<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 27, 1998
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
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(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 30, 1998, there were outstanding 32,818,949 shares of common
stock, par value $.01 per share.
<PAGE> 2
PERSONNEL GROUP OF AMERICA, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
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............................................. 9
PART II - OTHER INFORMATION
Item 5. Other Information............................................................................... 16
Item 6. Exhibits and Reports on Form 8-K................................................................ 16
Signatures................................................................................................ 17
Exhibit Index ............................................................................................ 18
</TABLE>
2
<PAGE> 3
PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED SEPTEMBER 27, 1998 AND SEPTEMBER 28, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPT. 27, SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
REVENUES:
Information technology services $120,832 $ 72,098 $313,626 $173,774
Commercial staffing 90,975 56,896 243,309 162,585
-------- -------- -------- --------
Total revenues 211,807 128,994 556,935 336,359
DIRECT COSTS OF SERVICE 151,615 94,755 401,143 248,409
-------- -------- -------- --------
Gross profit 60,192 34,239 155,792 87,950
OPERATING EXPENSES
Selling, general and administrative 37,057 21,148 98,045 56,354
Depreciation and amortization 4,351 2,393 11,536 6,405
-------- -------- -------- --------
Total operating expenses 41,408 23,541 109,581 62,759
OPERATING INCOME 18,784 10,698 46,211 25,191
INTEREST EXPENSE 2,773 1,801 9,086 4,834
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 16,011 8,897 37,125 20,357
PROVISION FOR INCOME TAXES 6,773 3,765 15,705 8,601
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 9,238 5,132 21,420 11,756
Income from discontinued operations, net of taxes -- 634 -- 1,921
-------- -------- -------- --------
NET INCOME $ 9,238 $ 5,766 $ 21,420 $ 13,677
======== ======== ======== ========
NET INCOME PER DILUTED SHARE:
Income from continuing operations $ 0.26 $ 0.20 $ 0.69 $ 0.48
Income from discontinued operations,
net of taxes -- 0.02 -- 0.07
-------- -------- -------- --------
NET INCOME PER DILUTED SHARE $ 0.26 $ 0.22 $ 0.69 $ 0.55
======== ======== ======== ========
AVERAGE DILUTED SHARES OUTSTANDING 39,686 31,320 35,688 27,150
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1998 AND DECEMBER 28, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPT. 27, DEC. 28,
ASSETS 1998 1997
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,755 $ 642
Accounts receivable, net 122,456 77,869
Prepaid expenses and other current assets 4,435 1,674
Deferred income taxes 4,117 4,165
Receivable from sale of discontinued operations 885 36,276
--------- ---------
Total current assets 137,648 120,626
Property and equipment, net 17,111 9,162
Intangible assets, net 492,132 316,413
Other assets 5,071 5,108
--------- ---------
Total assets $ 651,962 $ 451,309
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,150 $ 7,490
Accounts payable 4,848 2,200
Accrued wages, benefits and other 50,498 32,321
Income taxes payable 3,876 9,525
--------- ---------
Total current liabilities 69,372 51,536
Long-term debt 184,494 145,050
Other long-term liabilities 14,088 49,647
--------- ---------
Total liabilities 267,954 246,233
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;
32,819 and 24,278 shares issued and outstanding at
September 27, 1998 and December 28, 1997, respectively 328 242
Additional paid-in capital 328,386 171,038
Retained earnings 55,486 34,066
Deferred compensation (192) (270)
--------- ---------
Total shareholders' equity 384,008 205,076
--------- ---------
Total liabilities and shareholders' equity $ 651,962 $ 451,309
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH
FLOWS FOR THE PERIODS ENDED SEPTEMBER 27, 1998 AND
SEPTEMBER 28, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 27, SEPT. 28,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income from continuing operations $ 21,420 $ 11,756
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 11,536 6,405
Deferred income taxes, net 3,253 468
Changes in assets and liabilities:
Accounts receivable (22,499) (13,380)
Accounts payable and accrued liabilities 9,989 4,571
Income taxes payable 1,583 2,260
Other, net (2,318) 623
--------- ---------
Net cash provided by operating activities 22,964 12,703
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired (211,631) (95,016)
Net cash provided by discontinued operations 28,012 819
Purchases of property and equipment, net (6,183) (3,785)
--------- ---------
Net cash used in investing activities (189,802) (97,982)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 133,300 --
Proceeds from issuance of convertible subordinated notes -- 112,000
Repayments under credit facility (213,950) (142,082)
Borrowings under credit facility 252,950 110,257
Repayments of seller notes and acquired indebtedness (2,390) (1,500)
Proceeds from employee stock purchase plan and exercise
of stock options 2,041 1,493
--------- ---------
Net cash provided by financing activities 171,951 80,168
Net increase (decrease) in cash and cash equivalents 5,113 (5,111)
Cash and cash equivalents at beginning of period 642 5,111
--------- ---------
Cash and cash equivalents at end of period $ 5,755 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
PERSONNEL GROUP OF AMERICA, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT 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
28, 1997. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
All share and per share data have been restated to reflect the
two-for-one stock split effected by the Company as a stock dividend on March 30,
1998.
(2) INTANGIBLE ASSETS
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. Other intangibles consist primarily of
covenants not to compete and other and are generally amortized over three to
five years. Accumulated amortization of intangible assets amounted to $20,014
and $11,346 at September 27, 1998 and December 28, 1997, respectively.
The Company evaluates the recoverability of its investment in
intangible assets 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.
(3) ACQUISITIONS
During the first nine months of 1998, the Company acquired the
following businesses in 13 separate transactions:
<TABLE>
<CAPTION>
Name of Business Type of Business Date Acquired
---------------- ---------------- -------------
<S> <C> <C>
Ann Wells Personnel Commercial Staffing January 1998
Creative Temporaries Commercial Staffing January 1998
Corporate Staffing Consultants Commercial Staffing January 1998
Advanced Business Consultants Information Technology February 1998
IMA Plus Information Technology March 1998
The Temporary Connection Commercial Staffing March 1998
Trilogy Consulting Information Technology April 1998
Sloan Staffing Services Commercial Staffing May 1998
Careers Information Technology June 1998
IMS Consulting Information Technology June 1998
Gentry Information Technology July 1998
Paladin Consulting Information Technology August 1998
Keiter Stephens Computer Services Information Technology September 1998
</TABLE>
6
<PAGE> 7
The acquired businesses are collectively referred to hereinafter as the
"Acquired Companies." The 1997 revenues of the information technology companies
and the commercial staffing companies acquired in the first nine months of 1998
aggregated approximately $102,600 and $79,100, respectively.
The total cash paid for the Acquired Companies aggregated $172,000,
including direct acquisition costs but excluding certain contingent earnout
payments. In addition, certain sellers of the Acquired Companies received common
stock of the Company valued at approximately $21,900. Certain of these
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. All acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the entities acquired,
based on preliminary allocations, 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. Final allocation of the purchase
price may result in adjustments to the amounts previously recorded as excess of
cost over fair market value of assets acquired.
The following table presents the Company's pro forma consolidated
results of operations for the nine-month periods indicated, as if the Acquired
Companies and the other companies acquired during 1997 had been acquired on
December 30, 1996:
<TABLE>
<CAPTION>
Nine Months Ended,
Sept. 27, Sept. 28,
1998 1997
----------- ------------
<S> <C> <C>
Revenues..................................................... $ 609, 818 $ 537,217
Income from continuing operations............................ 22,802 15,746
Income from continuing operations per
diluted share ........................................ $ 0.72 $ 0.59
=========== ============
Weighted average diluted shares outstanding 36,284 28,514
=========== ============
</TABLE>
(4) DISCONTINUED OPERATIONS
On December 26, 1997, the Company completed the sale of its healthcare
division for $65,250. Of such amount, $34,600 was paid by delivery of a
promissory note which was collected in full in January 1998. The total proceeds
of the sale were used to repay outstanding borrowings under the Company's
revolving credit facility. The assets, liabilities, results of operations and
cash flows of the healthcare division have been segregated and reported as
discontinued operations for all periods presented, and previously reported
results have been restated. The sale of the healthcare division resulted in a
gain of $89.
During 1997, the Company allocated interest expense to the discontinued
operations based on the ratio of net assets of the discontinued operations to
the total net assets of the consolidated Company. Interest expense allocated in
the three and nine month periods ended September 28, 1997 was $573 and $1,531,
respectively. No other corporate overhead expenses have been allocated to the
discontinued operations.
7
<PAGE> 8
(5) LONG-TERM DEBT
Long-term debt consisted of the following at September 27, 1998 and
December 28, 1997:
<TABLE>
<CAPTION>
Sept. 27, Dec 28,
1998 1997
--------- ---------
<S> <C> <C>
5-3/4% convertible subordinated notes due July 2004 $ 115,000 $ 115,000
$200,000 revolving credit facility due June 2002 63,000 24,000
Notes payable to sellers of acquired companies
and other 16,644 13,540
--------- ---------
194,644 152,540
Less current portion (10,150) (7,490)
--------- ---------
$ 184,494 $ 145,050
========= =========
</TABLE>
(6) NET INCOME PER SHARE
In accordance with FAS 128, the following tables reconcile net income
and weighted average shares outstanding to the amounts used to calculate basic
and diluted earnings per share for each of the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
EARNINGS PER BASIC SHARE:
Net income $ 9,238 $ 5,766 $21,420 $13,677
Weighted average shares outstanding 32,681 24,236 28,528 24,180
------- ------- ------- -------
Earnings per basic share $ 0.28 $ 0.24 $ 0.75 $ 0.57
======= ======= ======= =======
EARNINGS PER DILUTED SHARE:
Net income $ 9,238 $ 5,766 $21,420 $13,677
Add: Interest expense on
Convertible Notes, net of tax 1,064 1,064 3,193 1,158
------- ------- ------- -------
Diluted net income 10,302 6,830 24,613 14,835
------- ------- ------- -------
Weighted average shares outstanding 32,681 24,236 28,528 24,180
Add: Dilutive employee stock options 549 628 704 627
Add: Assumed conversion of Convertible Notes 6,456 6,456 6,456 2,343
------- ------- ------- -------
Weighted average diluted shares outstanding 39,686 31,320 35,688 27,150
------- ------- ------- -------
Earnings per diluted share $ 0.26 $ 0.22 $ 0.69 $ 0.55
======= ======= ======= =======
</TABLE>
8
<PAGE> 9
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 related
notes. 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 ("IPO") in September
1995. Prior to the IPO, the Company was an indirect wholly owned subsidiary of
an international staffing company (the "Former Parent"). The Company was
organized 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 shares in the IPO.
The Company is organized into two divisions: the Information Technology
Services Division, which provides information technology staffing and consulting
services in a range of computer-related disciplines; and the Commercial Staffing
Division, which provides a wide variety of temporary office, clerical, light
technical and light industrial staffing services. Substantially all of the
Company's services are performed on a time and materials basis. At October 30,
1998, the Information Technology Services Division was comprised of 18 companies
and the Commercial Staffing Division was comprised of 24 companies.
The following table sets forth the number of the Company's offices by
division at the end of the years indicated and at October 30, 1998:
<TABLE>
<CAPTION>
Fiscal Year End
Oct. 30, ---------------
1998 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C> <C>
Information technology services 44 30 18 --
Commercial staffing 100 82 74 58
--- --- --- ---
Total offices 144 112 92 58
</TABLE>
On December 26, 1997, the Company completed the sale of its healthcare
division for approximately $65.3 million. With the sale of the healthcare
division, the Company completed a transformation that began in 1996 when the
Company made a strategic commitment to enter the high growth, high margin
information technology services business. The gain on the sale of the healthcare
division was not material. As a result of the sale, the healthcare division has
been reflected as a discontinued operation in the Company's financial statements
for all periods presented.
In May 1998, the Company successfully completed an offering of 7.0
million shares of common stock. The net proceeds from the offering of
approximately $133.3 million were used to repay indebtedness under the Company's
revolving credit facility.
9
<PAGE> 10
During the first nine months of 1998, the Company completed 13
acquisitions: Ann Wells Personnel in Silicon Valley, California; Creative
Temporaries in Charlotte, North Carolina; Corporate Staffing Consultants in
Charlotte, North Carolina; Advanced Business Consultants in Kansas City,
Missouri; IMA Plus in Jacksonville, Florida; The Temporary Connection in
Houston, Texas; Trilogy Consulting in Chicago, Illinois; Sloan Staffing Services
in New York, New York; Careers in Denver, Colorado; IMS Consulting in Irvine,
California; Gentry in Oakland, California; Paladin Consulting in Dallas, Texas,
and Keiter Stephens Computer Services in Richmond, Virginia. Ann Wells
Personnel, Creative Temporaries, Corporate Staffing Consultants, The Temporary
Connection and Sloan Staffing Services are leading providers of commercial
staffing services in their respective markets. Advanced Business Consultants,
IMA Plus, Trilogy Consulting, Careers, IMS Consulting, Gentry, Paladin and
Keiter Stephens Computer Services are leading providers of information
technology services in their respective markets. These 13 companies had combined
revenues of approximately $181.7 million in 1997. Had the Company owned all of
the 13 acquired companies discussed above and the other companies acquired in
1997 at the beginning of 1997, the Company's pro forma 1997 revenues would have
been approximately $727.8 million, and 55% and 45% of such revenues would have
come from the Information Technology Services and Commercial Staffing Divisions,
respectively.
Each of the Company's acquisitions has been accounted for using the
purchase method of accounting and has been included in the following discussion
as applicable since the respective dates 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 then allowing them to maintain
their separate identities and independence preserves the 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 75.5% of total assets and 128.2% of total
shareholders' equity at September 27, 1998. The Company evaluates the
recoverability of its investment in goodwill 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 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 commercial staffing
business is cyclical, the Company believes that the broad geographic coverage of
its operations, its emphasis on high-end clerical staffing and its rapid
expansion into the less cyclical information technology sector mitigate the
adverse effects of economic cycles in a single industry or geographic region.
10
<PAGE> 11
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 27, 1998 VERSUS QUARTER ENDED SEPTEMBER 28,
1997
Revenues. Total revenues increased 64.2% to $211.8 million in the third
quarter of 1998 from $129.0 million in 1997. Information technology services
revenue grew 67.6% as the Company continued its aggressive acquisition program
and experienced strong internal growth as same store sales grew 20.6% in the
third quarter of 1998 over 1997. Commercial staffing revenue grew 59.9% as the
result of the contribution of revenues from the commercial staffing companies
acquired by the Company in 1997 and 1998 and strong same store sales growth.
Commercial Staffing same store sales growth was approximately 13.2% in the third
quarter of 1998 over 1997. High internal growth rates were due to the continued
strong demand for information technology services, a significant new project in
the Commercial Staffing Division and the increasing acceptance by businesses and
other organizations of the use of a contingent workforce.
Direct Costs of Services and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased 60%
to $151.6 million in the third quarter of 1998. Gross profit as a percentage of
revenue increased 190 basis points to 28.4% from 26.5% during 1997. The increase
in gross profit as a percentage of revenue reflected the Company's continued
expansion into the higher margin information technology staffing and consulting
sectors and the acquisition of several companies that provide high margin
permanent placement services. Information technology services revenues
represented 57% of total revenues in the third quarter of 1998, up from 56% in
1997. Pay rate increases were generally passed on to the Company's customers
through higher bill rates.
Operating Expenses. Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense, increased
75.9% to $41.4 million in the third quarter of 1998 from $23.5 million in 1997.
As a percentage of revenues, selling, general and administrative expenses
increased to 17.5% in the third quarter of 1998 from 16.4% in 1997. This
increase was caused by investments in management personnel and management
systems, the continued business mix shift to IT, and several recent acquisitions
of companies that provide information technology and permanent placement
services. Both of these lines of business typically carry higher gross margins
as well as higher selling, general and administrative expenses as a percentage
of sales. In addition, depreciation and amortization expense increased to 2.1%
of revenues in the third quarter of 1998 from 1.9% in 1997 due to increased
amortization expense resulting from the acquisitions completed by the Company.
Interest Expense. Interest expense increased to $2.8 million in the
third quarter of 1998 from $1.8 million in 1997 as the Company continued to
borrow funds to finance its aggressive acquisition strategy. See "Liquidity and
Capital Resources."
Income Tax Expense. The effective tax rate remained constant at 42.3%
in the third quarter of 1998 and 1997. The Company's effective tax rate has
historically been higher than the U.S. federal statutory rate of 35% primarily
due to state income taxes and nondeductible amortization expense.
Income from Continuing Operations. Income from continuing operations
increased 80% to $9.2 million in the third quarter of 1998 (or 4.4% of revenue)
from $5.1 million (4.0% of revenue) in 1997 due to the factors discussed above.
11
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 27, 1998 VERSUS NINE MONTHS ENDED
SEPTEMBER 28, 1997
Revenues. Total revenues increased 65.6% to $556.9 million in the first
nine months of 1998 from $336.4 million in 1997. Information technology services
revenue grew 80.5% as the Company continued its aggressive acquisition program
and experienced strong internal growth. Commercial staffing revenue grew 49.7%
as the result of the contribution of revenues from the commercial staffing
companies acquired by the Company in 1997 and 1998 and strong internal growth.
High internal growth rates were due to the continued strong demand for
information technology services and the increasing acceptance by businesses and
other organizations of the use of a contingent workforce.
Direct Costs of Services and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased
61.5% to $401.1 million in the first nine months of 1998. Gross profit as a
percentage of revenue increased 190 basis points to 28.0 from 26.1% during 1997.
The increase in gross profit as a percentage of revenue reflected the Company's
continued expansion into the higher margin information technology staffing and
consulting sectors and the acquisition of several companies that provide high
margin permanent placement services. Information technology services revenues
represented 56% of total revenues in the first nine months of 1998, up from 52%
in 1997. Pay rate increases were generally passed on to the Company's customers
through higher bill rates.
Operating Expenses. Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense, increased
74.6% to $109.6 million in the first nine months of 1998 from $62.8 million in
1997. As a percentage of revenues, selling, general and administrative expenses
increased to 17.6% in the first nine months of 1998 from 16.8% in 1997. This
increase was caused by investments in management personnel and management
systems, the continued business mix shift to IT, and several recent acquisitions
of companies that provide information technology and permanent placement
services. Both of these lines of business carry higher gross margins as well as
higher selling, general and administrative expenses and a percentage of sales.
In addition, depreciation and amortization expense increased to 2.1% of revenues
in the first nine months of 1998 from 1.9% in 1997 due to increased amortization
expense resulting from the acquisitions completed by the Company.
Interest Expense. Interest expense increased to $9.1 million in the
first nine months of 1998 from $4.8 million in 1997 as the Company continued to
borrow funds to finance its aggressive acquisition strategy. See "Liquidity and
Capital Resources."
Income Tax Expense. The effective tax rate remained constant at 42.3%
in the first nine months of 1998 and 1997. The Company's effective tax rate has
historically been higher than the U.S. federal statutory rate of 35% primarily
due to state income taxes and nondeductible amortization expense.
Income from Continuing Operations. Income from continuing operations
increased 82.2% to $21.4 million in the first nine months of 1998 (or 3.8% of
revenue) from $11.8 million (3.5% of revenue) in 1997 due to the factors
discussed above.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from operations, borrowings
under its revolving credit facility and proceeds of public equity and debt
offerings. The Company's principal uses of cash are to fund acquisitions,
working capital and capital expenditures.
For the nine months ending September 27, 1998, cash provided by
operating activities increased to $23.0 million, up from $12.7 million in 1997,
primarily as a result of higher earnings before depreciation and amortization in
1998, offset by increases in receivables reflecting the growth in the volume of
business over the prior year. As of September 27, 1998, receivables for the
Information Technology Services Division and the Commercial Staffing Division
remained outstanding an average of 56 and 46 days, respectively, after billing.
In the aggregate, days sales outstanding were 52 and 48 days at September 27,
1998, and December 28, 1997, respectively. Cash used for investing activities
increased to $189.8 million in the first nine months of 1998 from $98.0 million
in 1997 primarily as a result of cash used of $211.6 million for acquisitions,
including contingent earnout payments, in 1998 versus $95.0 million in 1997,
offset in 1998 by the cash received in connection with the sale of the
healthcare division.
Cash generated from financing activities increased to $172.0 million in
the first nine months of 1998 from $80.2 million in 1997, primarily as a result
of the net proceeds of $133.3 million received in connection with the issuance
of 7.0 million shares of Common Stock in May 1998. The net proceeds were used to
repay indebtedness under the revolving credit facility.
As of September 27, 1998, the Company was obligated under certain
acquisition agreements to repay seller notes during the next two years of $16.0
million in the aggregate and to make contingent earnout payments to former
owners of acquired businesses. Earnout payments based on 1998 earnings and
beyond are contingent 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
$15.0 million to $22.0 million in 1999, $15.0 million to $30.0 million in 2000,
and $8.0 million to $15.0 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.
The Company recently initiated a project to replace the financial and
human resource systems for its information technology companies. Installation of
these systems is expected to continue through the year 2000. There can be no
assurance that there will not be unanticipated costs or delays associated with
these installations or that the systems will operate as expected. The Company
expects to spend approximately one percent of its annual revenues on management
information systems and other capital expenditures not directly related to
acquisitions.
13
<PAGE> 14
On October 6, 1998, the Company's Board of Directors authorized a share
repurchase program covering up to 12.5% (or approximately 4.0 million) of its
outstanding shares of common stock. Share repurchases made under this program
will be made from time to time in accordance with applicable securities
regulations in open market or privately negotiated transactions. The actual
number of shares purchased, the timing of purchases and the prices paid will
depend on future market conditions. Repurchased shares will be held in PGA's
treasury and will be available for resale and for general corporate purposes. As
of September 28, 1998, the Company had made no repurchases under this program.
The Company's revolving credit facility is a five-year $200.0 million
revolving line of credit due June 2002. As of October 30, 1998, $64.0 million of
borrowings were outstanding under the credit facility and approximately $4.3
million had been used for the issuance of undrawn letters of credit to secure
the Company's workers' compensation programs. At October 30, 1998, the amount
available for borrowing under the credit facility was approximately $131.7
million.
The Company believes that cash flow from operations, borrowing capacity
under it's revolving credit facility and the proceeds from offerings of debt or
equity securities of the Company will be adequate to meet its presently
anticipated needs for working capital, capital expenditures, acquisitions and
share repurchases. There can be no assurance, however, that other alternative
sources of capital will be available in the future or, if available, that any
such alternative sources will be available on favorable terms.
New Accounting Pronouncements. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information." ("FAS 131") which changes the way that
public companies report information about operating segments in annual and
interim financial statements. FAS 131 will be effective in years beginning after
December 15, 1997. The Company will be required to adopt FAS 131 beginning with
its 1998 annual financial statements. The adoption of FAS 131 does not affect
the Company's earnings, liquidity or capital resources. Management has not yet
completed its analysis of the impact that this standard will have on the
financial statements of the Company.
Year 2000 Compliance. The Company recently initiated a project to
replace the financial and human resource systems for its information technology
companies. Management believes that these new systems are year 2000 compliant.
The Company also believes that its other key computer systems and related
software are substantially year 2000 compliant. The Company expects that costs
related to ensuring that existing systems and software are year 2000 compliant
will not be material to the financial condition or results of operations of the
Company. In addition, the Company is assessing the year 2000 preparedness of its
vendors and customers. To date, no significant concerns have been identified.
However, there can be no assurance that no year 2000 problems or expenses will
arise with the Company's computer systems and software or in the computer
systems and software of the Company's vendors and customers. Upon completion of
discussions with the Company's vendors and customers, the Company will assess
the need for contingency plans in the case of failure of computer systems and
software of either the Company or its vendors and customers.
14
<PAGE> 15
Due to the Company's dependence upon, and its current uncertainty with,
the year 2000 compliance of certain government agencies, third-party suppliers,
vendors and customers with whom the Company deals, the Company is unable to
determine at this time its most reasonably likely worst case scenario. While
costs related to the lack of year 2000 compliance by third parties, business
interruptions, litigation and other liabilities related to year 2000 issues
could materially and adversely affect the Company's business, results of
operations and financial condition, the Company expects its internal year 2000
compliance efforts to reduce significantly the Company's level of uncertainty
about the impact of year 2000 issues.
The Company's Information Technology Services Division performs work
for clients to assist them in modifying their computer systems and software to
make them year 2000 compliant. Generally, this work is performed under the
direction and supervision of the client and the Company seeks to limit the
liability contractually. Additionally, the Company maintains errors and
omissions insurance to protect against these risks. Although the Company does
not believe that it will incur any material liabilities to clients for its work
on their year 2000 projects, there can be no assurance that the Company will not
incur liabilities or that liabilities, if any, will not be material.
Inflation. The effects of inflation on the Company's operation were not
material in the second quarter of 1998. Inflationary increases in payroll costs
were generally passed on to the Company's customers through higher bill rates.
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 Securities
Exchange Act of 1934, 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 wage inflation and other matters discussed in this report and the
Company's other filings with the Securities and Exchange Commission.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
The Board of Directors makes nominations for director candidates as
permitted by the Company's Bylaws. Section 14 of Article II of the Company's
Bylaws prescribes the procedure a shareholder must follow to make nominations
for director candidates or propose any other business to be considered at an
annual meeting of shareholders. Shareholder nominations for director candidates
will be considered at an annual meeting or a special meeting of shareholders and
other proposals will be considered at an annual meeting, if the shareholder (who
must be, at the time of delivery of notice, a shareholder of record) delivers to
the Secretary of the Company a timely notice setting forth the information
specified in Section 14 of Article II of the Company's Bylaws. In the case of an
annual meeting, such notice shall be considered timely if delivered not earlier
than the close of business on the 90th day, not later than the close of business
on the 60th day, prior to the first anniversary of the preceding year's annual
meeting. If, however, the annual meeting date is more than 30 days before or 60
days after the anniversary date of the preceding year's annual meeting, the
notice will be considered timely if delivered not earlier than the close of
business on the 90th day prior to such meeting nor later than the close of
business on the later of (i) the 60th day prior to such meeting or (ii) the 10th
day following the day on which the public announcement of the date of such
meeting is first made by the Company. In the case of a director nomination for a
special meeting, such notice shall be considered timely if delivered not earlier
than the close of business on the 90th day prior to such meeting nor later than
the close of business on the later of (i) the 60th day prior to such meeting or
(ii) the 10th day following the day on which public announcement is first made
of the special meeting date and the nominees proposed by the Board of Directors.
The anniversary date of the Company's 1998 annual meeting of shareholders is May
20, 1999. Any shareholder desiring a copy of the Company's Bylaws will be
furnished one without charge upon written request to the Secretary.
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 Company filed no current reports on Form 8-K
during the quarter ended September 27, 1998.
16
<PAGE> 17
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 12, 1998 By: /s/ Edward P. Drudge Jr.
----------------------------------------
Edward P. Drudge Jr.
Chief Executive Officer
Date: November 12, 1998 By: /s/ James C. Hunt
--------------- -------------------------
James C. Hunt
Senior Vice President
Chief Financial Officer and Treasurer
17
<PAGE> 18
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 1 0-27792
First Union National Bank (as successor
trustee)
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 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 Employment Agreement between the Company and 10.9 10-Q for quarter
Edward P. Drudge, Jr. ended 9/30/95
10.6 Amendment No. 1 to Employment Agreement 10.6 10-K for year ended
between the Company and Edward P. Drudge, Jr. 12/28/97
10.7 Employment Agreement between the Company and 10.10 10-K for year
James C. Hunt ended 12/29/96
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
10.8 Employment Agreement between the Company and 10.13 10-K for year
Ken R. Bramlett, Jr. ended 12/29/96
10.9 Indemnification Agreement between the Company 10.14 10-Q for quarter
and Adia Delaware ended 9/30/95
10.10 Tax-Sharing Agreement between the Company, 10.15 10-Q for quarter
Adia Delaware and Adia California ended 9/30/95
10.11 Amended and Restated Non-Qualified 10.16 10-K for year
Profit-Sharing Plan ended 12/29/96
10.12 Director's Non-Qualified Compensation Plan 10.12 10-K for year ended
12/28/97
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 Amendment No. 1 to Amended and Restated 10.14 10-Q for quarter ended
Credit Agreement among the Company and its 3/29/98
Subsidiaries, The Lenders party thereto and
NationsBank, N.A., as Agent
10.15 Asset Purchase Agreement between the Company 2 8-K dated 9/30/96
and Business Enterprise Systems and
Technology, Inc. (BEST Consulting)
10.16 Stock Purchase Agreement for the sale of 1 8-K dated 12/26/97
Nursefinders between PFI Corp., Nursefinders,
Inc., and Nursefinder Acquisition Corp.
10.17 Registration Rights Agreement between the 10.17 333-31863
Company and the Initial Purchasers
27.1 Financial Data Schedule *
(For SEC Purposes Only)
</TABLE>
# This Exhibit is substantially identical to Director and Officer
Indemnification Agreements (i) of the same date between the Company and
the following individuals: Edward P. Drudge, Jr., Kevin P. Egan, J.
Roger King, William Simione, Jr.; and (ii) dated April 17, 1998 between
the Company and each of James C. Hunt and Ken R. Bramlett, Jr.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PERSONNEL GROUP OF AMERICA FOR THE 9 MONTHS ENDED
SEPTEMBER 27, 1998 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> SEP-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 124,366
<ALLOWANCES> (1,910)
<INVENTORY> 0
<CURRENT-ASSETS> 137,648
<PP&E> 24,187
<DEPRECIATION> (7,076)
<TOTAL-ASSETS> 651,962
<CURRENT-LIABILITIES> 69,372
<BONDS> 184,494
0
0
<COMMON> 328
<OTHER-SE> 384,008
<TOTAL-LIABILITY-AND-EQUITY> 651,962
<SALES> 556,935
<TOTAL-REVENUES> 556,935
<CGS> 401,143
<TOTAL-COSTS> 499,188
<OTHER-EXPENSES> 11,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,086
<INCOME-PRETAX> 37,125
<INCOME-TAX> 15,705
<INCOME-CONTINUING> 21,420
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,420
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.69
</TABLE>
