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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 October 3, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________to____________
Commission File Number 001-13956
PERSONNEL GROUP OF AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1930691
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6302 Fairview Road, Suite 201, Charlotte, North Carolina 28210
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(704) 442-5100
--------------
(Registrant's telephone number including area code)
None
----
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of November 5, 1999, there were 25,771,937 shares of outstanding 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)
Unaudited Consolidated Statements of Income............... 3
Unaudited Consolidated Balance Sheets..................... 4
Unaudited Consolidated Statements of Cash Flows........... 5
Notes to Unaudited Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 17
Signatures................................................................ 18
Exhibit Index............................................................. 19
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
OCT. 3, SEPT. 27, OCT. 3, SEPT. 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $233,215 $211,807 $697,680 $556,935
DIRECT COSTS OF SERVICE 166,597 151,615 499,244 401,143
-------- -------- -------- --------
Gross profit 66,618 60,192 198,436 155,792
OPERATING EXPENSES
Selling, general and administrative 43,230 37,057 130,111 98,045
Depreciation and amortization 5,436 4,351 15,809 11,536
-------- -------- -------- --------
Total operating expenses 48,666 41,408 145,920 109,581
OPERATING INCOME 17,952 18,784 52,516 46,211
INTEREST EXPENSE 4,125 2,773 12,251 9,086
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 13,827 16,011 40,265 37,125
PROVISION FOR INCOME TAXES 5,807 6,773 16,911 15,705
-------- -------- -------- --------
NET INCOME $ 8,020 $ 9,238 $ 23,354 $ 21,420
======== ======== ======== ========
NET INCOME PER BASIC SHARE $ 0.31 $ 0.28 $ 0.82 $ 0.75
NET INCOME PER DILUTED SHARE $ 0.28 $ 0.26 $ 0.76 $ 0.69
</TABLE>
The accompanying notes are an integral part of these statements.
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
OCTOBER 3, 1999 AND JANUARY 3, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCT. 3, JAN. 3,
1999 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,096 $ 962
Accounts receivable, net 136,329 129,761
Prepaid expenses and other current assets 6,844 6,967
Deferred income taxes 5,453 5,149
Notes receivable from sale of discontinued operations 885 885
--------- ---------
Total current assets 150,607 143,724
Property and equipment, net 24,536 20,290
Intangible assets, net 537,243 539,977
Other assets 4,215 4,899
--------- ---------
Total assets $ 716,601 $ 708,890
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 375 $ 9,150
Accounts payable 7,329 5,310
Accrued wages, benefits and other 49,205 42,604
Income taxes payable 7,607 2,509
--------- ---------
Total current liabilities 64,516 59,573
Long-term debt 260,892 226,256
Other long-term liabilities 20,440 28,431
--------- ---------
Total liabilities 345,848 314,260
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;
33,065 and 32,929 shares issued at October 3, 1999 and
January 3, 1999, respectively 331 329
Additional paid-in capital 330,518 329,383
Retained earnings 88,437 65,083
Deferred compensation (87) (165)
--------- ---------
419,199 394,630
Less common stock held in treasury at cost -
6,590 shares at October 3, 1999 (48,446) --
--------- ---------
Total shareholders' equity 370,753 394,630
--------- ---------
Total liabilities and shareholders' equity $ 716,601 $ 708,890
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED OCTOBER 3, 1999 AND SEPTEMBER 27, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
OCT. 3, SEPT. 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 23,354 $ 21,420
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 15,809 11,536
Deferred income taxes, net (1,158) 3,253
Changes in assets and liabilities:
Accounts receivable (6,568) (22,499)
Accounts payable and accrued liabilities 9,477 9,989
Income taxes payable 5,092 1,583
Other, net 744 (2,318)
--------- ---------
Net cash provided by operating activities 46,750 22,964
Cash Flows from Investing Activities:
Cash used in acquisitions, net of cash acquired (15,484) (211,631)
Net cash provided by discontinued operations -- 28,012
Purchases of property and equipment, net (8,539) (6,183)
--------- ---------
Net cash used in investing activities (24,023) (189,802)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net -- 133,300
Repayments under credit facility (49,500) (213,950)
Borrowings under credit facility 84,500 252,950
Repurchases of common stock (51,944) --
Repayments of seller notes and acquired indebtedness (9,140) (2,390)
Proceeds from employee stock purchase plan and exercise
of stock options 3,491 2,041
--------- ---------
Net cash provided (used) by financing activities (22,593) 171,951
Net increase in cash and cash equivalents 134 5,113
Cash and Cash Equivalents at Beginning of Period 962 642
--------- ---------
Cash and Cash Equivalents at End of Period $ 1,096 $ 5,755
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
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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 January
3, 1999. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
(2) INTANGIBLE ASSETS
Intangible assets primarily consist of goodwill associated with
acquired businesses. 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
are amortized over the terms of the covenants, generally three to five years.
Accumulated amortization of intangible assets was $34,846 and $23,332 at October
3, 1999 and January 3, 1999, respectively.
The Company periodically 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 1998, the Company acquired the following businesses:
Name of Business Type of Business Date Acquired
---------------- ---------------- -------------
Ann Wells Personnel Commercial Staffing January 1998
Creative Temporaries Commercial Staffing January 1998
Corporate Staffing 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
InfoTech Contract Services Information Technology November 1998
RealTime Consulting Information Technology November 1998
These acquired businesses are collectively referred to hereinafter as the
"Acquired Companies." The Acquired Companies had combined annual revenues of
approximately $259,500 in 1998. The aggregate purchase price for the Acquired
Companies was $220,000, including direct acquisition costs but excluding
contingent earnout payments. Certain of these acquisitions are subject to
additional payments, contingent upon attainment of certain earnings targets for
various periods during the next two years. Any such contingent payments will be
recorded as additional purchase price when determined and will increase the
amount of excess cost over fair
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value of net assets acquired. All of these 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 acquisition and the results of
operations of the Acquired Companies have been included in the Company's
consolidated results of operations from the dates of each acquisition. Final
allocation of the purchase price for the Acquired Companies 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 period ended September 27, 1998, as if
the Acquired Companies had each been acquired on December 29, 1997:
Sept. 27,
1998
--------
Revenues $652,911
Net income 23,723
Net income per diluted share $ 0.74
========
Weighted average diluted shares outstanding 36,284
========
During 1999, the Company has made three acquisitions for an aggregate
purchase price of $2.9 million. The impact on revenues and net income from these
1999 acquisitions is not significant.
(4) LONG-TERM DEBT
Long-term debt consisted of the following at October 3, 1999 and
January 3, 1999:
<TABLE>
<CAPTION>
Oct. 3, Jan. 3,
1999 1999
--------- ---------
<S> <C> <C>
5-3/4% Convertible Subordinated Notes due
July 2004 $ 115,000 $ 115,000
$200,000 revolving credit facility due June 2002 145,000 110,000
Notes payable to sellers of acquired companies and other 1,267 10,406
--------- ---------
261,267 235,406
Less current portion (375) (9,150)
--------- ---------
$ 260,892 $ 226,256
========= =========
</TABLE>
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(5) 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
-------------------- --------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME PER BASIC SHARE:
Net income $ 8,020 $ 9,238 $23,354 $21,420
Weighted average shares outstanding 26,272 32,681 28,323 28,528
------- ------- ------- -------
Net income per basic share $ 0.31 $ 0.28 $ 0.82 $ 0.75
======= ======= ======= =======
NET INCOME PER DILUTED SHARE:
Net income $ 8,020 $ 9,238 $23,354 $21,420
Add: Interest expense on
Convertible Notes, net of tax 1,064 1,064 3,193 3,193
------- ------- ------- -------
Diluted net income 9,084 10,302 26,547 24,613
------- ------- ------- -------
Weighted average shares outstanding 26,272 32,681 28,323 28,528
Add: Dilutive employee stock options 76 549 137 704
Add: Assumed conversion of Convertible Notes 6,456 6,456 6,456 6,456
------- ------- ------- -------
Weighted average diluted shares outstanding 32,804 39,686 34,916 35,688
------- ------- ------- -------
Net income per diluted share $ 0.28 $ 0.26 $ 0.76 $ 0.69
======= ======= ======= =======
</TABLE>
Stock options to purchase approximately 2.5 million shares of common
stock at a weighted average exercise price of $13.87 per share were outstanding
during the three months and nine months ended October 3, 1999, but were excluded
from the computation of net income per diluted share because their effect was
antidilutive.
(6) SEGMENT INFORMATION
The Company has two reportable segments, its Information Technology
Services Division ("Information Technology") and its Commercial Staffing
Division ("Commercial Staffing"). Information Technology provides technical
staffing, training and information technology consulting services. Commercial
Staffing provides temporary staffing services, placement of full-time employees
and on-site management of temporary employees. The Company evaluates segment
performance based on income from operations before corporate expenses,
amortization of intangible assets, interest and income taxes.
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The table below presents operating results by reported segments for
each of the following periods:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- -----------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Information Technology $148,319 $120,832 $447,555 $313,626
Commercial Staffing 84,896 90,975 250,125 243,309
-------- -------- -------- --------
Total revenues 233,215 211,807 697,680 556,935
-------- -------- -------- --------
Operating income
Information Technology 17,514 14,438 51,409 35,768
Commercial Staffing 8,358 9,369 22,923 24,360
-------- -------- -------- --------
Total segment operating income 25,872 23,807 74,332 60,128
Corporate expenses 4,069 1,751 10,310 5,249
Amortization of intangible assets 3,851 3,272 11,506 8,668
Interest expense 4,125 2,773 12,251 9,086
-------- -------- -------- --------
Income before income taxes $ 13,827 $ 16,011 $ 40,265 $ 37,125
======== ======== ======== ========
</TABLE>
The Company does not report total assets by segment. The following
table sets forth identifiable assets by segment at October 3, 1999 and January
3, 1999:
Oct. 3, Jan. 3,
1999 1999
-------- --------
Accounts receivable, net
Information Technology $ 93,200 $ 84,999
Commercial Staffing 42,931 44,226
Corporate 198 536
-------- --------
Total accounts receivable, net $136,329 $129,761
======== ========
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ITEM 2. 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
appearing elsewhere in this report. The Company's fiscal year ends on the Sunday
nearest to December 31.
The Company is organized into two divisions: the Information Technology
Services Division ("Information Technology") and the Commercial Staffing
Division ("Commercial Staffing"). Information Technology provides technical
staffing, training and information technology consulting services. Commercial
Staffing provides temporary staffing services, placement of full-time employees
and on-site management of temporary employees. At October 3, 1999, Information
Technology was comprised of 19 companies and Commercial Staffing 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 26, 1999:
Years Ended
Oct. 26, ------------------------------
1999 1998 1997 1996
---- ---- ---- ----
Information Technology 46 47 30 18
Commercial Staffing 101 100 82 74
--- --- -- --
Total offices 147 147 112 92
In 1998, the Company acquired 10 information technology services
companies and five commercial staffing companies. The combined revenues of these
15 companies were approximately $259.5 million in 1998. Had the Company owned
each of these acquired companies at the beginning of fiscal 1998, the Company's
pro forma 1998 revenues would have been approximately $889.0 million and 61% and
39% of such revenues would have come from Information Technology and Commercial
Staffing, 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 its respective date of acquisition. The Company allocates
the excess of cost over the fair value of the net tangible assets first to
identifiable intangible assets, if any, and then to goodwill. The Company
believes that buying market leading companies and then generally allowing them
to maintain their identities and independence preserves the excess of cost over
the fair value of net assets acquired 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
75.0% of total assets and 144.9% of total shareholders' equity at October 3,
1999. The Company periodically 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 intangible assets to be
fully recovered.
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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.
After the end of the third quarter of 1999, the Company reorganized its
senior management structure. In connection with this restructuring, one senior
executive resigned to pursue other business interests. The Company will incur a
non-recurring expense of approximately $0.4 million in the fourth quarter of
1999 relating to severance for the departed executive.
The information technology services business is affected by the timing
of holidays and seasonal vacation patterns, generally resulting in lower IT
revenues and lower operating margins in the fourth quarter of each year. 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. The Company believes that the broad
geographic coverage of its operations, its emphasis on high-end clerical
staffing and its expansion into the less cyclical information technology
staffing and consulting sectors may partially mitigate the adverse effects of
economic cycles in a single industry or geographic region.
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RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 3, 1999 VERSUS QUARTER ENDED SEPTEMBER 27, 1998
Revenues. Total revenues increased 10.1% to $233.2 million in the third
quarter of 1999 from $211.8 million in 1998. Information Technology revenues
grew 22.7% in the third quarter as the result of a 5.0% increase in pro forma
Information Technology revenues over the two periods and the addition of
revenues from the five Information Technology acquisitions completed in the
second half of 1998. Although up over last year, Information Technology revenues
were below the Company's original expectations due primarily to an industry wide
softening in demand related to Y2K and the resulting billable consultant
reduction. The Company expects these demand issues to continue through the
fourth quarter of 1999 and into the first half of next year. Commercial Staffing
revenues of $84.9 million in the third quarter represented a 7% decline from the
third quarter last year due primarily to the impact of certain non-recurring
revenues in the third quarter of 1998 and the elimination of certain low margin
Commercial Staffing business in the fourth quarter of 1998 and the first quarter
of 1999.
Direct Costs of Service and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased
9.9% to $166.6 million in the third quarter of 1999. Gross margin as a
percentage of revenues increased 20 basis points to 28.6% for the third quarter
of 1999 from 28.4% during 1998. This increase reflected the Company's continued
business mix shift into the higher margin sectors of the IT staffing and
consulting industry and growth in higher margin permanent placement services.
Information Technology revenues grew to 63.6% of total revenues in the third
quarter of 1999, up from 57.0% in 1998. Although pay rate increases during the
third quarter were generally passed on to the Company's customers through higher
bill rates, there can be no assurance that the Company will be able to pass on
pay rate increases to its customers in the future.
Operating Expenses. Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense, increased
17.5% to $48.7 million in the third quarter of 1999 from $41.4 million in 1998.
As a percentage of revenues, selling, general and administrative expenses
increased to 18.5% in the third quarter, up 100 basis points from last year.
This increase was caused by investments in management personnel and information
systems, the continued business mix shift into IT services, and the acquisition
of companies in the second half of 1998 that provide IT and permanent placement
services (both of which typically carry higher gross margins, as well as higher
operating expenses, than Commercial Staffing). In addition, depreciation and
amortization expense increased to 2.3% of revenues in the third quarter of 1999
from 2.1% last year primarily as the result of the acquisitions completed by the
Company in 1998.
Interest Expense. Interest expense increased to $4.1 million in the
third quarter of 1999 from $2.8 million in 1998 primarily as the result of
borrowings during the last half of 1998 to finance acquisitions and borrowings
in the first half of 1999 to finance share repurchases. See "Liquidity and
Capital Resources."
Income Tax Expense. The effective tax rate decreased slightly to 42.0%
in the third quarter of 1999 from 42.3% in 1998. This decrease was due to a
reduction in nondeductible amortization expense relative to pretax income for
the period. 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.
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NINE MONTHS ENDED OCTOBER 3, 1999 VERSUS NINE MONTHS ENDED SEPTEMBER
27, 1998
Revenues. Total revenues increased 25.3% to $697.7 million in the first
nine months of 1999 from $556.9 million in 1998. Information Technology revenues
grew 42.7% primarily as the result of strong internal pro forma growth in the
first two quarters of 1999 and the contribution of revenues from the companies
acquired by the Company in 1998. Commercial Staffing revenues were up 2.8% over
the two nine-month periods.
Direct Costs of Services and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased
24.5% to $499.2 million in the first nine months of 1999. Gross profit as a
percentage of revenue increased 40 basis points to 28.4% during the nine months
of 1999 from 28.0% during 1998. This increase reflected the Company's continued
business mix shift into the higher margin information technology staffing and
consulting sectors, the acquisition of several companies that provide high
margin permanent placement services, and the elimination of certain lower margin
Commercial Staffing business in the fourth quarter of 1998 and the first quarter
of 1999. Information Technology revenues represented 64.1% of total revenues in
the first nine months of 1999, up from 56.3% in 1998. Although pay rate
increases during 1999 were generally passed on to the Company's customers
through higher bill rates, there can be no assurance that the Company will be
able to pass on pay rate increases to its customers in the future.
Operating Expenses. Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense, increased
33.2% to $145.9 million in the first nine months of 1999 from $109.6 million in
1998. As a percentage of revenues, selling, general and administrative expenses
increased to 18.6% in the first nine months of 1999 from 17.6% in 1998. This
increase was caused by investments in management personnel and management
systems, the continued business mix shift into IT services and the acquisition
of companies in the second half of 1998 that provide IT and permanent placement
services (both of which typically carry higher gross margins, as well as higher
operating expenses, than Commercial Staffing). In addition, depreciation and
amortization expense increased to 2.3% of revenues in the first nine months of
1999 from 2.1% in 1998 due to increased amortization expense resulting from the
acquisitions completed by the Company during 1998.
Interest Expense. Interest expense increased to $12.3 million in the
first nine months of 1999 from $9.1 million in 1998 primarily as the result of
borrowings during the last half of 1998 to finance acquisitions and borrowings
in the first half of 1999 to finance share repurchases. See "Liquidity and
Capital Resources."
Income Tax Expense. The effective tax rate decreased slightly to 42.0%
in the first nine months of 1999 from 42.3% in 1998. This decrease was due to a
reduction in nondeductible amortization expense relative to pretax income for
the period. 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from operations and
borrowings under the Credit Facility. The Company's principal uses of cash are
to fund working capital, capital expenditures and share repurchases under the
Company's share buyback programs. Prior to 1999, the Company had also used
substantial cash to fund its acquisition program. The Company's acquisition
activity has declined significantly in 1999, however, and the use of cash for
acquisitions has declined accordingly.
For the nine months ended October 3, 1999, cash provided by operating
activities increased to $46.8 million, primarily as a result of higher earnings
before depreciation and amortization during the nine months, offset by increases
in receivables reflecting the growth in the volume of business over the prior
year. As of October 3, 1999, receivables for Information Technology and
Commercial Staffing remained outstanding an average of 58 and 47 days,
respectively, after billing. In the aggregate, days sales outstanding were 54
and 52 days at October 3, 1999 and September 27, 1998, respectively. Cash used
for investing activities decreased to $24.0 million in the nine months of 1999
from $189.8 million in 1998 primarily as a result of the Company's reduced
acquisition activity during 1999.
As of October 3, 1999, the Company was obligated under certain
acquisition agreements to make contingent earnout payments to former owners of
acquired businesses during the next two years. Earnout payments based on
earnings for periods ending after January 3, 1999 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 the future performance of such acquired businesses, that
aggregate earnout payments may be in the range of $11.0 million to 13.0 million
in the fourth quarter of 1999, $15.0 million to $27.0 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.
For the nine months ended October 3, 1999, investing activities
included $8.5 million of capital expenditures primarily related to the
implementation of management information systems. The Company expects to spend
approximately 1.0 to 1.2 percent of its annual revenues in 1999 and 2000 on
management information systems and other capital expenditures not directly
related to acquisitions. The Company initiated a project in 1998 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.
In the first half of 1999, the Company repurchased approximately 7.1
million shares of its common stock in open market transactions for a total cost
of approximately $52.0 million. These purchases were financed with borrowings
under the Credit Facility. These repurchased shares have been held in the
Company's treasury and will be available for resale and for general corporate
purposes. As of November 5, 1999, treasury shares totaling 0.5 million shares
have been subsequently reissued upon the exercise of stock options and under the
Company's employee stock purchase plan.
On September 15, 1999, the Company's Board of Directors authorized a
new share repurchase program covering up to $30.0 million of its outstanding
shares of common stock in the aggregate. Share repurchases made under this
program are made from time to time in accordance with applicable securities
regulations in open market or privately negotiated transactions. As of November
5, 1999, the Company had repurchased an additional 0.7 million shares of common
stock under this program at a total cost of approximately $4.5 million in the
aggregate.
The Credit Facility is a five-year $200.0 million revolving line of
credit due June 2002. As of November 5, 1999, $141.0 million was outstanding
under the Credit Facility and approximately $5.5 million was reserved for the
issuance of undrawn letters of credit to secure the Company's workers'
compensation programs. In the first nine months of 1999, the weighted average
interest rate under the Credit Facility was 6.2%.
14
<PAGE> 15
The Company believes that cash flow from operations and borrowing
capacity under the existing Credit Facility will be adequate to meet its
presently anticipated needs for working capital, capital expenditures and share
repurchases. In the event that significant acquisition activity resumed
short-term, the Company would likely be required to seek alternative sources of
capital, such as an expansion of the Credit Facility or one or more offerings of
additional debt or equity securities of the Company. There can be no assurance,
however, that other alternative sources will be available, if and when needed,
on favorable terms.
Year 2000 Compliance. In 1998, the Company initiated a project to
replace the financial and human resource systems for its Information Technology
companies. In addition, the Company expects to complete the installation of
branch payroll and billing systems at its Commercial Staffing companies during
1999. Management believes that these new systems are year 2000 compliant based
on representations from the software vendors. The Company also believes that its
other key computer systems and related software, including systems used at
corporate headquarters, are substantially year 2000 compliant. An assessment to
determine what modifications are necessary to other systems was completed at the
end of the third quarter of 1999. Replacement or necessary modifications to
existing systems are scheduled to be completed before the end of 1999. As of
October 3, 1999, approximately $1.0 million had been expensed related to the
assessment and remediation of year 2000 issues. The Company estimates the total
expense to be between $1.1 million and $1.2 million. In addition, the Company is
continuing to assess 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, software or equipment or in the computer systems, software or
equipment of the Company's vendors and customers. Contingency plans are being
developed in certain key areas should year 2000 problems be identified.
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 believes that its internal year
2000 compliance efforts reduced significantly the Company's exposure from the
impact of year 2000 issues.
Information Technology performs work for clients to assist them in
modifying their computer systems and software to make them year 2000 compliant,
although this type of work does not represent a significant portion of that
Division's services. Generally, this work is performed under the direction and
supervision of the client and the Company seeks to limit its 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 such liabilities, if any, will not be material.
15
<PAGE> 16
FORWARD-LOOKING INFORMATION
This report, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" ("MD&A"), 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, including the impact of changes in utilization rates and unexpected
changes in demand attributable to the Year 2000 phenomenon, 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 professions, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's outstanding debt under the Credit Facility at October 3,
1999 was $145.0 million. Interest on borrowings under the Credit Facility is
based on LIBOR plus a variable margin. Based on the outstanding balance at
October 3, 1999, a change of 1% in the interest rate would cause a change in
interest expense of approximately $1.5 million on an annual basis.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - The exhibits filed with or incorporated by reference into
this Form 10-Q are set forth in the Exhibit Index, which immediately
precedes the exhibits to this report.
(b) Reports on Form 8-K -The Company filed no current reports on Form 8-K
during the quarter ended October 3, 1999.
17
<PAGE> 18
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 16, 1999 By: /s/ Edward P. Drudge Jr.
-------------------------------------
Edward P. Drudge Jr.
Chief Executive Officer
Date: November 16, 1999 By: /s/Ken R. Bramlett, Jr.
-------------------------------------
Ken R. Bramlett, Jr.
Senior Vice President,
Chief Financial Officer and Treasurer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED HEREWITH(*),OR
INCORPORATED BY
REFERENCE FROM PREVIOUS
EXHIBIT
EXHIBIT COMPANY REG. NO.
NUMBER DESCRIPTION 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+ Amended and Restated Management Incentive 10.2 10-K for year
Compensation Plan ended January 3, 1999
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
10.8+ Employment Agreement between the Company and 10.13 10-K for year
Ken R. Bramlett, Jr. ended 12/29/96
10.9+ Employment Agreement between the Company and 10.9 10-K for year ended
Michael H. Barker 1/3/99
10.10+ Employment Agreement between the Company and 10.10 10-K for year ended
William T. McCarthy 1/3/99
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
10.11+ Employment Agreement between the Company and 10.11 10-K for year ended
Donald Kierson 1/3/99
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+ Director's Non-Qualified Deferred Fee Plan 10.12 10-K for year ended
12/28/97
10.16 Amended and Restated Credit Agreement between 10.15 333-31863
the Company and its subsidiaries, the Lenders
party thereto and Bank of America N.A., as
Agent
10.17 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
Bank of America, N.A., as agent
10.18 Asset Purchase Agreement between the Company 2 8-K dated 9/30/96
and Business Enterprise Systems and
Technology, Inc. (BEST Consulting)
10.19 Stock Purchase Agreement for the sale of 1 8-K dated 12/26/97
Nursefinders between PFI Corp., Nursefinders,
Inc., and Nursefinder Acquisition Corp.
10.20 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.; (ii) dated April 17, 1998 between the
Company and each of James C. Hunt and Ken R. Bramlett, Jr.; and (iii)
dated August 9, 1999 between the Company and Janice L. Scites.
+ Management contract or compensation plan required to be filed under
Item 14(c) of this report and Item 601 of Regulation S-K of the
Securities and Exchange Commission.
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 1,096
<SECURITIES> 0
<RECEIVABLES> 139,200
<ALLOWANCES> (2,871)
<INVENTORY> 0
<CURRENT-ASSETS> 150,607
<PP&E> 36,211
<DEPRECIATION> (11,675)
<TOTAL-ASSETS> 716,601
<CURRENT-LIABILITIES> 64,516
<BONDS> 0
0
0
<COMMON> 331
<OTHER-SE> 370,422
<TOTAL-LIABILITY-AND-EQUITY> 716,601
<SALES> 697,680
<TOTAL-REVENUES> 697,680
<CGS> 499,244
<TOTAL-COSTS> 629,355
<OTHER-EXPENSES> 15,809
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,251
<INCOME-PRETAX> 40,265
<INCOME-TAX> 16,911
<INCOME-CONTINUING> 23,354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,354
<EPS-BASIC> 0.82
<EPS-DILUTED> 0.76
</TABLE>
