<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 October 1, 2000
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.
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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 November 10, 2000, there were 25,909,031 shares of outstanding common
stock, par value $.01 per share.
<PAGE> 2
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
Unaudited Consolidated Statements of Shareholders' Equity... 6
Notes to Unaudited Consolidated Financial Statements........ 7
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 2. Changes in Securities.............................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures.................................................................. 17
Exhibit Index .............................................................. 18
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PERSONNEL GROUP OF AMERICA, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED OCTOBER 1, 2000 AND OCTOBER 3, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
OCTOBER 1, OCTOBER 3, OCTOBER 1, OCTOBER 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES $223,954 $233,215 $663,816 $697,680
DIRECT COSTS OF SERVICE 158,561 166,597 472,677 499,244
-------- -------- -------- --------
Gross profit 65,393 66,618 191,139 198,436
OPERATING EXPENSES
Selling, general and administrative 46,508 43,230 135,100 130,111
Depreciation and amortization 6,563 5,436 18,517 15,809
-------- -------- -------- --------
Total operating expenses 53,071 48,666 153,617 145,920
OPERATING INCOME BEFORE NONRECURRING COSTS 12,322 17,952 37,522 52,516
NONRECURRING COSTS -- -- 1,452 --
-------- -------- -------- --------
OPERATING INCOME 12,322 17,952 36,070 52,516
INTEREST EXPENSE 5,262 4,125 14,775 12,251
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 7,060 13,827 21,295 40,265
PROVISION FOR INCOME TAXES 3,318 5,807 9,596 16,911
-------- -------- -------- --------
NET INCOME $ 3,742 $ 8,020 $ 11,699 $ 23,354
======== ======== ======== ========
NET INCOME PER BASIC SHARE $ 0.15 $ 0.31 $ 0.47 $ 0.82
NET INCOME PER DILUTED SHARE $ 0.15 $ 0.28 $ 0.47 $ 0.76
</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
OCTOBER 1, 2000 AND JANUARY 2, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 1, JANUARY 2,
ASSETS 2000 2000
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,469 $ 5,752
Accounts receivable, net 137,438 125,968
Prepaid expenses and other current assets 6,488 5,690
Deferred income taxes 9,031 6,594
Notes receivable from sale of discontinued operations 885 885
--------- ---------
Total current assets 156,311 144,889
Property and equipment, net 27,313 25,776
Intangible assets, net 566,482 560,113
Other assets 4,572 3,919
--------- ---------
Total assets $ 754,025 $ 735,350
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt $ 795 $ 956
Accounts payable 16,823 8,535
Accrued wages, benefits and other 48,160 47,859
Income taxes payable 27 752
--------- ---------
Total current liabilities 65,805 58,102
Long-term debt 274,021 253,395
Other long-term liabilities 36,442 54,010
--------- ---------
Total liabilities 376,268 365,507
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 October 1, 2000 and
January 2, 2000 331 331
Additional paid-in capital 321,609 330,237
Retained earnings 106,535 94,836
Deferred compensation -- (61)
--------- ---------
428,475 425,343
Less common stock held in treasury at cost -
7,160 shares at October 1, 2000 and 7,587 shares
at January 2, 2000 (50,718) (55,500)
--------- ---------
Total shareholders' equity 377,757 369,843
--------- ---------
Total liabilities and shareholders' equity $ 754,025 $ 735,350
========= =========
</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 OCTOBER 1, 2000 AND OCTOBER 3, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
OCTOBER 1, OCTOBER 3,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,699 $ 23,354
Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 18,517 15,809
Deferred income taxes, net 5,341 (1,158)
Changes in assets and liabilities:
Accounts receivable (11,470) (6,568)
Accounts payable and accrued liabilities 994 9,477
Income taxes payable (725) 5,092
Other, net (46) 744
-------- --------
Net cash provided by operating activities 24,130 46,750
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired (40,607) (15,484)
Purchases of property and equipment, net (6,394) (8,539)
-------- --------
Net cash used in investing activities (47,001) (24,023)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under credit facility (33,500) (49,500)
Borrowings under credit facility 54,500 84,500
Repurchases of common stock (10,584) (51,944)
Repayments of seller notes and acquired indebtedness (686) (9,140)
Proceeds from employee stock purchase plan and exercise
of stock options 1,671 3,491
Checks outstanding in excess of book balances 8,007 --
-------- --------
Net cash provided (used) by financing activities 19,408 (22,593)
Net increase (decrease) in cash and cash equivalents (3,283) 134
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,752 962
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,469 $ 1,096
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Stock issued for acquisition related earn-out payments $ 2,483 $ 717
</TABLE>
The accompanying notes are an integral part of these statements.
5
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PERSONNEL GROUP OF AMERICA, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDING OCTOBER 1, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON TOTAL
---------------- PAID-IN RETAINED DEFERRED STOCK HELD SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION IN TREASURY EQUITY
------ ------ ---------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 2, 2000 33,065 $331 $ 330,237 $ 94,836 $(61) $(55,500) $ 369,843
Stock issued for acquisitions -- -- (6,520) -- -- 11,588 5,068
Repurchase of common stock -- -- -- -- -- (10,584) (10,584)
Stock issued for employee stock purchase
plan and exercises of stock options -- -- (2,108) -- -- 3,778 1,670
Amortization of deferred compensation -- -- -- -- 61 -- 61
Net income -- -- -- 11,699 -- -- 11,699
------ ---- --------- -------- ---- -------- ---------
BALANCE, October 1, 2000 33,065 $331 $ 321,609 $106,535 $ 0 $(50,718) 377,757
====== ==== ========= ======== ==== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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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 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 150.0% of total shareholders' equity at
October 1, 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 completed in June 2000) on a straight-line basis over
40 years. The Careershop.com goodwill is amortized on a straight-line basis over
five years. Other intangibles are primarily covenants not to compete.
Amortization expense for the quarters ended October 1, 2000 and October 3, 1999
was $4,595 and $3,851, respectively. Accumulated amortization of intangible
assets was $51,481 and $38,690 at October 1, 2000 and January 2, 2000,
respectively.
The Company periodically evaluates the recoverability of its intangible
assets in relation to anticipated future cash flows on an undiscounted basis.
Based on current estimated future cash flows, the Company expects its intangible
assets to be fully recoverable.
(3) LONG-TERM DEBT
Long-term debt consisted of the following at October 1, 2000 and
January 2, 2000:
<TABLE>
<CAPTION>
October 1, January 2,
2000 2000
-------- --------
<S> <C> <C>
5-3/4% Convertible Subordinated Notes due July 2004 $115,000 $115,000
$200,000 revolving credit facility due June 2002 159,000 138,000
Notes payable to sellers of acquired companies
And other 816 1,351
-------- --------
274,816 254,351
Less current portion 795 956
-------- --------
Total Long-term Debt $274,021 $253,395
======== ========
</TABLE>
As of November 10, 2000, the balance outstanding on the $200,000
revolving credit facility was $155,000.
7
<PAGE> 8
(4) NET INCOME PER SHARE
In accordance with FAS 128, the following table reconciles 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 and nine-month
periods ended October 1, 2000 and October 3, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME PER BASIC SHARE:
Net income $ 3,742 $ 8,020 $11,699 $23,354
Weighted average shares outstanding 24,985 26,272 24,816 28,323
------- ------- ------- -------
Net income per basic share $ 0.15 $ 0.31 $ 0.47 $ 0.82
======= ======= ======= =======
NET INCOME PER DILUTED SHARE:
Net income $ 3,742 $ 8,020 $11,699 $23,354
Add: Interest expense on
Convertible Notes, net of tax 1,064 1,064 3,193 3,193
------- ------- ------- -------
Diluted net income 4,806 9,084 14,892 26,547
------- ------- ------- -------
Weighted average shares outstanding 24,985 26,272 24,816 28,323
Add: Dilutive employee stock options 121 76 109 137
Add: Assumed conversion of Convertible Notes 6,456 6,456 6,456 6,456
------- ------- ------- -------
Weighted average diluted shares outstanding 31,562 32,804 31,381 34,916
======= ======= ======= =======
Net income per diluted share $ 0.15 $ 0.28 $ 0.47 $ 0.76
======= ======= ======= =======
</TABLE>
Stock options to purchase 3,261 and 2,554 shares of the Company's
common stock, $.01 par value (the "Common Stock"), were outstanding during the
quarter ended October 1, 2000 and October 3, 1999, respectively, but were
excluded from the computation of net income per diluted share because their
effect was antidilutive.
(5) SEGMENT INFORMATION
The Company operates two business 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.
8
<PAGE> 9
The table below presents segment information for the quarters ended
October 1, 2000 and October 3, 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
Oct. 1, Oct. 3, Oct. 1, Oct. 3,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
IT Services $136,299 $148,319 $404,491 $447,555
Commercial Staffing 87,655 84,896 259,325 250,125
-------- -------- -------- --------
Total revenues 223,954 233,215 663,816 697,680
-------- -------- -------- --------
Operating income
IT Services 11,999 17,514 35,467 51,409
Commercial Staffing 8,747 8,358 25,357 22,923
-------- -------- -------- --------
Total segment operating income 20,746 25,872 60,824 74,332
Corporate expenses 3,829 4,069 11,963 10,310
Amortization of intangible assets 4,595 3,851 12,791 11,506
Interest expense 5,262 4,125 14,775 12,251
-------- -------- -------- --------
Income before income taxes $ 7,060 $ 13,827 $ 21,295 $ 40,265
======== ======== ======== ========
</TABLE>
The following table sets forth identifiable assets by segment at
October 1, 2000 and January 2, 2000:
October 1, January 2,
2000 2000
-------- --------
Accounts receivable, net
IT Services $ 93,636 $ 81,990
Commercial Staffing 43,638 43,602
Corporate 164 376
-------- --------
Total accounts receivable, net $137,438 $125,968
======== ========
9
<PAGE> 10
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 third 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 this acquisition is 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 is expected to be dilutive to the Company's earnings and earnings
per share in 2000 and 2001.
The Company has begun marketing Careershop's new vendor management
system and other technology offerings through its Commercial Staffing
operations, and Careershop's technology tools have already won several
significant customer commitments. First customer installations of the new
Web-enabled vendor management system and career channels resume management
system have also recently been completed.
On July 11, 2000, the Company issued .5 million stock options to key
officers and employees under its 1995 Equity Participation Plan. These 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 November 3, 2000 was $3.06. 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.
PGA made progress during the third quarter in its continuing effort to
identify a permanent Chief Executive Officer and develop its new branding and
repositioning strategy, both of which the Company expects to announce before the
end of the year. The objective with the branding and repositioning strategy is
to create a more common, unified focus and image among PGA's operations and to
take advantage of the Company's size and national scope more effectively.
The Company continued to roll out the PeopleSoft system in its IT
Services offices, although at a somewhat slower pace in the third quarter of
2000 than initially planned. Four IT Services offices were converted during the
third quarter, and as a result almost 70 percent of the IT Services offices are
currently on a common back office systems platform. In addition, during the
third quarter the Company converted all of the Commercial Staffing operations
and its corporate office to the PeopleSoft general ledger system.
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<PAGE> 11
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. Moreover,
customer demand for IT staffing services has been lower than originally expected
throughout the year 2000, and the Company does not expect significant
improvements in IT demand over the balance of this year and early next 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.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 1, 2000 VERSUS QUARTER ENDED OCTOBER 3, 1999
Revenues. Total revenues declined 4.0% to $224.0 million in the third
quarter of 2000 from $233.2 million in 1999 primarily as the result of a decline
in IT Services revenues during the quarter. IT Services revenues declined 8.1%
to $136.3 million in the third quarter of 2000 primarily as the result of the
continuing industrywide slower than expected recovery in customer demand for IT
staffing services. IT Services revenues in the third quarter would have been
essentially flat with the third quarter last year but for two operations (one in
the Pacific Northwest and one in the mid-Atlantic region) that had very poor
quarters.
The Company further increased its IT Services bill rates and pay rates
during the third quarter of 2000 as its billable consultant base continued to
migrate towards higher value technologies. Average bill rates were $80.27 per
hour in the third quarter and average pay rates were $58.00, up sequentially
from $79.20 and $56.79, respectively, in second quarter of this year. IT
billable headcount continued essentially unchanged from second quarter levels,
with an average of 3,825 IT professionals on assignment during the quarter.
Commercial Staffing revenues rose 3.2% to $87.7 million in the third
quarter of 2000 primarily due to continuing growth in permanent placement
revenues, which increased 37.1% over last year to 10.3% of total Commercial
Staffing revenues.
Gross Profit. Although gross profit declined 1.8% to $65.4 million from
$66.6 million last year on the lower revenues, gross profit as a percentage of
revenues increased over 60 basis points to 29.2% for the third quarter of 2000
from 28.6% 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 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.
IT Services billable consultant utilization rates were negatively
affected in the third quarter by certain regulatory issues in California
relating to the payment of overtime pay and by project delays in the Company's
government, e-Business and J. D. Edwards practices in the Pacific Northwest and
mid-Atlantic regions. Lower consultant utilization rates negatively affected IT
Services gross margin percentages. For third quarter, IT gross margins were
28.1%, up slightly from 27.9% in the second quarter this year and down from
28.6% in the third quarter of 1999. As a result of the strong Commercial
Staffing permanent placement business, gross margin percentage in that business
line rose to 30.8%, up from 28.4% in the third quarter last year.
Operating Expenses. Operating expenses, consisting of selling, general
and administrative expenses and depreciation and amortization expense, increased
9.1% to $53.1 million in the third quarter of 2000 from $48.7 million last year.
As a percentage of revenues, selling, general and administrative expenses
increased to 20.8% in the third quarter, up 230 basis points from 18.5% last
year. This increase was caused primarily by 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) and
the Careershop.com acquisition. In addition, depreciation and amortization
expense increased to 2.9% of revenues in the third quarter of 2000 from 2.3%
last year primarily due to increased amortization expense resulting from the
11
<PAGE> 12
Careershop.com acquisition, earn-out payments related to prior acquisitions and
higher depreciation expense due to the Company's continuing investments in
management information systems.
IT Services operating income margins were 8.8% during the third
quarter, down from 11.5% last year. Commercial Staffing operating income was
10.0%, essentially flat with the third quarter last year.
Interest Expense. Interest expense increased to $5.3 million in the
third quarter of 2000 from $4.1 million in 1999 primarily as the Company
borrowed additional funds to make earn-out payments and finance its share
repurchase programs during the first four months of the year, and to complete
the Careershop.com acquisition in June 2000. Additionally, the average interest
rate on borrowings during the third quarter rose to 8.8%, up 190 basis points
over the third quarter last year. See "Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate increased to 47.0% in the
third 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 53.3% to $3.7 million in the third
quarter of 2000 from $8.0 million last year due to the factors discussed above.
12
<PAGE> 13
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 1, 2000 VERSUS NINE MONTHS ENDED OCTOBER 3,
1999
Revenues. IT Services revenues declined 9.6% to $404.5 million in the
first nine months of 2000 primarily as the result of the continuing industrywide
slower than expected recovery in customer demand for IT staffing services.
Commercial Staffing revenues were up 3.7% to $259.3 million in the first nine
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 4.9% to $663.8 million in the
first nine months of 2000 from $697.7 million in 1999.
Gross Profit. Although gross profit declined 3.7% to $191.1 million
from $198.4 million last year on the lower revenues, gross profit as a
percentage of revenues increased over 30 basis points to 28.8% for the first
nine months of 2000 from 28.4% 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 nine 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 and depreciation and amortization expense, but
before nonrecurring charges, increased 5.3% to $153.6 million in the first nine
months of 2000 from $145.9 million in 1999. As a percentage of revenues,
selling, general and administrative expenses, before nonrecurring charges,
increased to 20.4% in the first nine months, up 170 basis points, from 18.7%
last year. This increase was caused primarily by 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) and
the June 2000 acquisition of Careershop.com. In addition, depreciation and
amortization expense increased to 2.8% of revenues in the first nine months of
2000 from 2.3% last year primarily due to increased depreciation and
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 $14.8 million in the
first nine months of 2000 from $12.3 million in 1999 as the Company borrowed
additional funds to make earn-out payments and finance its share repurchase
programs during the first four months of the year, and to complete the
Careershop.com acquisition in June 2000. Additionally, the average interest rate
on borrowings rose to 8.1%, up 190 basis points over the first nine months of
1999. See "Liquidity and Capital Resources."
Income Tax Expense. The effective tax rate increased to 45.1% in the
first nine 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 49.9% to $11.7 million in the first
nine months of 2000 from $23.4 million in 1999 due to the factors discussed
above.
13
<PAGE> 14
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 nine
months of 2000 were to fund working capital and capital expenditures, share
repurchases under the Company's share repurchase programs, contingent earn-out
payments made during the first four months of the year related to previous
acquisitions and the Careershop.com acquisition in June. The Company has not
made any share repurchases since May 2000, and has no current intention of
making additional significant share repurchases.
As of October 1, 2000, the Company was obligated to make certain
contingent earn-out payments to former owners of businesses that had been
acquired prior to the end of 1998. Earn-out payments made during the first nine
months of 2000 were approximately $31.6 million in the aggregate. The Company
made its last 2000 earn-out payment in early October (approximately $5.0
million, of which 50% was paid in cash and the balance by the issuance of
approximately 0.8 million shares of common stock). Earn-out payments based on
earnings of acquired businesses for periods ending after the date of this report
are contingent on the future performance of such acquired businesses, and thus
the actual amounts cannot be determined currently. The Company estimates, based
on certain assumptions as to the future performance of such acquired businesses,
that aggregate earn-out payments will be substantially lower next year and in
the range of $10.0 million to $14.0 million. 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. Following the 2001 earn-out payments, the Company will have no
further earn-out obligations with respect to any of its existing operations.
For the nine months ended October 1, 2000, cash provided by operating
activities decreased to $24.1 million from $46.8 million for the nine months
ended October 3, 1999, primarily as a result of lower earnings before
depreciation and amortization in the first nine months of 2000. In the
aggregate, days sales outstanding ("DSO") were 56 and 54 days at October 1, 2000
and October 3, 1999, respectively. IT Services DSO were 64 days and 58 days at
October 1, 2000 and October 3, 1999, respectively, and Commercial Staffing DSO
were 45 days and 47 days at the same dates. Cash used for investing activities
increased to $47.0 million during the nine-month period from $24.0 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 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 nine months of 2000 at an aggregate purchase price of $10.6 million.
Although no additional share repurchases are currently planned, as of November
10, 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 November 10, 2000, $155.0 million of borrowings were
outstanding under the Credit Facility and approximately $6.2 million had been
used for the issuance of undrawn letters of credit to secure the Company's
workers' compensation programs. The Company reduced the revolver balance by
$13.0 million in the third quarter, from $172.0 million to $159.0 million. In
the third quarter of 2000, the weighted average interest rate under the Credit
Facility was 8.8%.
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 continue into the first half of 2001.
The Company expects to spend approximately 1% 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. The Company reduced capital expenditures spending in
the third quarter to less than $1.9 million, down from approximately $2.6
million in the second
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quarter of this year. 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 of unanticipated needs
short-term, the Company would likely be required to seek alternative sources of
capital, such as an expansion or modification 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101 ("SAB 101"), which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. The Company is required to be in conformity
with the provisions of SAB 101 by the fourth quarter of fiscal 2000. While the
Company continues to evaluate SAB 101 including additional guidance issued by
the SEC, the Company does not expect the adoption of SAB 101 to have a material
impact on the financial statements.
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.
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<PAGE> 16
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 October 1,
2000, was $159.0 million. Interest on borrowings under the Credit Facility is
based on LIBOR plus a variable margin. Based on the outstanding balance at
October 1, 2000, a change of 1% in the interest rate would cause a change in
interest expense of approximately $1.6 million on an annual basis.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On September 28, 2000, the Company issued 784,437 shares of common stock
to the former owners of IMS Consulting, Inc. ("IMSC"), in partial payment of an
earn-out obligation relating to IMSC's financial performance from the 12-month
period ended June 30, 2000. The common stock issued to the former IMSC
shareholders was valued at approximately $2.5 million in the aggregate. This
common stock was issued 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 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 - None.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PERSONNEL GROUP OF AMERICA, INC.
(Registrant)
Date: November 13, 2000 By: /s/ James C. Hunt
-------------------------------------
James C. Hunt
President and Chief Operating Officer
Date: November 13, 2000 By: /s/ Ken R. Bramlett, Jr.
-------------------------------------
Ken R. Bramlett, Jr.
Senior Vice President,
Chief Financial Officer and Treasurer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
FILED HEREWITH(*),OR
PAT B? 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 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
10.8+ Supplemental Retirement Plan for Edward P. 10.7 10-K for year ended
Drudge, Jr. 1/2/00
10.9+ Retirement Agreement between the Company and 10.9 10-Q for quarter ended
Edward P. Drudge, Jr. April 2, 2000
10.10 Amended and Restated Non-Qualified 10.16 10-K for year
Profit-Sharing Plan ended 12/29/96
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
10.11+ Director's Non-Qualified Deferred Fee Plan 10.12 10-K for year ended
12/28/97
10.12 Amended and Restated Credit Agreement between 10.15 333-31863
the Company and its subsidiaries, the Lenders
party thereto and NationsBank N.A., as Agent
10.13 Amendment No. 1 to Amended and Restated 10.14 10-Q for quarter ended
Credit Agreement among the Company and its 3/29/98
Subsidiaries, The Lenders party thereto and
NationsBank, N.A., as agent
10.14 Stock Purchase Agreement for the sale of 1 8-K dated 12/26/97
Nursefinders between PFI Corp., Nursefinders,
Inc., and Nursefinder Acquisition Corp.
10.15 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: Kevin P. Egan, J. Roger King and 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 compensatory plan.
19
