<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 ended SEPTEMBER 28, 1997
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 Number 001-13956
PERSONNEL GROUP OF AMERICA, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1930691
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6302 Fairview Road, Suite 201, Charlotte, North Carolina 28210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(704) 442-5100
---------------
(Registrant's telephone number including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
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 that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of October 27, 1997, there were outstanding 12,133,825 shares of common
stock, par value $.01 per share.
<PAGE> 2
PERSONNEL GROUP OF AMERICA, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income...................... 3
Consolidated Balance Sheets............................ 4
Consolidated Statements of Cash Flows.................. 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 19
Signatures.......................................................... 20
Exhibit Index....................................................... 21
2
<PAGE> 3
PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIODS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
<TABLE>
<CAPTION>
Three months ended Nine months ended
1997 1996 1997 1996
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Revenues:
Information technology services $ 72,098 $15,442 $173,774 $ 16,863
Commercial staffing 56,896 51,885 162,585 136,288
Health care services 33,308 31,975 100,091 90,891
-------- ------- -------- --------
Total revenues 162,302 99,302 436,450 244,042
-------- ------- -------- --------
Expenses:
Direct cost of services 116,111 71,521 313,126 177,050
Selling, general and administrative 28,537 18,174 78,254 45,408
Depreciation and amortization 3,037 1,521 8,349 3,498
License fees 2,237 2,092 6,627 5,362
-------- ------- -------- --------
Total operating expenses 149,922 93,308 406,356 231,318
-------- ------- -------- --------
Operating income 12,380 5,994 30,094 12,724
Interest expense (income), net 2,388 (176) 6,424 51
-------- ------- -------- --------
Income before income taxes 9,992 6,170 23,670 12,673
Provision for income taxes 4,226 2,595 9,993 5,358
-------- ------- -------- --------
Net income $ 5,766 $ 3,575 $ 13,677 $ 7,315
======== ======= ======== ========
Net income per share:
Primary $ .46 $ .30 $ 1.11 $ .76
Fully diluted .44 .30 1.09 .76
Weighted average shares outstanding:
Primary 12,415 12,028 12,316 9,620
Fully diluted 15,660 12,028 13,575 9,620
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 28, December 29,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 247 $ 6,087
Accounts receivable, net 95,277 67,849
Prepaid expenses and other current assets 2,469 3,359
Deferred income taxes 3,830 3,512
-------- --------
Total current assets 101,823 80,807
Property and equipment, net 10,198 7,845
Excess of cost over fair value of net assets acquired, net 301,683 219,928
Other intangibles, net 4,063 3,815
Other assets 5,239 1,932
-------- --------
Total assets $423,006 $314,327
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,790 $ 6,847
Accounts payable 5,054 2,877
Accrued liabilities 36,710 33,593
Income taxes payable 4,130 778
-------- --------
Total current liabilities 53,684 44,095
Long-term debt 161,907 78,875
Deferred income taxes 8,988 8,100
-------- --------
Total liabilities 224,579 131,070
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; shares authorized 5,000;
no shares issued and outstanding -- --
Common stock $.01 par value; shares authorized 95,000;
12,133 and 12,034 shares issued and outstanding at September 28, 1997
and December 29, 1996, respectively 121 120
Additional paid-in capital 170,765 169,273
Retained earnings 27,541 13,864
-------- --------
Total shareholders' equity 198,427 183,257
-------- --------
Total liabilities and shareholders' equity $423,006 $314,327
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
Sept. 28, Sept. 29,
1997 1996
--------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 13,677 $ 7,315
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 8,349 3,498
Deferred income taxes, net 608 (456)
Changes in assets and liabilities, net of effects of
acquired companies
Accounts receivable (13,283) (11,253)
Prepaid expenses and other current assets 999 (797)
Accounts payable and accrued liabilities 4,027 6,263
Income taxes payable 2,260 (1,776)
Other assets 40 (425)
--------- --------
Net cash provided by operating activities 16,677 2,369
--------- --------
Cash flows used in investing activities:
Purchases of property and equipment, net (4,026) (2,937)
Cash used in acquisitions, net of cash acquired (98,106) (77,545)
--------- --------
Net cash used in investing activities (102,132) (80,482)
--------- --------
Cash flows provided by (used in) financing activities:
Proceeds from convertible subordinated notes issuance, net 111,750 --
Proceeds from common stock issuance, net -- 95,661
Repayments under credit facility (142,082) (30,758)
Borrowings under credit facility 110,257 29,999
Proceeds from exercise of stock options 1,493 --
Repayments of seller notes and acquired indebtedness (1,803) --
--------- --------
Net cash provided by financing activities 79,615 94,902
--------- --------
Net increase (decrease) in cash and cash equivalents (5,840) 16,789
Cash and cash equivalents at beginning of period 6,087 5,273
--------- --------
Cash and cash equivalents at end of period $ 247 $ 22,062
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE> 6
PERSONNEL GROUP OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) GENERAL
The unaudited consolidated financial statements included herein have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and footnotes required by generally accepted
accounting principles; however, they do include all adjustments of a normal
recurring nature which, in the opinion of management, are necessary to present
fairly the results of operations of the Company for the interim periods
presented. These interim financial statements should be read in conjunction with
the Company's audited consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
29, 1996. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
(2) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER
INTANGIBLES
The Company's businesses were initially acquired from unrelated third
parties in exchange for cash and other consideration. The Company allocates the
excess of cost over the fair value of net tangible assets first to identifiable
intangible assets, if any, and then to goodwill. Although the Company believes
that goodwill has an unlimited life, the Company amortizes such costs on a
straight-line basis over 40 years. Accumulated amortization of excess of cost
over fair value of net assets acquired amounted to $21,178 and $16,131 at
September 28, 1997 and December 29, 1996, respectively.
Other intangibles consist primarily of covenants not to compete and
client and employee lists. Other intangibles are generally amortized over four
to five years.
The Company evaluates the recoverability of its investment in excess of
cost over fair value of net assets acquired and other intangibles in relation to
anticipated future cash flows on an undiscounted basis. Based on this
assessment, the Company expects its investment in excess of cost over fair value
of net assets and other intangibles to be fully recovered.
6
<PAGE> 7
(3) LONG-TERM DEBT
Long-term debt consisted of the following at September 28, 1997 and
December 29, 1996:
<TABLE>
<CAPTION>
Sept. 28, Dec 29,
1997 1996
--------- -------
<C> <C> <C>
5-3/4% Convertible Subordinated Notes due July 2004 $115,000 $ --
$125,000 revolving credit facility due June 2002 35,500 67,325
Notes payable to sellers of acquired companies and other 19,197 18,397
-------- -------
169,697 85,722
Less current portion (7,790) (6,847)
-------- -------
$161,907 $78,875
======== =======
</TABLE>
In June and July 1997, the Company completed a private placement of
$115,000 of 5-3/4% Convertible Subordinated Notes due July 2004 (the "Notes").
The net proceeds of approximately $111,750 were used to repay a substantial
portion of outstanding indebtedness under the Company's $125,000 Revolving
Credit Facility (the "Credit Facility") and permanently repay outstanding
indebtedness under a separate $10,000 line of credit. Interest on the Notes is
payable semi-annually, commencing January 1998. The Notes are convertible into
Common Stock of the Company at any time before maturity at an initial conversion
price of $35.625 per share. The Notes are not redeemable prior to July 2000.
Thereafter, the Company may redeem the Notes initially at 103.29% and at
decreasing prices thereafter to 100% at maturity, in each case together with
accrued interest. The Notes are subordinated to all present and future senior
indebtedness of the Company (as defined), including indebtedness under the
Credit Facility.
Concurrent with the issuance of the Notes, the Credit Facility was
amended and restated. The restated Credit Facility has substantially the same
terms, but certain covenants were modified to reflect the issuance of the Notes
and other matters and the pricing provisions for borrowing under the Credit
Facility were improved. In addition, the term of the Credit Facility was
extended to June 2002.
7
<PAGE> 8
(4) ACQUISITIONS
During the nine months ended September 28, 1997, the Company acquired
the following businesses in six separate transactions. These acquired businesses
are collectively referred to hereinafter as the "Acquired Companies."
<TABLE>
<CAPTION>
1996 Pro Forma
Date Headquarters Revenues
Information Technology Acquired Location (in Millions)
---------------------- -------- ------------- -------------
<S> <C> <C> <C>
Energetix Feb. 1997 Chicago $ 7.0
Lloyd-Ritter Consulting Apr. 1997 Silicon Valley 15.7
Lipson Conroy Services Apr. 1997 Silicon Valley 6.6
Vital Computer Services June 1997 New York City 33.2
DRACS Sept. 1997 Atlanta 9.6
Commercial Staffing
-------------------
Word Processing Professionals Jan. 1997 New York City 6.0
Jeffrey Staffing Group* Sept. 1997 Boston 18.6
-----
Total 1996 Pro Forma Revenues $96.7
=====
</TABLE>
* Includes Franklin Pierce, Scott Wayne and Integrity Technical
Services
The purchase prices for the Acquired Companies aggregated approximately
$95,000, including seller notes and direct acquisition costs but excluding
certain contingent earnout payments. Certain acquisitions provide for additional
payments, contingent upon attainment of certain earnings targets for various
periods during the next four years. Any such contingent payments will be
recorded as additional purchase price when paid and will increase the amount of
excess cost over fair value of net assets acquired. The acquisitions of the
Acquired Companies have been accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the entities acquired
were recorded at their estimated fair values at the dates of the acquisitions
and the results of operations of the Acquired Companies have been included in
the Company's consolidated results of operations from the dates of the
respective acquisitions. The excess purchase price over the estimated fair value
of the net assets acquired is being amortized on a straight-line basis over 40
years.
8
<PAGE> 9
The following table presents the Company's pro forma consolidated
results of operations for the nine-month periods indicated, as if the 1997
acquisitions of the Acquired Companies and the nine other companies acquired
during 1996 and the conversion of six Nursefinders franchises during 1996 had
occurred on January 1, 1996:
<TABLE>
<CAPTION>
Sept. 28, Sept. 29,
1997 1996
-------- --------
<S> <C> <C>
Revenues.................................... $489,496 $410,832
Net income.................................. 15,388 8,805
Net income per fully diluted share ......... $ 1.13 $ 0.92
======== ========
Weighted average fully diluted shares
outstanding............................. 13,575 9,620
======== ========
</TABLE>
(5) NET INCOME PER SHARE
In 1997, the computation of primary net income per share was based on
the average number of shares of common stock and common stock equivalents
outstanding, and the computation of fully diluted net income per share assumed
the conversion of the Notes. In 1996, the computation of both primary and fully
diluted net income per share was based on the weighted average number of common
shares outstanding during the periods indicated.
The Company will adopt Statement of Financial Accounting Standards No.
128, "Earnings Per Share," for the year ending December 28, 1997. For the
quarter ended September 28, 1997, the Company is required to continue following
the computation requirements of Accounting Principles Board Opinion No. 15,
"Earnings Per Share." The adoption of the new statement would not have had a
material effect on the Company's net income per share for the quarter or the
nine months ended September 28, 1997.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction
with the Company's unaudited consolidated financial statements and notes thereto
included elsewhere in this document. The Company's fiscal year ends on the
Sunday nearest to December 31 and each fiscal quarter ends on the Sunday nearest
to the end of the respective calendar quarter.
The Company completed its initial public offering (the "IPO") in
September 1995. Prior to the IPO, the Company was a division of an international
staffing services company. The Company was organized by its former parent to
facilitate the IPO. As a result of the IPO, in which the former parent sold its
entire ownership interest in the Company, the Company became an independent
public company. The Company did not receive any of the proceeds of the sale of
its shares by the former parent in the IPO.
In June 1996, the Company issued 4,025,000 shares of its common stock
in an underwritten public offering (the "1996 Equity Offering"), which raised
approximately $95.6 million of net proceeds for the Company. The net proceeds of
the 1996 Equity Offering were used to repay indebtedness under the Company's
$125.0 million revolving credit facility (the "Credit Facility") and fund
several acquisitions.
In June and July 1997, the Company completed a private placement of
$115.0 million of 5-3/4% Convertible Subordinated Notes due 2004 (the "Notes").
The net proceeds from the Notes were approximately $111.8 million and were used
to repay indebtedness under the Credit Facility and to retire a separate $10.0
million line of credit.
The Company operates within one industry segment, and is organized into
three Divisions: the Information Technology Services Division, which provides
information technology staffing and consulting services in a range of
computer-related disciplines; the Commercial Staffing Division, which provides a
wide variety of temporary office and clerical staffing services; and the Health
Care Services Division, which, through Company-operated, franchised and licensed
offices, provides home health care services and supplemental staffing for health
care facilities. At October 27, 1997, the Information Technology Services
Division was comprised of 10 companies, the Commercial Staffing Division was
comprised of 16 companies and the Health Care Services Division operated under
the Nursefinders brand.
10
<PAGE> 11
The following table sets forth the number and nature of the Company's
offices at the end of the years indicated and at October 27, 1997:
<TABLE>
<CAPTION>
Oct. 27,
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Information technology offices 28 18 -- --
Commercial staffing offices 85 74 58 57
Nursefinders offices -
Company operated 46 50 48 47
Licensed 19 17 10 4
Franchised 33 33 40 48
--- --- --- ---
Total Offices 211 192 156 156
</TABLE>
The Company recognizes as revenues the amounts billed to clients of
licensed Nursefinders offices. In these cases, the temporary workers are the
Company's employees and all costs of employing the temporary workers are the
responsibility of the Company and are included in direct cost of services. The
Company remits monthly to its licensees the gross profits of each licensed
office less 7% of gross revenues, uncollectible receivables and certain other
expenses of each licensed office. The Company does not recognize revenues from
its franchised Nursefinders offices other than a 5% royalty on the gross
revenues of each franchised office.
The Company has not actively marketed new licenses or franchises in
recent periods and, accordingly, franchise and license fees received from the
granting of new franchises and licenses have not been material. However, the
Company views its franchises and licenses as an important part of the health
care business, because the program allows Nursefinders to operate in geographic
areas that might not otherwise meet the Company's criteria for a Company
operated office, allows a further spreading of fixed costs over additional
revenues, and is believed to yield a fair profit for the Company services
provided to the licensees and franchisees.
11
<PAGE> 12
During the nine months ended September 28, 1997, the Company acquired
five information technology services companies and four commercial staffing
companies in six separate transactions as follows:
<TABLE>
<CAPTION>
1996 Pro Forma
Date Headquarters Revenues
Information Technology Acquired Location (in Millions)
- ---------------------- --------- ------------ --------------
<S> <C> <C> <C>
Energetix Feb. 1997 Chicago $ 7.0
Lloyd-Ritter Consulting Apr. 1997 Silicon Valley 15.7
Lipson Conroy Services Apr. 1997 Silicon Valley 6.6
Vital Computer Services June 1997 New York City 33.2
DRACS Sept. 1997 Atlanta 9.6
Commercial Staffing
- -------------------
Word Processing Professionals Jan. 1997 New York City 6.0
Jeffrey Staffing Group* Sept. 1997 Boston 18.6
-----
Total 1996 Pro Forma Revenues $96.7
=====
</TABLE>
* Includes Franklin Pierce, Scott Wayne and Integrity Technical Services.
Had the Company owned each of these companies on December 29, 1996, the
Company's pro forma revenues for the nine months ended September 28, 1997, would
have been approximately $489.5 million, and 43%, 37% and 20% of such revenues
would have come from Information Technology Services, Commercial Staffing and
Health Care Services, respectively.
Each of the Company's acquisitions to date has been accounted for using
the purchase method of accounting, and has been included in the following
discussions as applicable since the respective date of acquisition. The Company
allocates the excess of cost over the fair value of the net tangible assets
first to identifiable intangible assets, if any, and then to goodwill. The
Company believes that buying market leading companies and allowing them to
maintain their separate identities and independence preserves goodwill for an
unlimited period. Although the Company believes that goodwill has an unlimited
life, the Company amortizes such costs on a straight-line basis over 40 years.
Intangible assets represented 72.3% of total assets and 154.1% of total
shareholders' equity at September 28, 1997. The Company evaluates the
recoverability of its investment in excess of cost over fair value of net assets
acquired and other intangibles in relation to anticipated future cash flows on
an undiscounted basis. Based on this assessment, the Company expects its
investments in intangible assets to be fully recovered.
In the future, the Company's revenues and expenses may be significantly
affected by the number and timing of the opening or acquisition of additional
offices or businesses. The timing of such expansion activities also can affect
period-to-period comparisons of the Company's results of operations.
12
<PAGE> 13
The traditional commercial staffing business is subject to the seasonal
impact of summer and holiday employment trends. Typically, the second six months
of each calendar year is more heavily affected as companies tend to increase
their use of temporary personnel during this period. While the staffing industry
is cyclical, the Company believes that the broad geographic coverage of its
operations, its emphasis on high-end clerical staffing in its Commercial
Staffing Division and its rapid expansion into the less seasonal information
technology sector mitigate the adverse effects of economic cycles in a single
industry or geographic region.
13
<PAGE> 14
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 28, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 29, 1996
REVENUES
Total revenues increased 63.4% to $162.3 million in the third quarter
of 1997 from $99.3 million in 1996. On a pro forma basis Information Technology
Services Division revenues increased over 37% in the third quarter of 1997 over
1996 due to the continued high demand for information technology services.
Actual Commercial Staffing Division revenue grew 9.7% as the result of
continuing internal growth attributable to increases in billable hours and the
contribution of revenues from companies acquired by the Company. During this
period, the Health Care Services Division experienced a 4.2% increase in actual
revenues (including franchise fees) primarily as a result of increases in
supplemental staffing billable hours.
DIRECT COSTS OF SERVICES
Direct costs, consisting of payroll and related expenses of consultants
and other temporary workers, increased 62.3% to $116.1 million from $71.5
million in the third quarter of 1996 primarily as the result of the Company's
acquisitions, but declined as a percentage of revenue to 71.5% from 72.0% during
1996 as the Company continued its expansion into the higher margin information
technology staffing and consulting sectors. Gross margins in the Information
Technology and Commercial Staffing divisions remain consistent with 1996 margins
as pay rate pressures have generally been passed on through higher bill rates.
The gross margins in the Health Care division have decreased slightly from 1996
levels due primarily to the shift in sales mix from the higher margin Medicare
business to lower margin supplemental staffing.
OTHER OPERATING EXPENSES
Other operating expenses, consisting of selling, general and
administrative expenses, depreciation and amortization expense and license fees,
increased 55.2% to $33.8 million in the third quarter of 1997 from $21.8 million
in 1996. As a percentage of revenues, however, selling, general and
administrative expenses decreased to 17.6% in the third quarter of 1997 from
18.3% for 1996 primarily as the result of the spreading of these expenses over a
larger revenue base. Depreciation and amortization expense recognized during the
third quarter of 1997 increased to 1.9% of revenues from 1.5% of revenues for
1996 primarily due to increased amortization expense arising from the
acquisitions completed by the Company. License fees increased by 6.9% to $2.2
million due primarily to an increase in the number of licensed offices in the
third quarter of 1997 over the same period of 1996.
14
<PAGE> 15
INTEREST EXPENSE
Interest expense increased to $2.4 million in the third quarter of 1997
as the Company completed in June and July 1997 a private placement of $115.0
million of 5-3/4% Convertible Subordinated Notes due 2004. In addition, the
Company continued to borrow funds under its Credit Facility and from certain
owner-sellers of acquired businesses to finance acquisitions. Borrowings were
minimal in the 1996 third quarter due to the proceeds received from the June
1996 Equity Offering. See "Liquidity and Capital Resources."
INCOME TAX EXPENSE
The effective tax rate increased slightly to 42.3% in the third quarter
of 1997 from 42.1% for 1996. This increase was due to additional nondeductible
amortization expense during the quarter in relation to pretax income. The
Company's effective tax rate has historically been higher than the U.S. federal
statutory rate of 35.0% primarily due to state income taxes and nondeductible
amortization expense.
NET INCOME
Net income increased 61.3% to $5.8 million in the third quarter of 1997
(or 3.6% of revenue) from $3.6 million (3.6% of revenue) in 1996 due to the
factors discussed above.
NINE MONTHS ENDED SEPTEMBER 28, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER
29, 1996
REVENUES
Total revenues increased 78.8% to $436.5 million in the nine months
ended September 28,1997, from $244.0 million in 1996. All of the Information
Technology Services Division's revenues have been acquired since May 1996, and
on a pro forma basis Information Technology Services Division revenues increased
over 37% in the first nine months of 1997 over 1996 due to the continued high
demand for information technology services. Actual Commercial Staffing Division
revenue grew 19.3% as the result of the contribution of revenues from businesses
acquired by the Company and continuing internal growth attributable to increases
in billable hours. During this period, the Health Care Services Division
experienced a 10.1% increase in actual revenues (including franchise fees)
primarily as a result of the revenues added by the Division from the six
franchised office conversions completed in 1996 and increases in home health
care visits and billable hours.
15
<PAGE> 16
DIRECT COSTS OF SERVICES
Direct costs, consisting of payroll and related expenses of consultants
and other temporary workers, increased 76.9% to $313.1 million from $177.1
million in the second quarter of 1996 primarily as the result of the Company's
acquisitions, but declined as a percentage of revenue to 71.7% from 72.5% during
1996 as the Company continued its expansion into the higher margin information
technology staffing and consulting sectors. Gross margins in the Information
Technology and Commercial Staffing divisions remain consistent with 1996 margins
as pay rate pressures have generally been passed on through higher bill rates.
The gross margins in the Health Care division have decreased slightly from 1996
levels due primarily to the shift in sales mix from the higher margin Medicare
business to lower margin supplemental staffing.
OTHER OPERATING EXPENSES
Other operating expenses, consisting of selling, general and
administrative expenses, depreciation and amortization expense and license fees,
increased 71.8% to $93.2 million in the nine months ended September 28, 1997,
from $54.3 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 17.9% in the nine months ended September
28, 1997, from 18.6% for 1996 primarily as the result of the spreading of these
expenses over a larger revenue base. Depreciation and amortization expense
recognized during the nine months ended September 28, 1997, increased to 1.9% of
revenues from 1.4% of revenues for 1996 primarily due to increased amortization
expense arising from the acquisitions completed by the Company. License fees
increased by 23.6% to $6.6 million due primarily to an increase in the number of
licensed offices in the nine months ended September 28, 1997 over the same
period of 1996.
INTEREST EXPENSE
Interest expense increased to $6.4 million in the nine months ended
September 28, 1997 as the Company completed in June and July 1997, a private
placement of $115.0 million of 5-3/4% Convertible Subordinated Notes due 2004.
In addition, the Company continued to borrow funds under its Credit Facility and
from certain owner-sellers of acquired businesses at various times primarily to
finance acquisitions. Interest expense on borrowings during the nine months
ended September 29, 1996 were substantially offset by interest income earned on
the net proceeds from the June 1996 Equity Offering. See "Liquidity and Capital
Resources."
INCOME TAX EXPENSE
The effective tax rate decreased slightly to 42.2% in the nine months
ended September 28, 1997 from 42.3% for 1996. The Company's effective tax rate
has historically been higher than the U.S. federal statutory rate of 35.0%
primarily due to state income taxes and nondeductible amortization expense.
16
<PAGE> 17
NET INCOME
Net income increased 87.0% to $13.7 million in the nine months ended
September 28, 1997 (or 3.1% of revenue) from $7.3 million (3.0% of revenue) in
1996 due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Changes in liquidity during the nine months ended September 28, 1997
represent the net effect of cash generated by operations, offset by the
Company's principal uses of cash to finance receivables due to the growth in the
business, fund acquisitions and make capital expenditures. For the nine months
ended September 28, 1997, cash flow provided by operating activities increased
to $16.7 million, compared to $2.4 million for 1996, primarily as the result of
higher earnings before depreciation and amortization in 1997. Cash used for
investing activities increased to $102.1 million in 1997 from $80.5 million in
1996, reflecting the Company's six acquisitions in the first nine months of
1997, contingent earnout payments and other post-closing payments to the former
owners of acquired businesses. Cash flows from financing activities during 1997
approximated $79.6 million, primarily due to increased borrowings needed to fund
acquisitions.
As of September 28, 1997, receivables for the Information Technology
Services Division, the Commercial Staffing Division and the Health Care Services
Division remained outstanding an average of 53, 44 and 60 days, respectively,
after billing. Health care receivables are generally paid by insurance companies
and governmental agencies and therefore tend to be outstanding longer than
commercial receivables. In the aggregate, days sales outstanding were 52 at
September 28, 1997 compared to aggregate days sales outstanding of 57 at
December 29, 1996.
The Company's primary capital expenditure requirements relate to
acquisitions. Since the IPO, the Company has made cash payments and issued notes
aggregating approximately $272.7 million for acquisitions of existing businesses
and for the conversion of six franchised Nursefinders offices to Company
operated offices. In addition, during the first quarter of 1997, the Company
made post-closing payments to former owners of acquired businesses of $5.9
million. The Company is also obligated under certain acquisition agreements to
repay seller notes during the next three years of $19.2 million and to make
contingent earnout payments to former owners of acquired businesses. Contingent
earnout payments are based on the future performance of such acquired businesses
and thus the actual amount cannot be determined until such date. The Company
estimates, based on certain assumptions as to future performance of such
acquired businesses, that aggregate earnout payments may be in the range of
$19.0 million to $36.0 million in 1998, $7.0 million to $18.0 million in 1999,
$20.0 million to $25.0 million in 2000 and $2.0 million to $4.0 million in 2001.
There can be no assurance, however, that the future performance of the acquired
businesses will be consistent with the assumptions used in establishing the
foregoing estimates, or that the actual amounts of any earnout payments will not
differ materially from the estimates set forth herein.
17
<PAGE> 18
The Company is selectively seeking acquisition opportunities and
management believes that the Company will continue to make acquisitions as
attractive opportunities become available. The Company intends to seek
additional capital as necessary to fund other potential acquisitions through one
or more funding sources that may include borrowings under the Credit Facility
described below or offerings of debt or equity securities of the Company. In
addition, the Company has previously announced that it intends to consider
strategic alternatives for its Health Care Services Division, including the
possible sale of the Division. If the Company sells the Division, the net
proceeds from the sale could be used to provide funding for future acquisitions.
Cash flow from operations, to the extent available, may also be used to fund a
portion of any acquisition expenditures. The Company also expects to spend
approximately one percent (1%) of its revenues during 1997 and 1998 on field
automation systems, management information systems and other capital
expenditures not directly related to acquisitions.
The Company's Credit Facility is a five-year $125.0 million revolving
line of credit. As of September 28, 1997, $35.5 million of borrowings were
outstanding under the Credit Facility and approximately $2.9 million had been
used for the issuance of undrawn letters of credit to secure the Company's
workers' compensation programs. Borrowings under the Credit Facility bear
interest at a rate equal to LIBOR plus a percentage corresponding to the
Company's consolidated leverage ratio, as defined, or the agents' base rate, as
defined, at the Company's option. At September 28, 1997, the majority of the
Company's borrowings under this facility bore interest at approximately 6.9%.
At October 27, 1997, the amount available for borrowing under the
Credit Facility was approximately $81.8 million. The Credit Facility is secured
by pledges of the stock of the Company's subsidiaries and contains customary
covenants such as the maintenance of certain financial ratios, minimum net worth
and working capital requirements and a restriction on the payment of cash
dividends on common stock. The Credit Facility also limits borrowing
availability for acquisition-related purposes.
In June and July 1997, the Company completed the private placement of
$115.0 million of Notes. The net proceeds of approximately $111.8 million from
the offering were used to repay a substantial portion of outstanding
indebtedness under the Company's Credit Facility and permanently repay
outstanding indebtedness under a separate $10.0 million line of credit. The
Notes are subordinated to all present and future senior indebtedness of the
Company, including indebtedness under the Credit Facility. Interest on the Notes
is payable semi-annually, commencing January 1998. The Notes are convertible
into Common Stock of the Company at any time before maturity at a conversion
price of $35.625 per share. The Notes are not redeemable prior to July 2000.
Thereafter, the Company may redeem the Notes initially at 103.29% and at
decreasing prices thereafter to 100% at maturity, in each case together with
accrued interest.
18
<PAGE> 19
The Company believes that cash flow from operations, the current
borrowing capacity under the Credit Facility and other available financing
alternatives, including offerings of debt or equity securities of the Company
and, if the Health Care Services Division is sold, proceeds from the sale of
that Division, will be adequate to meet its presently anticipated needs for
working capital, acquisitions, and capital expenditures. There can be no
assurance, however, that other alternative sources of capital will be available
in the future.
FORWARD-LOOKING INFORMATION
This report, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations," may contain various
"forward-looking statements," within the meaning of Section 21E of the Exchange
Act, that are based on management's belief and assumptions, as well as
information currently available to management. When used in this document, the
words "anticipate," "estimate," "expect," and similar expressions may identify
forward-looking statements. Although the Company believes that the expectations
reflected in any such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Any such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, the Company's actual results, performance or financial
condition may vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on the Company's actual
results, performance or financial condition are fluctuations in the economy, the
degree and nature of competition, demand for the Company's services, changes in
laws and regulations affecting the Company's business, the Company's ability to
complete acquisitions and integrate the operations of acquired businesses, to
recruit and place temporary professionals, to expand into new markets, and to
maintain profit margins in the face of pricing pressures and other matters
discussed in this report and the Company's other filings with the Securities and
Exchange Commission.
PART II - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with or incorporated by
reference into this Form 10-Q are set forth in the Exhibit
Index, which immediately precedes the exhibits to this report.
(b) Reports on Form 8-K - No Current Reports on Form 8-K were
filed during the quarter ended September 28, 1997.
19
<PAGE> 20
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.
PERSONNEL GROUP OF AMERICA, INC.
(Registrant)
Date: November 7, 1997 By: /s/ Edward P. Drudge, Jr.
------------------------------------
Edward P. Drudge Jr.
Chief Executive Officer
Date: November 7, 1997 By: /s/ James C. Hunt
-------------------------------------
James C. Hunt
Senior Vice President
Chief Financial Officer and Treasurer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED HEREWITH(*), OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- ----------------------- ----------------
<S> <C> <C> <C>
3.1 Restated Certificate of Incorporation of the 3.1 333-31863
Company, as amended
3.2 Amended and Restated Bylaws of the Company 3.2 33-95228
4.0 Specimen Stock Certificate 4.0 33-95228
4.1 Rights Agreement between the Company and The 1 0-27792
First National Bank of Boston
4.2 Indenture between the Company and First Union 4.2 333-31863
National Bank, as Trustee
4.3 Form of Note Certificate for 5-3/4% 4.3 333-31863
Convertible Subordinated Notes
10.1 1995 Equity Participation Plan, as amended 10.1 333-31863
10.2 Management Incentive Compensation Plan 10.2 10-Q for quarter
ended 9/30/95
10.3 1997 Employee Stock Purchase Plan 10.3 333-31863
10.4# Director and Officer Indemnification 10.3 10-K for year
Agreement of James V. Napier ended 12/31/95
10.5 Software License Agreement between the 10.8 10-Q for quarter
Company and Adia California ended 9/30/95
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
FILED HEREWITH(*), OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- ----------------------- ----------------
<S> <C> <C> <C>
10.6 Employment Agreement between the Company and 10.9 10-Q for quarter
Edward P. Drudge, Jr. ended 9/30/95
10.7 Employment Agreement between the Company and 10.10 10-K for year
James C. Hunt ended 12/29/96
10.8 Employment Agreement between Adia Delaware, 10.13 33-95228
PFI Corp. and Richard L. Peranton
10.9 Employment Agreement between the Company and 10.13 10-K for year
Ken R. Bramlett, Jr. ended 12/29/96
10.10 Indemnification Agreement between the Company 10.14 10-Q for quarter
and Adia Delaware ended 9/30/95
10.11 Tax-Sharing Agreement between the Company, 10.15 10-Q for quarter
Adia Delaware and Adia California ended 9/30/95
10.12 Amended and Restated Non-Qualified 10.16 10-K for year
Profit-Sharing Plan ended 12/29/96
10.13 Amended and Restated Credit Agreement between 10.15 333-31863
the Company and its subsidiaries, the Lenders
party thereto and NationsBank N.A., as Agent
10.14 Asset Purchase Agreement between the Company 2 8-K dated 9/30/96
and Business Enterprise Systems and
Technology, Inc. (BEST Consulting)
10.15 Registration Rights Agreement between the 10.17 333-31863
Company and the Initial Purchasers of the
5-3/4% Convertible Subordinated Notes
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
FILED HEREWITH(*), OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- ----------------------- ----------------
<S> <C> <C> <C>
11 Computation of Per Share Earnings *
27 Financial Data Schedule (for SEC use only) *
</TABLE>
# This Exhibit is substantially identical to Director and Officer
Indemnification Agreements of the same date between the Company and the
following individuals: Edward P. Drudge, Jr., Kevin P. Egan, J. Roger
King and William Simione, Jr.
23
<PAGE> 1
EXHIBIT 11
Personnel Group of America, Inc.
September 28, 1997 and September 29, 1996
Computation of Per Share Earnings
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- ----------------------
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net income-primary $ 5,766 $ 3,575 $13,677 $7,315
Add: Interest expense on 5-3/4% Convertible
Subordinated Notes, net of tax 1,064 -- 1,159 --
------- ------- ------- ------
Net income - fully dilutive 6,830 3,575 14,836 7,315
======= ======= ======= ======
Weighted average number of shares outstanding -
Primary:
Common stock 12,118 12,028 12,090 9,620
Common stock equivalents
Stock options (A) 297 -- 226 --
------- ------- ------- ------
Primary shares outstanding 12,415 12,028 12,316 9,620
------- ------- ------- ------
Fully diluted:
Common stock 12,118 12,028 12,090 9,620
Common stock equivalents
Stock options (A) 314 -- 314 --
Conversion of 5-3/4% Convertible
Subordinated Notes 3,228 -- 1,171 --
------- ------- ------- ------
Fully diluted shares outstanding 15,660 12,028 13,575 9,620
------- ------- ------- ------
Net income per share:
Primary $ 0.46 $ 0.30 $ 1.11 $ 0.76
======= ======= ======= ======
Fully dilutive $ 0.44 $ 0.30 $ 1.09 $ 0.76
======= ======= ======= ======
</TABLE>
(A) The treasury stock method was used to determine the weighted average number
of shares of common stock equivalents outstanding during the periods.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PERSONNEL GROUP OF AMERICA, INC.
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 AND
THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 29,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 247
<SECURITIES> 0
<RECEIVABLES> 96,723
<ALLOWANCES> (1,446)
<INVENTORY> 0
<CURRENT-ASSETS> 101,823
<PP&E> 17,213
<DEPRECIATION> (7,015)
<TOTAL-ASSETS> 423,006
<CURRENT-LIABILITIES> 53,684
<BONDS> 161,907
0
0
<COMMON> 121
<OTHER-SE> 198,306
<TOTAL-LIABILITY-AND-EQUITY> 423,006
<SALES> 436,450
<TOTAL-REVENUES> 436,450
<CGS> 313,126
<TOTAL-COSTS> 398,007
<OTHER-EXPENSES> 8,349
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,424
<INCOME-PRETAX> 23,670
<INCOME-TAX> 9,993
<INCOME-CONTINUING> 13,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,677
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.09
</TABLE>
