<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 2, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 001-13956
PERSONNEL GROUP OF AMERICA, INC.
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(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.)
5605 Carnegie Blvd., Suite 500, Charlotte, North Carolina 28209
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(Address of principal executive offices) (Zip Code)
(704) 442-5100
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(Registrant's telephone number including area code)
None
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of August 11, 2000, there were 24,943,010 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
<TABLE>
<CAPTION>
Page
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<S> <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
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ............................................................ 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities ................................................................. 14
Item 4. Submission of Matters to Vote of Security Holders ..................................... 14
Item 6. Exhibits and Reports on Form 8-K ...................................................... 15
Signatures ..................................................................................... 16
Exhibit Index .................................................................................. 17
</TABLE>
2
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PERSONNEL GROUP OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JULY 2, 2000 AND JULY 4, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $223,006 $234,826 $439,862 $464,465
DIRECT COSTS OF SERVICES 158,242 167,043 314,117 332,647
-------- -------- -------- --------
Gross profit 64,764 67,783 125,745 131,818
OPERATING EXPENSES
Selling, general and administrative 46,394 43,947 88,592 86,881
Depreciation and amortization 6,173 5,303 11,954 10,373
-------- -------- -------- --------
Total operating expenses 52,567 49,250 100,546 97,254
OPERATING INCOME BEFORE NONRECURRING 12,197 18,533 25,199 34,564
COSTS
NONRECURRING COSTS -- -- 1,452 --
-------- -------- -------- --------
OPERATING INCOME 12,197 18,533 23,747 34,564
INTEREST EXPENSE 5,079 4,393 9,513 8,126
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 7,118 14,140 14,234 26,438
PROVISION FOR INCOME TAXES 3,203 5,939 6,277 11,104
-------- -------- -------- --------
NET INCOME $ 3,915 $ 8,201 $ 7,957 $ 15,334
-------- -------- -------- --------
NET INCOME PER BASIC SHARE $ 0.16 $ 0.31 $ 0.32 $ 0.52
NET INCOME PER DILUTED SHARE $ 0.16 $ 0.28 $ 0.32 $ 0.49
</TABLE>
The accompanying notes are an integral part of these statements.
3
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PERSONNEL GROUP OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
JULY 2, 2000 AND JANUARY 2, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
July 2, January 2,
ASSETS 2000 2000
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8 $ 5,752
Accounts receivable, net 134,344 125,968
Prepaid expenses and other current assets 6,842 5,690
Deferred income taxes 6,844 6,594
Notes receivable from sale of discontinued operations 885 885
--------- ---------
Total current assets 148,923 144,889
Property and equipment, net 27,408 25,776
Intangible assets, net 572,255 560,113
Other assets 4,140 4,572
--------- ---------
Total assets $ 752,726 $ 735,350
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 944 $ 956
Accounts payable 9,958 8,535
Accrued wages, benefits and other 49,621 47,859
Income taxes payable 2,409 752
--------- ---------
Total current liabilities 62,932 58,102
Long-term debt 287,129 253,395
Other long-term liabilities 31,612 54,010
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Total liabilities 381,673 365,507
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 shares issued at July 2, 2000 and January 2, 2000 331 331
Additional paid-in capital 325,720 330,237
Retained earnings 102,793 94,836
Deferred compensation (9) (61)
--------- ---------
428,835 425,343
Less common stock held in treasury at cost -
8,122 shares at July 2, 2000 and 7,587 shares at
January 2, 2000 (57,782) (55,500)
--------- ---------
Total shareholders' equity 371,053 369,843
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Total liabilities and shareholders' equity $ 752,726 $ 735,350
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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PERSONNEL GROUP OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED JULY 2, 2000 AND JULY 4, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
July 2, July 4,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,957 $ 15,334
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 11,954 10,373
Deferred income taxes, net -- (1,158)
Changes in assets and liabilities:
Accounts receivable (8,376) (6,371)
Accounts payable and accrued liabilities 2,597 5,999
Income taxes payable 1,657 3,526
Other, net (630) (1,079)
-------- --------
Net cash provided by operating activities 15,159 26,624
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired (40,470) (14,196)
Purchases of property and equipment, net (4,521) (5,601)
-------- --------
Net cash used in investing activities (44,991) (19,797)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under credit facility (16,000) (25,000)
Borrowings under credit facility 50,000 69,000
Repurchases of common stock (10,584) (51,944)
Repayments of seller notes and other borrowings (529) (2,372)
Proceeds from employee stock purchase plan and exercise
of stock options 1,201 2,743
-------- --------
Net cash provided by (used in) financing activities 24,088 (7,573)
Net decrease in cash and cash equivalents (5,744) (746)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,752 962
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8 $ 216
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</TABLE>
The accompanying notes are an integral part of these statements.
5
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PERSONNEL GROUP OF AMERICA, INC.
NOTES TO 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 that, 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
2, 2000. 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 consist primarily of goodwill associated with
acquired businesses, and represented 154.2% of total shareholders' equity at
July 2, 2000. 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 (other than the goodwill associated with the
Careershop.com acquisition) on a straight-line basis over 40 years. The
Careershop.com goodwill will be amortized on a straight-line basis over five
years. Other intangibles are primarily covenants not to compete. Amortization
expense for the quarters ended July 2, 2000 and July 4, 1999 was $4,177 and
$4,019, respectively. Accumulated amortization of intangible assets was $46,886
and $38,690 at July 2, 2000 and January 2, 2000, 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 recoverable.
(3) LONG-TERM DEBT
Long-term debt consisted of the following at July 2, 2000 and January
2, 2000:
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
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<S> <C> <C>
5-3/4% Convertible Subordinated Notes due July
2004 $115,000 $115,000
$200,000 revolving credit facility due June 2002 172,000 138,000
Notes payable to sellers of acquired companies
and other 1,073 1,351
-------- --------
288,073 254,351
Less current portion 944 956
-------- --------
$287,129 $253,395
======== ========
</TABLE>
As of August 11, 2000, the balance outstanding on the $200,000
revolving credit facility was $166,000.
6
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(4) NET INCOME PER SHARE
In accordance with FAS 128, the following tables reconcile net income
and weighted average diluted shares outstanding to the amounts used to calculate
basic and diluted earnings per share for each of the quarters ended July 2, 2000
and July 4, 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 3,915 $ 8,201 $ 7,957 $15,334
======= ======= ======= =======
Weighted average shares outstanding 24,273 26,433 24,732 29,349
Basic earnings per share $ 0.16 $ 0.31 $ 0.32 $ 0.52
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Net income $ 3,915 $ 8,201 $ 7,957 $15,334
Add: Interest expense on Convertible
Notes, net of tax 1,064 1,064 2,128 2,128
------- ------- ------- -------
Diluted net income $ 4,979 $ 9,265 $10,085 $17,462
======= ======= ======= =======
Weighted average shares outstanding 24,273 26,433 24,732 29,349
Add: Dilutive employee stock options 3 111 59 160
Add: Assumed conversion of Convertible
Notes 6,456 6,456 6,456 6,456
------- ------- ------- -------
Diluted weighted average shares outstanding 30,732 33,000 31,247 35,965
Diluted earnings per share $ 0.16 $ 0.28 $ 0.32 $ 0.49
======= ======= ======= =======
</TABLE>
Stock options to purchase 3,333 and 2,560 shares of the Company's common stock,
$.01 par value (the "Common Stock"), were outstanding during the three months
ended July 2, 2000 and July 4, 1999, respectively, but were excluded from the
computation of net income per diluted share because their effect was
antidilutive.
(5) SEGMENT INFORMATION
The Company is organized in two segments: Information Technology
Services ("IT Services") and Commercial Staffing Services ("Commercial
Staffing"). IT Services 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. Because of the Company's substantial intangible
assets, management does not consider total assets by segment an important
management tool and, accordingly, the Company does not report this information
separately.
7
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The table below presents segment information for the quarters ended
July 2, 2000 and July 4, 1999:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
IT Services $ 135,493 $ 152,635 $ 268,192 $ 299,236
Commercial Staffing 87,513 82,191 171,670 165,229
---------- ---------- ---------- ----------
Total revenues 223,006 234,826 439,862 464,465
---------- ---------- ---------- ----------
Operating income
IT Services 11,714 18,485 23,468 33,895
Commercial Staffing 8,471 7,605 16,610 14,565
---------- ---------- ---------- ----------
Total segment operating
income 20,185 26,090 40,078 48,460
Corporate expenses 3,811 3,710 6,683 6,241
Amortization of intangible assets 4,177 3,847 8,196 7,655
Nonrecurring costs -- -- 1,452 --
Interest expense 5,079 4,393 9,513 8,126
---------- ---------- ---------- ----------
Income before income taxes $ 7,118 $ 14,140 14,234 $ 26,438
========== ========== ========== ==========
</TABLE>
The following table sets forth identifiable assets by segment at July
2, 2000 and January 2, 2000:
<TABLE>
<CAPTION>
July 2, January 2,
2000 2000
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<S> <C> <C>
Accounts receivable, net
IT Services $ 90,536 $ 81,990
Commercial Staffing 43,293 43,602
Corporate 515 376
---------- ----------
Total accounts receivable, net $ 134,344 $ 125,968
========== ==========
</TABLE>
8
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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 has two business lines: Information Technology Services
("IT Services") and Commercial Staffing Services ("Commercial Staffing"). IT
Services 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.
Approximately 61% of the Company's second quarter 2000 revenues came from IT
Services and 39% came from Commercial Staffing.
During the first quarter of 2000, the Company's Chief Executive Officer
retired from his positions as an officer, employee and director of the Company.
The Company incurred a nonrecurring pre-tax expense of approximately $1.5
million in the first quarter relating to severance and other benefits for the
departed executive.
The Careershop.com acquisition was completed in June 2000, providing
the Company an entree into the internet recruiting and services industry.
Careershop.com has been in business for over three years, but has not yet become
profitable. Careershop.com has been accounted for using the purchase method of
accounting, and the goodwill associated with the acquisition will be amortized
on a straight-line basis over five years. As a result of this rapid amortization
schedule, Careershop.com's unprofitability and certain other factors, this
acquisition will be dilutive to the Company's earnings and earnings per share.
On July 11, 2000, the Company issued .5 million stock options to key
officers and employees under it's 1995 Equity Participation Plan. The options
were granted at an exercise price of $2.53, vest 25% per year and are
exercisable for a term not longer than 10 years. The closing price of the
Company's Common Stock as of August 14, 2000, was $3.75. There can be no
assurance that the Company's stock price will remain at levels higher than the
exercise price for these options; however, if it does, these options will be
dilutive to the Company's earnings per share.
The information technology services business is affected by the timing
of holidays and seasonal vacation patterns, generally resulting in lower IT
revenues and gross 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 Commercial Staffing business is stronger in
the second half of each calendar year than in the first half. While the
commercial staffing industry is also cyclical, the Company believes that the
broad geographic coverage of its operations, its emphasis on high-end clerical
staffing, and its concentration in 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.
9
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RESULTS OF OPERATIONS
QUARTER ENDED JULY 2, 2000 VERSUS QUARTER ENDED JULY 4, 1999
Revenues. IT Services revenues declined 11.2% to $135.5 million in the
second quarter of 2000 primarily as the result of the continuing slower than
expected recovery in customer demand for IT staffing services. Commercial
Staffing revenues rose 6.5% to $87.5 million in the second quarter of 2000
primarily due to continuing growth in permanent placement revenues and the
retail component of the Company's temporary staffing business. On a consolidated
basis, total revenues declined 5.0% to $223.0 million in the second quarter of
2000 from $234.8 million in 1999.
Gross Profit. Gross profit declined 4.5% to $64.8 million from $67.8
million last year on the lower revenues, but gross profit as a percentage of
revenues increased 17 basis points to 29.04% for the second quarter of 2000 from
28.87% during 1999. The gross profit percentage increase primarily resulted from
the continued strength of the Company's higher margin permanent placement
business. 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
6.7% to $52.6 million in the second quarter of 2000 from $49.3 million last
year. As a percentage of revenues, selling, general and administrative expenses
increased to 20.8% in the second quarter, up 210 basis points, from 18.7% last
year. This increase was caused primarily by continuing infrastructure spending
and the continued strength of the Company's permanent placement business (which
typically carries higher gross margins and higher operating expenses than the
temporary staffing business). In addition, depreciation and amortization expense
increased to 2.8% of revenues in the second quarter of 2000 from 2.3% last year
primarily due to increased amortization expense resulting from the
Careershop.com acquisition, earn-out payments related to prior acquisitions and
continuing investments in management information systems.
Interest Expense. Interest expense increased to $5.1 million in the
second quarter of 2000 from $4.4 million in 1999 as the Company borrowed
additional funds to make earn-out payments, finance its share repurchase
programs and complete the Careershop.com acquisition. Additionally, the average
interest rate on borrowings was 8.1%, up 200 basis points over the second
quarter last year. See "Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate increased to 45.0% in the
second quarter of 2000 from 42.0% in 1999 primarily because nondeductible
amortization expense related to acquisitions increased as a percentage of the
Company's pretax income. The Company's effective tax rate has historically been
higher than the U.S. federal statutory rate of 35.0% primarily due to state
income taxes and nondeductible amortization expense.
Net Income. Net income decreased 52.3% to $3.9 million in the second
quarter of 2000 from $8.2 million last year due to the factors discussed above.
10
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JULY 2, 2000 VERSUS SIX MONTHS ENDED JULY 4, 1999
Revenues. IT Services revenues declined 10.4% to $268.2 million in the
first six months of 2000 primarily as the result of the continuing slower than
expected recovery in customer demand for IT staffing services. Commercial
Staffing revenues were up 3.9% to $171.7 million in the first six months of 2000
primarily due to continuing growth in permanent placement revenues and the
retail component of the Company's temporary staffing business. On a consolidated
basis, total revenues declined 5.3% to $439.9 million in the first six months of
2000 from $464.5 million in 1999.
Gross Profit. Gross profit declined 4.6% to $125.7 million from $131.8
million last year on the lower revenues, but gross profit as a percentage of
revenues increased 21 basis points to 28.59% for the first six months of 2000
from 28.38% during 1999. The gross profit percentage increase primarily was the
result of the continued strength of the Company's higher margin permanent
placement business. Although pay rate increases during the first six months of
2000 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, before nonrecurring charges, and depreciation and
amortization expense, increased 3.4% to $100.5 million in the first six months
of 2000 from $97.3 million in 1999. As a percentage of revenues, selling,
general and administrative expenses, before nonrecurring charges, increased to
20.1% in the first six months, up 140 basis points, from 18.7% last year. This
increase was caused primarily by continuing infrastructure spending and the
continued strength of the Company's permanent placement business (which
typically carries higher gross margins and higher operating expenses than the
temporary staffing business). In addition, depreciation and amortization expense
increased to 2.7% of revenues in the first six months of 2000 from 2.2% last
year primarily due to increased amortization expense resulting from the
Careershop.com acquisition, earn-out payments related to prior acquisitions and
continuing investments in management information systems.
Interest Expense. Interest expense increased to $9.5 million in the
first six months of 2000 from $8.1 million in 1999 as the Company borrowed
additional funds to make earn-out payments, finance its share repurchase
programs and complete the Careershop.com acquisition. Additionally, the average
interest rate on borrowings was 7.8%, up 180 basis points over the first six
months of 1999. See "Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate increased to 44.1% in the
first six months of 2000 from 42.0% in 1999 primarily because nondeductible
amortization expense related to acquisitions increased as a percentage of the
Company's pretax income. The Company's effective tax rate has historically been
higher than the U.S. federal statutory rate of 35.0% primarily due to state
income taxes and nondeductible amortization expense.
Net Income. Net income decreased 48.1% to $8.0 million in the first six
months of 2000 from $15.3 million in 1999 due to the factors discussed above.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of cash are from operations and
borrowings under the Company's $200.0 million revolving credit facility (the
"Credit Facility"). The Company's principal uses of cash in the first six months
of 2000 were to fund working capital, capital expenditures, share repurchases
under the Company's share repurchase programs, the Careershop.com acquisition
and contingent earn-out payments related to previous acquisitions. The Company
has not made any share repurchases since May 2000, and has no current intention
of making significant share repurchases over the balance of this year. Prior to
1999, the Company had also used substantial cash to fund its acquisition
program. The Company's acquisition activity has declined significantly since the
end of 1998, however, and the use of cash for acquisitions, other than
Careershop.com and for earn-out payments, has declined accordingly.
As of July 2, 2000, the Company was obligated to make certain
contingent earn-out payments to former owners of acquired businesses. Earn-out
payments made during the first six months of 2000 were approximately $31.6
million in the aggregate. Earn-out payments based on earnings for periods ending
after July 2, 2000 and beyond are contingent on the future performance of such
acquired businesses, and thus the actual amount cannot be determined at this
date. The Company estimates, based on certain assumptions as to the future
performance of such acquired businesses, that aggregate earn-out payments may be
in the range of $2.0 million to $3.0 million during the balance of 2000 and
$10.0 million to $13.0 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 earn-out payments will not differ materially from the estimates
set forth herein.
For the six months ended July 2, 2000, cash provided by operating
activities decreased to $15.2 million from $26.6 million for the six months
ended July 4, 1999, primarily as a result of lower earnings before depreciation
and amortization in the first half of 2000. In the aggregate, days sales
outstanding were 54 and 53 days at July 2, 2000 and July 4, 1999, respectively.
Cash used for investing activities increased to $45.0 million during the
six-month period from $19.8 million in 1999 primarily as a result of contingent
earn-out payments relating to acquisitions and the June 2000 acquisition of
Careershop.com. With the Careershop.com acquisition completed and its earn-out
obligations diminishing, the Company expects cash used for investing activities
to decrease substantially over the balance of this year and into 2001.
The Company repurchased 1.7 million shares of its Common Stock during
the first six months of 2000 at an aggregate purchase price of $10.6 million. As
of August 11, 2000, the Company had authorization from its Board of Directors to
repurchase an additional $11.3 million of Common Stock. Share repurchases were
made from time to time in accordance with applicable securities regulations in
open market or privately negotiated transactions. All share repurchases were
financed with cash from operations and borrowings under the Credit Facility and
all repurchased shares have been held in the Company's treasury and are
available for resale and for general corporate purposes.
The Credit Facility is a five-year, $200.0 million revolving line of
credit due June 2002. As of August 11, 2000, $166.0 million of borrowings were
outstanding under the Credit Facility (down from $172.0 million at July 2, 2000)
and approximately $6.2 million had been used for the issuance of undrawn letters
of credit to secure the Company's workers' compensation programs. In the second
quarter of 2000, the weighted average interest rate under the Credit Facility
was 8.1%.
The Company began a project in 1998 to replace the financial and human
resource systems for its IT Services companies. Installation of these systems
for the remaining companies is expected to
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<PAGE> 13
continue into the first half of 2001. The Company expects to spend one to one
and one-half percent of its 2000 revenues on management information systems and
other capital expenditures not directly related to acquisitions, including the
project to replace the financial and human resource systems discussed above.
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 believes that cash flow from operations and borrowing
capacity under the Credit Facility will be adequate to meet its presently
anticipated needs for working capital and capital expenditures and its
diminishing needs for earn-out payments. 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 alternative sources will be available,
if and when needed, on favorable terms.
YEAR 2000 COMPLIANCE
The Company uses software and related information technologies and
systems throughout its business that could be affected by the failure to
correctly interpret and process dates after 1999. Accordingly, the Company
attempted to identify and assess its areas of risk related to the year 2000
issue. The Company experienced no disruptions to its business as the result of
the changes to calendar year 2000 and believes, based on its experience and upon
representations from certain of its software vendors, that its key computer
systems and related software are substantially year 2000 compliant.
IT Services has performed work for clients to assist them in modifying
their computer systems and software to make them year 2000 compliant, although
this type of work did not represent a significant portion of IT Services'
business. Generally, this work was performed under the direction and supervision
of the client, and the Company limited its liability contractually.
Additionally, the Company maintains errors and omissions insurance to protect
against these risks. Although to date the Company is unaware of any claims from
its clients based on its work on year 2000 projects, there can be no assurance
that the Company will not incur liabilities or experience other problems in the
future related to the year 2000 issue or that any such liabilities or problems
will not be material.
13
<PAGE> 14
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, including the impact of changes in utilization rates, 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 2,
2000, was $172.0 million. Interest on borrowings under the Credit Facility is
based on LIBOR plus a variable margin. Based on the outstanding balance at July
2, 2000, a change of 1% in the interest rate would cause a change in interest
expense of approximately $1.7 million on an annual basis.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On June 1, 2000, the Company acquired all of the outstanding stock of
Careershop.com (4,752,538 shares) in exchange for approximately $4.5 million in
cash and 792,090 shares of the Company's common stock. The Company Common Stock
issued to the former Careershop.com shareholders was valued at approximately
$2.9 million in the aggregate. Simultaneously, the Company assumed
Careershop.com debt of approximately $4.1 million. The Company's common stock
was issued to the holders of the outstanding capital stock of Careershop.com in
a transaction not involving a public offering in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 25, 2000.
The matters voted on at the meeting were proposals: (1) to elect three directors
to serve a term of three years, (2) to approve an amendment to the Company's
1997 Employee Stock Purchase Plan and (3) to ratify the selection of
PricewaterhouseCoopers LLP as the Company's independent public accountant for
fiscal 2000. Each of these proposals was approved by the following margins:
14
<PAGE> 15
<TABLE>
<CAPTION>
PROPOSAL 1 VOTES FOR VOTES WITHHELD
---------- ---------- --------------
<S> <C> <C>
Election of Directors
Kevin P. Egan 19,754,325 244,743
J. Roger King 19,753,039 246,029
Janice L. Scites 19,757,895 241,173
<CAPTION>
VOTES VOTES
PROPOSAL 2 FOR AGAINST ABSTENTIONS
---------- ---------- --------- -----------
<S> <C> <C> <C>
Approval of the Amendment
to the 1997 Employee
Stock Purchase Plan 17,290,339 2,680,957 27,772
<CAPTION>
VOTES VOTES
PROPOSAL 3 FOR AGAINST ABSTENTIONS
---------- ---------- ------- -----------
<S> <C> <C> <C>
Ratification of Selection of
Independent Public Accountants 19,932,970 37,801 28,297
</TABLE>
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 one current report on Form 8-K,
dated June 1, 2000, during the quarter ended July 2, 2000. This report
incorporated by reference the contents of a Company press release
issued on June 1, 2000, announcing the Careershop.com acquisition.
15
<PAGE> 16
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 16, 2000 By: /s/ James C. Hunt
-------------------------------------
James C. Hunt
President and Chief Operating Officer
Date: August 16, 2000 By: /s/ Ken R. Bramlett, Jr.
-------------------------------------
Ken R. Bramlett, Jr.
Senior Vice President,
Chief Financial Officer and Treasurer
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<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED
HEREWITH(*),OR
INCORPORATED BY
REFERENCE FROM
EXHIBIT PREVIOUS EXHIBIT COMPANY REG.
NUMBER DESCRIPTION NO.
------- ----------- 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 1/3/99
10.3+ Employee Stock Purchase Plan, as amended 10.3 10-K for year
ended 1/2/00
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 10.10 10-K for year
James C. Hunt ended 12/29/96
10.6+ Employment Agreement between the Company and 10.13 10-K for year
Ken R. Bramlett, Jr. ended 12/29/96
10.7+ Employment Agreement between the Company and 10.9 10-K for year ended
Michael H. Barker 1/3/99
</TABLE>
17
