10-Q 1 g71290e10-q.txt PERSONNEL GROUP OF AMERICA INC 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 1, 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 August 14, 2001, there were 26,665,869 shares of outstanding common stock, par value $.01 per share. 2 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........... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 14 PART II - OTHER INFORMATION Item 4. Submission of Matters to Vote of Security Holders............ 14 Item 6. Exhibits and Reports on Form 8-K............................. 14 Signatures.............................................................. 15 Exhibit Index .......................................................... 16 2 3 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED JULY 1, 2001 AND JULY 2, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)

Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES $ 194,370 $ 223,006 $ 403,993 $ 439,862 DIRECT COSTS OF SERVICE 142,427 158,242 295,301 314,117 --------- --------- --------- --------- GROSS PROFIT 51,943 64,764 108,692 125,745 OPERATING EXPENSES Selling, general and administrative 40,202 46,394 83,788 88,592 Depreciation and amortization 6,071 6,173 12,139 11,954 Restructuring and rationalization charges 3,913 -- 4,359 1,452 --------- --------- --------- --------- OPERATING INCOME 1,757 12,197 8,406 23,747 INTEREST EXPENSE 5,077 5,079 9,828 9,513 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES (3,320) 7,118 (1,422) 14,234 PROVISION (BENEFIT) FOR INCOME TAXES (2,261) 3,203 (1,293) 6,277 --------- --------- --------- --------- NET INCOME (LOSS) $ (1,059) $ 3,915 $ (129) $ 7,957 ========= ========= ========= ========= NET INCOME (LOSS) PER BASIC SHARE $ (.04) $ 0.16 $ -- $ 0.32 NET INCOME (LOSS) PER DILUTED SHARE $ (.04) $ 0.16 $ -- $ 0.32

The accompanying notes are an integral part of these statements. 3 4 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS JULY 1, 2001 AND DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT PER SHARE DATA)

July 1, December 31, 2001 2000 --------- --------- ASSETS (Unaudited) (Audited) Current assets: Cash and cash equivalents $ 5,235 $ 6,233 Accounts receivable, net 115,926 127,292 Prepaid expenses and other current assets 9,403 6,537 Deferred income taxes 11,450 10,064 Notes receivable from sale of discontinued operations 885 885 --------- --------- Total current assets 142,899 151,011 Property and equipment, net 22,680 25,986 Intangible assets, net 554,934 563,031 Other assets 3,862 3,565 --------- --------- Total assets $ 724,375 $ 743,593 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 138,350 $ 647 Accounts payable 12,665 13,910 Accrued wages, benefits and other 50,970 53,877 --------- --------- Total current liabilities 201,985 68,434 Long-term debt 115,000 265,000 Other long-term liabilities 42,814 45,860 --------- --------- Total liabilities 359,799 379,294 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 317,201 319,910 Retained earnings 92,532 92,661 --------- --------- 410,064 412,902 Less common stock held in treasury at cost - 6,476 shares at July 1, 2001 and 6,873 shares at December 31, 2000 (45,488) (48,603) --------- --------- Total shareholders' equity 364,576 364,299 --------- --------- Total liabilities and shareholders' equity $ 724,375 $ 743,593 ========= =========

The accompanying notes are an integral part of these balance sheets. 4 5 PERSONNEL GROUP OF AMERICA, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JULY 1, 2001 AND JULY 2, 2000 (IN THOUSANDS)

Six Months Ended July 1, July 2, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (129) $ 7,957 Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization 12,139 11,954 Loss on abandonment and disposals 950 -- Deferred income taxes, net 329 -- Changes in assets and liabilities: Accounts receivable 11,366 (8,376) Accounts payable and accrued liabilities (8,560) 2,597 Income taxes payable -- 1,657 Other, net 4,190 (630) -------- -------- Net cash provided by operating activities 20,285 15,159 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition-related payments (6,575) (40,470) Purchases of property and equipment, net (1,590) (4,521) -------- -------- Net cash used in investing activities (8,165) (44,991) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under credit facility (24,000) (16,000) Borrowings under credit facility 12,000 50,000 Credit facility amendment fees (1,227) -- Repurchases of common stock -- (10,584) Repayments of seller notes and other borrowings (297) (529) Proceeds from employee stock purchase plan and exercise of stock options 406 1,201 -------- -------- Net cash provided by (used in) financing activities (13,118) 24,088 Net decrease in cash and cash equivalents (998) (5,744) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,233 5,752 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,235 $ 8 ======== ========

The accompanying notes are an integral part of these statements. 5 6 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 $62,940 and $54,747 at July 1, 2001 and December 31, 2000, respectively. Amortization expense for the quarters ended July 1, 2001 and July 2, 2000 was $4,088 and $4,177, 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. In conjunction with the decline in the demand for Company services, the Company continues to monitor for recoverability of its intangible assets. Under the Company's impairment policy, based on the operating results during the first six months of 2001, the Company generally recovers the intangible asset values over periods ranging from 5 to 20 years. Certain markets are more adversely impacted by current market conditions. The Company continues to forecast recoverability as these markets are anticipated to recover. However, should the Company continue to experience a further decline in operating results, the recoverability of its intangible assets could be impaired. (3) LONG-TERM DEBT Long-term debt consisted of the following at July 1, 2001 and December 31, 2000:

July 1, 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") 138,000 150,000 Notes payable to sellers of acquired companies and other 350 647 --------- --------- 253,350 265,647 Less current portion (138,350) (647) --------- --------- $ 115,000 $ 265,000 ========= =========

6 7 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 provides 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 is scheduled to reduce to $176.0 million by the end of the third quarter of 2001, $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 currently set at LIBOR plus 325 basis points. The amended Credit Facility is collateralized by substantially all of the Company's tangible and intangible assets. (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 14% of permanent workforce has been eliminated since the beginning of 2001. A summary of the restructuring and rationalization charges for the six months ended July 1, 2001:

Employee Lease Property Severance Termination Abandonment Other --------- ----------- ----------- ------- Restructuring and rationalization charges $ 999 $ 1,777 $ 394 $ 1,189 Cash payments (801) (173) -- (206) Write down of abandoned property -- -- (394) -- Loss on sale of CareerShop -- -- -- (660) ------- ------- ------- ------- Accrued liability at July 1, 2001 $ 198 $ 1,604 $ -- $ 323 ======= ======= ======= =======

The second quarter 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 $1.2 million were recorded in 2001 associated with incremental costs in downsizing the business to current operating levels, the loss on the sale of CareerShop and changes in estimates for previous lease terminations of $0.4 million. To conform with classifications adopted in the second quarter, the financial statements for the first quarter were revised to reflect certain reclassifications, but these reclassifications had no effect on net income. 7 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 July 1, 2001 and July 2, 2000:

Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 -------- -------- -------- -------- BASIC EARNINGS PER SHARE: Net income (loss) $ (1,059) $ 3,915 $ (129) $ 7,957 ======== ======== ======== ======== Weighted average shares outstanding 26,540 24,273 26,362 24,732 Basic earnings per share $ (.04) $ 0.16 $ -- $ 0.32 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: Net income (loss) $ (1,059) $ 3,915 $ (129) $ 7,957 Add: Interest expense on Convertible Notes, net of tax -- 1,064 -- 2,128 -------- -------- -------- -------- Diluted net income (loss) $ (1,059) $ 4,979 $ (129) $ 10,085 ======== ======== ======== ======== Weighted average shares outstanding 26,540 24,273 26,362 24,732 Add: Dilutive employee stock options -- 3 -- 59 Add: Assumed conversion of Convertible Notes -- 6,456 -- 6,456 -------- -------- -------- -------- Diluted weighted average shares outstanding 26,540 30,732 26,362 31,247 Diluted earnings per share $ (.04) $ 0.16 $ -- $ 0.32 ======== ======== ======== ========

Stock options to purchase 4,532,183 and 3,333,337 shares of Common Stock were outstanding during the quarter ended July 1, 2001 and July 2, 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. 8 9 The table below presents segment information for the quarters ended July 1, 2001 and July 2, 2000:

Three Months Ended Six Months Ended July 1, July 2, July 1, July 2, 2001 2000 2001 2000 --------- --------- --------- --------- Revenues IT Services $ 120,833 $ 135,493 $ 253,038 $ 268,192 Commercial Staffing 73,537 87,513 150,955 171,670 --------- --------- --------- --------- Total revenues 194,370 223,006 403,993 439,862 --------- --------- --------- --------- Operating income IT Services 8,570 11,714 17,976 23,468 Commercial Staffing 5,348 8,471 11,235 16,610 --------- --------- --------- --------- Total segment operating income 13,918 20,185 29,211 40,078 Corporate expenses 4,160 3,811 8,252 6,683 Amortization of intangible assets 4,088 4,177 8,194 8,196 Restructuring and rationalization charges 3,913 -- 4,359 1,452 Interest expense 5,077 5,079 9,828 9,513 --------- --------- --------- --------- Income (loss) before income taxes $ (3,320) $ 7,118 $ (1,422) $ 14,234 ========= ========= ========= =========

The following table sets forth identifiable assets by segment at July 1, 2001 and December 31, 2000: July 1, December 31, 2001 2000 -------- -------- Accounts receivable, net IT Services $ 80,725 $ 85,344 Commercial Staffing 34,496 41,398 Corporate 705 550 -------- -------- Total accounts receivable, net $115,926 $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. 9 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 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 could result in an impairment charge which 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. 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 62% of the Company's second quarter 2001 revenues came from IT Services and 38% 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. RESULTS OF OPERATIONS QUARTER ENDED JULY 1, 2001 VERSUS QUARTER ENDED JULY 2, 2000 Revenues. Total revenues declined 12.8% to $194.4 million in the second quarter of 2001 from $223.0 million in 2000. IT Services revenues declined 10.8% to $120.8 million in the second 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 3,500 at the end of the first quarter of 2001 to approximately 3,200 at the end of the second quarter. Commercial Staffing revenues declined 16.0% to $73.5 million in the second quarter of 2001 from $87.5 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 6.8% of Commercial Staffing revenues in the second quarter of 2001, down from 10.7% during the second quarter of 2000. The 10 11 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 10.0% to $142.4 million in the second quarter of 2001 on the lower revenues. Gross margin as a percentage of revenues decreased 230 basis points to 26.7% for the second quarter of 2001 from 29.0% 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 12.0% to $46.3 million in the second quarter of 2001 from $52.6 million in 2000. The decrease was primarily due to the Company's aggressive cost containment program, including the work force reduction and office consolidation initiatives. Approximately 14% of the Company's permanent workforce has been eliminated since the beginning of 2001. Also, variable or incentive compensation declined in the second quarter due to lower 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 second quarter, up 20 basis points from last year. In addition, depreciation and amortization expense increased to 3.1% of revenues in the second quarter of 2001 from 2.8% last year primarily due to the decline in revenues in 2001. Interest Expense. Interest expense remained constant at $5.1 million in the second quarter of 2001 versus last year. The average interest rate on borrowings was 8.69%, up 60 basis points over the second quarter last year due to the increase in the Company's borrowing costs under the amended Credit Facility, but offset by lower borrowing levels under the Credit Facility. See "--Liquidity and Capital Resources." Income Tax Expense (Benefit). The income tax benefit recorded in the second quarter was comprised of 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. The effective tax rate was 45.0% in the second 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. RESULTS OF OPERATIONS SIX MONTHS ENDED JULY 1, 2001 VERSUS SIX MONTHS ENDED JULY 2, 2000 Revenues. Total revenues declined 8.2% to $404.0 million in the first six months of 2001 from $439.9 million in 2000. IT Services revenues declined 5.7% to $253.0 million in the first six 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 3,200 at the end of the second quarter of 2001. Commercial Staffing revenues declined 12.1% to $151.0 million in the first six months of 2001 from $171.7 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 7.7% of Commercial Staffing revenues in the first six months of 2001, down from 10.3% during the first six 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. 11 12 Direct Costs of Service and Gross Profit. Direct costs, consisting of payroll and related expenses of consultants and temporary workers, decreased 6.0% to $295.3 million in the first six months of 2001 on the lower revenues. Gross margin as a percentage of revenues decreased 170 basis points to 26.9% for the first six months of 2001 from 28.6% 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 4.6% to $95.9 million in the first six months of 2001 from $100.5 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 23.7% in the first six months, up 80 basis points from last year. In addition, depreciation and amortization expense increased to 3.0% of revenues in the first six months of 2001 from 2.7% last year primarily due to the decline in revenues in 2001. Interest Expense. Interest expense increased slightly to $9.8 million in the first six months of 2001 from $9.5 million in 2000. The average interest rate on borrowings was 8.24%, up 45 basis points over the first six months last year. See "--Liquidity and Capital Resources." Income Tax Expense (Benefit). The income tax benefit recorded for the six months ended July 1, 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 45.0% for the first half 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 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 half of 2001. As a result, for the six months ended July 1, 2001, cash provided by operating activities increased to $20.3 million from $15.2 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, day's sales outstanding increased slightly to 55 days at July 1, 2001, from 54 days at July 2, 2000. Cash used for investing activities decreased to $8.2 million in the quarter from $45.0 million in 2000 primarily as a result of lower contingent earn-out payments relating to acquisitions and reduced capital spending. The Company has also reduced its capital spending, and currently expects to spend less than 2/3 of 1% of its 2001 revenues on management information systems and other capital expenditures. Capital spending in the first six months of 2001 was less than $1.6 million, down from approximately $4.5 million in the first six months of 2000. Earn-out payments made to the former owners of acquired businesses during the first six months 12 13 of 2001 were approximately $6.6 million in the aggregate. The Company is obligated to make additional earn-out payments based on earnings of acquired businesses for the year ended December 31, 2000 and estimates that these payments will be in the range of $2.1 million to $3.1 million in the aggregate. There can be no assurance, however, 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. 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 July 1, 2001 would have been $78.9 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 August 14, 2001, $129.0 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 July 1, 2001 the Company was in compliance with the Credit Facility covenants. Also under the terms of the amendment, the maximum principal amount available for borrowing is scheduled to reduce to $176.0 million by the end of the third quarter of 2001, $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 currently set at LIBOR plus 325 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 8.24% during the first six months of 2001. The weighted average interest rate of the Company's borrowings under the Credit Facility was 7.88% at July 1, 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 borrowing capacity under the amended Credit Facility will be adequate to meet its diminished needs for working capital, capital expenditures and the remainder of its contingent earn-out payments. Because the Credit Facility matures in June 2002, however, it is reflected as a current liability on the Company's July 1, 2001 balance sheet. The Company intends to seek an extension to, or a refinancing of, the Credit Facility prior to maturity, but can give no assurance that it can obtain such extension or refinancing on acceptable terms. In the event of unanticipated short-term liquidity needs, the Company would likely be required to seek alternative sources of capital. 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, or is unable to find alternative sources of capital in the event of an unanticipated short-term need, the Company could be required to consider a number of strategic alternatives, including the sale of certain or all of its assets, to finance its operations. 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," 13 14 "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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's outstanding debt under the Credit Facility at July 1, 2001, was $138 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 July 1, 2001, a change of 1% in the interest rate would cause a change in interest expense of approximately $1.4 million on an annual basis. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on May 23, 2001. The matters voted on at the meeting were proposals: (1) to elect three directors to serve a term of three years and (2) to ratify the selection of PricewaterhouseCoopers LLP as the Company's independent public accountant for fiscal 2001. Each of these proposals was approved by the following margins:

PROPOSAL 1 VOTES FOR VOTES WITHHELD ---------- --------- -------------- Election of Directors Larry L. Enterline 21,447,017 248,804 James V. Napier 21,492,799 203,022 William J. Simione, Jr. 21,492,824 202,997 PROPOSAL 2 VOTES FOR VOTES AGAINST ABSTENTIONS ---------- --------- ------------- ----------- Ratification of Selection of Independent Public Accountants 21,637,327 39,552 18,942

14 15 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. 15 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 15, 2001 By: /s/ Larry L. Enterline -------------------------------------- Larry L. Enterline Chief Executive Officer Date: August 15, 2001 By: /s/ James C. Hunt -------------------------------------- James C. Hunt President and Chief Financial Officer 16 17 EXHIBIT INDEX

FILED HEREWITH(*), OR INCORPORATED BY REFERENCE FROM PREVIOUS EXHIBIT EXHIBIT COMPANY REG. NO. NUMBER DESCRIPTION NUMBER OR REPORT ------- ----------- ------ ---------------- 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+ 2001 Non-Qualified Employee Stock Purchase 4.1 333-66334 Plan 10.4#+ Director and Officer Indemnification 10.3 10-K for year Agreement of James V. Napier ended 12/31/95 10.5+ Letter of Employment between the Company and 10.5 10-K for year Larry L. Enterline ended 12/31/00 10.6+ Supplemental Retirement Plan for Edward P. 10.7 10-K for year Drudge, Jr. ended 1/2/00 10.7+ Form of Retirement Agreement between the 10.8 10-K for year Company and Edward P. Drudge, Jr. ended 1/2/00 10.8+ Employment Agreement between the Company and 10.10 10-K for year James C. Hunt ended 12/29/96

17 18

FILED HEREWITH(*), OR INCORPORATED BY REFERENCE FROM PREVIOUS EXHIBIT EXHIBIT COMPANY REG. NO. NUMBER DESCRIPTION NUMBER OR REPORT ------- ----------- ------ ---------------- 10.9+ Employment Agreement between the Company and 10.13 10-K for year Ken R. Bramlett, Jr. ended 12/29/96 10.10+ Employment Agreement between the Company and 10.9 10-K for year Michael H. Barker ended 1/3/99 10.11 Amended and Restated Non-Qualified 10.16 10-K for year Profit-Sharing Plan 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 10.13 10-K for year Credit Agreement among the Company and its ended 12/31/00 subsidiaries, the lenders party thereto and Bank of America, 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

# 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. 18