<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ------------------
COMMISSION FILE NO. 000-23711
-----------------------------
ACSYS, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2299173
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
75 FOURTEENTH STREET, SUITE 2200, ATLANTA, GA 30309
(Address of principal executive offices)
404-817-9440
------------
(Registrant's telephone number, including area code)
Indicate by check [X] whether the registrant: (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of outstanding shares of the registrant's Common Stock on
November 10, 1999 was 14,502,736.
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ACSYS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998....................... 3
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 1999 and 1998
For the Nine Months Ended September 30, 1999 and 1998.......... 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 1998.......... 5
Notes to Condensed Consolidated Financial Statements............. 6
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 11
3. Quantitative and Qualitative Disclosures About Market Risk............ 17
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K...................................... 18
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 1,777
Accounts receivable, (net of allowances of $1,057 and $958 at
September 30, 1999 and December 31, 1998, respectively) 25,240 22,836
Prepaid expenses and other 1,873 2,073
------- -------
Total current assets 27,113 26,686
PROPERTY AND EQUIPMENT, net 7,078 4,979
GOODWILL AND OTHER INTANGIBLE ASSETS, net 54,143 54,366
OTHER ASSETS 284 332
------- -------
Total assets $88,618 $86,363
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 44 $ 44
Accounts payable 3,639 3,777
Accrued liabilities 7,913 7,086
Deferred income taxes 413 413
------- -------
Total current liabilities 12,009 11,320
------- -------
LONG-TERM DEBT 38,433 38,276
------- -------
DEFERRED INCOME TAXES 2,771 2,771
------- -------
OTHER LONG-TERM LIABILITIES 178 293
------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, no par value, 45,000,000 shares authorized
14,502,736 and 14,452,466 issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 30,548 30,499
Retained earnings 4,679 3,204
------- -------
Total shareholders' equity 35,227 33,703
------- -------
Total liabilities and shareholders' equity $88,618 $86,363
======= =======
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
ACSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
SERVICE REVENUES:
Temporary staffing $ 33,807 $ 29,525 $ 101,415 $ 69,564
Permanent placement 7,462 8,050 23,741 19,807
-------- -------- --------- --------
Total service revenues 41,269 37,575 125,156 89,371
-------- -------- --------- --------
DIRECT COST OF SERVICES, consisting of
payroll, payroll taxes and benefit costs for
temporary employees 22,922 20,714 69,320 48,768
-------- -------- --------- --------
Gross profit 18,347 16,861 55,836 40,603
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 14,439 12,436 44,996 32,969
AMORTIZATION AND DEPRECIATION 849 502 2,325 1,059
COMBINATION EXPENSES -- -- -- 1,730
SEVERANCE AND OFFICE CLOSING COSTS 450 -- 3,279 650
-------- -------- --------- --------
Operating income 2,609 3,923 5,236 4,195
OTHER INCOME (EXPENSE):
Interest expense, net (1,024) (402) (2,668) (466)
Other, net -- -- 256 --
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 1,585 3,521 2,824 3,729
Income tax expense 775 1,500 1,349 5,185
-------- -------- --------- --------
NET INCOME (LOSS) $ 810 $ 2,021 $ 1,475 $ (1,456)
-------- -------- --------- --------
NET INCOME (LOSS) PER SHARE:
Basic and diluted net income (loss) per share $ 0.06 $ 0.14 $ 0.10 $ (0.10)
======== ======== ========= ========
Shares used in computing basic net income (loss)
per share 14,496 14,430 14,478 13,878
======== ======== ========= ========
Shares used in computing diluted net income (loss)
per share 14,527 14,744 14,506 13,878
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
ACSYS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,475 $ (1,456)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Amortization and depreciation 2,597 1,059
Imputed interest 45 --
Deferred taxes -- 1,899
Changes in operating assets and liabilities, net of effect of purchase
acquisitions:
Accounts receivable, net (2,404) (7,001)
Prepaid expenses and other 200 475
Other assets 48 15
Accounts payable (138) (1,556)
Accrued liabilities and other 827 1,718
Other long-term liabilities (115) (93)
------- --------
Net cash provided by (used in) operating activities 2,535 (4,940)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash paid for business acquisitions -- (34,260)
Capital expenditures (3,308) (2,341)
------- --------
Net cash used in investing activities (3,308) (36,601)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public offering -- 20,170
Net borrowings of long-term debt 112 22,891
Distributions to shareholders -- (545)
Deferred financing costs (1,165) (266)
Proceeds from exercise of employee stock options 49 96
------- --------
Net cash provided by (used in) financing activities (1,004) 42,346
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,777) 805
CASH AND CASH EQUIVALENTS, beginning of period 1,777 370
------- --------
CASH AND CASH EQUIVALENTS, end of period $ -- $ 1,175
======= ========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE> 6
ACSYS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY BACKGROUND
Acsys, Inc. ("the Company") is a specialty professional staffing firm that
operates approximately 40 offices serving 20 major metropolitan markets across
the United States with a more significant presence in the Eastern and Midwestern
United States.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The December 31, 1998 balance
sheet was derived from audited financial statements and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The Company believes that the
financial statements include all adjustments of a normal and recurring nature
necessary to present fairly the results of operations, financial position and
cash flows for the periods presented. These financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's annual report on Form 10-K. The condensed consolidated financial
statements include the accounts of the Company and its subsidiaries. All
material intercompany balances and transactions have been eliminated. Interim
results of operations are not necessarily indicative of results to be expected
for the entire year.
3. INITIAL PUBLIC OFFERING
In February 1998, the Company completed its initial public offering ("IPO") of
2,842,500 shares of common stock at a price of $8.50 per share, generating net
cash proceeds of approximately $20.1 million after deducting underwriters'
discounts and offering costs of approximately $2.4 million.
In connection with the IPO, the Company terminated its S corporation status and
recorded in the first quarter of 1998 income tax expense and a corresponding net
deferred tax liability of approximately $3.0 million, representing the tax
effect of differences in bases in assets and liabilities for financial reporting
and income tax purposes.
6
<PAGE> 7
4. DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility ....................................... $ 38,163 $ 37,660
Non-compete agreements with former shareholders of Infinity
Enterprises, Inc., maturing February 2009 .................... 941 1,017
Other ........................................................... -- 4
-------- --------
39,104 38,681
Less--Unamortized discount ...................................... (627) (361)
-------- --------
38,477 38,320
Less--Current portion ........................................... (44) (44)
-------- --------
$ 38,433 $ 38,276
======== ========
</TABLE>
In April 1999, the Company amended its revolving credit facility (the "Credit
Facility") to increase the principal amount of money it could borrow, within the
limitation of financial covenants included therein, from $40.0 million to $80.0
million. At September 30, 1999, the Company had borrowed approximately $38.2
million under the Credit Facility, none of which is classified as current.
Borrowings under the Credit Facility have been used to finance the Company's
business acquisitions and for general corporate purposes.
Interest accrues at a variable rate indexed, at the Company's option, at the
bank's prime rate or the London Interbank Offered Rate ("LIBOR"), plus an
applicable margin which varies based on certain leverage ratio requirements.
Accordingly, interest rates may vary from the prime rate to the prime rate plus
1.0% or from LIBOR plus 1.5% to LIBOR plus 2.5%, based on the Company's
Consolidated Leverage Ratio (as defined in the Credit Facility), provided,
however, that until September 30, 1999, the applicable margin was fixed at 3.0%.
The Credit Facility contains customary affirmative covenants and certain
operating and financial covenants. The financial covenants include requirements
to not exceed a specified consolidated leverage ratio, to maintain a certain
consolidated fixed charge coverage ratio and to maintain a minimum consolidated
net worth, and to not exceed certain consolidated capital expenditures and
rental payments levels. As of September 30, 1999, the Company was in compliance
with all financial and non-financial covenants.
5. MERGERS, ACQUISITIONS, AND PRO FORMA FINANCIAL INFORMATION
Pooling Transaction
On May 22, 1998, the Company acquired all of the outstanding stock of ICON
Search and Consulting, Inc. ("ICON"), an Atlanta-based information technology
staffing company, in a stock-for-stock merger. This transaction was accounted
for as a pooling of interests for accounting purposes and as a tax-free
reorganization. Under the terms of the merger agreement, ICON shareholders
received 2,820,360 shares of Common Stock in exchange for all of the equity
interests in ICON. In connection with the merger, the Company recorded a charge
for combination expenses of $1.7 million in 1998, including investment banking,
legal and accounting fees, and other transaction costs associated with the
merger.
7
<PAGE> 8
Purchase Transactions
On July 1, 1998, the Company acquired all of the outstanding stock of KPD
Systems, Inc. ("KPD"), an information technology staffing firm located on Long
Island, New York. The Company accounted for this transaction under the purchase
method of accounting. The results of operations for KPD are included from the
date of acquisition foward.
On August 4, 1998, the Company acquired all of the outstanding stock of Staffing
Edge, Inc. ("Staffing Edge"), a specialty professional staffing firm with
offices throughout the Midwestern United States, for $22.5 million in cash,
81,766 shares of Common Stock with an estimated fair value of $838,000,
transaction costs of $2.1 million and assumption of debt of $7.0 million. The
Company has accounted for this transaction under the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
net assets acquired, of approximately $32.5 million, was recorded as goodwill
and is being amortized on a straight line basis over forty years. The results of
operations for Staffing Edge are included from the date of acquisition forward.
The following unaudited pro forma consolidated results of operations assume that
all of the above purchases occurred on January 1, 1998, and that the Company
incurred incremental interest expense on debt presumed to be incurred to fund
the acquisitions. Additionally, these pro forma results reflect an adjustment to
officer and employee compensation based upon employment agreements entered into
upon the closing of certain of the Company's acquisitions.
Prior to February 5, 1998, the Company was an S corporation and not subject to
income taxes. These pro forma results include adjustments to reflect the Company
as a taxable entity during all periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------------ ------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro forma revenue $ 39,875 $ 107,776
Pro forma net income 954 1,330
Basic net income per share 0.07 0.09
Diluted net income per share $ 0.06 $ 0.09
Basic shares 14,462 14,016
Diluted shares 14,775 14,473
</TABLE>
6. SEVERANCE AND CLOSING COSTS
During the first quarter of 1999, the Company announced plans to reduce future
selling, general and administrative costs. These plans included the closure of
an under-performing office and the termination of certain former employees,
principally related to integration efforts. The Company expensed $2.8 million
and $450,000 during the first and third quarters of 1999, respectively, of which
approximately $2.7 million related to severance costs and $550,000 related to
office closing costs. Approximately $750,000 of these severance and office
closing costs will be paid in periods after September 30, 1999.
8
<PAGE> 9
7. SUPPLEMENTAL CASH FLOW INFORMATION
During the nine months ended September 30, 1999 and 1998, the Company paid
interest expense of $2.4 million and $370,000, respectively.
During the nine months ended September 30, 1999 and 1998, the Company paid
income taxes of $1.1 million and $1.2 million, respectively.
8. SEGMENT AND RELATED INFORMATION
The Company operates in approximately 20 major metropolitan markets in the
United States. Within each market, the Company offers a variety of professional
staffing services that result in differing profit margins. The Company has three
reportable segments: Permanent Placement, Temporary Services, and IT Contract
Services. While there is cross selling, these segments are managed separately as
each business generally offers different services, has distinct candidate and
client pools, and requires different marketing strategies.
The Permanent Placement segment provides contingency-based placement services by
identifying, evaluating and recommending qualified candidates for permanent
employment by clients. The Permanent Placement segment generates revenue equal
to a percentage of a candidate's first-year annual salary. The Temporary
Services segment provides professional and clerical temporary employees to
clients, generally billing clients on an hourly basis. The IT Contract Services
segment provides qualified information technology professionals to clients on a
contracted or hourly basis to assist in enterprise resource planning software
implementation, systems integration services and information technology
services.
The Company does not allocate depreciation expense or assets to each of the
segments due to the nature of the Company's service-based operations, which are
not capital intensive. Depreciation expense is included in Corporate Overhead
Expense for each of the periods presented below. The Company evaluates
performance based on profit or loss from operations before depreciation,
amortization, interest and income taxes.
The revenues and operating income (loss) for each of the three identifiable
business segments are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER, SEPTEMBER,
-------------------------- -------------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Permanent Placements $ 7,462 $ 8,050 $ 23,741 $ 19,807
Temporary Services 20,380 16,951 60,584 40,996
IT Contract Services 13,427 12,574 40,831 28,568
---------- --------- --------- ---------
$ 41,269 $ 37,575 $ 125,156 $ 89,371
========== ========= ========= =========
Operating Income (Loss):
Permanent Placements $ 942 $ 1,202 $ 2,977 $ 2,307
Temporary Services 2,571 2,531 7,596 4,745
IT Contract Services 1,694 1,878 5,119 3,366
Corporate Overhead Expense (2,148) (1,688) (7,177) (3,843)
Combination, Severance and
Office Closing Costs (450) - (3,279) (2,380)
---------- --------- --------- ---------
$ 2,609 $ 3,923 $ 5,236 $ 4,195
========== ========= ========= =========
</TABLE>
9
<PAGE> 10
9. SHAREHOLDER RIGHTS PROTECTION RIGHTS AGREEMENT
During the second quarter of 1999, the Company adopted a shareholder protection
rights agreement (the "Rights Plan") and issued Rights in connection with the
Rights Plan. The Rights Plan provided that a dividend of one share purchase
Right be issued for each outstanding share of Common Stock to shareholders of
record as of the close of business on July 2, 1999. Generally, the Rights are
exercisable only if a person or group (other than certain existing shareholders)
acquires 15% or more of the Company's Common Stock or announces a tender offer.
Each Right entitles shareholders to buy one one-thousandth of a share of a new
series of junior participating preferred stock at an exercise price of $25.
If the Company is acquired after a person has acquired 15% or more of the
Company's Common Stock, each Right will entitle its holder to purchase, at the
Right's then-current exercise price, a number of shares of the acquiring
company's common stock having a market value of twice such price. Additionally,
if the Company is not acquired, a Rights holder (other than the person or group
acquiring 15% or more) will be entitled to purchase, at the Right's then-current
exercise price, a number of shares of the Company's Common Stock having a market
value of twice such price.
Following the acquisition of 15% or more of the Company's Common Stock, but less
than 50% by any Person or Group, the Board may exchange the Rights (other than
Rights owned by such person or group) at an exchange ratio of one share of the
Company's Common Stock for each Right.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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
Exchange Act of 1934, as amended. These statements relate to future economic
performance, plans and objectives of management for future operations and
projections of revenue and other financial items that are based on the beliefs
of our management, as well as assumptions made by, and information currently
available to, our management. The words "expect," "estimate," "anticipate,"
"believe," "intend," and similar expressions are intended to identify
forward-looking statements. Such statements involve assumptions, uncertainties
and risks. If one or more of these risks or uncertainties materialize or
underlying assumptions prove incorrect, actual outcomes may vary materially from
those anticipated, estimated or expected. Among the key factors that may have a
direct bearing on our expected operating results, performance or financial
condition are economic conditions facing the staffing industry generally,
uncertainties relating to Y2K, uncertainties related to the job market and our
ability to attract qualified candidates, uncertainties associated with our brief
operating history; our ability to achieve and manage growth; our ability to
successfully identify suitable acquisition candidates, complete acquisitions or
integrate the acquired business into our operations; our ability to attract and
retain qualified personnel; our ability to develop new services; general
economic conditions; and other factors discussed from time to time in our
filings with the Securities and Exchange Commission.
INTRODUCTION
We are a specialty professional staffing firm that operates approximately 40
offices serving 20 major metropolitan markets across the United States with a
more significant presence in the Eastern and Midwestern United States. We have
acquired several companies that provide temporary and permanent placement
staffing services primarily in the areas of accounting, finance and information
technology. The results of operations of KPD Systems, Inc. ("KPD") and Staffing
Edge, Inc. ("Staffing Edge") are included in the Company's consolidated results
of operations beginning July 1, 1998 and August 4, 1998, respectively. As a
result, consolidated results may not be comparable to or indicative of future
performance. Our revenues and expenses may be significantly affected by the
number and timing of the acquisition of additional businesses, the opening of
additional offices or the introduction of new services. The timing of such
expansion activities may also affect period-to-period comparisons.
RESULTS OF OPERATIONS
HISTORICAL RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
HISTORICAL RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Service Revenues. Total service revenues increased $3.7 million, or 9.8%, to
$41.3 million for the three months ended September 30, 1999 from $37.6 million
for the corresponding period in 1998. Temporary staffing service revenues,
excluding IT contract service revenue, increased $3.4 million, or 20.2%, to
$20.4 million for the three months ended September 30, 1999 as compared to $17.0
million for 1998. IT contract service revenues increased $853,000, or 6.8%, to
$13.4 million in the three months ended September 30, 1999 as compared to $12.6
million in 1998. The increase in temporary staffing revenues was principally due
to internal growth and an increase in the average billing rate in this segment.
Permanent placement service revenues decreased $588,000, or 7.3%, to $7.5
million for the three months ended September 30, 1999 from $8.1
11
<PAGE> 12
million for the corresponding period in 1998, principally as a result of a
reduction in the number of placements that was only partially offset by an
increase in the average fee per placement.
Gross Profit. Gross profit increased $1.5 million, or 8.8%, to $18.3 million for
the three months ended September 30, 1999 from $16.9 million for the
corresponding period in 1998. The gross profit increase was due principally to
higher temporary services revenues in the three months ended September 30, 1999
as compared to the same period in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $2.0 million, or 16.1%, to $14.4
million for the three months ended September 30, 1999 from $12.4 million for the
three months ended September 30, 1998. As a percentage of revenues, SG&A was
35.0% for the three months ended September 30, 1999 compared with 33.1% for the
corresponding period in 1998. The higher percentage relationship in 1999 was due
principally to higher costs of integration and other company-wide initiatives.
Amortization and Depreciation. Amortization and depreciation for the three
months ended September 30, 1999 increased $347,000 from the corresponding period
in 1998 principally due to capital expenditures relating to system integration.
Severance and Office Closing Costs. During the first quarter of 1999, we
announced plans to reduce future selling, general and administrative costs.
These plans included the closure of an under-performing office and the
termination of certain former employees, principally related to integration
efforts. We expensed $2.8 million and $450,000 during the first and third
quarters of 1999, respectively, of which approximately $2.7 million related to
severance costs and $550,000 related to office closing costs. Approximately
$750,000 of these severance and office closing costs will be paid in periods
after September 30, 1999.
Other Income (Expense). For the three months ended September 30, 1999, we
recorded net interest expense of $1.0 million consisting principally of interest
on borrowings under our credit facility.
Income Tax Expense. For the three months ended September 30, 1999, we recognized
income tax expense of $775,000 on pre-tax income of $1.6 million. For the three
months ended September 30, 1998, we recognized income tax expense of $1.5
million on a pre-tax income of $3.5 million. The effective income tax rate was
48.9% and 42.6% for the three months ended 1999 and 1998, respectively. The
increase in the effective income tax rate in 1999 reflects the impact of
non-deductible goodwill spread over a smaller pre-tax income.
Net Income. We recognized net income and net income per share of $810,000 and
$0.06 per share, respectively, in the third quarter of 1999. In the comparable
period for 1998 we recognized net income and net income per share of $2.0
million and $0.14, respectively.
12
<PAGE> 13
HISTORICAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
HISTORICAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Service Revenues. Total service revenues increased $35.8 million, or 40.0%, to
$125.2 million for the nine months ended September 30, 1999 from $89.4 million
for the corresponding period in 1998. Temporary staffing service revenues,
excluding IT contract service revenue, increased $19.6 million, or 47.8%, to
$60.6 million for the nine months ended September 30, 1999 as compared to $41.0
million in 1998. IT contract service revenue increased $12.3 million, or 42.9%,
to $40.8 million in 1999 as compared to $28.6 million for the corresponding
period in 1998. Permanent placement service revenues increased $3.9 million, or
19.9%, to $23.7 million for the nine months ended September 30, 1999 from $19.8
million for the corresponding period in 1998. The revenue increases for the
three business segments relate principally to 1998 business acquisitions whose
results of operations are included only from the purchase date.
Gross Profit. Gross profit increased $15.2 million, or 37.5%, to $55.8 million
for the nine months ended September 30, 1999 from $40.6 million for the
corresponding period in 1998. The gross profit increase was principally due to
higher temporary services revenues in the nine months ended September 30, 1999
as compared to the same period in 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $12.0 million, or 36.5%, to $45.0 million for
the nine months ended September 30, 1999 from $33.0 million for the nine months
ended September 30, 1998. As a percentage of revenues, selling, general and
administrative expenses were 36.0% for the nine months ended September 30, 1999
compared with 36.9% for the corresponding period in 1998. This decrease as a
percentage of revenues was primarily due to the spreading of overhead costs over
a larger revenue base.
Amortization and Depreciation. Amortization and depreciation expense for the
nine months ended September 30, 1999 increased $1.3 from the corresponding
period in 1998 principally due to capital expenditures relating to system
integration.
Severance and Office Closing Costs. During the first quarter of 1999, the
Company announced plans to reduce future selling, general and administrative
costs. These plans included the closure of an under-performing office and the
termination of certain former employees, principally related to integration
efforts. We expensed $2.8 million and $450,000 during the first and third
quarters of 1999, respectively, of which approximately $2.7 million related to
severance costs and $550,000 related to office closing costs. Approximately
$750,000 of these severance and office closing costs will be paid in periods
after September 30, 1999.
Other Income (Expense). For the nine months ended September 30, 1999, we
recorded net interest expense of $2.7 million consisting principally of interest
expense on borrowings under our credit facility which arose from acquisitions
made during 1998. Additionally, in the first nine months of 1999 we realized
other income of $256,000 principally from the sale of miscellaneous assets.
Income Tax Expense. For the nine months ended September 30, 1999, we recognized
income tax expense of $1.3 million on a pre-tax income of $2.8 million. For the
nine months ended September 30, 1998 we recognized income tax expense of $5.2
million on a pre-tax income of $3.7 million. The income tax expense in 1998
included $3.0 million recorded in the second quarter of 1998 that represented
the tax effect of differences in bases in assets and liabilities for financial
reporting and income tax purposes. This liability will be paid over a four-year
period.
13
<PAGE> 14
Net Income (Loss). We recognized net income and net income per share of $1.5
million and $0.10 per share, respectively, for the nine months ended September
30, 1999. In the comparable period for 1998 we recognized a net loss and net
loss per share of $1.5 million and $0.10, respectively.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, net cash provided by operating
activities was $2.2 million primarily due to net income and a net increase in
accrued liabilities which was only partially offset by an increase in accounts
receivable and a decrease in accounts payable. For the nine months ended
September 30, 1998, cash used in operations was $3.5 million primarily due to an
increase in accounts receivable, which was only partially offset by an increase
in accrued liabilities.
For the nine months ended September 30, 1999, net cash used in investing
activities was $3.3 million which related to capital expenditures incurred in
connection with system integration. For the nine months ended September 30,
1998, net cash used in investing activities was $36.6 million and related to the
impact of business acquisitions and capital expenditures.
For the nine months ended September 30, 1999, net cash used by financing
activities was $655,000, principally due to financing costs related to our
credit facility. For the nine months ended September 30, 1998, net cash provided
by financing activities was $40.9 million, principally due to our IPO proceeds
and a net increase in long-term debt.
On April 13, 1999, we amended and restated our credit facility with Bank of
America, N.A. (formerly NationsBank, N.A.), as administrative agent (the
"Administrative Agent"), and the lenders party thereto from time to time (the
"Credit Facility"). The Credit Facility consists of an $80.0 million revolving
credit facility, including a subfacility for letters of credit in an amount of
$10.0 million and a subfacility for swing-line loans in an amount of $5.0
million. At September 30, 1999, we had borrowed approximately $38.2 million
under the Credit Facility.
Loans under the Credit Facility are evidenced by notes and mature on or before
April 13, 2002. Proceeds of the Credit Facility may be used to finance working
capital and general corporate purposes, capital expenditures and permitted
acquisitions.
Interest accrues at a variable rate indexed, at our option, at the
Administrative Agent's prime rate or the London Interbank Offered Rate
("LIBOR"), plus an applicable margin which varies based on certain leverage
ratio requirements. Accordingly, interest rates may vary from the prime rate to
the prime rate plus 1.0% or from LIBOR plus 1.5% to LIBOR plus 2.5%, based upon
our Consolidated Leverage Ratio (as such term is defined in the Credit
Facility), provided, however, that until September 30, 1999, the applicable
margin was fixed at 3.0%
Our obligations under the Credit Facility are secured by a lien on substantially
all of our assets, including accounts receivable, inventory, equipment, general
intangibles and other property. Additionally, the Credit Facility is secured by
a first priority pledge of the capital stock of our subsidiaries.
The Credit Facility contains customary affirmative covenants and certain
operating and financial covenants. The financial covenants include requirements
to not exceed a specified consolidated leverage ratio, to maintain a certain
consolidated fixed charge coverage ratio and to maintain a
14
<PAGE> 15
minimum consolidated net worth, and to not exceed certain consolidated capital
expenditures and rental payment levels.
On September 7, 1999, we moved the listing of our common stock to the American
Stock Exchange to accommodate the Nasdaq National Market's minimum bid
requirement.
RECENT TRENDS AND DEVELOPMENTS
In the third quarter of 1999, we generated approximately 12.4% of our revenues
and 6.7% of our gross profit from the placement of contract professionals in
positions related to the implementation of the enterprise resource planning
software, or ERP, licensed by SAP AG. SAP has announced that it has experienced
a slowdown in orders for its software. SAP believes this slowdown is related to
its clients allocating resources away from ERP implementation in order to
address year 2000 and other resource allocation issues. We have experienced a
decrease in our SAP implementation staffing business and expect this trend to
continue into the beginning of 2000. Like SAP, we believe this decrease is due
to clients allocating their resources away from SAP implementation to address
year 2000 issues and thus, that the decrease will be temporary.
We have also experienced a decrease in our permanent placement staffing business
and expect this trend to continue into the fourth quarter of 1999. We believe
this decrease principally relates to hiring delays related to year 2000 issues.
Our belief that these trends are temporary is a forward-looking statement that
is subject to numerous risks and uncertainties. Actual results may differ
materially from our estimate due to a variety of factors, including continued
decreased demand for SAP software and the attendant implementation services.
YEAR 2000 COMPUTER ISSUES
Introduction. The Year 2000 issue refers to the problems that result from the
many existing computer software programs and operating systems that use only two
digits rather than four to define the applicable year in a date field. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000.
Acsys' State of Readiness. We have assessed our major IT vendors and technology
providers and are in the process of testing our systems to determine Year 2000
compliance. In addition, we are also in the process of testing our non-IT
systems that utilize embedded technology such as micro-controllers and reviewing
them for Year 2000 compliance.
To operate our business, we rely upon government agencies, utility companies,
providers of telecommunication services, suppliers, and other third party
service providers ("Primary Service Providers"), over which we assert little
control. Our ability to conduct our core business depends upon the ability of
these Primary Service Providers to fix their Year 2000 issues and to the extent
they cannot or do not fix their Year 2000 issues, our financial condition could
be materially and adversely affected. In addition, our customers may experience
Year 2000 issues that could have a material adverse effect on their business and
their need for our services, which in turn could have a material adverse effect
on our business.
We use various software packages in conducting and accounting for our temporary
staffing, IT contract staffing, permanent placement and general accounting
operations. These packages, among other things, track and accumulate temporary
staff time and client billings, process staff
15
<PAGE> 16
payroll, and produce financial statements and other financial data. We use
software packages and hardware in certain locations that may not be Year 2000
compliant.
We expect that our information systems integration efforts will enable us to be
fully Year 2000 compliant, although we cannot guarantee that software
represented by vendors as Year 2000 compliant will in fact be compliant.
Further, we use third-party payroll processing companies, and although we expect
that these companies will be Year 2000 compliant, no assurances can be given in
that regard. We could acquire an entity that is not Year 2000 compliant.
Depending on the size of the entity acquired, noncompliance could negatively
affect our results of operations.
Costs to Address Acsys' Year 2000 Issues. We expense costs associated with Year
2000 system changes as the costs are incurred except for system change costs
that we would otherwise capitalize in accordance with generally accepted
accounting principles. For the nine months ended September 30, 1999, we incurred
$3.3 million in capital expenditures. The majority of these capital expenditures
related to system integration efforts that, in addition to increasing
efficiencies in conducting our business, will enable us to be Year 2000
compliant. We expect to spend an additional $700,000 to complete our system
integration. As a result, we expect to be Year 2000 compliant. We do not expect
future costs to be material to our consolidated financial position or results of
operations. We cannot estimate the future costs incurred as a result of Year
2000 issues suffered by our Primary Service Providers and customers, and we
cannot be assured that we will successfully address the Year 2000 issues present
in our own systems.
Risks Presented by Year 2000 Issues. We have substantially completed the
system-testing phase of our Year 2000 Plan. However, we may still identify areas
of our business that are at risk of Year 2000 disruption. The absence of any
such determination at this point represents only the current status in the
implementation of our Year 2000 Plan, and should not be construed to mean that
there is no area of our business which is at risk of a Year 2000 related
disruption. As noted above, many of our Primary Service Providers and customers
may not appropriately address their Year 2000 issues, the result of which could
have a material adverse effect on our financial condition and results of
operations.
Acsys' Contingency Plans. We are prepared for the possibility that system
integration testing may hereafter identify certain areas of business at risk. We
will develop specific Year 2000 contingency plans as needed for such areas of
business as and if such determinations are made.
The estimates and conclusions included in this discussion contain
forward-looking statements and are based on management's best estimates of
future events. Our expectations about risks, future costs and the timely
completion of our Year 2000 modifications may turn out to be incorrect and any
variance from these expectations could cause actual results to differ materially
from what has been discussed above. Factors that could influence risks, amount
of future costs and the effective timing of remediation efforts include our
success in identifying and correcting potential Year 2000 issues and the ability
of third parties to appropriately address their Year 2000 issues. The foregoing
Year 2000 discussion and the information contained herein is provided as a "Year
2000 Readiness Disclosure" as defined in the Year 2000 Information and Readiness
Disclosure Act of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October
19, 1998.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Acsys does not engage in investing in or trading market risk sensitive
instruments. We also do not purchase, for investment, hedging, or for purposes
"other than trading," instruments that are likely to expose Acsys to market
risk, whether interest rate, foreign currency exchange, commodity price or
equity price risk, except as discussed in the following paragraph. We have not
entered into any forward or futures contracts, purchased any options or entered
into any interest rate swaps. We currently do not have any foreign operations,
and thus we do not believe that we have any exposure to foreign currency
exchange rate risk.
We have interest rate risk under our Credit Facility. A change in our lender's
prime rate, the federal funds rate or the London Inter-Bank Offering Rate
(LIBOR) would affect the rate at which that we could borrow funds under our
existing credit agreement. See Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources"
for a further discussion of the terms of our Credit Facility.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4 Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Acsys' Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on September 1, 1999.)
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
On September 8, 1999, we filed a Current Report on Form 8-K. Under
Item 5, Other Events, we announced the move of the listing of our
Common Stock to the American Stock Exchange. We did not file any other
Current Reports on Form 8-K during the quarter ended September 30,
1999.
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.
Acsys, Inc.
-------------------------------------------
(registrant)
Date: November 12, 1999 /s/ Brady W. Mullinax, Jr.
------------------ -------------------------------------------
Brady W. Mullinax, Jr.
Executive Vice President Finance and
Administration
(the registrant's principal financial and
chief accounting officer, who is duly
authorized to sign this report)
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
4 Specimen Common Stock Certificate. (Filed as Exhibit 4 to
Acsys' Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on September 1, 1999.)
27 Financial Data Schedule (for SEC use only).
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 26,297
<ALLOWANCES> 1,057
<INVENTORY> 0
<CURRENT-ASSETS> 27,113
<PP&E> 7,078
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,618
<CURRENT-LIABILITIES> 12,009
<BONDS> 0
0
0
<COMMON> 30,548
<OTHER-SE> 4,679
<TOTAL-LIABILITY-AND-EQUITY> 88,618
<SALES> 125,156
<TOTAL-REVENUES> 125,156
<CGS> 69,320
<TOTAL-COSTS> 119,920
<OTHER-EXPENSES> (256)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,668
<INCOME-PRETAX> 2,824
<INCOME-TAX> 1,349
<INCOME-CONTINUING> 1,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,475
<EPS-BASIC> .10
<EPS-DILUTED> .10
</TABLE>
