April 1, 2003 through June 30, 2003. The stated interest rate on the outstanding
Credit Facility remained at prime plus 3%. The Sixth Amendment expires on July
1, 2003, at which time all amounts outstanding pursuant to the Credit Facility
are to be paid in full.
7
ACCESS WORLDWIDE COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (unaudited) - (Continued)
10. WARRANT PAYABLE
The warrant that was issued to the Bank Group in connection with the Credit
Facility (the "Warrant"), that entitled the Bank Group to purchase approximately
1.5 million shares of our common stock at an exercise price of $0.01 per share,
and which was scheduled to expire on April 3, 2011, was cancelled in connection
with the repayment of approximately $28.9 million on the Credit Facility in
connection with the execution of the Fifth Amendment.
11. SEGMENTS
In accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", our
reportable segments are strategic business units that offer various products and
services to different industries principally in the United States.
The table below presents information about our reportable segments for our
continuing operations used by the chief operating decision-maker of the Company
for the three and six months ended June 30, 2002 and 2001. The following
information about reportable segments for the three and six months ended June
30, 2002 and 2001 excludes the results of Phoenix (previously included in the
Pharmaceutical Segment) and CAG (previously included in the Other Segment), as
such amounts have been reclassified as discontinued operations (see Note 8):
For the three months ended June 30,
Pharmaceutical Consumer Segment Total Reconciliation Total
-------------- -------- ------------- -------------- -----
2002
- ----
Revenues. ........................... $ 9,334,631 $ 5,610,791 $14,945,422 $ -- $14,945,422
Gross profit. ....................... 2,867,413 2,277,122 5,144,535 -- 5,144,535
EBITDA .............................. 1,450,919 693,772 2,144,691 (737,186) 1,407,505
Depreciation expense. ............... 109,197 267,831 377,028 18,798 395,826
Amortization expense. ............... 60,532 -- 60,532 -- 60,532
2001
- ----
Revenues. ........................... $12,518,172 $ 4,178,030 $16,696,202 $ -- $16,696,202
Gross profit. ....................... 3,308,696 1,763,829 5,072,525 -- 5,072,525
EBITDA .............................. 2,113,011 (96,576) 2,016,435 (202,778) 1,813,657
Depreciation expense ................ 92,811 260,798 353,609 13,193 366,802
Amortization expense ................ 532,490 -- 532,490 -- 532,490
For the six months ended June 30,
Pharmaceutical Consumer Segment Total Reconciliation Total
-------------- -------- ------------- -------------- -----
2002
- ----
Revenues ............................ $13,931,490 $10,332,586 $24,264,076 $ -- $24,264,076
Gross profit ........................ 4,222,405 4,416,108 8,638,513 -- 8,638,513
EBITDA .............................. 1,211,719 1,202,546 2,414,265 (1,553,495) 860,770
Depreciation expense ................ 217,754 535,698 753,452 36,305 789,757
Amortization expense ................ 121,068 -- 121,068 -- 121,068
2001
- ----
Revenues ............................ $20,491,933 $ 9,518,631 $30,010,564 $ -- $30,010,564
Gross profit ........................ 5,121,772 4,068,940 9,190,712 -- 9,190,712
EBITDA .............................. 2,475,277 390,534 2,865,811 (542,125) 2,323,686
Depreciation expense ................ 185,794 489,583 675,377 27,711 703,088
Amortization expense ................ 1,066,040 -- 1,066,040 -- 1,066,040
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the unaudited
financial statements and notes thereto included under Item 1 of this Form 10-Q
as well as our Annual Report on Form 10-K for the year ended December 31, 2001.
Critical Accounting Policies
In connection with the preparation of our interim consolidated financial
statements for the three and six months ended June 30, 2002, we determined that
the following additional accounting policy is deemed "critical". Critical
accounting policies are those policies, which require management's highest
degree of judgment, estimates, and assumptions.
Discontinued operations:
We considered the disposal of our Phoenix Marketing Group division
("Phoenix") and Cultural Access Group division ("CAG") during the three and six
months ended June 30, 2002 and 2001 to be discontinued operations pursuant to
the guidance in Statement of Financial Accounting Standards No. 144. As a result
of the guidance, we determined that such amounts met the criteria established in
the literature with respect to presenting such operations from discontinued
businesses separately from continuing operations of the Company.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Our revenues decreased $1.8 million, or 10.8%, to $14.9 million for the
three months ended June 30, 2002, compared to $16.7 million for the three months
ended June 30, 2001. Revenues for the Pharmaceutical Segment decreased $3.2
million, or 25.6%, to $9.3 million for the three months ended June 30, 2002,
compared to $12.5 million for the three months ended June 30, 2001. The decrease
was due to a reduced or delayed scheduling of medical education meetings as our
clients take a more cautious approach to meeting planning as a result of the
slow-down in the economy. Revenues for our medical education business are
recorded using a percentage of completion methodology whereby a portion of
revenues are recorded over the life of the project including a percentage of the
total projected costs at scheduling. Revenues for the Consumer Segment increased
$1.4 million, or 33.3% to $5.6 million for the three months ended June 30, 2002,
compared to $4.2 million for the three months ended June 30, 2001. The increase
was due to an increase in telemarketing programs from existing clients. A
portion of the increase in programs relates to programs previously scheduled to
occur in the first quarter of 2002 but had been delayed by the clients.
Our cost of revenues decreased $1.8 million, or 15.5%, to $9.8 million for
the three months ended June 30, 2002, compared to $11.6 million for the three
months ended June 30, 2001. Cost of revenues as a percentage of revenues
decreased to 65.8% for the three months ended June 30, 2002, from 69.5% for the
three months ended June 30, 2001. Cost of revenues as a percentage of revenues
for the Pharmaceutical Segment for the three months ended June 30, 2002
decreased to 68.8%, compared to 73.6% for the three months ended June 30, 2001.
The decrease was attributed to a decrease in medical meetings, which included
higher direct costs incurred due to client specifications. Cost of revenues as a
percentage of revenues for the Consumer Segment increased to 58.9% for the three
months ended June 30, 2002, from 57.1% for the three months ended June 30, 2001.
The increase was due to higher costs associated with an abbreviated lead time to
ramp up for the increase in telemarketing programs in the second quarter of
2002, which resulted in the higher revenues.
Our selling, general and administrative expenses increased by $0.5 million,
or 13.9%, to $4.1 million for the three months ended June 30, 2002, compared to
$3.6 million for the three months ended June 30, 2001. Selling, general and
administrative expenses as a percentage of revenues for the Company increased to
27.5% for the three months ended June 30, 2002, compared to 21.6% for the three
months ended June 30, 2001. Selling, general and administrative expenses as a
percentage of revenues for the Pharmaceutical Segment increased to 16.1% for the
three months ended June 30, 2002, from 10.4% for the three months ended June 30,
2001. The increase was due to the decrease in revenues related to medical
education meeting programs scheduling in the second quarter of 2002 due to our
clients' cautious approach to scheduling medical meeting due to the slow down in
the economy. Selling, general and administrative expenses as a percentage of
revenues for the Consumer Segment decreased to 33.9% for the three months ended
June 30, 2002, compared to 50% for the three months ended June 30, 2001. The
decrease was due to an increase in revenues while continuing to manage costs.
Our amortization expense decreased $471,958, or 88.6%, to $60,532 for the
three months ended June 30, 2002, compared to $532,490 for the three months
ended June 30, 2001. The decrease was due to the implementation of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which terminated the amortization of goodwill effective January 1, 2002.
9
Our net interest expense decreased $682,187, or 76.4%, to $210,282 for the
three months ended June 30, 2002, compared to $892,469 for the three months
ended June 30, 2001. The decrease was due to a pay down of approximately $30.4
million of outstanding debt obtained from the Phoenix and CAG proceeds, interest
income from Phoenix and CAG intercompany loans for which the corresponding
interest expense has been classified as discontinued operations and a lower
prime rate of interest.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Our revenues decreased $5.7 million, or 19.0%, to $24.3 million for the six
months ended June 30, 2002, compared to $30.0 million for the six months ended
June 30, 2001. Revenues for the Pharmaceutical Segment decreased $6.6 million,
or 32.2%, to $13.9 million for the six months ended June 30, 2002, compared to
$20.5 million for the six months ended June 30, 2001. The decrease was due to a
reduced or delayed scheduling of medical education meetings as our clients take
a more cautious approach to meeting planning as a result of the slow-down in the
economy. Revenues for our medical education business are recorded using a
percentage of completion methodology whereby a portion of revenues are recorded
over the life of the project including a percentage of the total projected costs
at scheduling. Revenues for the Consumer Segment increased slightly by $0.8
million or 8.4% to $10.3 million for the six months ended June 30, 2002,
compared to $9.5 million for the six months ended June 30, 2001. The increase
was due to an increase in telemarketing programs from existing clients.
Our cost of revenues decreased $5.2 million, or 25.0%, to $15.6 million for
the six months ended June 30, 2002, compared to $20.8 million for the six months
ended June 30, 2001. Cost of revenues as a percentage of revenues decreased to
64.2% for the six months ended June 30, 2002, from 69.3% for the six months
ended June 30, 2001. Cost of revenues as a percentage of revenues for the
Pharmaceutical Segment for the six months ended June 30, 2002 decreased to
69.8%, compared to 75.1% for the six months ended June 30, 2001. The decrease
was due to the decrease in revenues offset by management's efforts to more
efficiently and effectively run the communications center while managing their
mix of programs. Cost of revenues as a percentage of revenues for the Consumer
Segment decreased to 57.3% for the six months ended June 30, 2002, from 56.8%
for the six months ended June 30, 2001.
Our selling, general and administrative expenses increased by $1.0 million,
or 13.2%, to $8.6 million for the six months ended June 30, 2002, compared to
$7.6 million for the six months ended June 30, 2001. Selling, general and
administrative expenses as a percentage of revenues for the Company increased to
35.4% for the six months ended June 30, 2002, compared to 25.3% for the six
months ended June 30, 2001. Selling, general and administrative expenses as a
percentage of revenues for the Pharmaceutical Segment increased to 23.0% for the
six months ended June 30, 2002, from 13.7% for the six months ended June 30,
2001. The increase was due to a reduced or delayed scheduling of medical
education meetings as our clients take a more cautious approach to meeting
planning as a result of the slow-down in the economy and severance expense
recorded for certain management personnel. Selling, general and administrative
expenses as a percentage of revenues for the Consumer Segment decreased to 35.9%
for the six months ended June 30, 2002, compared to 44.2% for the six months
ended June 30, 2001. The decrease was due to increased revenues at our Boca
Raton communication center while continuing to manage cost levels.
Our amortization expense decreased $944,972, or 88.6%, to $121,068 for the
six months ended June 30, 2002, compared to $1,066,040 for the six months ended
June 30, 2001. The decrease was due to the implementation of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,"
which terminated the amortization of goodwill effective January 1, 2002.
Our net interest expense decreased $1,672,910, or 87.3%, to $244,347 for
the six months ended June 30, 2002, compared to $1,917,257 for the six months
ended June 30, 2001. The decrease was due to a pay down of approximately $30.4
million of outstanding debt from the Phoenix and CAG proceeds, a cancellation of
the Warrant, interest income from Phoenix and CAG intercompany loans for which
the corresponding interest expense has been classified as discontinued
operations and a lower prime rate of interest.
Discontinued Operations
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we have
reclassified as discontinued operations, the operations of our (a) CAG division,
which provided in-language, in-culture market research services and consulting
services to Fortune 500 companies in a variety of industries, and which was sold
on January 31, 2002 to LuminaAmericas, Inc., a provider of integrated marketing
solutions for the US-Hispanic and Latin America markets, for $1.2 million in
cash, plus the assumption of certain liabilities and (b) Phoenix division, which
provided pharmaceutical sample distribution services, and which was sold on
February 25, 2002 to Express Scripts, Inc., a pharmacy benefit management
company, for $33.0 million in cash, plus the assumption of certain liabilities.
We realized a net
10
gain of $8.4 million on the disposal of the segments, net of income tax
(benefit) expense and expenses incurred in connection with the transactions.
During the second quarter of 2002, we agreed to the final working capital
settlement in connection with the sale of our CAG division and paid $122,500 to
LuminaAmericas Inc. Such amount reduced the gain originally recorded on the
disposal of segments during the three months ended March 31, 2002. In addition,
during the second quarter of 2002, the New Jersey Corporation Business Tax
authority changed its tax law regarding the utilization of net operating losses.
The new law defers the utilization of net operating losses (these "losses")
generated in 2001 and prior years. These losses cannot be used in 2002 or 2003
but instead are carried to 2004 and beyond. This change resulted in an increase
in income taxes expense of $195,559, after federal benefit, on discontinued
operations, which was recorded by the Company during the three month period
ended June 30, 2002.
In addition to the classification of the gain on the disposal of the
segments as discontinued operations, we reclassified the (loss) income from the
operations of the segments, net of the related income tax (benefit) expense, for
the period from January 1, 2002 until the closing date of the transactions and
for the six month period ended June 30, 2002 and the three and six month periods
ended June 30, 2001 to discontinued operations in the accompanying statements of
operations. Revenues and operating (loss) income for these two divisions were:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
CAG
Revenues $-- $ 1,215,430 $ 358,008 $ 2,035,133
Operating loss -- (170,809) (370,998) (334,803)
Phoenix
Revenues -- 7,017,013 4,207,194 14,790,707
Operating income (loss) -- 495,269 (7,189) 1,396,918
Liquidity and Capital Resources
At June 30, 2002, we had working capital of $2.4 million, as compared to
negative working capital of $24.0 million at December 31, 2001. Cash and cash
equivalents were $1.6 million at June 30, 2002, compared to $3.4 million at
December 31, 2001.
Net cash used in operating activities during the first six months of 2002
was $2.5 million, compared to $0.5 million used in operating activities during
the first six months of 2001. The increase in net cash used in operating
activities was due principally to an increase in accounts receivable and
accounts payable and accrued expenses offset by a decrease in other assets.
Net cash provided by investing activities was $31.0 million for the first
six months of 2002, compared to net cash used in investing activities of $1.5
million for the first six months of 2001. The increase in cash provided by
investing activities was due principally to net proceeds received from the sales
of our Phoenix and CAG divisions.
Net cash used in financing activities was $30.3 million for the first six
months of 2002, compared to net cash provided by financing activities of $0.7
million for the first six months of 2001. The increase in net cash used in
financing activities was due principally to the pay down of our Credit Facility
with the net proceeds received from the sales of our Phoenix and CAG divisions.
At December 31, 2001, we were in default on all our financial covenants
under the Credit Facility with the Bank Group. On February 22, 2002 and April 5,
2002, we renegotiated the Credit Facility with the Bank Group and entered into
the Fifth and Sixth Amendment and Waiver agreements, respectively, in connection
with the Credit Facility (the "Amendments"). As a result of the renegotiations,
the sale of two of our divisions and the repayment of approximately $30.4
million of the outstanding bank debt subsequent to December 31, 2001 pursuant to
the Amendments, we are now required to repay the outstanding balance on the
revolving credit in full on July 1, 2003, rather than January 2, 2003, as
previously provided under the Credit Facility. As of June 30, 2002, we had $4.7
million outstanding and $0.7 million available on our Credit Facility.
11
We believe that we will be able to maintain compliance with the financial
covenants established by the Amendments during 2002, which compliance would
allow us to maintain sufficient liquidity in 2002 to fund operations. However,
failure to achieve our revenue and income projections as a result of the loss of
a key customer or other factors could result in us not being able to maintain
compliance with such covenants. Such non-compliance would result in an event of
default, which, if not waived by the Bank Group, would result in the
acceleration of the amounts due under the Credit Facility. We would be unable to
make such accelerated repayment of amounts due on the Credit Facility. Such
acceleration would likely have an adverse effect on the Company.
We believe that to the extent that our outstanding balance on the Credit
Facility is not repaid from the proceeds of the sale of any of our divisions
prior to the maturity thereof, or that we do not refinance the outstanding
balance pursuant to the Credit Facility prior to maturity, we will be required
to find sources other than operations to repay the outstanding balance on the
Credit Facility at maturity. If we are unable to sell any of our divisions,
providing sufficient proceeds to repay the Credit Facility, refinance the Credit
Facility on acceptable terms or find another source of repayment for the Credit
Facility other than operations, then our business and financial condition could
be materially and adversely impacted. We cannot assure our stockholders that we
will be able to sell any of our remaining divisions on terms that are acceptable
to the Company or at all, obtain any such refinancing on terms acceptable to us
or at all or that we would otherwise be able to obtain funds to repay the Credit
Facility when due.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks from changes in interest rates and are
subject to interest rate risks on our Credit Facility caused by changes in
interest rates. Our ability to limit our exposure to market risk and interest
rate risk is restricted as a result of our current cash management arrangement
under the Credit Facility. Accordingly, we are unable to enter into any
derivative or similar transactions that could limit our exposure to market risk
and interest rate risks. Our Credit Facility is currently at an interest rate of
prime plus 3%. The prime rate is the prime rate published by Bank of America,
N.A. A one percent increase in the prime interest rate would result in a pre-tax
impact to earnings of approximately $47,000 per year.
Risk Factors That May Affect Future Results
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Those statements represent our
current expectations, beliefs, future plans and strategies, anticipated events
or trends concerning matters that are not historical facts. Such forward-looking
statements relate to our ability to maintain compliance with our financial
covenants under the Credit Facility.
Such statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results to differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, but are not limited, to the following:
. Additional risks as a result of our recent downsizing;
. Competition from other third-party providers and those of our clients and
prospects who may decide to do the work that we do in-house;
. Industry consolidation which reduces the number of clients that we are
able to serve;
. Potential consumer saturation reducing the need for our services;
. Our dependence on the continuation of the trend towards outsourcing;
. Our dependence on the industries we serve;
. The effect of change in a drug's lifecycle;
. Our ability and our clients' ability to comply with state, federal and
industry regulations;
. Our reliance on a limited number of major customers;
. The effects of possible contract cancellations;
. Our reliance on technology;
12
. Our reliance on key personnel and our labor force and recent changes in
management;
. The possible prolonged impact of the events of September 11 and the
general downturn in the U.S. economy;
. The effect of an interruption of our business;
. The risks associated with our stock trading on the OTC Bulletin Board;
. The risk associated with our Credit Facility;
. The volatility of our stock price; and
. The unpredictability of the outcome of litigation in which we are
involved.
The Company assumes no duty to update any forward-looking statements. For a
more detailed discussion of these risks and others that could affect the
Company's results, see the Company's filings with the Securities and Exchange
Commission, including the risk factors section of Access Worldwide's Annual
Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in legal actions arising in the ordinary course of our
business. We believe that the ultimate resolution of these matters will not have
a material adverse effect on our financial position, results of operation or
cash flow except as described below.
On May 29, 2001, Douglas Rebak and Joseph Macaluso filed suit against the
Company in Federal District Court for the district of New Jersey. The lawsuit
seeks enforcement of an alleged amendment to an earn-out agreement between the
Company and Messrs. Rebak and Macaluso relating to our acquisition of Phoenix in
1997. Messrs. Rebak and Macaluso were two primary shareholders of Phoenix prior
to the acquisition and became officers of the Company after Phoenix became a
subsidiary of Access Worldwide. The suit alleges that we agreed to amend the
earn-out agreement. The lawsuit seeks actual damages of $850,000 plus additional
unspecified punitive damages. We have denied the allegations of the Complaint,
and intend to defend vigorously. While we believe the claims have no legal
basis, we cannot provide assurance as to the outcome of the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 2, 2002, the Company held its 2002 Annual Meeting of Stockholders. At
the Annual Meeting, the following matters were submitted to a vote of
stockholders:
1. The following four individuals, constituting the full Board of Directors
of the Company, were nominated and elected to serve as the Directors of the
Company:
Liam S. Donohue For: 5,981,756
Withhold Authority: 499,869
Lee H. Edelstein For: 5,981,756
Withhold Authority: 499,869
Shawkat Raslan For: 5,981,756
Withhold Authority: 499,869
Charles Henri Weil For: 6,032,456
Withhold Authority: 449,169
2. The holders of 3,065,755 shares of common stock voted in favor of, the
holders of 854,337 shares of common stock voted against, the holders of
12,213 shares of common stock abstained, and there were 2,549,320 shares of
common stock unvoted (Broker Non-Votes), with respect to act upon a proposal
to amend the Company's 1997 Stock Option Plan to increase the number of
shares of common stock available for grant thereunder from 1,429,000 to
1,929,000.
3. The holders of 6,466,020 shares of common stock voted in favor of, and
the holders of 7,005 shares of common
13
stock voted against, and the holders of 8,600 shares of common stock
abstained, with respect to the ratification of the selection of
PricewaterhouseCoopers LLP, independent certified public accountants, to
serve as independent accountants for the Company for the year ended December
31, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10(tt) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-08-06 -
Shawkat Raslan, Chief Executive Officer.
10(uu) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-08-06 - Jack
Hamerski, Chief Financial Officer.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCESS WORLDWIDE COMMUNICATIONS, INC.
Date: August 9, 2002 By: /s/ Shawkat Raslan
---------------------------------------
Shawkat Raslan, Chairman of the Board,
President, and Chief Executive Officer
Date: August 9, 2002 By: /s/ John Hamerski
---------------------------------------
John Hamerski, Executive Vice President
and Chief Financial Officer (principal
financial and accounting officer)
14
Exhibit Index
Exhibit Description
Number
10(tt) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-08-06 -
Shawkat Raslan, Chief Executive Officer.
10(uu) Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002-08-06 -
Jack Hamerski, Chief Financial Officer.