<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 JUNE 29, 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6302 Fairview Road, Suite 201, Charlotte, North Carolina 28210
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(Address of principal executive offices) (Zip Code)
(704) 442-5100
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(Registrant's telephone number including area code)
None
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(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 July 31, 1997, there were outstanding 12,103,497 shares of common stock,
par value $.01 per share.
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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 2. Changes in Securities........................................ 19
Item 4. Submission of Matters to a Vote of Security-Holders.......... 19
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signatures.............................................................. 21
Exhibit Index........................................................... 22
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIODS ENDED JUNE 29, 1997 AND JUNE 30, 1996
<TABLE>
<CAPTION>
Three months ended Six months ended
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Information technology services $ 58,686 $ 1,421 $101,676 $ 1,421
Commercial staffing 54,518 46,150 105,689 84,402
Health care services 33,551 30,296 66,783 58,917
-------- ------- -------- --------
Total revenues 146,755 77,867 274,148 144,740
-------- ------- -------- --------
Expenses:
Direct cost of services 105,313 56,678 197,015 105,529
Selling, general and administrative 26,373 14,163 49,717 27,234
Depreciation and amortization 2,773 1,097 5,312 1,977
License fees 2,289 1,790 4,390 3,270
-------- ------- -------- --------
Total operating expenses 136,748 73,728 256,434 138,010
-------- ------- -------- --------
Operating income 10,007 4,139 17,714 6,730
Interest expense 2,297 227 4,036 227
-------- ------- -------- --------
Income before income taxes 7,710 3,912 13,678 6,503
Provision for income taxes 3,261 1,662 5,768 2,763
-------- ------- -------- --------
Net income $ 4,449 $ 2,250 $ 7,910 $ 3,740
======== ======= ======== ========
Net income per share:
Primary $ .36 $ .26 $ .65 $ .45
Fully diluted .36 .26 .64 .45
Weighted average shares outstanding:
Primary 12,267 8,807 12,239 8,403
Fully diluted 12,523 8,807 12,297 8,403
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 29, December 29,
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ -- $ 6,087
Accounts receivable, net 87,488 67,849
Prepaid expenses and other current assets 3,513 3,359
Deferred income taxes 3,715 3,512
-------- --------
Total current assets 94,716 80,807
Property and equipment, net 9,206 7,845
Excess of cost over fair value of net assets acquired, net 274,529 219,928
Other intangibles, net 4,052 3,815
Other assets 5,085 1,932
-------- --------
Total assets $387,588 $314,327
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,678 $ 6,847
Accounts payable 3,723 2,877
Accrued liabilities 37,167 33,593
Income taxes payable 1,270 778
-------- --------
Total current liabilities 49,838 44,095
Long-term debt 137,447 78,875
Deferred income taxes 7,965 8,100
-------- --------
Total liabilities 195,250 131,070
-------- --------
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 20,000;
12,102 and 12,034 shares issued and outstanding at June 29, 1997
and December 29, 1996, respectively 121 120
Additional paid-in capital 170,443 169,273
Retained earnings 21,774 13,864
-------- --------
Total shareholders' equity 192,338 183,257
-------- --------
Total liabilities and shareholders' equity $387,588 $314,327
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six months ended
June 29, June 30,
1997 1996
--------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income $ 7,910 $ 3,740
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 5,312 1,977
Deferred income taxes, net (300) (298)
Changes in assets and liabilities, net of effects of
acquired companies
Accounts receivable (6,953) (7,945)
Prepaid expenses and other current assets (67) (1,704)
Accounts payable and accrued liabilities 3,805 4,780
Income taxes payable (600) (1,642)
Other assets (116) (120)
--------- --------
Net cash provided by (used in) operating activities 8,991 (1,212)
--------- --------
Cash flows used in investing activities:
Purchases of property and equipment, net (2,197) (2,300)
Cash used in acquisitions, net of cash acquired (67,854) (49,172)
--------- --------
Net cash used in investing activities (70,051) (51,472)
--------- --------
Cash flows provided by (used in) financing activities:
Proceeds from convertible subordinated notes issuance, net 97,000 --
Proceeds from common stock issuance, net -- 95,660
Repayments under credit facility (116,525) (29,775)
Borrowings under credit facility 74,807 29,775
Proceeds from exercise of stock options 1,171 --
Repayments of seller notes and acquired indebtedness (1,480) --
--------- --------
Net cash provided by financing activities 54,973 95,660
--------- --------
Net increase (decrease) in cash and cash equivalents (6,087) 42,976
Cash and cash equivalents at beginning of period 6,087 5,273
--------- --------
Cash and cash equivalents at end of period $ -- $ 48,249
========= ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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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 $19,341 and $16,131 at June
29, 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.
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(3) LONG-TERM DEBT
Long-term debt consisted of the following at June 29, 1997 and December
29, 1996:
<TABLE>
<CAPTION>
June 29, Dec 29,
1997 1996
--------- --------
<S> <C> <C>
5-3/4% Convertible Subordinated Notes due July 2004 $ 100,000 $ --
$125,000 revolving credit facility due June 2002 25,607 67,325
Notes payable to sellers of acquired companies and other 19,518 18,397
--------- --------
145,125 85,722
Less current portion (7,678) (6,847)
--------- --------
$ 137,447 $ 78,875
========= ========
</TABLE>
In June 1997, the Company completed a private placement of $100,000 of
5-3/4% Convertible Subordinated Notes due July 2004 (the "Notes"). Subsequent to
June 29, 1997, the Company issued an additional $15,000 of Notes as the initial
purchasers of the Notes exercised their overallotment option. The net proceeds
of approximately $111,500 (including the proceeds from the $15,000 of Notes
issued pursuant to the overallotment option) 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 recently incurred $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 initial 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.
(4) ACQUISITIONS
During the six months ended June 29, 1997, the Company completed the
acquisitions of Word Processing Professionals, Inc. (Word Processing
Professionals") in New York, New York, Energetix, Inc. ("Energetix") in Chicago,
Illinois, Lloyd-Ritter Consulting, Inc., and The Lipson Conroy Services
Corporation (collectively, the "Lloyd-Ritter Companies") in the Silicon Valley
area of California, and Vital Computer Services International, Inc. ("Vital") in
New York, New York. Word Processing Professionals provides word processing and
desktop publishing services to professional services firms and financial
institutions in mid-town Manhattan. Energetix provides information technology
staffing services to a variety of clients in the Chicago area. The Lloyd-Ritter
Companies provide software engineering, systems design and development, network
administration and technical publication development staffing services to a
variety of
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technology companies in Northern California's Silicon Valley. Vital has offices
in New York, New York, Livingston, New Jersey, Washington D.C. and Miami and
Orlando, Florida, and provides information technology staffing and consulting
services to the banking and financial institutions, insurance,
telecommunications and pharmaceuticals industries. These acquired businesses are
collectively referred to hereinafter as the "Acquired Companies." The Acquired
Companies had combined revenues in 1996 of approximately $68,500.
The purchase price for the Acquired Companies aggregated approximately
$60,400, including seller notes and direct acquisition costs but excluding
certain contingent earnout payments. The acquisitions of Energetix, the
Lloyd-Ritter Companies and Vital provide for additional payments, contingent
upon attainment of certain earnings targets for various periods during the next
three 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 date 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. All of the acquisitions were
funded through borrowings under the Credit Facility.
The following table presents the Company's pro forma consolidated
results of operations for the six-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>
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Revenues $300,650 $248,968
Net income 8,521 4,366
Net income per fully diluted share $ 0.69 $ 0.52
======== ========
Weighted average fully diluted shares outstanding 12,297 8,403
======== ========
</TABLE>
-8-
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(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 June 29, 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 six
months ended June 29, 1997.
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<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 Credit Facility and fund several acquisitions.
In June 1997, the Company completed a private placement of $100.0
million of 5-3/4% Convertible Subordinated Notes due 2004 (the "Notes").
Subsequent to June 29, 1997, the Company issued an additional $15.0 million of
Notes as the initial purchasers of the Notes exercised their overallotment
option. The net proceeds from the Notes were approximately $111.5 million and
were used to repay indebtedness under the Credit Facility.
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 July 31, 1997, the Information Technology Services Division
was comprised of nine companies, the Commercial Staffing Division was comprised
of 13 companies and the Health Care Services Division operated under the
Nursefinders brand.
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The following table sets forth the number and nature of the Company's
offices at the end of the years indicated and at July 31, 1997:
<TABLE>
<CAPTION>
July 31,
1997 1996 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Information technology offices 25 18 -- --
Commercial staffing offices 72 74 58 57
Nursefinders offices -
Company operated 46 50 48 47
Licensed 19 17 10 4
Franchised 33 33 40 48
--- --- --- ---
Total Offices 195 192 156 156
</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 the 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 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 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.
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<PAGE> 12
Since the IPO in 1995, the Company has acquired nine information
technology services companies and five commercial staffing companies as follows:
<TABLE>
<CAPTION>
1996 Pro Forma
Date Headquarters Revenues
Information Technology Acquired Location (in Millions)
- ---------------------- -------- -------- -------------
<S> <C> <C> <C>
Computer Resources Group June 1996 San Francisco $ 36.7
Command Technologies July 1996 Denver 7.2
Broughton Systems July 1996 Richmond 15.5
BEST Consulting Sept. 1996 Seattle 66.5
Software Service Corp. Sept. 1996 Atlanta 12.7
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 33.2
Commercial Staffing
- -------------------
Profile Temporary Services Mar. 1996 Chicago (Loop Area) 6.4
Allegheny Personnel Mar. 1996 Pittsburgh 15.1
Judith Fox Staffing Companies May 1996 Richmond 16.8
Denver Temporaries July 1996 Denver 3.0
Word Processing Professionals Jan. 1997 New York City 6.0
------
Total 1996 Pro Forma Revenues $248.4
======
</TABLE>
Additionally, in 1996 the Company converted six Nursefinders franchised
offices, which had combined 1996 revenues of approximately $16.8 million, to
Company operated offices by acquiring the applicable franchises. Had the Company
owned each of the 14 acquired companies and six converted franchises at January
1, 1996, the Company's pro forma 1996 revenues would have been approximately
$533.3 million and 38%, 39% and 23% of such revenues would have come from
Information Technology Services, Commercial Staffing and Health Care Services,
respectively.
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<PAGE> 13
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. Although
the Company believes that goodwill has an unlimited life, the Company amortizes
such costs on a straight-line basis over 40 years. The Company believes that
buying market leading companies and then allowing the acquired companies to
maintain their separate identities and independence preserves goodwill for an
unlimited period. Intangible assets represented 72% of total assets and 145% of
total shareholders' equity at June 29, 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.
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 staffing and consulting sector, mitigate the adverse effects of
economic cycles in a single industry or geographic region.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 29, 1997 VERSUS THREE MONTHS ENDED JUNE 30, 1996
REVENUES
Total revenues increased 88.5% to $146.8 million in the second quarter
of 1997 from $ 77.9 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 40% in the
second quarter of 1997 over 1996 due to the continued high demand for
information technology services. Commercial Staffing Division revenue grew 18.1%
as the result of the contribution of revenues from companies acquired by the
Company and continuing internal growth attributable to increases in billable
hours. During this period, the Health Care Services Division experienced a 10.7%
increase in 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.
DIRECT COSTS OF SERVICES
Direct costs, consisting of payroll and related expenses of consultants
and other temporary workers, increased 85.8% to $105.3 million from $56.7
million in the second quarter of 1996 primarily as the result of the addition of
the acquired companies, but declined as a percentage of revenue to 71.8% from
72.8% during 1996 as the Company continued its expansion into the higher margin
information technology staffing and consulting sectors.
OTHER OPERATING EXPENSES
Other operating expenses, consisting of selling, general and
administrative expenses, depreciation and amortization expense and license fees,
increased 84.4% to $31.4 million in the second quarter of 1997 from $17.1
million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 21.4% in the second quarter of 1997 from
21.9% for 1996 primarily as the result of the spreading of these expenses over a
larger revenue base. Depreciation and amortization expense recognized during the
second quarter of 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 27.9% to $2.3
million due primarily to an increase in the number of licensed offices in the
second quarter of 1997 over the same period of 1996.
INTEREST EXPENSE
Interest expense increased to $2.3 million in the second quarter of
1997 as the Company continued to borrow funds under its Credit Facility and from
certain owner-sellers of Acquired Companies to finance acquisitions. See
"Liquidity and Capital Resources."
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<PAGE> 15
INCOME TAX EXPENSE
The effective tax rate decreased slightly to 42.3% in the second
quarter of 1997 from 42.5% for 1996. This decrease was due to reductions in
nondeductible amortization expense 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 97.7% to $4.4 million in the second quarter of
1997 (or 3.0% of revenue) from $2.3 million ( 2.9% of revenue) in 1996 due to
the factors discussed above.
SIX MONTHS ENDED JUNE 29, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996
REVENUES
Total revenues increased 89.4% to $274.1 million in the six months
ended June 29,1997, from $ 144.7 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 six months of 1997 over 1996 due to the continued high
demand for information technology services. Commercial Staffing Division revenue
grew 25.2% as the result of the contribution of revenues from companies acquired
by the Company and continuing internal growth attributable to increases in
billable hours. During this period, the Health Care Services Division
experienced a 13.4% increase in 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.
DIRECT COSTS OF SERVICES
Direct costs, consisting of payroll and related expenses of consultants
and other temporary workers, increased 86.7% to $197.0 million from $105.5
million in the second quarter of 1996 primarily as the result of the addition of
the Acquired Companies, but declined as a percentage of revenue to 71.9% from
72.9% during 1996 as the Company continued its expansion into the higher margin
information technology staffing and consulting sectors.
OTHER OPERATING EXPENSES
Other operating expenses, consisting of selling, general and
administrative expenses, depreciation and amortization expense and license fees,
increased 82.9% to $59.4 million in the six months ended June 29, 1997, from
$32.5 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased to 21.7% in the six months ended June 29,
1997, from 22.4% for 1996 primarily as the result of the spreading of these
expenses over a larger revenue base. Depreciation and amortization expense
recognized during the six months ended June 29, 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
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<PAGE> 16
Company. License fees increased by 34.3% to $4.4 million due primarily to an
increase in the number of licensed offices in the six months ended June 29, 1997
over the same period of 1996.
INTEREST EXPENSE
Interest expense increased to $4.0 million in the six months ended June
29, 1997 as the Company continued to borrow funds under its Credit Facility and
from certain owner-sellers at various times primarily to finance acquisitions.
See "Liquidity and Capital Resources."
INCOME TAX EXPENSE
The effective tax rate decreased slightly to 42.2% in the six months
ended June 29, 1997 from 42.5% for 1996. This decrease was due to reductions in
nondeductible amortization expense 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 111.5% to $7.9 million in the six months ended
June 29, 1997 (or 2.9% of revenue) from $3.7 million (2.6% of revenue) in 1996
due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Changes in liquidity during the six months ended June 29, 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 six months
ended June 29, 1997, cash flow provided by operating activities increased to
$9.0 million as compared to cash used by operating activities of $1.2 million
for 1996, primarily as the result of higher operating profits in 1997. Cash used
for investing activities increased to $70.1 million in 1997, from $51.5 million
in 1996, reflecting the Company's acquisitions in the first six months of 1997,
contingent earnout payments and other post-closing payments to the former
owners of Acquired Companies. Cash flows from financing activities during 1997
approximated $55.0 million, primarily due to increased borrowings needed to
fund acquisitions.
As of June 29, 1997, receivables for the Information Technology
Services Division, the Commercial Staffing Division and the Health Care Services
Division remained outstanding an average of 54, 42, and 61 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 51 at June
29, 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 $241.9 million for acquisitions of existing businesses
and for the conversion of six franchised
-16-
<PAGE> 17
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 companies of $5.9 million. The Company is also obligated under certain
acquisition agreements to repay seller notes during the next three years of
$19.5 million and to make contingent earnout payments to former owners of
acquired companies. Contingent earnout payments are based on the future
performance of such acquired companies 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 companies, that aggregate earnout
payments may be in the range of $19.0 million to $33.0 million in 1998, $6.0
million to $15.0 million in 1999 and $18.0 million to $21.0 million in 2000.
There can be no assurance, however, that the future performance of the acquired
companies 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.
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 on field automation
systems and other capital expenditures not directly related to acquisitions.
The Company has a bank loan agreement providing for a five-year $125.0
million revolving line of credit (the "Credit Facility"). As of June 29, 1997,
$25.6 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. On July 1,
1997, the initial purchasers of the Notes exercised the overallotment option and
the net proceeds of $14.6 million were used to pay down the revolver borrowings.
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 June
29, 1997, the majority of the Company's borrowings under this facility bore
interest at approximately 6.9% (or LIBOR plus 1.25%).
At July 31, 1997, the amount available for borrowing under the Credit
Facility was approximately $115.0 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.
-17-
<PAGE> 18
During June 1997, the Company obtained a $10.0 million additional line
of credit to finance a portion of the acquisition purchase price for Vital
Computer Services International, Inc. and for general corporate purposes. This
additional line of credit was canceled upon the initial issuance of the Notes.
In June 1997, the Company completed the private placement of $100.0
million of Notes. Subsequent to June 29, 1997, the Company issued an additional
$15.0 million of Notes as the initial purchasers of the Notes exercised their
overallotment option. The net proceeds of approximately $111.5 million
(including the proceeds from $15.0 million of Notes issued after June 29) 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 recently incurred $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.
The Company believes that cash flow from operations, the current
borrowing capacity under the Credit Facility as amended 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.
-18-
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
At the Company's annual meeting of shareholders held May 21, 1997, the
shareholders approved an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 20,000,000 to
95,000,000. Such additional authorized shares of Common Stock are available for
issuance from time to time without shareholder approval upon such terms and for
such purposes as determined by the Board of Directors.
On June 23, 1997 (and pursuant to the exercise of an overallotment
option on July 1, 1997), the Company sold $115,000,000 aggregate principal
amount of 5-3/4% Convertible Subordinated Notes due 2004 (the "Notes") to Smith
Barney Inc., PaineWebber Incorporated, J.C. Bradford & Co., The
Robinson-Humphrey Company, Inc. and NationsBanc Capital Markets, Inc., as
initial purchasers (the "Initial Purchasers"). Aggregate discounts and
commissions to the Initial Purchasers were $2,875,000. The Notes were sold to
the Initial Purchasers in a transaction not involving a public offering in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and Rule 506 of Regulation D thereunder. The Notes are
convertible at any time at or before maturity, unless previously redeemed, at an
initial conversion price of $35.625 per share, subject to adjustment in certain
events.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
The Company's annual meeting of shareholders was held on May 21, 1997.
The matters voted upon at the meeting were proposals: (1) to elect two directors
to serve a term of three years, (2) to amend the Company's certificate of
incorporation to increase its authorized Common Stock, (3) to amend the
Company's 1995 Equity Participation Plan to change the methodology for reserving
number of shares of common stock subject to the plan, (4) to approve the
Company's 1997 Employee Stock Purchase Plan and (5) to ratify the selection of
Price Waterhouse LLP as the Company's independent public accountants for fiscal
1997. Each of these proposals was approved by the following margins:
Votes Against
Proposal Votes For or Withheld
-------- --------- -----------
Election of Directors (1): Kevin P. Egan 9,931,388 310,245
J. Roger King 9,930,788 310,845
-19-
<PAGE> 20
<TABLE>
<CAPTION>
Votes Against Broker
Proposal Votes For or Withheld Abstentions Non-Votes
-------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Amendment to Certificate of
Incorporation 7,098,084 3,120,334 23,125 90
Proposal
--------
Amendment to 1995 Equity Participation
Plan 5,025,084 3,715,942 26,965 1,473,642
Proposal
--------
Approval of 1997 Employee Stock
Purchase Plan 8,355,286 391,005 21,700 1,473,642
Proposal
--------
Ratification of Selection of
Independent Public Accountants 10,221,523 2,447 17,663
</TABLE>
(1) Following the meeting, Edward P. Drudge, Jr., James C. Hunt, James
V. Napier and William J. Simione, Jr. continued to serve as directors of the
Company, together with Messrs. Egan and King.
-20-
<PAGE> 21
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 - the following Current Reports on Form
8-K were filed during the quarter ended June 29, 1997:
(i) Current Report on Form 8-K dated May 22, 1997,
reporting that the Company had signed a definitive
agreement to acquire Vital Computer Services
International, Inc. and would raise up to $100
million in a private placement of senior subordinated
notes.
(ii) Current Report on Form 8-K dated June 5, 1997,
reporting that the Company had decided to raise up to
$100 million in a private placement of convertible
subordinated notes in lieu of senior subordinated
notes (as previously announced).
(iii) Current report on Form 8-K dated June 18, 1997,
reporting the terms of the Company's completed
private placement of $100 million of convertible
subordinated notes.
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: August 12, 1997 By: /s/ Edward P. Drudge Jr.
----------------------------------------
Edward P. Drudge Jr.
Chief Executive Officer
Date: August 12, 1997 By: /s/ James C. Hunt
----------------------------------------
James C. Hunt
Senior Vice President
Chief Financial Officer and Treasurer
-21-
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED HEREWITH(*),OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- -------------- ---------
<C> <S> <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 Administrative Services Agreement between the 10.6 10-Q for quarter
Company and Adia California ended 9/30/95
10.6 Paybill Services Agreement between the 10.7 10-Q for quarter
Company and Adia California ended 9/30/95
</TABLE>
-22-
<PAGE> 23
<TABLE>
<CAPTION>
FILED HEREWITH(*),OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- -------------- ---------
<C> <S> <C> <C>
10.7 Software License Agreement between the 10.8 10-Q for quarter
Company and Adia California ended 9/30/95
10.8 Employment Agreement between the Company and 10.9 10-Q for quarter
Edward P. Drudge, Jr. ended 9/30/95
10.9 Employment Agreement between the Company and 10.10 10-K for year
James C. Hunt ended 12/29/96
10.10 Employment Agreement between Adia Delaware, 10.13 33-95228
PFI Corp. and Richard L. Peranton
10.11 Employment Agreement between the Company and 10.13 10-K for year
Ken R. Bramlett, Jr. ended 12/29/96
10.12 Indemnification Agreement between the Company 10.14 10-Q for quarter
and Adia Delaware ended 9/30/95
10.13 Tax-Sharing Agreement between the Company, 10.15 10-Q for quarter
Adia Delaware and Adia California ended 9/30/95
10.14 Amended and Restated Non-Qualified 10.16 10-K for year
Profit-Sharing Plan ended 12/29/96
10.15 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
10.16 Asset Purchase Agreement between the Company 10.20 333-04573
and Computer Resources Group
</TABLE>
-23-
<PAGE> 24
<TABLE>
<CAPTION>
FILED HEREWITH(*),OR
INCORPORATED BY
REFERENCE FROM PREVIOUS COMPANY REG. NO.
EXHIBIT NUMBER DESCRIPTION EXHIBIT NUMBER OR REPORT
- -------------- ----------- -------------- ---------
<C> <S> <C> <C>
10.17 Asset Purchase Agreement between the Company 2 8-K dated 9/30/96
and Business Enterprise Systems and
Technology, Inc. (BEST Consulting)
10.18 Registration Rights Agreement between the 10.18 333-31863
Company and the Initial Purchasers of the
5-3/4% Convertible Subordinated Notes
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., Richard L. Peranton,
Kevin P. Egan, J. Roger King and William Simione, Jr.
-24-
<PAGE> 1
Exhibit 11
Personnel Group of America, Inc.
Computation of Per Share Earnings
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- --------------------------
June 29, 97 June 30, 96 June 29,97 June 30, 96
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income-primary $ 4,449 $2,250 $ 7,910 $3,740
Add: Interest expense on 5-3/4% Convertible
Subordinated Notes (B) 72 -- -- --
------- ------ ------- ------
Net income - fully dilutive 4,521 2,250 7,910 3,740
Weighted average number of shares outstanding
Primary:
Common stock 12,086 8,807 12,076 8,403
Common stock equivalents
Stock options (A) 181 -- 163 --
------- ------ ------- ------
Primary shares outstanding 12,267 8,807 12,239 8,403
Fully diluted:
Common stock 12,086 8,807 12,076 8,403
Common stock equivalents
Stock options (A) 221 -- 221 --
Conversion of 5-3/4% Convertible Subordinated Notes (B) 216 -- -- --
------- ------ ------- ------
Fully diluted shares outstanding 12,523 8,807 12,297 8,403
Net income per share:
Primary $ 0.36 $ 0.26 $ 0.65 $ 0.45
======= ====== ======= ======
Fully dilutive $ 0.36 $ 0.26 $ 0.64 $ 0.45
======= ====== ======= ======
</TABLE>
(A) The treasury stock method was used to determine the weighted average
number of shares of common stock equivalents outstanding during the
periods.
(B) The 5-3/4% Convertible Subordinated Notes did not have a dilutive
effect on earnings per share for the six months ended June 29, 1997.
<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 SIX MONTH PERIODS ENDED JUNE 30, 1996 AND JUNE 29, 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> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1997
<PERIOD-END> JUN-29-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 88,827
<ALLOWANCES> (1,339)
<INVENTORY> 0
<CURRENT-ASSETS> 94,716
<PP&E> 16,796
<DEPRECIATION> (7,590)
<TOTAL-ASSETS> 387,588
<CURRENT-LIABILITIES> 49,838
<BONDS> 137,447
0
0
<COMMON> 121
<OTHER-SE> 192,217
<TOTAL-LIABILITY-AND-EQUITY> 387,588
<SALES> 274,148
<TOTAL-REVENUES> 274,148
<CGS> 197,015
<TOTAL-COSTS> 251,122
<OTHER-EXPENSES> 5,312
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,036
<INCOME-PRETAX> 13,678
<INCOME-TAX> 5,768
<INCOME-CONTINUING> 7,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,910
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.64
</TABLE>
