<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 July 4, 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
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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
- --------------------------------------------------------------------------------
(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 August 10, 1999, there were 26,262,208 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 4. Submission of Matters to Vote of Security Holders................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................. 18
Exhibit Index ............................................................. 19
2
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JULY 4, 1999 AND JUNE 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JULY 4, JUNE 28, JULY 4, JUNE 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $234,826 $190,291 $464,465 $345,128
DIRECT COSTS OF SERVICE 167,043 135,679 332,647 249,528
-------- -------- -------- --------
Gross profit 67,783 54,612 131,818 95,600
OPERATING EXPENSES
Selling, general and administrative 43,947 34,685 86,881 60,987
Depreciation and amortization 5,303 4,106 10,373 7,185
-------- -------- -------- --------
Total operating expenses 49,250 38,791 97,254 68,172
OPERATING INCOME 18,533 15,821 34,564 27,428
INTEREST EXPENSE 4,393 3,826 8,126 6,313
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 14,140 11,995 26,438 21,115
PROVISION FOR INCOME TAXES 5,939 5,075 11,104 8,933
-------- -------- -------- --------
NET INCOME $ 8,201 $ 6,920 $ 15,334 $ 12,182
======== ======== ======== ========
NET INCOME PER BASIC SHARE $ 0.31 $ 0.25 $ 0.52 $ 0.46
NET INCOME PER DILUTED SHARE $ 0.28 $ 0.23 $ 0.49 $ 0.42
</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
JULY 4, 1999 AND JANUARY 3, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 4, JAN. 3,
ASSETS 1999 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 216 $ 962
Accounts receivable, net 136,132 129,761
Prepaid expenses and other current assets 8,221 6,967
Deferred income taxes 5,453 5,149
Notes receivable from sale of discontinued operations 885 885
--------- ---------
Total current assets 150,907 143,724
Property and equipment, net 23,174 20,290
Intangible assets, net 539,110 539,977
Other assets 4,574 4,899
--------- ---------
Total assets $ 717,765 $ 708,890
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,017 $ 9,150
Accounts payable 6,654 5,310
Accrued wages, benefits and other 46,644 42,604
Income taxes payable 6,035 2,509
--------- ---------
Total current liabilities 66,350 59,573
Long-term debt 270,017 226,256
Other long-term liabilities 20,156 28,431
--------- ---------
Total liabilities 356,523 314,260
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 July 4, 1999 and
January 3, 1999, respectively 331 329
Additional paid-in capital 330,625 329,383
Retained earnings 80,417 65,083
Deferred compensation (113) (165)
--------- ---------
411,260 394,630
Less common stock held in treasury at cost -
6,804 shares at July 4, 1999 (50,018) --
--------- ---------
Total shareholders' equity 361,242 394,630
--------- ---------
Total liabilities and shareholders' equity $ 717,765 $ 708,890
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JULY 4, 1999 AND JUNE 28, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 4, JUNE 28,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,334 $ 12,182
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 10,373 7,185
Deferred income taxes, net (1,158) 595
Changes in assets and liabilities:
Accounts receivable (6,371) (14,848)
Accounts payable and accrued liabilities 5,999 8,868
Income taxes payable 3,526 942
Other, net (1,079) (1,073)
--------- ---------
Net cash provided by operating activities 26,624 13,851
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired (14,196) (186,625)
Net cash provided by discontinued operations -- 8,041
Purchases of property and equipment, net (5,601) (3,118)
--------- ---------
Net cash used in investing activities (19,797) (161,702)
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 133,300
Repayments under credit facility (25,000) (198,450)
Borrowings under credit facility 69,000 212,950
Repurchases of common stock (51,944) --
Repayments of seller notes and acquired indebtedness (2,372) (1,900)
Proceeds from employee stock purchase plan and exercise
of stock options 2,743 1,309
--------- ---------
Net cash provided (used) by financing activities (7,573) 147,209
Net decrease in cash and cash equivalents (746) (642)
Cash and cash equivalents at beginning of period 962 642
--------- ---------
Cash and cash equivalents at end of period $ 216 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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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 amounted to $30,988 and $23,332 at
July 4, 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:
<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 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
</TABLE>
6
<PAGE> 7
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 three years. Any such contingent payments will
be recorded as additional purchase price when determined and will increase the
amount of excess cost over fair 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 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 six-months ended June 28, 1998, as if the Acquired
Companies had each been acquired on December 29, 1997:
June 28,
1998
--------
Revenues $420,656
Net income 14,037
Net income per diluted share $ 0.47
--------
Weighted average diluted shares outstanding 34,519
========
(4) LONG-TERM DEBT
Long-term debt consisted of the following at July 4, 1999 and January
3, 1999:
<TABLE>
<CAPTION>
July 4, 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 154,000 110,000
Notes payable to sellers of acquired companies
and other 8,034 10,406
--------- ---------
277,034 235,406
Less current portion (7,017) (9,150)
--------- ---------
$ 270,017 $ 226,256
========= =========
</TABLE>
7
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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 Six Months Ended
-------------------- --------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME PER BASIC SHARE:
Net income $ 8,201 $ 6,920 $15,334 $12,182
Weighted average shares outstanding 26,433 28,140 29,349 26,451
------- ------- ------- -------
Net income per basic share $ 0.31 $ 0.25 $ 0.52 $ 0.46
======= ======= ======= =======
NET INCOME PER DILUTED SHARE:
Net income $ 8,201 $ 6,920 $15,334 $12,182
Add: Interest expense on
Convertible Notes, net of tax 1,064 1,064 2,128 2,128
------- ------- ------- -------
Diluted net income 9,265 7,984 17,462 14,310
------- ------- ------- -------
Weighted average shares outstanding 26,433 28,140 29,349 26,451
Add: Dilutive employee stock options 111 787 160 782
Add: Assumed conversion of Convertible Notes 6,456 6,456 6,456 6,456
------- ------- ------- -------
Weighted average diluted shares outstanding 33,000 35,383 35,965 33,689
------- ------- ------- -------
Net income per diluted share $ 0.28 $ 0.23 $ 0.49 $ 0.42
======= ======= ======= =======
</TABLE>
Stock options to purchase approximately 2.6 million shares of common
stock at a weighted average exercise price of $13.92 per share were outstanding
during the three months and six months ended July 4, 1999, but were excluded
from the computation of net income per dilutive share because their effect was
antidilutive.
(6) SEGMENT INFORMATION
The Company has two reportable segments, 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. The Company evaluates segment
performance based on income from operations before corporate expenses,
amortization of intangible assets, interest and income taxes.
8
<PAGE> 9
The table below presents operating results by reported segments for
each of the following periods:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
July 4, June 28, July 4, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Information Technology $152,635 $107,366 $299,235 $192,794
Commercial Staffing 82,191 82,925 165,229 152,334
-------- -------- -------- --------
Total revenues 234,826 190,291 464,464 345,128
-------- -------- -------- --------
Operating income
Information Technology 18,485 12,288 33,895 21,330
Commercial Staffing 7,605 8,667 14,565 14,991
-------- -------- -------- --------
Total segment operating income 26,090 20,955 48,460 36,321
Corporate expenses 3,710 2,014 6,241 3,497
Amortization of intangible assets 3,847 3,120 7,655 5,396
Interest expense 4,393 3,826 8,126 6,313
-------- -------- -------- --------
Income before income taxes $ 14,140 $ 11,995 $ 26,438 $ 21,115
======== ======== ======== ========
</TABLE>
The Company does not report total assets by segment. The following
table sets forth identifiable assets by segment at July 4, 1999 and January 3,
1999:
July 4, Jan. 3,
1999 1999
-------- --------
Accounts receivable, net
Information Technology $ 94,036 $ 84,999
Commercial Staffing 41,478 44,226
Corporate 618 536
-------- --------
Total accounts receivable, net $136,132 $129,761
======== ========
9
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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 July 4, 1999, Information
Technology was comprised of 20 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 August 10, 1999:
<TABLE>
<CAPTION>
Years End
Aug. 10, ------------------------------
1999 1998 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
IT Division 48 47 30 18
Commercial Staffing 101 100 82 74
------ ------ ------ ------
Total offices 149 147 112 92
====== ====== ====== ======
</TABLE>
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 the Information Technology Division
and Commercial Staffing, respectively.
Also in May 1998, the Company completed a public offering of 7.0
million shares of common stock. The net proceeds of approximately $133.3 million
from this offering were used to repay indebtedness under the Company's $200.0
million revolving credit facility (the "Credit Facility").
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 of 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
10
<PAGE> 11
costs on a straight-line basis over 40 years. Intangible assets represented
75.1% of total assets and 149.2% of total shareholders' equity at July 4, 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.
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 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 rapid 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.
11
<PAGE> 12
RESULTS OF OPERATIONS
QUARTER ENDED JULY 4, 1999 VERSUS QUARTER ENDED JUNE 28, 1998
Revenues. Total revenues increased 23.4% to $234.8 million in the
second quarter of 1999 from $190.3 million in 1998. Information Technology
revenues grew 42.2% in the second quarter as the result of a 15% increase in
Information Technology pro forma revenues and the addition of revenues from the
eight Information Technology Division acquisitions completed after March 30,
1998. Commercial Staffing revenues of $82.2 million in the second quarter were
slightly under reported revenues in the same period of 1998. Commercial Staffing
pro forma revenues in the second quarter also declined slightly from the year
ago quarter as the Company continued to eliminate targeted Commercial Staffing
accounts that failed to meet minimum profitability objectives. Management
currently expects internal growth for the balance of 1999 of 11% to 13% in
Information Technology. Excluding the impact of certain non-recurring revenues
in the second half of 1998 associated with a large vendor-on-premises client and
the elimination of certain low margin accounts, management currently believes
Commercial Staffing internal growth during the second half of 1999 will be in
the low-to-mid single digits. In each division, these expected internal growth
rates are down from 1998 internal growth rates. There can be no assurance that
these expected internal growth rates will be achieved. See "Forward-Looking
Information" for a discussion of certain risks and uncertainties. Lower than
expected internal growth rates could have an adverse effect on the Company's
financial condition and results of operations, and that effect could be
material.
Direct Costs of Service and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased
23.1% to $167.0 million in the second quarter of 1999. Gross margin as a
percentage of revenues increased 20 basis points to 28.9% for the second quarter
of 1999 from 28.7% during 1998. This increase reflected the Company's continued
business mix shift into the higher margin information technology staffing and
consulting sectors and growth in higher margin permanent placement services.
Information Technology revenues grew to 65% of total revenues in the second
quarter of 1999, up from 56% in 1998. Although pay rate increases during the
second 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
27% to $49.3 million in the second quarter of 1999 from $38.8 million in 1998.
As a percentage of revenues, selling, general and administrative expenses
increased to 18.7% in the second quarter, up 50 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 several recent
acquisitions of companies 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 second quarter of 1999 from 2.2%
last year primarily as the result of the 1998 acquisitions completed by the
Company.
Interest Expense. Interest expense increased to $4.4 million in the
second quarter of 1999 from $3.8 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 the Company's share repurchase program. See
"Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate decreased slightly to 42.0%
in the second 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.
12
<PAGE> 13
SIX MONTHS ENDED JULY 4, 1999 VERSUS SIX MONTHS ENDED JUNE 28, 1998
Revenues. Total revenues increased 34.6% to $464.5 million in the first
six months of 1999 from $345.1 million in 1998. Information Technology revenue
grew 55.2% and Commercial Staffing revenue grew 8.5% as the result of continued
strong internal growth in Information Technology and the contribution of
revenues from the companies acquired by the Company in 1998.
Direct Costs of Services and Gross Profit. Direct costs, consisting of
payroll and related expenses of consultants and temporary workers, increased
33.3% to $332.6 million in the first six months of 1999. Gross profit as a
percentage of revenue increased 70 basis points to 28.4% during the first half
of 1999 from 27.7% 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 reduction in lower margin
commercial staffing business. Information Technology services revenues
represented 64.4% of total revenues in the first six months of 1999, up from
55.9% in 1998. 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
42.7% to $97.3 million in the first six months of 1999 from $68.2 million in
1998. As a percentage of revenues, selling, general and administrative expenses
increased to 18.7% in the first six months of 1999 from 17.7% in 1998. This
increase was caused by investments in management personnel and management
systems, the continued business mix shift to IT and permanent placement
services. Both of these lines of business 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 2.2% of revenues in
the first six 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 $8.1 million in the
first six months of 1999 from $6.3 million in 1998 primarily as the result of
borrowings during the last half of 1998 to finance further acquisitions and
borrowings in the first half of 1999 to finance the Company's share repurchase
program. See "Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate decreased slightly to 42.0%
in the first six 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.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from operations, borrowings
under the Credit Facility and proceeds of equity and debt offerings. The
Company's principal uses of cash are to fund working capital, capital
expenditures and acquisitions and, in the first half of 1999, to fund share
repurchases under the Company's share buyback program.
For the six months ended July 4, 1999, cash provided by operating
activities increased to $26.6 million, primarily as a result of higher earnings
before depreciation and amortization in the quarter, offset by increases in
receivables reflecting the growth in the volume of business over the prior year.
As of July 4, 1999, receivables for the IT Division and Commercial Staffing
remained outstanding an average of 56 and 46 days, respectively, after billing.
In the aggregate, days sales outstanding were 53 and 50 days at July 4, 1999 and
June 28, 1998, respectively. Cash used for investing activities decreased to
$19.8 million in the six months of 1999 from $161.7 million in 1998 primarily as
a result of the Company's reduced acquisition activity during 1999.
As of July 4, 1999, the Company was obligated under certain acquisition
agreements to repay seller notes during the next two years of $6.5 million in
the aggregate and to make contingent earnout payments to former owners of
acquired businesses. 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 $15.0 million to $23.0 million in the second half of 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.
For the six months ended July 4, 1999, investing activities included $5.6
million of capital expenditures primarily related to the implementation of
common management information systems in the operating companies. The Company
expects to spend approximately one 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. In addition, the Company expects to complete the installation of
branch payroll and billing systems at its commercial staffing companies during
1999. 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.
On October 6, 1998, the Company's Board of Directors authorized a share
repurchase program, which was subsequently expanded, covering up to $52.0
million of its outstanding shares of common stock in the aggregate (including
shares previously purchased under the program). 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. During 1999,
the Company purchased approximately 7.1 million shares of common stock in the
aggregate for a total cost of approximately $52.0 million, substantially
completing the repurchase program approved by the Board. The purchases were made
on the open market and were financed with borrowings under the Credit Facility.
The repurchased shares will be held in the Company's treasury and will be
available for resale and for general corporate purposes. Treasury shares
totaling 0.3 million shares have been subsequently reissued upon the exercise of
stock options and under the employee stock purchase plan.
14
<PAGE> 15
The Credit Facility is a five-year $200.0 million revolving line of credit
due June 2002. As of August 10, 1999, $144.0 million of borrowings were
outstanding under the Credit Facility and approximately $5.5 million had been
used for the issuance of undrawn letters of credit to secure the Company's
workers' compensation programs. In the first half of 1999, the weighted average
interest rate under the Credit Facility was 6.1%.
The Company believes that cash flow from operations, borrowing capacity
under the existing or expanded Credit Facility and the proceeds from future
offerings of debt or equity securities of the Company will be adequate to meet
its presently anticipated needs for working capital, capital expenditures and
acquisitions. There can be no assurance, however, that other alternative sources
will be available 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 is underway. The
Company expects to complete this assessment and make the necessary modifications
by the end of the third quarter of 1999. As of July 4, 1999, approximately $0.6
million has been expensed related to the assessment and remediation of year 2000
issues. The Company estimates the total expense to be between $1.0 million and
$1.2 million. 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, software or equipment
or in the computer systems, software or equipment 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, software or equipment of either the Company or its
vendors and customers.
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 IT Division 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 the
Division's services. 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 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. For example, management's statements of
expectation regarding internal growth rates for the balance of 1999, which are
set forth above under "MD&A-Results of Operations-Quarter ended July 4, 1999
versus Quarter ended June 28, 1998-Revenues", are 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 July 4, 1999,
was $154.0 million. Interest on borrowings under the Credit Facility is based on
LIBOR plus a variable margin. Based on the outstanding balance at July 4, 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 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 20, 1999.
The matters voted upon at the meeting were proposals (1) to elect two directors
to serve a term of three years, (2) to approve the Company's Amended and
Restated Management Incentive Compensation Plan, (3) to approve the continuation
of the Company's 1995 Equity Participation Plan and (4) to ratify the selection
of PricewaterhouseCoopers LLP as the Company's independent public accounts for
fiscal 1999. Each of these proposals was approved by the following margins:
PROPOSAL 1 VOTES FOR VOTES WITHHELD
- ----------- --------- --------------
Election of Directors -
James C. Hunt 24,814,475 213,332
Ken R. Bramlett, Jr. 24,812,587 215,220
VOTES VOTES BROKER
PROPOSAL 2 FOR AGAINST ABSTENTIONS NON-VOTES
- ---------- --- ------- ----------- ---------
Approval of the Amended and
Restated Management Incentive
Compensation Plan 24,402,293 619,235 6,279 -0-
VOTES VOTES BROKER
PROPOSAL 3 FOR AGAINST ABSTENTIONS NON-VOTES
- ---------- --- ------- ----------- ---------
Approval of the 1995 Equity
Participation Plan 22,974,686 2,046,120 7,001 -0-
VOTES VOTES
PROPOSAL 4 FOR AGAINST ABSTENTIONS
- ---------- --- ------- -----------
Ratification of Selection of
Independent Public Accountants 24,857,315 22,555 147,937
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 July 4, 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: August 18, 1999 By: /s/ Edward P. Drudge Jr.
-------------------------------------
Edward P. Drudge Jr.
Chief Executive Officer
Date: August 18, 1999 By: /s/ James C. Hunt
-------------------------------------
James C. Hunt
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
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C> <C> <C>
10.10+ Employment Agreement between the Company and 10.10 10-K for year ended
William T. McCarthy 1/3/99
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> 6-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JUL-04-1999
<CASH> 216
<SECURITIES> 0
<RECEIVABLES> 138,691
<ALLOWANCES> (2,559)
<INVENTORY> 0
<CURRENT-ASSETS> 150,907
<PP&E> 33,470
<DEPRECIATION> (10,296)
<TOTAL-ASSETS> 717,765
<CURRENT-LIABILITIES> 66,350
<BONDS> 0
0
0
<COMMON> 331
<OTHER-SE> 360,911
<TOTAL-LIABILITY-AND-EQUITY> 717,765
<SALES> 464,465
<TOTAL-REVENUES> 464,465
<CGS> 332,647
<TOTAL-COSTS> 419,528
<OTHER-EXPENSES> 10,373
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,126
<INCOME-PRETAX> 26,438
<INCOME-TAX> 11,104
<INCOME-CONTINUING> 15,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,334
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.49
</TABLE>
