10-Q 1 g72823e10-q.txt PERSONNEL GROUP OF AMERICA, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________to____________ Commission File Number 001-13956 PERSONNEL GROUP OF AMERICA, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 56-1930691 ------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5605 Carnegie Blvd., Suite 500, Charlotte, North Carolina 28209 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (704) 442-5100 -------------- (Registrant's telephone number including area code) None ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of November 9, 2001, there were 26,646,517 shares of outstanding common stock, par value $.01 per share. PERSONNEL GROUP OF AMERICA, INC. TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements (unaudited) Unaudited Consolidated Statements of Operations.................................. 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.................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................................ 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................................... 16 Signatures......................................................................................... 17 Exhibit Index ..................................................................................... 18
2 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED SEPTEMBER 30, 2001 AND OCTOBER 1, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended Sept. 30, Oct. 1, Sept. 30, Oct. 1, 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES $ 173,573 $ 223,954 $ 577,567 $ 663,816 DIRECT COSTS OF SERVICE 129,451 158,561 424,916 472,677 --------- --------- --------- --------- GROSS PROFIT 44,122 65,393 152,651 191,139 OPERATING EXPENSES Selling, general and administrative 35,138 46,508 118,762 135,100 Depreciation and amortization 5,942 6,563 18,081 18,517 Restructuring and rationalization charges 474 -- 4,833 1,452 --------- --------- --------- --------- OPERATING INCOME 2,568 12,322 10,975 36,070 INTEREST EXPENSE 4,638 5,262 14,467 14,775 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (2,070) 7,060 (3,492) 21,295 PROVISION (BENEFIT) FOR INCOME TAXES (900) 3,318 (2,193) 9,596 --------- --------- --------- --------- NET INCOME (LOSS) $ (1,170) $ 3,742 $ (1,299) $ 11,699 ========= ========= ========= ========= NET INCOME (LOSS) PER BASIC SHARE $ (0.04) $ 0.15 $ (0.05) $ 0.47 NET INCOME (LOSS) PER DILUTED SHARE $ (0.04) $ 0.15 $ (0.05) $ 0.47
The accompanying notes are an integral part of these statements. 3 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 1,448 $ 6,233 Accounts receivable, net 102,448 127,292 Prepaid expenses and other current assets 7,624 6,537 Deferred income taxes 11,070 10,064 Notes receivable from sale of discontinued operations 885 885 --------- --------- Total current assets 123,475 151,011 Property and equipment, net 21,227 25,986 Intangible assets, net 550,893 563,031 Other assets 3,315 3,565 --------- --------- Total assets $ 698,910 $ 743,593 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 120,000 $ 647 Accounts payable 7,305 13,910 Accrued wages, benefits and other 51,661 53,877 --------- --------- Total current liabilities 178,966 68,434 Long-term debt 115,000 265,000 Other long-term liabilities 41,505 45,860 --------- --------- Total liabilities 335,471 379,294 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 and outstanding 331 331 Additional paid-in capital 317,010 319,910 Retained earnings 91,362 92,661 --------- --------- 408,703 412,902 Less common stock held in treasury at cost - 6,419 shares at September 30, 2001 and 6,873 shares at December 31, 2000 (45,264) (48,603) --------- --------- Total shareholders' equity 363,439 364,299 --------- --------- Total liabilities and shareholders' equity $ 698,910 $ 743,593 ========= =========
The accompanying notes are an integral part of these balance sheets. 4 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED SEPTEMBER 30, 2001 AND OCTOBER 1, 2000 (IN THOUSANDS)
Nine Months Ended Sept. 30, Oct. 1, 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (1,299) $ 11,699 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization 18,081 18,517 Loss on abandonment and disposals 950 -- Deferred income taxes, net 4,253 5,341 Changes in assets and liabilities: Accounts receivable 24,844 (11,470) Accounts payable and accrued liabilities (10,600) 994 Income taxes payable -- (725) Other, net 1,045 (46) --------- --------- Net cash provided by operating activities 37,274 24,310 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition-related payments (8,620) (40,607) Purchases of property and equipment, net (2,004) (6,394) --------- --------- Net cash used in investing activities (10,624) (47,001) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under credit facility (45,000) (33,500) Borrowings under credit facility 15,000 54,500 Credit facility amendment fees (1,227) -- Repurchases of common stock -- (10,584) Repayments of seller notes and other borrowings (647) (686) Proceeds from employee stock purchase plan and exercise of stock options 439 1,671 Checks outstanding in excess of book balances -- 8,007 --------- --------- Net cash provided by (used in) financing activities (31,435) 19,408 Net decrease in cash and cash equivalents (4,785) (3,283) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,233 5,752 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,448 $ 2,469 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Stock issued for acquisition related earn-out payments $ -- $ 2,483
The accompanying notes are an integral part of these statements. 5 PERSONNEL GROUP OF AMERICA, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS 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 December 31, 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 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. Accumulated amortization of intangible assets amounted to $67,016 and $54,747 at September 30, 2001 and December 31, 2000, respectively. Amortization expense for the quarters ended September 30, 2001 and October 1, 2000 was $4,075 and $4,595, respectively. The Company periodically evaluates the recoverability of its goodwill and other intangible assets in relation to anticipated future cash flows on an undiscounted basis. As general economic conditions have weakened over the last year, demand for the Company's services has declined. As of September 30, 2001, the Company continues to project recoverability of recorded goodwill over periods ranging from 5 to 20 years based on long-term cash flow projections. These projections assume the Company will continue to have access to capital to finance on-going operations, and assume a recovery in the economy beginning in 2002. The assumptions used in these cash flow projections are subject to change. Changes such as a continued decline in operating results, changes in management's assumptions regarding the economic recovery, the Company's inability to obtain an extension or refinancing of the existing revolving credit facility or a requirement to close certain locations or sell assets in the near term are likely to result in projected cash flows that do not fully recover existing goodwill resulting in a requirement to record a significant non-cash impairment provision. 6 (3) BORROWINGS Long-term debt consisted of the following at September 30, 2001 and December 31, 2000:
September 30, December 31, 2001 2000 ------------- ----------- 5-3/4% Convertible Subordinated Notes due July 2004 (the "Notes") $115,000 $ 115,000 Revolving credit facility due June 2002 (the "Credit Facility") 120,000 150,000 Notes payable to sellers of acquired companies and other -- 647 --------- --------- 235,000 265,647 Less current portion (120,000) (647) --------- --------- $ 115,000 $ 265,000 ========= =========
The Credit Facility expires in June 2002, and has been classified as a current liability on the Company's balance sheet. The Credit Facility was amended in March 2001 to cure fourth quarter 2000 technical violations of certain financial covenants. The amendment provided for a $180.0 million reducing revolving line of credit due June 2002. The amended Credit Facility contains customary covenants that require quarterly maintenance of certain financial ratios, minimum net worth and a restriction on the payment of cash dividends on Common Stock. It also places additional limitations on share repurchases, acquisitions and capital expenditures. Under the terms of the amendment, the maximum principal amount available for borrowing was reduced to $176.0 million as of September 30, 2001, and is scheduled to reduce to $171.0 million by the end of the fourth quarter of 2001 and $166.0 million by the end of the first quarter of 2002. Interest rates payable under the amended Credit Facility were increased to reflect current market and credit conditions, and are set at the base rate, as defined, or LIBOR plus 350 basis points. The amended Credit Facility is collateralized by substantially all of the Company's tangible and intangible assets. The Company has experienced a decline in operating results for the first nine months of fiscal 2001 as compared to the prior year due to the weak economic environment, which weakened further following the events of September 11, 2001. Although currently in compliance with its covenants, unless the fourth quarter results improve substantially, the Company is likely to fail to meet certain of the Credit Facility financial covenants as of the end of the fourth quarter. The Company is currently seeking an extension to, or a refinancing of, the Credit Facility, but can give no assurance that it can obtain such extension or refinancing on acceptable terms. If unable to obtain such extension or refinancing, the Company could be required to seek alternative sources of capital, and there can be no assurance that alternative sources of capital will be available, if and when needed, on favorable terms. If the Company is unable to extend or refinance the Credit Facility prior to maturity, is unable to obtain a waiver of covenant violations, and is unable to find alternative sources of capital, the lenders would be entitled to require immediate repayment of all amounts outstanding under the Credit Facility. Should this occur, the Company will be required to consider a number of strategic alternatives, including the closure of certain locations or the sale of certain or all of its assets in order to continue to fund its operations. In the current economic environment, management believes that any such sale would be at depressed prices that could be significantly lower than the net book value of assets sold and may not be sufficient to satisfy its liabilities. 7 (4) RESTRUCTURING AND RATIONALIZATION CHARGES In June 2001, the Company announced a plan to restructure and rationalize certain operations, which resulted in the Company recording a charge totaling $3.9 million in the second quarter of 2001. Additionally, the Company initiated a workforce reduction program during the first quarter. Approximately 18% of the Company's permanent workforce has been eliminated since the beginning of 2001. During the third quarter of 2001, the Company recorded $0.5 million restructuring and rationalization charges related primarily to severance and other costs. Following is a summary of the restructuring and rationalization charges for the nine months ended September 30, 2001:
Employee Lease Property Severance Termination Abandonment Other --------- ----------- ----------- --------- Restructuring and rationalization charges $ 1,278 $ 1,777 $ 394 $ 1,384 Cash payments (1,224) (412) -- (424) Write down of abandoned property -- -- (394) -- Loss on sale of CareerShop -- -- -- (660) --------- --------- --------- --------- Accrued liability at September 30, 2001 $ 54 $ 1,365 $ -- $ 300 ========= ========= ========= =========
The charges consisted primarily of estimated lease termination costs, write down of abandoned leasehold improvements and other equipment and severance-related costs. The job functions eliminated included both administrative and income-producing employees. The Company plans to consolidate operations in other geographic markets in which the Company currently operates multiple branches and to downsize in selected other existing locations. Other rationalization expenses of $1.4 million were recorded in 2001 associated with incremental costs in downsizing the business to current operating levels, the loss on the sale of CareerShop, professional services expenses and changes in estimates for previous lease terminations of $0.4 million. Of the remaining accrued liability, the Company expects to pay approximately $0.8 million over the next twelve months and the balance, primarily lease termination payments, over the following five years. 8 (5) 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 September 30, 2001 and October 1, 2000:
Three Months Ended Nine Months Ended Sept. 30, Oct. 1, Sept. 30, Oct. 1, 2001 2000 2001 2000 --------- --------- --------- --------- BASIC EARNINGS PER SHARE: Net income (loss) $ (1,170) $ 3,742 $ (1,299) $ 11,699 ========= ========= ========= ========= Weighted average shares outstanding 26,624 24,985 26,449 24,816 Basic earnings per share $ (0.04) $ 0.15 $ (0.05) $ 0.47 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: Net income (loss) $ (1,170) $ 3,742 $ (1,299) $ 11,699 Add: Interest expense on Convertible Notes, net of tax -- 1,064 -- 3,193 --------- --------- --------- --------- Diluted net income (loss) $ (1,170) $ 4,806 $ (1,299) $ 14,892 ========= ========= ========= ========= Weighted average shares outstanding 26,624 24,985 26,499 24,816 Add: Dilutive employee stock options -- 121 -- 109 Add: Assumed conversion of Convertible Notes -- 6,456 -- 6,456 --------- --------- --------- --------- Diluted weighted average shares outstanding 26,624 31,562 26,449 31,381 Diluted earnings per share $ (0.04) $ 0.15 $ (0.05) $ 0.47 ========= ========= ========= =========
Stock options to purchase 4,423,196 and 3,261,350 shares of Common Stock were outstanding during the quarters ended September 30, 2001 and October 1, 2000, respectively, but were excluded from the computation of net income per diluted share because their effect was antidilutive. The conversion of the Notes into 6,456,140 shares of Common Stock was also excluded from the computation of net income per diluted share in 2001 because their effect was antidilutive. (6) 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, information technology consulting services and technology tools for human capital management. 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. 9 The table below presents segment information for the quarters ended September 30, 2001 and October 1, 2000:
Three Months Ended Nine Months Ended Sept. 30, Oct. 1, Sept. 30, Oct. 1, 2001 2000 2001 2000 --------- --------- --------- --------- Revenues IT Services $ 103,939 $ 136,299 $ 356,976 $ 404,491 Commercial Staffing 69,634 87,655 220,591 259,325 --------- --------- --------- --------- Total revenues 173,573 223,954 577,567 663,816 --------- --------- --------- --------- Operating income IT Services 6,890 11,999 24,083 35,467 Commercial Staffing 4,140 8,747 15,142 25,357 --------- --------- --------- --------- Total segment operating income 11,030 20,746 39,225 60,824 Corporate expenses 3,913 3,829 11,148 10,511 Amortization of intangible assets 4,075 4,595 12,269 12,791 Restructuring and rationalization charges 474 -- 4,833 1,452 Interest expense 4,638 5,262 14,467 14,775 --------- --------- --------- --------- Income (loss) before income taxes $ (2,070) $ 7,060 $ (3,492) $ 21,295 ========= ========= ========= =========
The following table sets forth identifiable assets by segment at September 30, 2001 and December 31, 2000:
September 30, December 31, 2001 2000 ------------- ------------ Accounts receivable, net IT Services $ 70,548 $ 85,344 Commercial Staffing 31,117 41,398 Corporate 783 550 --------- --------- Total accounts receivable, net $ 102,448 $ 127,292 ========= =========
(7) NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the FASB issued Statement of Financial Accounting Standard No. 141, "Business Combinations" ("FAS 141"), and Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method, and eliminated the use of the pooling-of-interests method. The Company will be required to adopt FAS 141 in the third quarter of 2001. FAS 142 eliminates the amortization of goodwill against earnings, effective January 1, 2002. FAS 142 also provides that an intangible asset with a finite life is amortized over the estimated useful life of the asset; an intangible asset, including goodwill, with an indefinite life is not amortized. FAS 142 also requires the Company to test goodwill and other intangible assets not subject to amortization for impairment annually, or more frequently, if events or changes in circumstances indicate that an asset might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. 10 The Company's intangible assets consist principally of goodwill. While the Company has not made any assessment of the impact of FAS 142 on the carrying value of its goodwill, the methodology for the impairment assessment represents a significant change from the existing goodwill impairment methodology periodically performed by the Company. The Company believes that based on current economic conditions and operating results experienced by the Company and the overall economic conditions of its industry, the implementation of the impairment test required under FAS 142 will result in an impairment charge that could be material to the Company's operating results and financial position. The Company expects to complete its assessment during the first six months of 2002 and any impact of the impairment test would be recognized in accordance with the FAS 142 provisions at that time. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This new statement also supersedes certain aspects of APB 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," with regard to reporting the effects of a disposal of a segment of a business and will require expected future operating losses from discontinued operations to be reported in discontinued operations in the period incurred (rather than as of the measurement date as presently required by APB 30). In addition, more dispositions may qualify for discontinued operations treatment. The provisions of this statement are required to be applied for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company has not yet determined what effect this statement will have on its financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements and related notes appearing elsewhere in this report. The Company's fiscal year ends on the Sunday nearest to December 31. The Company is organized into two Divisions: the Information Technology Services Division ("IT Services"), which provides information technology staffing and consulting services in a range of computer-related disciplines and technology tools for human capital management, and the Commercial Staffing Services Division ("Commercial Staffing"), which provides a variety of temporary office, clerical, accounting and finance, light technical and light industrial staffing services. Approximately 60% of the Company's third quarter 2001 revenues came from IT Services and 40% came from Commercial Staffing. 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. 11 RESULTS OF OPERATIONS QUARTER ENDED SEPTEMBER 30, 2001 VERSUS QUARTER ENDED OCTOBER 1, 2000 Revenues. Total revenues declined 22.5% to $173.6 million in the third quarter of 2001 from $224.0 million in 2000. IT Services revenues declined 23.7% to $103.9 million in the third quarter of 2001 primarily as the result of the continuing industry-wide slowdown in customer demand for IT staffing services. IT Services billable consultants on assignment declined from approximately 3,200 at the end of the second quarter of 2001 to approximately 2,800 at the end of the third quarter. Commercial Staffing revenues declined 20.6% to $69.6 million in the third quarter of 2001 from $87.7 million in 2000 primarily due to the weak economic climate, which resulted in declines in permanent placement revenues and the retail component of the Company's temporary staffing business. Permanent placement revenues were 5.2% of Commercial Staffing revenues in the third quarter of 2001, down from 10.3% during the third quarter of 2000. The Company does not expect improvements in demand for its services during the balance of 2001 due to the ongoing weak economic conditions. Direct Costs of Service and Gross Profit. Direct costs, consisting of payroll and related expenses of consultants and temporary workers, decreased 18.4% to $129.5 million in the third quarter of 2001 on the lower revenues. Gross margin as a percentage of revenues decreased 380 basis points to 25.4% for the third quarter of 2001 from 29.2% in 2000. This decrease primarily was the result of the continued softening in the higher margin sectors of the staffing and consulting businesses and the significant decline in permanent placement services. Operating Expenses. Operating expenses, consisting of selling, general and administrative expenses, before restructuring and rationalization charges decreased 22.6% to $41.1 million in the third quarter of 2001 from $53.1 million in 2000. The decrease was primarily due to the Company's aggressive cost containment program, including its work force reduction and office consolidation initiatives. Approximately 18% of the Company's permanent workforce has been eliminated since the beginning of 2001. Also, variable or incentive compensation declined in the third quarter due to lower revenues and operating margins. As a percentage of revenues, selling, general and administrative expenses before restructuring and rationalization charges remained constant at 23.7% in the third quarter of 2001 versus last year. In addition, depreciation and amortization expense increased to 3.4% of revenues in the third quarter of 2001 from 2.9% last year primarily due to the decline in revenues in 2001. Interest Expense. Interest expense decreased 11.9% to $4.6 million in the third quarter of 2001 from $5.3 million in 2000 due to the decreases in interest rates and due to lower borrowing levels under the Credit Facility. The average interest rate on borrowings was 8.1% in the third quarter, down 70 basis points over the third quarter last year. See "--Liquidity and Capital Resources." Income Tax Expense (Benefit). The income tax benefit recorded in the third quarter of 2001 was comprised of the tax benefit related to the operating loss for the period. The effective tax rate was 47.0% in the third quarter of 2000, higher than the U.S. federal statutory rate of 35.0%, primarily due to non-deductible amortization expense and state income taxes. 12 RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2001 VERSUS NINE MONTHS ENDED OCTOBER 1, 2000 Revenues. Total revenues declined 13.0% to $577.6 million in the first nine months of 2001 from $663.8 million in 2000. IT Services revenues declined 11.7% to $357.0 million in the first nine months of 2001 primarily as the result of the continuing industry-wide slowdown in customer demand for IT staffing services. IT Services billable consultants on assignment declined from approximately 3,750 at the end of 2000 to approximately 2,800 at the end of the third quarter of 2001. Commercial Staffing revenues declined 14.9% to $220.6 million in the first nine months of 2001 from $259.3 million in 2000 primarily due to the weak economic climate, which resulted in declines in permanent placement revenues and the retail component of the Company's temporary staffing business. Permanent placement revenues were 7.0% of Commercial Staffing revenues in the first nine months of 2001, down from 10.3% during the first nine months of 2000. The Company does not expect improvements in demand for its services during the balance of 2001 due to the ongoing weak economic conditions. Direct Costs of Service and Gross Profit. Direct costs, consisting of payroll and related expenses of consultants and temporary workers, decreased 10.1% to $424.9 million in the first nine months of 2001 on the lower revenues. Gross margin as a percentage of revenues decreased 240 basis points to 26.4% for the first nine months of 2001 from 28.8% in 2000. This decrease primarily was the result of the continued softening in the higher margin sectors of the staffing and consulting businesses and the significant decline in permanent placement services. Operating Expenses. Operating expenses, consisting of selling, general and administrative expenses, depreciation and amortization expense, before restructuring and rationalization charges decreased 10.6% to $137.3 million in the first nine months of 2001 from $153.6 million in 2000. The decrease in operating expenses was due primarily to the Company's aggressive cost containment program, including the workforce reduction and office consolidation initiatives, as well as lower variable or incentive compensation due to reduced revenues and operating margins. As a percentage of revenues, selling, general and administrative expenses before restructuring and rationalization charges increased to 23.8% in the first nine months, up 70 basis points from last year, primarily due to lower revenue levels. In addition, depreciation and amortization expense increased to 3.1% of revenues in the first nine months of 2001 from 2.8% last year primarily due to the decline in revenues in 2001. Interest Expense. Interest expense decreased slightly to $14.5 million in the first nine months of 2001 from $14.8 million in 2000. The average interest rate on borrowings during 2001 was 7.9%, down 20 basis points over the first nine months last year. See "--Liquidity and Capital Resources." Income Tax Expense (Benefit). The income tax benefit recorded for the nine months ended September 30, 2001 included the tax benefit related to the operating loss for the period and the $1.4 million tax benefit related to the diminution in value in the Company's investment in CareerShop, which was sold during the second quarter of 2001. The effective tax rate was 45.1% for the first nine months of 2000, higher than the U.S. federal statutory rate of 35.0%, primarily due to non-deductible amortization expense and state income taxes. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash are from operations and borrowings under the Company's bank revolving credit facility (the "Credit Facility"). The Company's principal uses of cash 13 are to repay debt and to fund working capital, capital expenditures and contingent earn-out payments related to previous acquisitions. The Company's working capital needs have diminished on the lower business volumes during the first nine months of 2001. As a result, for the nine months ended September 30, 2001, cash provided by operating activities increased to $37.3 million from $24.1 million for the same period last year, primarily as a result of a reduction in accounts receivables levels since the end of 2000. In the aggregate, days sales outstanding decreased slightly to 54 days at September 30, 2001, from 56 days at October 1, 2000. Cash used for investing activities decreased to $10.6 million during the nine-month period from $47.0 million in 2000 primarily as a result of lower contingent earn-out payments relating to previous acquisitions and reduced capital spending. The Company has also reduced its capital spending, and currently expects to spend less than 1/2 of 1% of its 2001 revenues on management information systems and other capital expenditures. Capital spending in the first nine months of 2001 was $2.0 million, down from $6.4 million in the first nine months of 2000. Earn-out payments made to the former owners of acquired businesses during the first nine months of 2001 were approximately $8.6 million in the aggregate. In October 2001, the Company completed its obligation to make additional earn-out payments with a final payment of $1.5 million. The Credit Facility expires in June 2002, and has been classified as a current liability on the Company's balance sheet. But for this reclassification, net current assets at September 30, 2001 would have been $64.5 million. The Credit Facility was amended in March 2001 to cure fourth quarter 2000 technical violations of certain financial covenants. The amendment provided for a $180.0 million reducing revolving line of credit due June 2002. As of November 9, 2001, $122.0 million of borrowings were outstanding under the amended Credit Facility and approximately $6.7 million had been used for the issuance of undrawn letters of credit to secure the Company's workers' compensation programs. The amended Credit Facility includes covenants that require maintenance of certain financial ratios on a quarterly basis, and placed additional limitations on share repurchases, acquisitions and capital expenditures. As of September 30, 2001, the Company was in compliance with the Credit Facility covenants. Also under the terms of the Credit Facility amendment, the maximum principal amount available for borrowing was reduced to $176.0 million as of September 30, 2001, and is scheduled to reduce to $171.0 million by the end of the fourth quarter of 2001 and $166.0 million by the end of the first quarter of 2002. Interest rates payable under the amended Credit Facility were increased to reflect current market and credit conditions, and are set at the base rate, as defined, or LIBOR plus 350 basis points. Additionally, the Company paid bank fees of $1.2 million in connection with the amendment to the Credit Facility in March 2001. These fees will be amortized over the remaining term of the Credit Facility. The daily weighted average interest rate under the Credit Facility was 7.9% during the first nine months of 2001. The weighted average interest rate of the Company's borrowings under the Credit Facility was 6.0% at September 30, 2001. The amended Credit Facility is collateralized by a pledge of substantially all of the Company's tangible and intangible assets. The Company believes that cash flow from operations and, subject to continued availability, borrowing capacity under the amended Credit Facility will be adequate to meet its diminished needs for working capital and its capital expenditures. Because the Credit Facility matures in June 2002, however, it is reflected as a current liability on the Company's September 30, 2001 balance sheet. The Company has experienced a decline in operating results for the first nine months of fiscal 2001 14 as compared to the prior year due to the weak economic environment, which weakened further following the events of September 11, 2001. Although currently in compliance with its covenants, unless the fourth quarter results improve substantially, the Company is likely to fail to meet certain of the Credit Facility financial covenants as of the end of the fourth quarter. The Company is currently seeking an extension to, or a refinancing of, the Credit Facility, but can give no assurance that it can obtain such extension or refinancing on acceptable terms. If unable to obtain such extension or refinancing, the Company could be required to seek alternative sources of capital, and there can be no assurance that alternative sources of capital will be available, if and when needed, on favorable terms. If the Company is unable to extend or refinance the Credit Facility prior to maturity, is unable to obtain a waiver of covenant violations, and is unable to find alternative sources of capital, the lenders would be entitled to require immediate repayment of all amounts outstanding under the Credit Facility. Should this occur, the Company will be required to consider a number of strategic alternatives, including the closure of certain locations or the sale of certain or all of its assets in order to continue to fund its operations. In the current economic environment, management believes that any such sale would be at depressed prices that could be significantly lower than the net book value of assets sold and may not be sufficient to satisfy its liabilities. 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. These statements may be identified by words such as "estimate," "forecast," "plan," "intend," "believe," "expect," "anticipate," or variations or negatives thereof, or by similar or comparable words or phrases. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in such statements. These risks and uncertainties include, but are not limited to, the following: changes in levels of unemployment and other economic conditions in the United States, or in particular regions or industries; adverse changes in credit and capital markets conditions that may affect the Company's ability to obtain financing or refinancing on favorable terms; adverse changes to management's periodic estimates of future cash flows that may affect management's assessment of its ability to fully recover its intangible assets; economic declines that affect the Company's ability to comply with its loan covenants; reductions in the supply of qualified candidates for temporary employment or the Company's ability to attract qualified candidates; the entry of new competitors into the marketplace or expansion by existing competitors; the ability of the Company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions; the impact of competitive pressures, including any change in the demand for its services, or the Company's ability to maintain its profit margins; the possibility that the Company will incur liability for the activities of its temporary employees or for events affecting its temporary employees on clients' premises; the success of the Company in attracting, training and retaining qualified management personnel and other staff employees; and whether governments will impose additional regulations or licensing requirements on personnel services businesses in particular or on employer/employee relationships in general, and other matters discussed in this report and the Company's other filings with the Securities and Exchange Commission. Because long-term contracts are not a significant part of the Company's business, future results cannot be reliably predicted by considering past trends or extrapolating past results. The Company undertakes no obligation to update information contained in this report. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's outstanding debt under the Credit Facility at September 30, 2001, was $120 million. Interest on borrowings under the Credit Facility is based on LIBOR plus a variable margin or the base rate, as defined. Based on the outstanding balance at September 30, 2001, a change of 1% in the interest rate would cause a change in interest expense of approximately $1.2 million on an annual basis. PART II - OTHER INFORMATION ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - The exhibits filed with or incorporated by reference into this Form 10-Q are set forth in the Exhibit Index, which immediately precedes the exhibits to this report. (b) Reports on Form 8-K - None. 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: November 14, 2001 By: /s/ Larry L. Enterline ---------------------------------------- Larry L. Enterline Chief Executive Officer Date: November 14, 2001 By: /s/ James C. Hunt ---------------------------------------- James C. Hunt President and Chief Financial Officer 17 EXHIBIT INDEX
FILED HEREWITH(*), OR INCORPORATED BY REFERENCE FROM COMPANY EXHIBIT PREVIOUS EXHIBIT REG. NO. NUMBER DESCRIPTION NUMBER OR REPORT ------- ----------- ------------------- --------- 3.1 Restated Certificate of Incorporation of the Company, as amended 3.1 333-31863 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 First Union National Bank (as 1 0-27792 successor trustee) 4.2 Indenture between the Company and First Union National Bank, as Trustee 4.2 333-31863 4.3 Form of Note Certificate for 5-3/4% Convertible Subordinated Notes 4.3 333-31863 10.1+ 1995 Equity Participation Plan, as amended 10.1 333-31863 10.2+ Amended and Restated Management Incentive Compensation Plan 10.2 10-K for year ended 1/3/99 10.3+ 2001 Non-Qualified Employee Stock Purchase Plan 4.1 333-66334 10.4#+ Director and Officer Indemnification Agreement of James V. Napier 10.3 10-K for year ended 12/31/95 10.5+ Letter of Employment between the Company and Larry L. Enterline 10.5 10-K for year ended 12/31/00 10.6+ Supplemental Retirement Plan for Edward P. Drudge, Jr. 10.7 10-K for year ended 1/2/00 10.7+ Form of Retirement Agreement between the Company and Edward P. Drudge, Jr. 10.8 10-K for year ended 1/2/00 10.8+ Employment Agreement between the Company and James C. Hunt 10.10 10-K for year ended 12/29/96
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FILED HEREWITH(*), OR INCORPORATED BY REFERENCE FROM COMPANY EXHIBIT PREVIOUS EXHIBIT REG. NO. NUMBER DESCRIPTION NUMBER OR REPORT ------- ----------- ------------------- --------- 10.9+ Employment Agreement between the Company and Ken R. Bramlett, Jr. 10.13 10-K for year ended 12/29/96 10.10+ Employment Agreement between the Company and Michael H. Barker 10.9 10-K for year ended 1/3/99 10.11 Amended and Restated Non-Qualified Profit-Sharing Plan 10.16 10-K for year ended 12/29/96 10.12+ Director's Non-Qualified Deferred Fee Plan 10.12 10-K for year ended 12/28/97 10.13 Amendment No. 3 to Amended and Restated Credit Agreement among the Company 10.13 10-K for year and its subsidiaries, the lenders party thereto and Bank of America, as ended 12/31/00 Agent 10.14 Stock Purchase Agreement for the sale of Nursefinders between PFI Corp., 1 8-K dated 12/26/97 Nursefinders, Inc., and Nursefinder Acquisition Corp. 10.15 Registration Rights Agreement between the Company and the Initial 10.17 333-31863 Purchasers
- 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 required to be filed under Item 14(c) of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission. 19