As filed with the Securities and Exchange Commission on August 3, 1999
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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1999
Commission file number 0-28662
PROFESSIONAL STAFF PLC
(Exact name of Registrant as specified in its charter)
England and Wales
(Jurisdiction of incorporation or organization)
Buckland House
Waterside Drive
Langley Business Park
Slough SL3 6EZ
England
-----------------------------------
(Address of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Name of each exchange
each class on which registered
---------- -------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Ordinary Shares, nominal value 2p per share
(Title of Class)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION
PURSUANT TO SECTION 15(d) OF THE ACT:
None
(Title of Class)
Indicate the number of issued shares of each of the issuer's classes of capital
or common stock as of the close of the period covered by the annual report:
8,496,353 Ordinary Shares, nominal value 2p per share
-----------------------
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:
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has elected
to follow:
Item 17 |_| Item 18 |X|
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Page 1 of 48-Exhibit Index on Page 30
TABLE OF CONTENTS
PART I.........................................................................4
Item 1. DESCRIPTION OF BUSINESS.........................................4
Item 2. DESCRIPTION OF PROPERTY........................................12
Item 3. LEGAL PROCEEDINGS..............................................12
Item 4. CONTROL OF REGISTRANT..........................................12
Item 5. NATURE OF TRADING MARKET.......................................13
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS........................................................13
Item 7. TAXATION.......................................................14
Item 8. SELECTED FINANCIAL DATA........................................18
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................19
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......25
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT...........................25
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS.........................27
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.27
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.................29
PART II.......................................................................29
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.....................29
PART III......................................................................29
Item 15. DEFAULTS UPON SENIOR SECURITIES................................29
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES..........................................29
PART IV.......................................................................29
Item 17. FINANCIAL STATEMENTS...........................................29
Item 18. FINANCIAL STATEMENTS...........................................29
Item 19. FINANCIAL STATEMENTS AND EXHIBITS..............................30
2
Introduction
In this Annual Report on Form 20-F (the "Annual Report"), references to
"U.S. dollars", "dollars", "U.S.$" or "$" are to currency of the United States
of America (the "U.S." or the "United States"), references to "pounds sterling",
"sterling", "(pound)", "pence" or "p" are to currency of the United Kingdom of
Great Britain and Northern Ireland (the "U.K." or "United Kingdom"). The Company
publishes its consolidated financial statements in pounds sterling. Solely for
the convenience of the reader, this Annual Report contains translations of
certain pound sterling amounts into U.S. dollars at specified rates. These
translations should not be construed as representations that the pound sterling
amounts actually represent such U.S. dollar amounts or have been, could have
been, or could be, converted into U.S. dollars at the rate indicated or at any
other rate. Unless otherwise indicated, the translations of pounds sterling into
U.S. dollars have been made at $1.6140 per (pound)1.00, the noon buying rate in
the City of New York for cable transfers in pounds sterling as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate") on March 31, 1999, the date of the most recent balance sheet of the
Company included herein.
Professional Staff plc prepares its financial statements in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP"). The financial statements and other financial data included elsewhere in
this Annual Report have been prepared in accordance with U.S. GAAP, unless
otherwise stated. The Company prepares its financial statements on the basis of
a financial year beginning on April 1 and ending on March 31. References to a
fiscal year in this Annual Report shall, unless otherwise indicated, be
references to the financial year of the Company ending on March 31 of such year.
In this Annual Report, financial results and operating statistics are, unless
otherwise indicated, stated on the basis of such financial years.
------------------------------------------
Unless otherwise specified or the context otherwise requires, in this
Annual Report, the "Company" or "Professional Staff" refers to Professional
Staff plc together with its subsidiaries, "Lab Staff" refers to Lab Staff
Limited, "Executives on Assignment" refers to Executives on Assignment Limited,
"Salisbury" refers to Salisbury Consulting Group Limited, "S-Com" refers to
S-Com Computer Systems Engineers Limited, "SDS" refers to SDS Computer Group
Limited, "The Woolf Group" refers to The Woolf Group, Inc., "Euromedica" refers
to Euromedica plc and Euromedica International Limited combined, "EPL" refers to
EPL Overseas Limited "S-Com EPL" refers to S-Com and EPL combined, and
"Praxis" refers to Praxis Executive Task Force Limited.
The Company was incorporated on February 20, 1990 under the laws of
England and Wales. Its principal executive offices are located at Buckland
House, Waterside Drive, Langley Business Park, Slough SL3 6EZ, United Kingdom
(telephone 44-1-753-580-540).
3
PART I
Item 1. DESCRIPTION OF BUSINESS
Professional Staff is a specialty staffing services company based
mainly in the United Kingdom and the United States, providing temporary and
permanent placement services to the technology, science and management sectors.
Since the Company's initial public offering in August 1996, the Company has
completed seven significant acquisitions which have expanded the range of
specialty services, geographic markets and industry sectors that the Company
serves. Within the technology sector, the Company offers highly specialized
professionals in telecommunications, datacommunications, IT and specialty
engineering. Major customers of the Company's technology staffing services
include BT, Orange, Ericsson, Qualcomm, Lucent and Nokia. Within the science
sector, in which the Company continues to dominate the UK staffing market, the
Company offers scientists and laboratory technicians with expertise in more than
500 different skills in disciplines including chemistry, microbiology and
biotechnology. In the United States, the Company offers clinical research
professionals and associated services to major pharmaceutical and clinical
research organisations. The Company's science division also includes Europe's
largest executive search consultancy dedicated to the pharmaceutical, bioscience
and healthcare industries. The Company's major clients within the science sector
include Glaxo Wellcome, Astra Zeneca, SmithKline Beecham, Merck, Sharp & Dohme
and Evans Medical. Within the management sector, in which the Company leads the
UK market, the Company offers interim managers and executives across a broad
spectrum of industry and commerce.
The Company's head offices are located in Langley near London. In
addition, the Company has offices throughout the United Kingdom, in San
Francisco and Chapel Hill, North Carolina in the United States, and in Brussels
and Munich in continental Europe.
Industry Overview
The staffing industry in the United Kingdom, including both temporary
and permanent staffing, is the largest in Europe and has experienced significant
growth. From 1995 to 1998, the total market grew from an estimated $18.5 billion
to $25.6 billion, or approximately 38%. The penetration rate, measured as the
number of temporary workers expressed as a percentage of the total work force,
is estimated by the Federation of Recruitment and Employment Services ("FRES")
to be approximately 3.3%. The UK market is highly fragmented with approximately
2,500 companies active in a deregulated environment. The overall trend in
continental Europe has been toward progressive liberalization and recent
deregulation has created new development opportunities for the staffing
industry. See "--Regulation."
Specialty staffing services have become a significant component of
human resource management. Staffing companies create value by providing the
flexible work force that allows client companies to focus on core competencies.
Strategic recruitment outsourcing allows companies effectively to manage human
resources in response to operational fluctuations and economic and product
cycles. Increasingly, corporations are turning to temporary workers as a means
to achieve greater operating efficiency, to transfer fixed labor costs to
variable costs, to add flexibility to operations, to reduce risks associated
with hiring permanent employees and to import skills missing from their
organizations.
Permanent recruitment services with dedicated technical expertise are
also becoming increasingly important as demand has reduced the pool of available
specialty professionals and made it more difficult to locate qualified
candidates. For these reasons the Company believes that clients have become
increasingly reliant upon specialty permanent placement and search services.
Technology Sector. Telecommunications services is one of the fastest
growing sectors of the staffing industry. The expansion of the global market for
communication services and the continued development of new technology has been
accompanied by substantial expenditure on developing new equipment and services
required to upgrade existing and develop new networks. Particularly in less
developed countries with limited existing communications infrastructure, the
number of subscribers has increased substantially as the installation of
wireless networks proves more cost-efficient and expeditious than the rollout of
landline networks. Expenditures on equipment and service are driven by changing
technology as existing land line and wireless networks that represent first
generation technology are converted to accommodate second generation digital
technologies. The Company expects
4
that in the next several years newer third generation technologies will be
developed that will deliver voice, data and video signals. These new
technologies should continue to stimulate expenditures for services and
equipment.
Information Technology services, including data communications and
specialty software engineering, is also a fast growing sector as a result of
increased demand for personnel in a range of computer-related disciplines,
including technical project support, software development, documentation systems
and database management.
Industries involved in high and emerging technologies continue to
experience strong growth and an increasing reliance on both core and contingent
skills at the right levels and at the right time. Management believes that rapid
technological change, intense competition and increasing specialization have all
resulted in an increasing use of and reliance by employers upon providers of
specialty staffing services.
Science Sector. Science services has been a growing sector in the
United Kingdom following the Company's pioneering of the use of temporary
professionals in the scientific laboratory. The use of temporary scientific
professionals has grown in recent years in the pharmaceutical, biotechnology,
environmental, food, chemical and petrochemical industries. This growth is the
result of increased acceptance of the use of temporary workers as well as
shortages of certain scientific skills. In the United States, demand for
clinical trials staffing services is being driven by the unprecedented growth in
the clinical trial segment of the drug development industry. Technological
advances and market demand for novel drug therapies have led pharmaceutical and
biotechnology companies ("sponsors") to produce over 400 new drug compounds a
year. Concurrently, stringent approval requirements demand a greater number of
trials per compound and a greater number of patients per trial. As a result of
the growth in this segment, sponsors are increasing their reliance on clinical
trial outsourcing services to gain access to greater clinical trial capacity and
a larger supply of experienced clinical trial personnel with specific
therapeutic expertise. Management believes that science services in both the UK
and the US offer significant opportunities for future growth.
Management Sector. The use of interim managers and executives in the UK
is an emerging market, in which the Company has been one of the leading
pioneers. There is now growing acceptance of the flexibility and cost
effectiveness of using interim managers alongside the regular management team,
not simply as a solution to a crisis. Management believes that the management
sector offers significant opportunities for future growth.
Business Strategy
Management believes that the Company has achieved a strong competitive
position in the staffing industry attributable to a number of business
strategies, including the following:
Operating only in specialized sectors. The Company operates in highly
focused sectors of the staffing industry through businesses with readily
identifiable trade names related to the sector served. These sectors are
technology, science and management and, as such, offer higher added value
services to clients. The Company believes that the large number of discrete
technology and scientific skills, the need for large candidate databases to
match candidates' skills with clients' needs and the importance of established
client relationships raise the barriers to entry for competitors in these
sectors. Through its teams of recruitment consultants and its delivery systems,
the Company believes it offers its clients quality service due to its
exceptional understanding of the skills required for each sector.
Employing qualified and experienced sales teams. In the technology
sector, recruitment consultants are generally computer or business graduates,
trained in the specific industry in which they work. The Company's recruitment
consultants working in the scientific sector generally have university degrees
in science, including many with PhDs. Each consultant is qualified in a
specialized scientific discipline such as analytical chemistry, biochemistry,
microbiology, organic chemistry or food science, among others. As a result, the
Company's sales teams are experienced and well qualified to understand and serve
the specific needs of clients in each of the sectors in which it operates.
Providing value-added services. Management places great importance on
providing a high quality, flexible service. Encouraging as well as responding to
the trend toward flexible employment practices, the Company is able to deliver
qualified candidates whose skills are carefully matched to each assignment and
who are available when needed. The Company focuses on achieving an exceptional
understanding of clients' needs, quickly identifying
5
suitable candidates who meet those needs and then managing the process of
selection and assignment and administering the ongoing service.
Identifying qualified candidates. The Company invests in recruitment
advertising through the Internet and other media to identify and recruit
qualified professionals who are available for client assignments. The Company's
databases contain approximately 25,000 names in technology, 30,000 names in
science and 5,000 names in management.
Emphasizing a partnership approach. Management emphasizes a partnership
approach that offers added value to both clients and candidates. For example,
Lab Staff advises candidates on interview and presentation skills. In addition,
the Company offers information to its clients regarding the availability of
skills and on appropriate and prevailing salary levels. Under S-Com's "Skills
Management" approach, the Company assesses with its clients both current and
future skills requirements. For its contractors S-Com EPL pays special
attention to financial, social and accommodation issues, particularly in the
case of remote or overseas assignments.
Operating decentralized management with central financial controls.
Each of the Company's subsidiaries focuses on its own service sector,
technology, skills and clients. The Company operates in a decentralised manner
which encourages an entrepreneurial environment within each subsidiary.
Operating company managers are given latitude to concentrate on their market and
manage day-to-day operations within their areas of expertise. The Company's
management regularly monitors operations and results are reported and
consolidated monthly. The Company's businesses operate discrete accounting
systems in accordance with the specific requirements of each business, but
report results under a common reporting timetable and framework and according to
common accounting policies. Treasury operations are controlled centrally. Each
operating company's financial planning, budgeting and forecasting is
co-ordinated by the Company's Chief Financial Officer.
Continuing investment in advanced information systems and office
technology. The Company believes its databases and operating systems permit a
rapid and precise response to client needs and a high degree of productivity.
Management believes that the responsiveness of these systems provides an
important competitive advantage. The Company budgets for continuing investment
in operating systems to benefit from advances in office technology.
Growth Strategy
The Company is pursuing a growth strategy which includes investment in,
and development of, its current businesses combined with an acquisition strategy
to increase the size and scale of services within existing markets served and to
enter new specialty sectors.
In the technology sector, the Company believes that it is well
positioned to generate internal growth as a result of its focus in the growing
telecommunications, datacommunications and IT industries and in the specialty
engineering sectors it serves. In addition, S-Com EPL has established a growing
presence in the United States and Germany.
In the science sector, the Company intends to strengthen its position
as the market leader in the United Kingdom by expanding its range of staffing
services to higher skill levels and further promoting its existing brands. The
acquisition of Euromedica, the largest executive search firm in Europe dedicated
exclusively to the pharmaceutical, bioscience and healthcare sectors, expands
the Company's operations in science employment into selected European countries.
The acquisition of The Woolf Group gives the Company a significant presence in
science employment in the United States. The Company intends to accelerate the
implementation of The Woolf Group's growth strategies, which include entry into
new regional operations in the United States.
In the interim management sector, a relatively new and developing
market, the Company believes it is well positioned to achieve greater market
penetration by increasing sales to existing clients and developing business with
new clients. The acquisition of Praxis further strengthened the position of the
Company in this sector, making it the leading provider of interim executives and
managers in the United Kingdom.
The Company intends to pursue and evaluate further acquisition
opportunities which fit within its growth strategy. The Company's acquisition
policy is to expand its presence in its current sectors, facilitate entry into
new
6
geographic areas within its current sectors and permit expansion into new
specialty growth markets within the United Kingdom. The primary criteria for
evaluating each potential acquisition include the nature and degree of
specialization, growth potential within the sector served, geographic coverage,
quality of management and its commitment to the business on an ongoing basis,
profitability trends and transaction terms believed by the Company to be
favorable.
Operations
The following table sets forth the structure, by sector, of the
Company's principal operations and services provided.
Business Sector Principal Industries Served Brand Name Services Provided
- --------------- --------------------------- ---------- -----------------
Technology Telecommunications, S-Com EPL Temporary Staffing
Datacommunications,
IT, Specialty Software Engineering
Science Pharmaceutical, Chemicals, Science Recruitment Group
Biotechnology, Food & Beverage, Lab Staff Temporary Staffing
ESCA Permanent Recruitment
Scientech Permanent Recruitment
Salisbury Advertising &
Marketing Recruitment Advertising
Euromedica Executive Search
The Woolf Group Clinical Trials Staffing
Management All industry sectors Executives on Assignment Temporary Staffing
Praxis Executive Taskforce Temporary Staffing
ESA Permanent Recruitment and
Temporary Staffing
In fiscal 1999, S-Com and EPL were fully integrated into a single
subsidiary of the Company operating under the S-Com EPL name.
In fiscal 1999, following the determination of all remaining contingent
consideration, the Company restructured Salisbury's operations by selling or
terminating minor non-core activities and transferring other operations to the
Company's Management and the Science divisions. ESCA, which provides science
professionals for permanent appointments from research scientists through to
senior management levels, and Scientech, which supplies laboratory level
scientists and technicians for permanent positions, have been transferred to the
Science Recruitment Group. ESA, which provides permanent recruitment services in
technology and civil engineering, has been transferred to the management
division.
Staffing and Recruitment Services in Technology
S-Com EPL. S-Com EPL specializes in providing temporary and contract
systems engineers and other specialists to the telecommunications and
datacommunications industries. S-Com EPL also provides information technology
and specialty engineering skills to these and other sectors including the
defense industry and for air traffic control systems. Skills provided include
systems planning and design, project management, software application
development, systems and network implementation, systems integration, high-level
programming and system maintenance.
S-Com EPL has pioneered a partnering approach with telecommunications
equipment manufacturers and service providers for the roll out of new networks
for mobile telephones. The Company identifies bidders for license awards and
helps the bidder to identify the specific skills required to complete the
rollout successfully. The Company plans the delivery of the technical personnel
required, and in some cases, subsequently manages the staffing of projects. The
planning process is generally undertaken some months before the license is
awarded. While the Company attempts to align itself strategically with key
bidders, it seeks to avoid exclusive arrangements so that it can provide
services to any successful bidder. S-Com EPL currently has operations in the
United Kingdom, Germany and in the United States and is providing contractors in
some 25 countries.
7
Staffing and Recruitment Services in Science
Lab Staff, ESCA and Scientech (the Science Recruitment Group). Lab
Staff is the leading temporary staffing business specializing in the laboratory
sciences in the United Kingdom. It provides temporary scientists and technicians
to industrial employers, government laboratories and research institutions
throughout the United Kingdom. Average assignment length is six months, and
approximately 15% of assignments are ultimately converted to permanent
assignments for which a fee is generally payable. ESCA and Scientech provide
scientific management and laboratory level permanent placement services,
respectively. The businesses seek to provide quality service to their clients by
understanding each client's highly technical needs, quickly identifying suitable
candidates that meet those needs and managing the process of introducing a
candidate and administering the ongoing service with a minimum of client
involvement.
The three brands, Lab Staff, ESCA and Scientech, now operate within an
umbrella brand, the Science Recruitment Group which represents a single source
for science employers' recruitment needs whether for temporary or permanent
positions, senior management or laboratory technicians.
Euromedica. Euromedica, which was acquired by the Company in March
1999, is the largest executive search firm in Europe dedicated exclusively to
the pharmaceutical, bioscience and healthcare sectors. Euromedica provides
executive-level recruitment services to clients through the United Kingdom and
continental Europe. The company has a network of offices serving the United
Kingdom, Belgium, Holland and Germany as well as licence arrangements covering
France and Spain and associates or joint ventures in the United States, the Far
East and India. The Company believes that the acquisition of Euromedica
substantially enhances the Company's permanent placement business while
providing Lab Staff with in-country bases and local expertise for assisting with
the development of temporary scientific staffing services in Europe.
The Woolf Group. The Company acquired the Woolf Group in March 1999.
Headquartered in Chapel Hill, North Carolina, The Woolf Group specializes in the
recruitment and placement of clinical research professionals on a contract basis
for pharmaceutical, biotechnology, clinical research and site management
organizations. The Company also provides meeting planning services, primarily
for investigator meetings to initiate clinical trials, to those same companies.
In addition, the Company recently began providing permanent placement services
in response to the increasing demand for permanent clinical research
professionals and senior management positions. The Company's clients are
primarily located in North Carolina, Virginia, New Jersey, Pennsylvania,
California, Massachusetts, New York and Texas.
The Woolf Group markets it clinical research staffing services to
companies engaged in the clinical trial stage of drug development. The Company
recruits and places a variety of clinical research professionals, including
monitors, project managers, medical writers, medical officers, clinical research
coordinators and quality assurance auditors. The objective of the clinical
staffing business is appropriately and responsively to identify and match
clinical research professionals with each client's staffing needs. To do so, The
Woolf Group adheres to a comprehensive standard operating procedure when seeking
to fulfil clients' requirements.
Staffing and Recruitment Services in Interim Management
Executives on Assignment and Praxis Executive Taskforce. The Company
acquired Praxis Executive Taskforce in October 1998. Executives on Assignment
and Praxis Executive Taskforce place experienced executives on temporary
assignments across all functions in all types of industrial, commercial and
public sector activity throughout the United Kingdom. Management believes that
together, these companies are the leading employment business dedicated
exclusively to this sector. All senior recruitment consultants in the business
are experienced executives with knowledge and insight into management and its
functions. Their effective selection of qualified candidates and accurate
matching of these to clients' needs is fundamental to the business. Assignments
range from senior executive officers to middle management, and are typically for
periods of six to twelve months.
Candidates
The identification and recruitment of qualified professionals who are
available for client assignments is a key component of the Company's operations.
The Company expends considerable efforts and resources in maintaining
8
its candidate databases. The Company's databases contain approximately 25,000
names in technology, 30,000 names in science, and 5,000 names in management.
Candidates are sourced principally through advertising and direct
solicitation. In the technology sector, candidates are sourced through
advertising in trade journals such as Mobile Europe, Computer Weekly and
Computer Contractor, as well as globally through the Internet. In the science
sector, the Company advertises in the specialty trade press such as New
Scientist, Chemistry in Britain and other journals relevant to a specific
industry such as food, plastics or biotechnology. In the management sector
candidates are sought through advertising, usually in national newspapers such
as The Times, The Sunday Times and The Daily Telegraph. The Company also
receives a considerable number of unsolicited resumes without the need for
specific advertising or solicitation. Universities are a valued source of newly
qualified candidates and the Company recruits at a number of universities
through university web sites and attendance at career and job fairs.
In technology, candidates are selected for possible assignments
initially on the basis of the technical information provided on the resume and
are normally interviewed in depth on the telephone and in person where
appropriate. The recruitment consultant assesses a candidate's suitability for
the assignment based on a detailed understanding of the skills required by a
client. In science, all candidates for temporary or permanent positions are
interviewed in person by the Company's recruitment consultants and their skills
and experience are precisely matched to the demands of the assignment. In
management, only candidates meeting strict selection criteria are accepted onto
the Company's database. Those selected for possible assignments are interviewed
personally by both the Company's recruitment consultants and by the client.
Clients
Over 60% of the Company's revenues in the technology sector are derived
from clients in the telecommunications industry and include both equipment
manufacturers and service providers such as BT, Orange, Ericsson, Qualcomm,
Lucent Technologies and Nokia. Clients in datacommunications include BT,
National Westminster Bank, Racal and IBM. BT is the largest client, accounting
for approximately 9% of the Company's revenues for the year ended March 31,
1999. Other clients include GEC Marconi, Raytheon, the Defence Research
Association, the Civil Aviation Authority and the National Air Transport System.
Staffing assignments are agreed on the basis of rates and terms negotiated for
each assignment or which form part of a preferred supplier agreement. In
international telecommunications rollouts, the Company does not enter into
contractual commitments to provide services on any date or at any specific cost,
nor are there penalties for failure to deliver personnel, to complete a rollout
in a given manner or by a specified time.
In the science sector, clients include leading pharmaceutical,
biotechnology, chemical, environmental, petrochemical, food and beverage and
manufacturing companies as well as government laboratories and research
institutions. The Company's major clients within the science sector include
Glaxo Wellcome, Astra Zeneca, SmithKline Beecham, Merck, Sharp & Dohme and Evans
Medical. In temporary staffing, the majority of the Company's agreements with
customers cover assignments with rates and on terms negotiated for each
assignment. However, the Company has entered into special agreements with
certain regular clients covering services supplied, bill rates, conversion fees,
discounts and rebates. Such agreements generally have a term of one year. None
of these agreements requires clients to use the Company's services.
Clients in the management sector are found in a broad cross section of
industry, commerce, financial services and public sectors and range in size from
small companies to very large global organizations. Assignments for temporary
executives have been in general management, sales, marketing, finance,
information technology, human resources and production.
Quality
Management attaches great importance to providing high quality services
on a consistent and regular basis. Most of the Company's technology and science
staffing companies are ISO 9002 accredited. The Company has implemented
comprehensive internal quality policies that control, monitor and record a
number of procedures. Such policies include quality control calls that are
generally made during the first week and periodically throughout temporary
assignments to ensure that both client and temporary worker are satisfied with
the progress of the
9
assignment. Lab Staff clients are asked to complete candidate assessments which
are regularly summarized and reviewed by management. Permanent recruitment
services are governed by quality control procedures from the outset of the
recruitment process, through the appointment of the selected candidate to
follow-up calls some weeks later. The initial stages involve very detailed
liaison between the Company and its clients to ensure a complete understanding
by the Company of clients' needs.
Sales and Marketing
Each operating company has developed a sales and marketing strategy to
address specific needs within each sector served. In the technology sector,
S-Com's recruitment consultants focus on developing client relationships through
regular contacts at various levels within a client's organization. This may
involve spending time on the clients' premises or on site to gain deeper
understanding of future projects and the skills required for these. S-Com is a
pioneer in the "Skills Management" process whereby its staff, with clients,
jointly assess future skills requirements and plan accordingly. In the science
sector, marketing focuses primarily on temporary scientific personnel, and is
targeted toward laboratory managers and research or development directors. The
Company also targets human resource departments. Marketing methods include
seminars, direct mail, publication of articles in national and trade press
journals and exhibits at trade shows as well as telephone contact and client and
prospect site visits. In the management sector, potential clients are targeted
through direct contact and mailing and public relations programs including a
newsletter, The Interim. Marketing also includes management briefings for chief
executives, human resource directors and finance directors.
Information Systems
Information systems are fundamental to the operations of the Company
due to the broad range of specialty skills employed in the sectors served. A
client's request typically specifies not only a particular skill, but also a
specific level of educational qualification, the type of industry experience,
the functions performed and the total years of experience required. Because of
these requirements, each business has developed a candidate database that allows
rapid identification of suitable candidates who meet the client's specified
criteria.
Competition
In each of the sectors in which the Company operates, the staffing
services industry is fragmented and highly competitive with relatively low
barriers to entry. Competition and the Company's competitive position in the
technology sector vary across the industries served. In international
telecommunications staffing, S-Com EPL has established a leading position with
few competitors having similar skills and industry expertise. In the U.K.
telecommunications, data communications and information technology markets,
S-Com EPL faces competition from a number of IT staffing companies but seeks to
position itself as a specialist provider of technical skills often supporting
clients' R&D activities. Competitors include Glotel, a telecommunications
specialty services provider, as well as numerous IT staffing companies such as
Delphi Group, Parity, Abraxas (part of Select Appointments) and Lorien.
In the science sector, management believes that Lab Staff is the only
scientific staffing company in the United Kingdom with an extensive nationwide
presence and which specializes in all levels of science employment. Competition
is usually regional in nature with few companies specializing in science. ESCA
and Scientech are among several leading recruitment businesses specializing in
the permanent placement of scientists. These businesses also compete with
certain national search firms who, while not specializing in science, accept all
types of recruitment assignments at senior executive levels.
In the management sector, Executives on Assignment and Praxis Executive
Taskforce are one of the leaders in the field of interim management and face
competition from other specialist providers, of which management believes there
are three or four. Some search firms and management consultants, such as PA
Consulting, also operate in this sector.
Management believes that the Company's competitiveness is based on its
ability to understand a client's specific needs, the ability to deliver
qualified candidates whose skills are well matched to those needs and on the
pricing of its services.
10
The principal competitive factors in attracting qualified candidates
are salaries and benefits and the availability, duration and quality of
assignments. Management believes that many candidates seeking temporary or
permanent assignments through the Company are also pursuing employment through
other means, including other temporary employment service firms. Increasing
demand, particularly in the technology sector, has reduced the pool of available
specialty professionals and increased difficulty of finding qualified
candidates. Therefore, the Company's reputation and its ability to offer
appropriate assignments are important factors in the Company's ability to
attract high-quality candidates. In permanent recruitment, the ability to secure
quality job opportunities from quality clients will determine competitive
advantage and will help to attract suitable candidates.
Employees
At March 31, 1999, the Company had 251 employees (full-time
equivalent), of whom approximately 160 were recruitment consultants and
operational staff. None of the Company's employees, or its temporary workers, is
represented by a collective bargaining agreement. The Company believes that its
employee relations are good.
Regulation
Staffing services firms are generally subject to one or more of the
following types of government regulations: (i) regulation of the
employer/employee relationship between a firm and its staffing personnel; (ii)
registration, licensing, record keeping and reporting requirements; and (iii)
substantive limitations on its operations, including (a) restrictions on
categories of workers that may be placed pursuant to temporary employment
contracts; (b) limitations on the duration of such contracts; and (c)
restrictions on or prohibition of permanent placement of staff in certain
jurisdictions. Accordingly, staffing companies must comply with laws and
regulations that govern the employer/employee relationship, such as tax
withholding or reporting, social security or retirement, anti-discrimination and
workers' compensation.
As a staffing services business operating in the United Kingdom, the
Company is subject to the Employment Agencies Act 1973, which imposes certain
obligations of fair practice on the Company. The Company believes that it
complies in all material respects with these regulations. Although the Company's
business is not specifically regulated by European Union ("EU") regulation, the
EU has in the past attempted to introduce measures relating to rights of workers
generally. A number of European countries require staffing companies to maintain
some form of license or permit which is issued by the applicable authorities.
Certain European countries require the operations of staffing companies to be
supported by bank guarantees. A number of other restrictions and requirements
are common to regulations in European countries, including certain requirements
for contracts between clients and staffing companies, limitations in the
conditions under which temporary work is allowed, limitations in the duration of
staffing contracts (varying from three to 24 months) and requirements for wage
levels and social security. Management believes that the Company complies in all
material aspects with these regulations, to the extent applicable. However,
there can be no assurance that, as regulatory regimes evolve or change in
particular jurisdictions, the operations or performance of the Company will not
be affected.
In the United Kingdom, all mandatory social benefits (including
unemployment, national healthcare and pensions benefits) are funded by employers
and employees through National Insurance contributions. The rates for National
Insurance are established on a national basis and vary only by compensation and
not job classification or other risk or cost-adjusted criteria. This is in
contrast to U.S. companies which generally are responsible for the management
and payment of unemployment insurance and workers' compensation premiums in
addition to social security contributions under state and federal programs and
optional health benefits. In the U.S., there is no federal legislation
specifically related to the regulation of staffing businesses, although some
states have licensing requirements.
In the past twelve months the UK Government has passed a number of
significant laws affecting employment relationships and the relationship that an
employment business has with its own employees and its temporary workers. These
are (i) the Working Time Regulations, (ii) the National Minimum Wage, (iii)
Public Interest Disclosure Act, and the Employment Relations Bill which is
currently making its way through Parliament. These laws all apply to "workers"
and are not limited to "employees", which means that the rules can apply to
agency temporary workers. The Working Time Regulations regulate hours worked,
rest breaks, holidays and record keeping. The National Minimum Wage sets out
minimum rates of pay and the Public Interest Disclosure Act provides certain
rights to
11
workers who disclose alleged wrongdoing in defined circumstances. The Employment
Relations Bill, in its present form, covers the areas of trades unions,
maternity provisions, and unfair dismissal rights.
Under "IR35", a recently announced Inland Revenue proposal, legislation
is intended to be introduced (to take effect on 6 April 2000) to prevent tax
avoidance through the hiring of individuals through their own personal service
companies. Employers and employees are currently able to pay less income tax and
National Insurance by arranging for the employee to be engaged indirectly
through the medium of a company. It is intended that the changes will ensure
that people working in such "disguised employment" will pay the same tax and
National Insurance as an employee.
The Department of Trade and Industry published a consultation document
in May 1999 concerning the Regulation of the United Kingdom Recruitment
Industry. The proposals include measures to restrict the charging of fees which
might discourage clients from transferring a temporary worker to a permanent
employee and to ensure that temporary workers have a contractual relationship
with an employment business.
The Company is responding to the consultation document and to IR35
through its trade body. The Company supports stronger regulation of its industry
in the UK although some of the measures under consultation may have a
detrimental effect on its business.
The Company's growth strategy includes expansion into other countries
in Europe and internationally. The Company will carefully evaluate the
regulatory environment of any market in determining where to pursue such
expansion.
Item 2. DESCRIPTION OF PROPERTY
The Company owns approximately 7,600 square feet of office space at its
headquarters in Langley (near London). The Company also leases offices in London
Docklands, Hatfield, Aylesbury, Windsor (all within an hour of London),
Cambridge, Coleshill (near Birmingham), as well as having a network of serviced
offices throughout the UK. The Company also has leased offices in Chapel Hill
and San Francisco in the U.S., and in Brussels and Munich in continental Europe.
The Company's leased offices occupy approximately 40,000 square feet in the
aggregate. The Company believes that its facilities are adequate for its short
term needs.
Item 3. LEGAL PROCEEDINGS
The Company may from time to time be involved in routine litigation
incidental to the conduct of its business. There is no material pending
litigation to which the Company is a party.
Item 4. CONTROL OF REGISTRANT
As far as known to the Company, the Company is not directly or
indirectly owned or controlled by another corporation or by any government.
The following table sets forth information regarding the beneficial
ownership of the Shares as of June 30, 1999, by (i) each person known by the
Company to own beneficially more than 10% of the outstanding Shares and (ii) all
directors and executive officers as a group.
12
Title of Class Identity of Person or Group Amount Owned Percent of Class
- -------------- --------------------------- ------------ ----------------
Ordinary Shares Bruce R. Culver 1,127,800 13.2%
Ordinary Shares Board of Directors as a group
(6 persons) 1,933,800 22.7%
Ordinary Shares T. Rowe Price Associates 854,900 10.1%
The Company does not know of any arrangements which might result in a
change in its control.
Item 5. NATURE OF TRADING MARKET
The Company's Ordinary Shares are traded in the form of American
Depositary Shares ("ADSs"), each ADS representing one Ordinary Share, on the
Nasdaq National Market under the symbol "PSTF". The ADSs are evidenced by
American Depositary Receipts ("ADRs") issued by The Bank of New York, as
Depositary, under a Deposit Agreement, dated as of June 8, 1996, among the
Company, The Bank of New York and the registered holders from time to time.
The following table shows, for the calendar periods indicated, the
reported highest and lowest middle market quotations for the Company's ADSs on
the Nasdaq National Market, based on the highest and lowest sales prices of the
ADSs.
U.S. Dollars per ADS
-----------------------
High Low
--------- ----------
1997:
Third Quarter....................................... 16 11 1/2
Fourth Quarter...................................... 18 1/4 15
1998:
First Quarter....................................... 18 3/4 15
Second Quarter...................................... 19 1/2 11 1/2
Third Quarter....................................... 16 1/8 9 7/8
Fourth Quarter...................................... 11 1/2 6 3/8
1999:
First Quarter....................................... 8 3/4 6
Second Quarter (through June 30).................... 7 3/8 5 11/16
According to information provided by The Bank of New York, the
Depositary, as of June 30, 1999, there were 22 registered U.S. holders of
8,206,839 ADSs. In the aggregate, such holdings constituted 96.3% of the total
outstanding Shares of the Company. Since certain of the Shares and ADSs are held
by brokers and other nominees, these numbers may not be representative of the
actual number of U.S. beneficial holders or of the number of Shares or ADSs
beneficially held by U.S. persons.
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no U.K. foreign exchange control restrictions on
the payment of dividends on Ordinary Shares or on the conduct of the Company's
operations.
There are currently no limitations on grounds of nationality imposed by
English law or by the Company's Articles of Association on the rights of
non-U.K. holders of Ordinary Shares to hold, own or vote such securities.
13
Item 7. TAXATION
The following discussion summarizes the material U.S. federal income
tax consequences and U.K. tax consequences of the acquisition, ownership and
disposition of Ordinary Shares represented by ADSs evidenced by ADRs by a
beneficial owner of ADSs that is (i) a citizen or resident of the United States,
(ii) a corporation organized under the laws of the United States or any state
thereof or the District of Columbia or (iii) otherwise subject to U.S. federal
income tax on a net income basis in respect of the Ordinary Shares or ADSs (a
"U.S. Holder"). This summary applies only to U.S. Holders who will hold ADSs as
capital assets. This summary is based (i) upon current U.K. tax law and U.S.
law, and U.K. Inland Revenue and U.S. Internal Revenue Service practice, (ii)
upon the United Kingdom-United States Income Tax Convention as in effect on the
date of this Annual Report (the "Treaty") and the United Kingdom-United States
Convention relating to estate and gift taxes as in effect on the date of this
Annual Report (the "Estate Tax Treaty"), and (iii) in part upon representations
of the Depositary and assumes that each obligation provided for in or otherwise
contemplated by the Deposit Agreement and any related agreement will be
performed in accordance with their respective terms.
The following summary of certain U.S. federal income tax considerations
does not address all of the tax consequences to certain categories of U.S.
Holders who may be subject to special rules (such as United States expatriates,
insurance companies, regulated investment companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax,
securities brokers-dealers, U.S. Holders who hold ADSs as part of hedging or
conversion transactions or U.S. Holders who own directly, indirectly or by
attribution 10% or more of the voting power of the Company) and U.S. Holders
whose functional currency for U.S. tax purposes is not the United States dollar.
In addition, the following summary of certain U.K. tax considerations does not
address the tax consequences to a U.S. Holder (i) that is resident (or, in the
case of an individual, ordinarily resident) in the United Kingdom for U.K. tax
purposes, (ii) whose holding of ADSs is effectively connected with a permanent
establishment in the United Kingdom through which such U.S. Holder carries on
business activities or, in the case of an individual who performs independent
personal services, with a fixed base situated therein, or (iii) that is a
corporation which alone or together with one or more associated corporations,
controls directly or indirectly, 10% or more of the Company.
Holders of Ordinary Shares or ADSs should consult their own tax
advisors as to the consequences under foreign, U.S. state and local, and other
laws, of the acquisition, ownership and disposition of ADSs. For U.S. federal
income tax purposes, U.S. Holders of ADSs will be treated as owners of the
underlying Ordinary Shares attributable thereto and this discussion of U.S.
federal income tax consequences to U.S. Holders of ADSs applies as well to U.S.
Holders of Ordinary Shares.
Certain United Kingdom Tax Considerations
Taxation of Dividends
The taxation treatment of dividends paid in respect of the ADSs will
depend upon the law and practice in force at the time dividends are paid. The
following summary is based upon current law and practice, which may change by
the time that any dividends become payable.
The UK Government has announced changes to the taxation of dividends
which affect the position of shareholders in respect of dividends paid on or
after April 6, 1999. With effect from this date, UK companies are not required
to account for advance corporation tax when a dividend is paid. The rate of tax
credits is halved to 10 per cent and tax credits are no longer payable to
shareholders with no tax liability. Individual UK resident shareholders whose
income is within the lower or basic rate tax bands are liable to tax at 10 per
cent and the tax credit will satisfy their tax liability. Individual UK resident
shareholders whose income is subject to income tax at the higher rate are liable
to tax at 32.5 per cent.
Under the Treaty, a US investor is entitled to receive from the Inland
Revenue, in addition to any dividend, the tax credit, subject to a UK
withholding tax equal to 15 per cent of the gross dividend. However, because the
15% UK withholding tax currently exceeds the tax credit amount (which is equal
to one-ninth of the dividend), a US investor will not receive any treaty payment
from the UK Inland Revenue.
14
Under the terms of the Treaty, US resident individuals and corporations
controlling less than 10% of the voting stock of the Company are technically
entitled to a refund from the UK Inland Revenue calculated by reference to the
amount of the tax credit available to a UK individual. However, the reduction in
the value of the tax credit on dividends paid to UK individuals to one-ninth of
the dividend from 6 April 1999 means that no refunds will be made to US
stockholders holding less than 10% of the Company's voting stock.
U.S. Holders who are not resident or ordinarily resident for tax
purposes in the United Kingdom and have no other source of U.K. income are not
required to file a U.K. income tax return.
Taxation of Capital Gains
U.S. Holders who are not resident or ordinarily resident for tax
purposes in the United Kingdom will not be liable for U.K. tax on capital gains
realized on the disposal of their ADSs unless such ADSs are used, held or
acquired for the purposes of a trade, profession or vocation carried on in the
United Kingdom through a branch or agency.
The surrender of ADSs in exchange for Shares will not be a taxable
event for the purposes of U.K. corporation tax or U.K. capital gains tax.
Accordingly, U.S. Holders will not recognize any gain or loss for such purposes
upon such surrender.
A US Holder who becomes resident in the United Kingdom after a period
of "temporary" non-residence (of up to five tax years) following an earlier
period of residence in the United Kingdom will be liable to capital gains tax.
Inheritance and Gift Taxes
An individual who is domiciled in the United States for the purposes of
the Estate Tax Treaty and who is not a national of the United Kingdom for the
purposes of the Estate Tax Treaty will generally not be subject to U.K.
inheritance tax in respect of the ADSs on the individual's death or on a gift of
the ADSs during the individual's lifetime provided that any applicable U.S.
federal gift or estate tax liability is paid, unless the ADSs are part of the
business property of a permanent establishment of an enterprise of the
individual in the United Kingdom or pertain to a fixed base in the United
Kingdom of the individual used for the performance of independent personal
services. Where the ADSs have been placed in trust by a settlor who, at time of
settlement, was a U.S. Holder, the ADSs will generally not be subject to U.K.
inheritance tax unless the settlor, at the time of settlement, was not domiciled
in the United States and was a U.K. national. In the exceptional case where the
ADSs are subject both to U.K. inheritance tax and to U.S. federal gift or estate
tax, the Estate Tax Treaty generally provides for the tax paid in the United
Kingdom to be credited against tax paid in the United States or for tax paid in
the United States to be credited against tax payable in the United Kingdom based
on priority rules set out in that Treaty.
U.K. Stamp Duty and Stamp Duty Reserve Tax
A transfer for value of the Shares will generally be subject to U.K. ad
valorem stamp duty, normally at the rate of 50p per (pound)100 (or part thereof)
of the amount or value of the consideration given for the transfer irrespective
of the identity of the parties to the transfer and the place of execution of any
instrument of transfer. Stamp duty is normally a liability of the purchaser.
An agreement to transfer Shares for money or money's worth will
normally give rise to a charge to stamp duty reserve tax ("SDRT") at the rate of
0.5% of the amount or value of the consideration for the Shares unless an
instrument of transfer of the Shares is executed in pursuance of the agreement
and is duly stamped. SDRT is in general payable by the purchaser.
A stamp duty charge at the higher rate of (pound)1.50 per (pound)100
(or part thereof) or, in the case of SDRT, a charge at the higher rate of 1.5%
of the amount or value of the consideration, or in some circumstances, the value
of the Shares, may arise on a transfer or issue of the Shares (i) to, or to a
nominee for, a person whose business is or includes the provision of clearance
services or (ii) to, or to a nominee or agent for, a person whose business is or
includes issuing depositary receipts. Under the U.K. Finance Act 1996, as from
July 1, 1996, an option has been introduced whereby clearance services may opt,
under certain conditions, for the normal rates of SDRT to apply to a transfer of
shares into, and to transactions within, the service instead of the higher rate
applying to an issue or
15
transfer of shares into the clearance service. From March 9, 1999, where
securities are held by persons providing clearance services, but whose business
is not exclusively that of providing such services, agreements to transfer
securities held in this way are exempt from the principal charge to SDRT.
In accordance with the terms of the Deposit Agreement, (i) the Company
will pay all U.K. stamp duty or SDRT charges that arise as a result of the
initial deposit by the Company of Shares with the Depositary pursuant to the
Offering (ii) the Selling Shareholders will pay all U.K. stamp duty or SDRT
charges that arise as a result of the initial deposit by the Selling
Shareholders with the Depositary pursuant to the Offering and (iii) any tax or
duty payable by the Depositary or the Custodian of the Depositary on any
subsequent deposit of Shares will be charged by the Depositary to the holder of
the ADS or any deposited security represented by the ADS.
No U.K. stamp duty will be payable on the acquisition or transfer of an
ADS evidenced by an ADR or of beneficial ownership of an ADS, provided that any
instrument of transfer or written agreement to transfer remains at all times
outside the United Kingdom, and provided further that any instrument of transfer
or written agreement to transfer is not executed in the United Kingdom and the
transfer does not relate to any matter or thing done or to be done in the United
Kingdom. An agreement for the transfer of an ADR or the beneficial ownership of
an ADR will not give rise to a liability to SDRT. The UK Chancellor of the
Exchequer announced on March 9, 1999 that with effect from October 1, 1999
interest will be charged on duty that is not paid within 30 days of execution of
a transfer of securities subject to stamp duty, wherever execution takes place.
Interest paid will not be allowable as a deduction in computing profits and
losses for tax purposes. Penalties will also apply to document submitted for
stamping more than 30 days after the document was executed. For document
executed outside the UK, penalties will apply to documents not submitted for
stamping within 30 days after they are first brought into the UK.
Any transfer for value of the underlying Shares represented by ADSs
evidenced by ADRs, may give rise to a liability to U.K. stamp duty or SDRT. The
amount of U.K. stamp duty or SDRT payable is generally calculated at the
applicable rate on the consideration for the transfer of the Shares at the rate
of 50p per (pound)100 (or part thereof), or in the case of SDRT, at the rate of
0.5% of the amount or value of the consideration; however, on a transfer from
the Custodian of the Depositary to a holder of an ADS upon cancellation of the
ADS, only a fixed U.K. stamp duty of 50p per instrument of transfer will be
payable.
Certain United States Federal Income Tax Considerations
Taxation of Dividends
The gross amount of distributions made with respect to ADSs (including
the full amount of the related Tax Credit and unreduced by any U.K. withholding
taxes) will constitute dividends for U.S. federal income tax purposes to the
extent paid out of current or accumulated earnings and profits of the Company as
determined for U.S. federal income tax purposes. To the extent that a
distribution exceeds the earnings and profits of the Company, it will be treated
as a nontaxable return of capital to the extent of the U.S. Holder's adjusted
tax basis in the ADS and thereafter as a capital gain. Dividends paid by the
Company generally will be treated as foreign source dividend income and will not
be eligible for the dividends received deduction allowed to corporate
shareholders under the U.S. Internal Revenue Code.
The amount of any distribution will equal the fair market value in U.S.
dollars of the pounds sterling (or other foreign currency) or other property
received on the date received by the U.S. Holder, in the case of Ordinary
Shares, or received by the Depositary, in the case of ADSs, which, in the case
of a distribution paid in pounds (or other foreign currency) will be based on
the spot exchange rate on such date. A U.S. holder will have a basis in any
pounds sterling (or other foreign currency) distributed, for U.S. federal income
tax purposes, equal to the dollar value of pounds sterling (or other foreign
currency) on the date received by the U.S. Holder, in the case of Ordinary
Shares, or received by the Depositary, in the case of ADSs. Any gain or loss
recognized upon a subsequent disposition of pounds sterling (or other foreign
currency) will generally be ordinary income or loss.
Subject to certain complex limitations and only to the extent of the
related tax credit amount, the 15% U.K. withholding tax will be treated for U.S.
tax purposes as a foreign tax that may be claimed as a foreign tax credit
against the U.S. federal income tax liability of the U.S. Holder. Dividends
distributed by the Company will generally
16
be categorized as "passive income" or, in the case of certain holders, as
"financial services income," for purposes of computing allowable foreign tax
credits for U.S. tax purposes. The rules relating to the determination of the
foreign tax credit are complex and U.S. Holders should consult their tax
advisors to determine whether and to what extent a credit would be available. In
lieu of claiming a credit, a U.S. Holder may claim a deduction of foreign taxes
paid in the taxable year. A deduction does not reduce U.S. tax on a dollar for
dollar basis like a tax credit. The deduction, however, is not subject to the
limitations described above.
Taxation of Capital Gains
A U.S. Holder will, upon the sale or exchange of an ADS, recognize a
gain or a loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized and the U.S. Holder's adjusted tax basis
in the ADS. Such gain or loss will be a capital gain or loss if the ADS was a
capital asset in the hands of the U.S. Holder. Such gain or loss will generally
be treated as U.S. source gain or loss. In the case of a U.S. Holder who is an
individual, capital gains will generally be subject to U.S. federal income tax
at preferential rates if specified minimum holding periods are met.
The surrender of ADSs in exchange for Shares will not be a taxable
event for U.S. federal income tax purposes. Accordingly, U.S. Holders will not
recognize any gain or loss upon such surrender.
Passive Foreign Investment Company Status
The Company believes that it will not be treated as a passive foreign
investment company ("PFIC") for U.S. federal income tax purposes for the current
taxable year or for future taxable years. However, such a determination is
fundamentally factual in nature and generally cannot be made until the close of
the applicable taxable year. The Company will be a PFIC if either 75% or more of
its gross income in a tax year is passive income or the average percentage of
its assets (by value or adjusted basis, in certain circumstances) that produce
or are held for the production of passive income is at least 50%.
If the Company were to be classified as a PFIC, a U.S. Holder generally
would be subject to adverse U.S. federal income tax consequences on certain
distributions and on any gain realized from a sale or other disposition of
Ordinary Shares or ADSs. U.S. Holders of Ordinary Shares or ADSs are urged to
consult their own tax advisors concerning the potential application of the PFIC
rules to their ownership or disposition of Ordinary Shares or ADSs.
United States Information Reporting and Backup Withholding
Dividend payments with respect to ADSs and proceeds from the sale,
exchange or redemption of ADSs may be subject to information reporting to the
IRS and possible U.S. backup withholding at a 31% rate. Backup withholding will
not apply, however, to a holder who furnishes a correct taxpayer identification
number or certificate of foreign status and makes any other required
certification or who is otherwise exempt from backup withholding. Persons
required to establish their exempt status generally must provide such
certification on IRS Form W-9 (Request for Taxpayer Identification Number and
Certification) in the case of U.S. persons and on IRS Form W-8 (Certificate of
Foreign Status) in the case of non-U.S. persons. Finalized Treasury regulations,
which are applicable to payments made after December 31, 2000, have generally
expanded the circumstances under which information reporting and backup
withholding may apply unless the holder provides the information described
above.
Amounts withheld as backup withholding may be credited against a
holder's U.S. federal income tax liability, and a holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS and furnishing any required
information. U.S. Holders of Ordinary Shares or ADSs should consult their tax
advisors regarding the application of the backup withholding and information
reporting rules.
Item 8. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company.
The selected financial data for the five fiscal years ended March 31, 1999, have
been excerpted or derived from the Company's consolidated financial statements
for the fiscal years ended March 31, 1995, 1996, 1997, 1998 and 1999 which have
been audited by
17
Deloitte & Touche, Chartered Accountants. The data should be read in conjunction
with the Consolidated Financial Statements included elsewhere in this Annual
Report and Item 9., Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Fiscal Years Ended March 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(thousands, except per share amounts)
Consolidated Income Statement Data
Revenue ...............................................(pound)11,943 (pound)15,996 (pound)19,666 (pound)58,313 (pound)95,359
Direct cost of revenue ................................ 8,134 10,863 13,636 43,715 74,210
----- ------ ------ -------- ------
Gross profit .......................................... 3,809 5,133 6,030 14,598 21,149
Selling, general and administrative expenses(4) ....... 1,801 2,408 2,998 9,660 16,076
Amortization of goodwill .............................. -- -- -- 193 375
----- ------ ------ -------- ------
Income from continuing operations before other
income and income taxes ....................... 2,008 2,725 3,032 4,745 4,698
Other income .......................................... 83 126 550 410 1,435
----- ------ ------ -------- ------
Income from continuing operations before
income taxes and discontinued operations ...... 2,091 2,851 3,582 5,155 6,133
Income taxes .......................................... 708 970 1,253 1,711 2,084
----- ------ ------ -------- ------
Net income from continuing operations(2) .............. 1,383 1,881 2,329 3,444 4,049
===== ====== ====== ======== ======
Earnings per Share Data
Basic
Net income per share from continuing operations ....... (pound)0.79 (pound)1.07 (pound)0.47 (pound)0.59 (pound)0.45
Number of shares used in computation ('000) ........... 1,758 1,758 4,968 5,864 8,929
Fully diluted
Net income per share from continuing operations ....... (pound)0.31(3) (pound)0.40 (pound)0.40 (pound)0.51 (pound)0.43
Number of shares used in computation ('000) ........... 4,467 4,696 5,839 6,787 9,381
1999(1)
--------
$153,909
119,775
--------
34,134
25,947
605
--------
7,583
2,316
--------
9,899
3,364
--------
6,535
========
$ 0.73
8,929
$ 0.69
9,381
At March 31,
----------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999(1)
---- ---- ---- ---- ---- ----
(thousands)
Consolidated Balance Sheet Data
Working capital................. (pound)1,014 (pound)1,768 (pound)11,975 (pound)7,044 (pound)18,192 $29,362
Total assets.................... 4,646 6,302 17,470 26,581 62,767 101,306
Long-term debt.................. 61 522 -- -- 69 111
Shareholders' equity............ 1,563 2,775 13,516 17,000 46,053 74,330
<FN>
- ------------------
(1) Solely for the convenience of the reader, pound sterling amounts have been translated into U.S. dollars at the Noon Buying
Rate on March 31, 1999 of $1.6140 per(pound)1.00.
(2) Effective March 1996, the Company sold the ongoing businesses of its French operations acquired in fiscal 1993. The Company
has recorded the results of its French operations in fiscal years 1995 and 1996 and the losses on the sale of the French
businesses in fiscal 1996 and 1997 as discontinued operations.
(3) Net income per share from continuing operations in fiscal 1995 includes the effect of a special dividend of(pound)375,000
paid to holders of the Company's convertible preferred shares.
(4) Includes in 1999(pound)809,000 of unusual items for restructuring and merging of acquired operations.
</FN>
Dividends
The Company has not paid dividends on its Ordinary Shares since its
incorporation in 1990. The Board of Directors does not currently anticipate
paying dividends in the foreseeable future. Management expects that all
available cash from operations will be used to meet the Company's projected
capital and other expenditure requirements, including those related to its
expansion plans.
Under English law, the Company may only pay dividends out of profits
available for that purpose. Cash dividends, if any, will be paid by the Company
in pounds sterling and converted by the Depositary into U.S. dollars, subject to
the terms of the Deposit Agreement. Holders of ADSs on the relevant record date
will receive their portion of any dividends or distributions paid on the
Ordinary Shares, subject to the terms of the Deposit Agreement. Exchange rate
fluctuations will affect the U.S. dollar amount received by holders of ADSs on
conversion by the Depositary of dividends paid in pounds sterling.
Exchange Rate Information
18
The table below sets forth, for the periods and dates indicated,
certain information concerning the Noon Buying Rates for pounds sterling
expressed in U.S. dollars per pound. Fluctuations in the exchange rate between
the pound sterling and the U.S. dollar will affect, among other things, the
market price of the ADSs, the U.S. dollar amount received by holders of ADSs on
conversion by the Depositary of any cash dividends paid in pounds sterling on
the Ordinary Shares and the U.S. dollar translation of the Company's results of
operations and financial condition.
Period Period
Period High Low Average(1) End
- ------ ---- --- ------- ---
1993................................. 1.59 1.42 1.50 1.48
1994................................. 1.64 1.46 1.54 1.57
1995................................. 1.64 1.53 1.58 1.55
1996................................. 1.71 1.49 1.57 1.71
1997................................. 1.70 1.58 1.65 1.67
1998 ................................ 1.72 1.61 1.66 1.66
1999 (Through June 29)............... 1.66 1.59 1.61 1.58
- ------------------
(1) The average of the Noon Buying Rates on the last business day of each
month during the period.
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and Item 8.
Selected Financial Data which appear elsewhere in this Annual Report.
Professional Staff has grown from being a leading national provider of
temporary laboratory scientists and technicians in the United Kingdom into an
international specialty staffing services company providing temporary and
permanent placement services to the technology, science and management sectors
with operations in the UK, USA and Continental Europe. Since the Company's
initial public offering in August 1996, the Company has made seven acquisitions
which have increased the Company's range of specialty services, geographic
markets and industry sectors. The Company now derives more than 35% of revenue
from markets outside the United Kingdom and has temporary professionals working
in 25 different countries.
Acquisitions
The businesses acquired in the year ended March 31, 1999 are described
below, together with a summary of the acquisition terms.
Annual
Revenue(1)
Date of Acquisition Name Sectors (millions)
- ------------------- ---- ------- -----------
July 1998 EPL Technology (pound)8.8m
October 1998 Praxis Management (pound)4.4m
March 1999 Euromedica Science (pound)2.3m
March 1999 The Woolf Group Science $13.2m
(1) Information derived from the audited financial statements for the
twelve month periods ended December 31, 1997 for EPL, September 30,
1998 for Praxis, March 31, 1999 for Euromedica and December 31, 1998
for Woolf, the most recent audited periods available prior to each
acquisition. These revenues may not be indicative of future revenues.
EPL. On July 17, 1998 the Company acquired the entire issued share
capital of EPL Overseas Limited, a UK based provider of skilled contract
personnel to the European telecommunications industry. The initial purchase
price was (pound)1,650,000 in cash. Further cash consideration may become
payable dependent upon the gross profit of the group's technology businesses,
into which the acquired business was merged from January 1, 1999 to form the
S-Com EPL brand, for the period to July 2000. Ron Stewart, formerly Managing
Director and significant selling shareholder, was retained as Managing Director
of EPL and was subsequently appointed as Managing Director of S-Com EPL. The
19
acquisition of EPL, alongside the Company's existing S-Com business, strengthens
the Company's position as a leading player in worldwide telecommunications
staffing.
Praxis. On October 1, 1998 the Company acquired the entire issued share
capital of Praxis Executive Taskforce Limited, a UK based provider of interim
executives and managers to industry and commerce. The initial purchase price was
(pound)2,525,000 in cash. Further cash consideration may become payable in
December 1999 and December 2000 dependent upon improvements to operating income
for the years ended September 30, 1999 and September 30, 2000. Mr. Carl Hague,
the majority selling shareholder, was retained as an executive officer of
Praxis. This acquisition, alongside the Company's existing Executives On
Assignment business, makes the Company the dominant provider of interim
executives in the UK.
Euromedica. On March 26, 1999 the Company purchased the entire issued
share capital of Euromedica plc and 94% of the share capital of Euromedica
International Limited (together "Euromedica"). Euromedica is the largest
executive search firm in Europe in the pharmaceutical, bioscience and healthcare
sectors and has a network of offices in the UK, Belgium and Germany and
strategic partnerships in the US, India, France and Spain. The purchase price
was (pound)2,888,000.
Woolf. On March 31, 1999 the Company purchased the entire issued share
capital of The Woolf Group, Inc., a US based provider of clinical trials
staffing services to pharmaceutical companies and contract research
organizations. The initial purchase price was (pound)9,560,000. Further cash
consideration may become payable in May 2000, May 2001 and May 2002 dependent
upon improvements to operating income for the years ended March 31, 2000, 2001
and 2002 and will be payable to the three selling principals all of whom remain
as executive officers of Woolf.
The acquisitions of Woolf and Euromedica alongside the Company's
existing scientific staffing business, Lab Staff, and recruitment business ESCA,
provide a significant step toward the Company's development of a global
vertically integrated science staffing business.
Results of Operations - Years ended March 31, 1999 and 1998
The following tables set forth the percentage relationship to revenue
of selected items:
Fiscal Years Ended March 31,
1999 1998
---- ----
Revenue 100.0% 100.0%
Direct cost of revenue 77.8 75.0
Gross profit 22.2 25.0
Selling, general and administrative expenses 16.9 16.6
Income from continuing operations before interest and tax 4.9 8.1
Net income from continuing operations 4.2 5.9
Revenue
Revenue increased by 64% to (pound)95.4 million during the year ended
March 31, 1999 from (pound)58.3 million during the year ended March 31, 1998.
The increase in revenue was attributable to internal revenue growth of
approximately 18%, the full year effect of the of S-Com, SDS and Salisbury
acquisitions made in the year ended March 31, 1998, and the EPL and Praxis
acquisitions which added (pound)10.1 million of revenue in the periods from
acquisition to March 31, 1999. Internal revenue growth was primarily as a result
of growth in the number of billable hours, and to a lesser extent, increases in
bill rates.
20
For the year ended March 31, 1999, revenue from services to the
technology sector contributed 68% (1998 - 52%) of total revenue, services to the
science sector contributed 26% (1998 - 39%) and services to the management
sector contributed 6% (1998 - 9%) of total revenue.
As a percentage of total revenue for the year ended March 31, 1999,
temporary staffing represented 94.4%, permanent placement represented 3.6% and
other services accounted for 2.0%, as compared to 90.9%, 5.7% and 3.4%,
respectively. The increase in temporary staffing revenue principally was a
result of the full year year effect of the S-Com acquisition, the EPL and Praxis
acquisitions being predominantly temporary staffing businesses and, to a lesser
extent, a decrease in permanent placement revenues from the Salisbury
businesses.
The Company now derives more than 35% of its revenue from markets
outside the United Kingdom. As S-Com EPL's international operations continue to
expand, particularly in the United States, and with the introduction of revenues
from the Woolf Group in the United States and Euromedica in Continental Europe,
the proportion of revenue derived by the Company from operations and markets
outside the United Kingdom is likely to increase.
Gross Profit
The Company defines gross profit as total revenue less the direct cost
of providing workers for its clients, including wages, benefits, expenses and
allowances for temporary professionals, and fees for permanent placements less
the cost of direct research associated with those placements. Gross profit was
(pound)21.1 million and (pound)14.6 million during the years ended March 31,
1999 and 1998 respectively. Gross profit as a percentage of revenue was 22.2%
and 25.0% respectively. Lower gross margin percentages in 1999 resulted from the
increase in the proportion of revenues derived from temporary staffing compared
to permanent and other revenues and from higher rates of internal growth in the
lower margin technology staffing sector relative to the higher margin science
and interim management sectors. In 1999, 82% of the Company's gross profit was
derived from temporary staffing services compared to 71% in 1998. While the
composite gross profit margin for the Company has declined for the year ended
March 31, 1999 compared to the year ended March 31, 1998, the gross profit
margins within each of the Company's businesses have been maintained or
improved.
Selling, General and Administrative Expenses
Selling, general and administrative expenses primarily comprise
compensation payable to employees, office rentals and other facility related
costs and marketing expenses. Selling, general and administrative expenses were
(pound)16.1 million and (pound)9.7 million for the years ended March 31, 1999
and 1998 respectively. As a percentage of revenue, selling, general and
administrative expenses were 16.9% and 16.6% respectively. Included in fiscal
1999 were unusual items totalling (pound)809,000 incurred in restructuring the
Company's Salisbury businesses, merging the S-Com and EPL businesses, aborting a
prospective acquisition and increasing provisions for collection costs of
certain receivables and general reserves against doubtful debts. Excluding these
unusual items, selling, general and administrative expenses would have fallen as
a percentage of revenue from 16.6% in fiscal 1998 to 16.0% in fiscal 1999.
Amortization of Goodwill
The Company has goodwill arising from acquisitions that it is
amortizing over estimated useful lives of 30 years. Goodwill amortization was
(pound)375,000 for the year ended March 31, 1999 compared to (pound)193,000 for
the year ended March 31, 1998. The increase in amortization expense is due to
the full year effect of acquisitions made in the year ended March 31, 1998
together with acquisitions made in the year ended March 31, 1999. With
contingent consideration and the full year effect of acquisitions made in fiscal
1999, amortization expense will increase further in fiscal 2000.
Other Income/(Expense)
Other income is comprised primarily of interest income, but also
includes interest expense and gains or losses on foreign currency translation
and totaled (pound)1,435,000 and (pound)410,000 for the years ended March 31,
1999 and 1998 respectively. The increase in 1999 was due to interest income from
the investment of the proceeds of the Company's secondary public offering
completed in May 1998.
21
Income Taxes
The Company is subject to United Kingdom corporation tax at a statutory
rate of 31% (fiscal 1998: 31%) and, to a much lesser extent, to income taxes in
the United States and Germany. Income tax expense was provided for at effective
rates, excluding the non-deductibility of goodwill amortization expense, of
32.0% (fiscal 1998 - 32.0%) and totaled (pound)2.1 million and (pound)1.7
million respectively for the years ended March 31, 1999 and 1998. The effective
tax rate (excluding non-deductible goodwill amortization) is expected to remain
at between 31% and 32% despite a 1% cut in UK corporation tax which becomes
effective on 1 April 1999, as the Company experiences an increasing taxation
burden in the higher rate jurisdictions of the United States and Germany.
Operational Overview
The Company's revenues are derived from amounts billed to clients for
temporary and permanent recruitment services. Amounts billed to clients for
temporary assignments include the workers' wages and benefits and the Company's
fees and billable expenses; fees depend on the number of billable hours worked,
as well as the skill and experience of the temporary worker. Temporary workers
are paid only when on assignment with a client. At the end of an assignment,
workers may be re-assigned to another client, permanently placed with the client
(for which a fee is generally payable) or retained on the Company's databases
pending further assignment.
Amounts billed to clients for permanent recruitment services are
usually a percentage of the annual salary of the recruited worker. Fees are
payable for database and executive searches as well as temporary to permanent
conversions and range from 33% for an executive search to 15% for a database
search. Lower percentages may apply in certain circumstances, for multiple
appointments or for some temporary to permanent conversions. Some recruitment
assignments involve the design and insertion of media advertising, a cost which
is billed to clients. There are no on-going costs or benefits associated with
the recruited worker who, on appointment, becomes the sole responsibility of the
client. Consistent with industry practice, the Company offers a money-back
guarantee or a further search on a no-charge basis in the event that the worker
is found to be unsatisfactory after a limited number of weeks. This guarantee,
the duration of the "trial period" and the terms under which further work is
undertaken are all within industry standard procedures in the U.K. recruitment
market.
Approximately 35% of the Company's billings were in currencies other
than the pound sterling for the year ended March 31, 1999. The Company's policy
is, wherever possible, to match the currency in which a temporary professional
is paid with the currency in which the client is billed. The Company is exposed
to exchange rate fluctuations between contractor payment date and client payment
date on transactions where currencies are matched and to transaction exposure on
the rare occasions where currencies are not matched. To date, management has
considered these risks to have limited impact and has not deemed it appropriate
to engage in any currency hedging activities other than passive use of
borrowings in foreign currency.
Results of Operations - Years ended March 31, 1998 and 1997
The following tables set forth the percentage relationship to revenue
of the selected items:
Fiscal Years Ended March 31,
----------------------------
1998 1997
---- ----
Revenue 100.0% 100.0%
Direct cost of revenue 75.0 69.3
Gross profit 25.0 30.7
Selling, general and administrative expenses 16.6 15.2
Income from continuing operations before interest and tax 8.1 15.4
Net income from continuing operations 5.9 11.8
22
Revenue
Revenue increased by 197% to (pound)58.3 million during the year ended
March 31, 1998 from (pound)19.6 million during the year ended March 31, 1997.
The increase in revenue in 1998 was primarily attributable to the revenue
derived from the acquired operations of Salisbury, S-Com and SDS. Revenues,
excluding the acquired businesses, increased by 17.6% to (pound)23.1 million
from (pound)19.6 million during this period, primarily as a result of growth in
the number of billable hours, and to a lesser extent, increases in billable
rates. As a percentage of total revenue for the year ended March 31, 1998,
temporary staffing represented 90.9%, permanent placement represented 5.7% and
other services accounted for 3.4%, as compared to 97.2%, 2.8% and 0%,
respectively, during the prior year. The increase in permanent placement revenue
principally was a result of the acquisition of Salisbury and, to a lesser
extent, an increase in the number of permanent placements by Lab Staff during
fiscal 1998 compared to the prior year.
Gross Profit
Gross profit was (pound)14.6 million and (pound)6.0 million during the
years ended March 31, 1998 and 1997 respectively. Gross profit as a percentage
of revenue was 25.0% and 30.7% respectively. Lower gross margin percentages in
1998 resulted from the increasing proportion of revenues derived from
acquisitions in the technology staffing sector, partially offset by an increase
in high margin permanent placement fees. Gross profit margins in the technology
sector are significantly lower than the Company's other businesses. While, as a
result of a change in the relative growth in different operating sectors, the
average gross profit margin for the Company declined for the year ended March
31, 1998 compared to the year ended March 31, 1997, the gross profit margins
within each of the Company's original businesses were maintained, and, on a pro
forma basis, gross margins of the acquired businesses were also maintained.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were (pound)9.7 million
and (pound)3.0 million for the years ended March 31, 1998 and 1997 respectively.
As a percentage of revenue, selling, general and administrative expenses were
16.6% and 15.2% respectively. The increase in 1998 in selling, general and
administrative expenses resulted from an increase in permanent placement
activities, which are characterized by higher selling, general and
administrative expenses, as a result of the Salisbury acquisition.
Amortization of Goodwill
Goodwill arose in connection with the acquisitions during the year
ended March 31, 1998. Goodwill amortization was (pound)193,000 for the period.
Other Income/Expense
Other income, primarily interest income, totaled (pound)410,000 and
(pound)550,000 for the years ended March 31, 1998 and 1997 respectively. The
decrease in 1998 was due to the investments made, including working capital, in
acquisitions.
Income Taxes
The Company was subject to United Kingdom corporation tax at a
statutory rate of 31% (fiscal 1997: 33%). Income tax expense was provided for at
effective rates of 32.0% and 35.0% and totaled (pound)1.7 million and (pound)1.3
million for the years ended March 31, 1998 and 1997.
Liquidity and Capital Resources
Cash used by operations was (pound)1.8 million in fiscal 1999 compared
to (pound)3.2 million in fiscal 1998. Cash was used primarily to fund working
capital requirements in the Company's growing technology business. Average days'
sales outstanding increased from 69 days at March 31, 1998 to 88 days at March
31, 1999 due to the increased proportion of monthly billed technology business
and increased incidence of international sales in that sector with
23
attendant collection issues. The Company's science and management businesses
continued to be cash generative from operations with no significant change in
average days' sales outstanding.
The Company's principal source of cash in fiscal 1999 was provided by a
secondary offering of 3,052,500 ordinary shares completed in May 1998 which
provided (pound)28.8 million net of issue expenses. The principal source of cash
in fiscal 1998 was cash balances brought forward from fiscal 1997 which in turn
arose from the Company's initial public offering in August, 1996, which raised
(pound)8.4 million net of expenses for the Company, and cash generated from
operations in fiscal 1997 and prior periods.
The principal use of cash in fiscal 1999 and fiscal 1998, other than
that used by operations, was in acquisitions. In fiscal 1999 the Company paid in
aggregate (pound)16.6 million in consideration for the four businesses acquired
in fiscal 1999 and (pound)3.2 million in consideration for businesses acquired
in fiscal 1998 upon the determination of contingencies. This amount included
final settlements in respect of Salisbury and SDS. The Company also used
(pound)4.0 million of cash to repurchase 762,000 Ordinary Shares. In fiscal 1998
the Company paid in aggregate (pound)6.6 million in consideration for the three
businesses acquired, Salisbury, S-Com and SDS.
On March 31, 1999 the Company had cash balances of (pound)2.0 million.
The Company has available lines of credit of up to (pound)5 million under a
secured overdraft facility on which interest is payable at the rate of 1.15%
over base rate when drawn down. The payment of UK corporation tax converts to a
current period payment on account method for fiscal 2000 compared to annual
payment in arrears in fiscal 1999. Except for the payment of UK corporation tax,
management expects the Company to become cash neutral from operating activities
during fiscal 2000. Management expect the Company's cash balances, available
line of credit and borrowing capacity will be sufficient to fund the Company's
anticipated cash requirements for the next twelve to eighteen months which
principally comprise of contingent consideration for acquired businesses.
Management also believes the Company has sufficient borrowing capacity to
continue its acquisition strategy.
Year 2000 readiness disclosure
The majority of the management, accounting and communication systems
used by the Company have been installed since 1996 and management believes that
such systems are Year 2000 compliant. The Company is in the process of achieving
full Year 2000 compliance. The Company's full range of electronic equipment
underwent testing during fiscal 1999. The Company has approached its principal
suppliers to confirm compliance of their computer software. A project team
headed by the Professional Staff Systems Manager has been established to ensure
that a fully co-ordinated program is implemented throughout the Company and full
compliance is expected to be confirmed by September 1999. Management does not
anticipate that the Company will incur significant operating expenses or be
required to invest heavily in computer systems improvements to be Year 2000
compliant, and does not anticipate that business operations will be disrupted or
that its customers will experience any interruption of service as a result of
the millennium change. However, any disruption or interruption arising from Year
2000 compliance problems could have a material adverse effect on the Company's
operating results and financial condition.
Impact of Inflation
Management believes that over the past three years inflation has not
had a significant impact on the Company's results of operations.
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
24
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT
Board of Directors
The Directors and Executive Officers of the Company are:
Name Age Position
- ---- --- --------
Board of Directors
Benjamin P. Blackden(3)........................ 53 Chairman and Group Managing Director
Kevin A. Worrall(1)............................ 46 Group Finance Director
Bruce R. Culver(2)(3).......................... 53 Deputy Chairman and Non-Executive Director
Jerry C. Benjamin(1)(2)........................ 58 Non-Executive Director
John C. Maynard(1)(2).......................... 66 Non-Executive Director
Russell S. Reynolds, Jr.(2)(3)................. 67 Non-Executive Director
Other Executive Officers
Peter Lowman................................... 53 Managing Director, Science Recruitment Group
Ronald L. Stewart.............................. 52 Managing Director, S-Com EPL
Robert C. Snell................................ 55 Managing Director, Executives on Assignment
Carl M. Hague.................................. 54 Managing Director, Praxis Executive Taskforce
Faye Woolf..................................... 38 Managing Director, The Woolf Group
Peter Banks.................................... 61 Chairman, Euromedica
Peter Woods.................................... 50 Managing Director, Euromedica
Cathy M. Lasher................................ 45 Company Secretary
- ----------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominations Committee.
Benjamin P. Blackden was co-founder of the Company and has been the
Company's Managing Director since 1990 and was appointed Chairman in January
1999. Prior to joining the Company, Mr. Blackden was President of a New
Jersey-based subsidiary of Fisons Instruments, a scientific instrument
manufacturer, and then Director of P-E International's Temporary Executive
Service, the original provider of interim management in the United Kingdom. He
previously held director level appointments in Human Resources at Fisons
Scientific Equipment and Avdel Ltd., following an earlier career with GEC.
Kevin A. Worrall has served as Group Finance Director since September
1995 and was appointed to the Board in December 1995. Mr. Worrall was Director
of Corporate Development at Lease Plan UK Ltd, the U.K. leasing arm of the Dutch
Bank ABN AMRO from 1993 to 1995. Mr. Worrall served as Finance Director, Group
Treasurer and Business Development Director of several subsidiaries of PHH
Europe (now part of Cendant Corporation), a multinational vehicle leasing and
business services group, during his employment with PHH from 1979 to 1992. Mr.
Worrall holds an MBA with distinction from the University of Warwick and is a
member of the Association of Corporate Treasurers.
Bruce R. Culver was co-founder of the Company and Chairman through
November 1995 and remains on the Board as Deputy Chairman and a Non-Executive
Director. In 1986 Mr. Culver founded Lab Support, Inc. in the U.S. (now called
On Assignment, Inc.). He was its Chief Executive, Chairman and Director until
1990. From 1984 to 1986, Mr. Culver was a management consultant to a number of
technology companies. Prior to 1984 he was Vice President of marketing for
Bausch & Lomb/ARL. Mr. Culver serves as a director of a number of other
companies in the U.S.
Jerry C. Benjamin was a Non-Executive Director from the Company's
founding through October 1997, and was re-appointed to the Board in February
1998. Mr. Benjamin is also a director of Advent Limited, which he joined in 1988
where he is responsible for investments in the health care and biotechnology
sectors. From 1965 to 1988, Mr. Benjamin held a variety of executive positions
in Monsanto's Chemical and health care businesses, latterly as
25
Director of Corporate Venture Capital. Mr Benjamin is a director of Biomagnetic
Technologies, Inc., Orthofix International N.V. and a number of private
companies.
John C. Maynard OBE was appointed a Non-Executive Director in January
1996. Dr. Maynard has had a distinguished career at Amersham International (now
Nycomed Amersham) where he has served as Director of Inorganic Research and
Radiopharmaceuticals, and subsequently Group Research & Development and
Operations Director. He retired from Amersham International in December 1996.
Dr. Maynard is Honorary Professor in the Department of Chemistry at the
University of Wales.
Russell S. Reynolds, Jr. was appointed to the Board of Directors as a
Non-Executive Director in April 1996. Mr. Reynolds founded Russell Reynolds
Associates, Inc., a leading executive recruiting firm in 1969. He is a director
of a number of organizations including the Oppenheimer Fund. He is also
Chairman of Directorship, a Connecticut-based consultancy advising chairmen and
CEOs on a range of boardroom issues, including corporate governance, the
appointment of directors and compensation.
Peter Lowman joined Professional Staff as Managing Director of the
Sciences Recruitment Group in June 1999. He founded a strategic and change
management consultancy in 1991 providing consulting in organizational change and
performance improvement to a range of blue chip clients. Prior to that, he spent
16 years in the recruitment industry in operational and marketing roles with
Manpower, as Operations Director with Reed Employment and as Chief Executive
with Alfred Marks. Earlier in his career he held sales positions with a number
of major companies. He started his career with Pfizer in the Process Development
Labs. He is a Fellow of the Institute of Management.
Ronald L. Stewart founded EPL Overseas Limited in 1985 and is currently
Managing Director of S-Com EPL Limited. He has considerable business experience
in many parts of the world, particularly the Philippines and Hong Kong. Prior to
his business career he was in the British Army for 16 years retiring with the
rank of major.
Robert C. Snell has been Managing Director of Executives on Assignment
since its formation in 1994. Previously, he had a two-year interim management
assignment with Nuclear Electric plc. From 1984 to 1989, he held various
positions at Saatchi & Saatchi plc, including General Manager, Consulting
Division and Director of Corporate Business Administration. From 1977 to 1984,
he was with Booz, Allen & Hamilton in Turin, Paris and London, where he became a
Vice President. He is a qualified Cost and Management Accountant.
Carl M. Hague is Managing Director of Praxis Executive Taskforce. He
trained originally as a brewer and bio-chemist with Samuel Webster Limited. He
quickly moved to a management services position with Bass Mitchells and Butlers
Limited becoming deeply involved in post acquisition project work. From there he
transferred to HR undertaking increasingly senior strategic management rolls
with Bass plc. He founded Praxis in 1989.
Faye Woolf had retail business interests before founding The Woolf
Company in 1992. Originally devoted to providing investigation, meeting and
planning services to the clinical trials industry, it was relaunched as The
Woolf Group in 1995 when Jean Hendrickson and Betsy Brown joined the business
and the services offered were extended to clinical trials staffing and permanent
placements.
Peter Banks gained his PhD at Manchester University Institute of
Science and Technology. He worked in R&D and management positions with CIBA in
the UK, then spent many years in the Netherlands as Global Head of Purchasing
and Supply of semi-finished and finished products. He worked as a consultant
with Grosvenor Stewart in Brussels before co-founding Euromedica in 1987.
Dr. Peter Woods is Managing Director of Euromedica. A graduate in
Physiology and Biochemistry he also qualified as a doctor at Westminster Medical
School. After practicing medicine for some years he began his business career at
Smith & Nephew and has had senior appointments at BZW (healthcare research),
Fisons (corporate affiars) and Williams De Broe. He joined Euromedica in January
1997.
Cathy M. Lasher was appointed Company Secretary in May 1997. Ms. Lasher
has spent her career in the private sector service industry, including three
years as company secretary of a management consulting company listed on the
London Stock Exchange. Ms. Lasher spent nine years with a major international
accounting firm after
26
qualifying as an accountant in the United States and as an ACA in the United
Kingdom. Ms. Lasher holds an MBA from the Wharton School of Business.
At each annual general meeting of shareholders, one-third of the
Company's directors (or the whole number nearest to but lower than one-third)
must retire from office by rotation, provided that no director holding office as
Chief Executive or Managing Director shall be subject to retirement by rotation.
The directors to retire by rotation shall be those who have been longest in
office since their last re-election and so that as between persons who became or
were last re-elected directors on the same day, those to retire shall (unless
they otherwise agree among themselves) be determined by lot. Accordingly, at the
annual general meeting of the Company to be held in September 1999, it is
anticipated that John C. Maynard will retire and offer himself for re-election,
subject to him being a director at the relevant time.
The Board of Directors may delegate any of its powers, authorities or
discretions (with the power to sub-delegate) to any committee consisting of such
person or persons as it thinks fit, provided that the majority of the members of
any such committee consists of directors of the Company. The Board of Directors
has established an audit committee, a compensation committee and a nominations
committee.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS
The Company paid its Board of Directors as a group (6 persons)
(pound)307,000 (of which (pound)138,000 is paid to the highest-compensated
director) for the year ended March 31, 1999 of which (pound)12,000 represented
pension contributions. The Company currently contributes to third-party personal
pension plans of directors to a maximum of 5% of salary, so long as each such
director matches such amount.
Employment Agreements
Each of the Company's directors and executive officers has entered into
an employment agreement with the Company providing, among other things, that
each of the executive officers will provide services to Professional Staff or
its subsidiaries, as the case may be, on substantially a full-time basis. The
contracts also contain non-compete provisions which restrict the executive
officers from being involved in, for the period of their employment and for up
to one year thereafter, any business which engages in the business of
recruitment and/or provision of temporary or permanent staff in the Science,
Technology or Management sectors, as appropriate, and which is a competitor of
the Company.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has two employee share option plans, the Professional Staff
Employee Share Plan (the "1992 Approved Option Plan") and the 1996 Professional
Staff Company Share Option Plan (the "1996 Option Plan").
1992 Approved Option Plan
All of the options under the 1992 Approved Option Plan were granted
between March 6, 1992 and April 26, 1996. The 1992 Approved Option Plan is
approved by the Inland Revenue.
Options granted under the 1992 Approved Option Plan entitle
participants to subscribe for Ordinary Shares at an exercise price which is not
less than the market value of an Ordinary Share at the date of grant as
determined by the Board and agreed with the Inland Revenue. Options are
non-transferable, except in the case of death of a participant, in which case
the personal representatives are entitled to exercise such option within 12
months of the participant's death. Options granted under the 1992 Approved
Option Plan are normally exercisable between three and ten years after the date
of grant. Options generally expire on the termination of employment of the
participant other than by reason of injury, disability, pregnancy, retirement or
the sale of the business or subsidiary for which the participant works. In those
circumstances the participant may exercise all options generally within a 6
month period after the third anniversary of the date of grant. If the
participant's employment terminates by reason of redundancy or resignation,
options may be exercised in accordance with a vesting schedule as follows.
Options lapse if the redundancy or resignation takes place within 12 months of
the date of grant. Thereafter, 25% of the Ordinary Shares under option may be
exercised if the redundancy or resignation occurs more than 12 but less than 13
months
27
from the date of grant with an additional 3.125% becoming exercisable for
each complete month of employment over 13 but less than 36 months from the date
of grant. Exercise is allowed in the event of an amalgamation, re-construction
or takeover of the Company; alternatively, options may, with the agreement of
the acquiring company, be exchanged for options over shares in the acquiring
company or a company associated with the acquiring company. In the event of any
increase or variation in the issued ordinary share capital of the Company by way
of re-capitalization or otherwise, the number of Ordinary Shares subject to any
option and the price payable upon the exercise of any option may be adjusted by
the Board provided that the adjustment is fair and reasonable and subject to the
prior approval of the Inland Revenue.
As of July 24, 1999, options to acquire a total of 263,445 Ordinary
Shares were outstanding under the 1992 Approved Option Plan. Such options have
exercise prices ranging from (pound)0.25 to (pound)1.40 per Ordinary Share and
exercise periods which expire between April 2004 and April 2006.
1996 Option Plan
The 1996 Option Plan comprises two parts, Part A, which has been
approved by the Inland Revenue and Part B, which, not being eligible, will not
be so approved.
Other than as set out below, the terms of Part A of the 1996 Option
Plan are in all material respects identical to those of the 1992 Approved Option
Plan. The market value of an Ordinary Share at the date of grant will generally
be the NASDAQ market value (as agreed with the Inland Revenue). Each
individual's participation will be limited so that the aggregate market value
(as at their relevant dates of grant) of Ordinary Shares under Part A of the
1996 Option Plan and under any other approved discretionary share plan
established by the Company (including the 1992 Approved Option Plan), in any ten
year period will not exceed (pound)30,000.
The exercise of options granted under Part A of the Option Plan may be
made subject to the attainment of objective performance targets set by the
Compensation Committee of the Board of Directors at the date of grant linked to
the underlying performance of the Company.
As to the exercise of options, the vesting schedule referred to above
in respect of the 1992 Approved Option Plan will apply to termination of
employment of the participant by reason of death, injury, disability, pregnancy,
redundancy, retirement, the sale of the business or subsidiary for which the
employee works or (at the discretion of the Compensation Committee) if the
employee ceases to be employed in any other circumstances. Options will lapse if
a participant ceases employment otherwise than in the circumstances referred to
above.
As of July 24, 1999, options to acquire a total of 341,100 Ordinary
Shares were outstanding under Part A of the 1996 Option Plan. Such options have
exercise prices ranging from $6.625 to $16.875 per Ordinary Share and exercise
periods which expire between April 2007 and June 2009. Options to acquire a
total of 5,050 Ordinary Shares are held by certain directors of the Company.
Other than as set out below, the terms of Part B of the 1996 Option
Plan are in all material respects identical to those of Part A of the 1996
Option Plan. If options are not exercised within seven years of their grant,
they will generally lapse. Each individual's participation will be limited so
that the aggregate market value (as at their relevant dates of grant) of Shares
under option under Part B of the 1996 Option Plan and under any other
discretionary share plan established by the Company, excluding options granted
under the 1992 Approved Option Plan and non-approved option arrangements, in any
10 year period will not exceed four times the annual remuneration of such
individual or (pound)100,000, if greater (excluding options which have been
exercised).
As of July 24, 1999, options to acquire a total of 967,618 Ordinary
Shares were outstanding under Part B of the 1996 Option Plan. Such options have
exercise prices ranging from $6.625 to $16.875 per Ordinary Share and exercise
periods which expire between April 2004 and June 2006. Options to acquire
254,950 Ordinary Shares are held by certain directors of the Company.
28
Grants of Non-Approved Options
In addition to the options granted under the 1992 Approved Option Plan
and options granted under the 1996 Option Plan, the Company granted certain
employees and directors non-approved options to purchase Ordinary Shares in the
Company by deed.
As of July 24, 1999, options to acquire a total of 188,040 Ordinary
Shares were outstanding. Such options have exercise prices ranging from
(pound)1.25 to $16.875 per Ordinary Share and exercise periods which will expire
between October 2002 and May 2005. Non-approved options to acquire a total of
80,000 Ordinary Shares are held by certain directors of the Company.
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Not applicable.
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
Item 15. DEFAULTS UPON SENIOR SECURITIES
None.
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES
None.
PART IV
Item 17. FINANCIAL STATEMENTS
Not applicable.
Item 18. FINANCIAL STATEMENTS
See pages F-1 through F-17.
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following financial statements together with the report of
Deloitte & Touche thereon are filed as part of this Annual Report:
Page
Report of Independent Auditors ................................. F-1
Consolidated Statements of Income and Comprehensive Income ..... F-2
Consolidated Balance Sheets .................................... F-3
Consolidated Statements of Shareholders' Equity ................ F-5
29
Consolidated Statements of Cash Flows .......................... F-6
Notes to the Financial Statements .............................. F-8
(b) Exhibits
None.
30
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and
Exchange Act 1934, the registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PROFESSIONAL STAFF PLC
By: /s/ Kevin Worrall
------------------------------------
Kevin Worrall
Group Finance Director
Date: July ____, 1999
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of
Professional Staff plc
Slough, England
We have audited the accompanying consolidated balance sheets of Professional
Staff plc and subsidiaries as of March 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended March 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom which are similar to those in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Professional Staff plc and
subsidiaries at March 31, 1999 and 1998, and the results of their operations and
cash flows for each of the three years in the period ended March 31, 1999 in
conformity with generally accepted accounting principles of the United States of
America.
DELOITTE & TOUCHE
Chartered Accountants
Bracknell, England
May 4, 1999
F-1
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended March 31, 1999, 1998 and 1997
Note 1999 1998 1997
(pound)'000 (pound)'000 (pound)'000
Revenue 95,359 58,313 19,666
Direct cost of revenue 74,210 43,715 13,636
------------ ----------- ------------
Gross profit 21,149 14,598 6,030
Selling, general and administrative expenses 10 16,076 9,660 2,998
Amortization of goodwill 375 193 -
------------ ----------- ------------
Income from continuing operations before other
income/(expense) and income taxes 4,698 4,745 3,032
Other income/(expense)
Interest and other income 1,521 474 572
Interest and other expense (86) (64) (22)
------------ ----------- ------------
Income from continuing operations before
income taxes 6,133 5,155 3,582
Income taxes 7 2,084 1,711 1,253
------------ ----------- ------------
Income from continuing operations 4,049 3,444 2,329
Discontinued operations
Loss on disposal of discontinued operations (net of tax) - - (149)
------------ ----------- ------------
Net income 4,049 3,444 2,180
============ =========== ============
EARNINGS PER SHARE DATA 3
Basic earnings per share:
Income from continuing operations (pound)0.45 (pound)0.59 (pound)0.47
============ =========== ============
Loss on disposal of discontinued operations (pound)- (pound)- (pound)(0.03)
============ =========== ============
Net income (pound)0.45 (pound)0.59 (pound)0.44
============ =========== ============
Diluted earnings per share:
Income from continuing operations (pound)0.43 (pound)0.51 (pound)0.40
============ =========== ============
Loss on disposal of discontinued operations (pound)- (pound)- pound)(0.02)
============ =========== ============
Net income (pound)0.43 (pound)0.51 (pound)0.38
============ =========== ============
COMPREHENSIVE INCOME, NET OF TAX (pound)'000 (pound)'000 (pound)'000
Net income 4,049 3,444 2,180
Foreign currency translation adjustment - - 149
------------ ----------- ------------
Comprehensive income 4,049 3,444 2,329
============ =========== ============
See notes to consolidated financial statements.
F-2
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
Note 1999 1998
(pound)'000 (pound)'000
ASSETS
Current assets
Cash and cash equivalents 2,032 1,040
Accounts receivable (less allowance for doubtful
debts of(pound)790,000 in 1999 and(pound)179,000 in
1998) 25,010 14,059
Unbilled receivables 2,126 1,061
Prepaid expenses 537 332
Other receivables 1,182 133
--------- --------
Total current assets 30,887 16,625
Property and equipment, net 4 3,326 2,689
Goodwill (less accumulated amortisation of(pound)568,000 in
1999 and(pound)193,000 in 1998) 28,552 7,265
Other assets 2 2
--------- --------
TOTAL ASSETS 62,767 26,581
========= =========
See notes to consolidated financial statements.
F-3
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and 1998
Note 1999 1998
(pound)'000 (pound)'000
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Accounts payable 2,154 3,205
Accrued liabilities 5,058 1,978
Income tax payable 2,266 1,637
Other taxes and social security payable 2,098 1,423
Current portion of capital lease obligations 93 163
Other liabilities 1,026 1,175
--------- --------
Total current liabilities 12,695 9,581
Long term liabilities
Capital lease obligations 69 -
--------- --------
12,764 9,581
Commitments and contingencies 2, 9 3,950 -
--------- --------
Shareholders' equity
Ordinary shares, 2p par value:
Authorised shares - 24,000,000 in 1999
and 1998
Issued shares - 8,496,353 in 1999 and
5,924,121 in 1998 170 118
Additional paid-in capital 37,706 8,782
Capital redemption reserve 16 1
Retained earnings 8,161 8,099
--------- --------
Total shareholders' equity 46,053 17,000
--------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 62,767 26,581
========= ========
See notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Convertible Additional Capital
Ordinary Ordinary preferred paid-in redemption
shares Shares shares capital reserve
No.'000 (pound)'000 (pound)'000 (pound)'000 (pound)'000
BALANCE AT APRIL 1, 1996 1,758 35 375 38 1
Conversion of preferred shares 1,875 38 (375) 337 -
Ordinary share options exercised 500 10 - 28 -
Ordinary shares issued, net of issue costs of
(pound)1,311,000 1,675 33 - 8,341 -
Net income - - - - -
------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 1997 5,808 116 - 8,744 1
Ordinary share options exercised 116 2 - 38 -
Net income - - - - -
------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 1998 5,924 118 - 8,782 1
Ordinary shares issued, net of issue costs of 3,052 61 - 28,717 -
(pound)2,588,000
Ordinary share options exercised 282 6 - 207 -
Ordinary shares repurchased (762) (15) - - 15
Net income - - - - -
------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 1999 8,496 170 - 37,706 16
============ ============ ============ ============ ============
Cumulative
translation Retained
adjustment earnings Total
(pound)'000 (pound)'000 (pound)'000
BALANCE AT APRIL 1, 1996 (149) 2,475 2,775
Conversion of preferred shares - - -
Ordinary share options exercised - - 38
Ordinary shares issued, net of issue costs of
(pound)1,311,000 - - 8,374
Net income 149 2,180 2,329
------------ ----------- ----------
BALANCE AT MARCH 31, 1997 - 4,655 13,516
Ordinary share options exercised - - 40
Net income - 3,444 3,444
------------ ----------- ----------
BALANCE AT MARCH 31, 1998 - 8,099 17,000
Ordinary shares issued, net of issue costs of - - 28,778
(pound)2,588,000
Ordinary share options exercised - - 213
Ordinary shares repurchased - (3,987) (3,987)
Net income - 4,049 4,049
------------ ----------- -----------
BALANCE AT MARCH 31, 1999 - 8,161 46,053
============ =========== ==========
See notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1999, 1998 and 1997
1999 1998 1997
(pound)'000 (pound)'000 (pound)'000
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 4,049 3,444 2,180
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,476 856 199
Profit on disposal of property and equipment (40) (26) (9)
Loss on disposal of discontinued operations - - 149
Changes in assets and liabilities, net of effects of acquisitions
Accounts receivable (6,080) (9,645) (431)
Unbilled receivables (812) (785) (276)
Prepaid expenses (44) (135) 78
Other receivables (970) (32) (77)
Net assets of discontinued operations - - 200
Accounts payable (1,659) 2,459 31
Accrued liabilities 1,771 274 46
Income taxes payable 460 307 286
Other taxes and social security payable 308 (12) 208
Other liabilities (290) 64 447
Other long term liabilities - - (495)
---------- ---------- ----------
Net cash (used by) provided by operating activities: (1,831) (3,231) 2,536
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,419) (950) (431)
Proceeds from sale of property and equipment 170 219 29
Acquisition of businesses, net of cash acquired (20,789) (6,984) -
---------- ---------- ----------
Net cash (used in) investing activities (22,038) (7,715) (402)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Ordinary share options exercised 213 40 38
Ordinary share issuance 28,778 - 8,374
Repurchase of ordinary shares (3,987) - -
Mortgage repayments - (460) (60)
Payments under capital lease obligations (143) (465) (36)
---------- ---------- ----------
Net cash provided by (used in) financing activities 24,861 (885) 8,316
---------- ---------- ----------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 992 (11,831) 10,450
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,040 12,871 2,421
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR 2,032 1,040 12,871
========== ========= ==========
See notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended March 31, 1999, 1998 and 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW 1999 1998 1997
INFORMATION (pound)'000 (pound)'000 (pound)'000
Interest paid 86 22 22
========== ========== ==========
Income taxes paid 1,624 967 634
========= ========== ==========
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
1. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS AND SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS
Nature of business
Professional Staff plc and its subsidiaries (the "Company") primarily
operate in niche sectors of the temporary staffing industry and other
recruitment services in the United Kingdom, United States of America and
Western Europe.
Basis for consolidation
The consolidated financial statements include the financial statements
of Professional Staff plc and all of its subsidiaries. Professional
Staff plc and its major subsidiaries are incorporated in Great Britain
except for The Woolf Group, Inc. and S-Com Computer Systems Engineers,
Inc. which are incorporated in the United States of America and S-Com
Computer Systems Engineers GmbH which is incorporated in Germany. All
significant intercompany transactions, profits and balances have been
eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ
from those estimates.
Currency
These consolidated financial statements are stated in United Kingdom
pounds sterling.
SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
The Company considers all highly liquid investments with maturity of
three months or less when purchased to be cash equivalents.
Property and equipment
Property and equipment is stated at cost and depreciated using the
straight-line method. Freehold land is not depreciated, freehold
buildings are depreciated over an estimated useful life of 40 years,
fixtures, fittings and equipment are depreciated over estimated useful
lives ranging from 3 to 10 years and motor vehicles are depreciated over
an estimated useful life of 4 years.
Goodwill
Goodwill arising on the acquisition of a business is calculated by
comparing the cost of the acquisition with the fair value of the net
assets acquired. Any difference is treated as purchased goodwill and is
amortised in equal amounts over its expected useful life. The
amortisation period is assessed separately for each acquisition and the
carrying value of goodwill and the adequacy of the amortisation rates
are reviewed at each balance sheet date. All goodwill arising on
acquisitions to date is being amortised over 30 years.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
1. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Impairment of long-lived assets
Management assesses the recoverability of its long-lived assets by
determining whether the amortisation of the asset's balance over its
remaining life can be recovered through projected discounted future cash
flows from operations. Management continually evaluates the existence of
potential impairment by analysing operating results, trends and
prospects. Management also takes into consideration any other events or
circumstances that might indicate potential impairment. Based upon these
evaluations, the Company has determined that no impairment of recorded
long-lived assets has occurred.
Fair values of financial instruments
The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximate to fair value due to the short maturities
of such instruments.
Revenue recognition
The Company derives most of its revenues from supplying temporary
staffing services. Revenues are recorded as such services are provided.
Direct cost of revenue
Direct cost of revenue consists primarily of compensation payable to
temporary workers, related payroll taxes and direct expenses billable to
clients. Direct cost of revenue does not include an allocation of
overhead costs.
Income taxes
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109 "Accounting for Income Taxes". Under this method, deferred tax
assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Earnings per share
Basic earnings per share is computed on the weighted average number of
ordinary shares outstanding during the respective period. Diluted
earnings per share includes the effect of dilutive ordinary share
equivalents outstanding during the periods using the treasury stock
method.
Share options granted to employees
The Company accounts for all share-based compensation plans under the
intrinsic value method prescribed by APB Opinion No.25, "Accounting for
Stock Issued to Employees".
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
1. BASIS FOR PRESENTATION OF THE FINANCIAL STATEMENTS AND SIGNIFICANT
ACCOUNTING POLICIES (continued)
Foreign exchange
The Company's reporting and functional currency is pounds sterling.
Transactions of the Company denominated in foreign currencies are
translated into functional currencies at the rates of exchange ruling at
the date of transactions. Monetary assets and liabilities in foreign
currencies at the balance sheet date are translated into functional
currencies at the rates of exchange ruling at that date. Any differences
are dealt with in the income statement.
The balance sheets of foreign subsidiaries are translated into sterling
at the closing rates of exchange and the profit and loss account at an
average rate. The differences arising from the translation are charged
directly to equity.
Leases
Assets held under finance leases are capitalised at their fair value on
the inception of the lease and depreciated over their estimated useful
lives. Finance charges are allocated over the period of the lease in
proportion to the capital amount outstanding. Rentals under operating
leases are charged to the income statement in equal annual amounts over
the lease term.
2. ACQUISITIONS
On July 17, 1998 the Company acquired the entire issued share capital of
EPL Overseas Limited ("EPL"), a UK based provider of skilled contract
personnel to the European telecommunications industry. The initial
purchase price was (pound)1,650,000 in cash. Further cash consideration
may become payable dependent upon the gross profit of the group's
technology businesses, into which the acquired business has been merged,
for the period from October 1998 to July 2000. Such payments are due in
May 1999, May 2000 and August 2000.
On October 1, 1998 the Company acquired the entire issued share capital
of Praxis Executive Taskforce Limited ("Praxis"), a UK based provider of
interim executives and managers to industry and commerce. The initial
purchase price was (pound)2,525,000 in cash. Further cash consideration
may become payable in December 1999 and December 2000 dependent upon
improvements to operating income for the years ended September 30, 1999
and September 30, 2000.
On March 26, 1999 the Company purchased the entire issued share capital
of Euromedica plc and 94% of the share capital of Euromedica
International Limited (together "Euromedica"). Euromedica is the largest
executive search firm in Europe in the pharmaceutical, bioscience and
healthcare sectors and has a network of offices in the UK, Belgium and
Germany. The purchase price was (pound)2,888,000.
On March 31, 1999 the Company purchased the entire issued share capital
of The Woolf Group, Inc. ("Woolf"), a US based provider of clinical
trials staffing services to pharmaceutical companies and contract
research organisations. The initial purchase price was (pound)9,560,000.
Further cash consideration may become payable in May 2000, May 2001 and
May 2002 dependent upon improvements to operating income for the years
ended March 31, 2000, 2001 and 2002.
All acquisitions were accounted for by the purchase method and,
accordingly, the purchase price (including transaction costs) was
allocated among the identifiable tangible assets acquired and
liabilities assumed based on their respective fair market values. The
fair values allocated were approximately (pound)6,409,000 for the assets
acquired and approximately (pound)4,084,000 for the liabilities assumed.
The excess of purchase price over these
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
2. ACQUISITIONS (CONTINUED)
estimated fair values of the net assets acquired was approximately
(pound)14,551,000 and was recorded as goodwill which is being amortised
using the straight line method over 30 years. The results of acquired
operations have been included in the consolidated income statement from
the respective dates of acquisition.
The following unaudited consolidated pro-forma results of operations for
the years ended March 31, 1999 and 1998 assume that all acquisitions
made in the years ended March 31, 1999 and 1998 occurred as of April 1,
1997:
1999 1998
(pound)'000 (pound)'000
Revenue 111,984 89,431
=========== ==========
Net income 4,431 2,531
=========== ==========
Earnings per share:
Basic (pound)0.50 (pound)0.43
=========== ==========
Diluted
(pound)0.47 (pound)0.37
=========== ==========
Such pro-forma amounts are not necessarily indicative of what the actual
consolidated results of operations might have been if the acquisitions
had been effective at the beginning of the periods.
Contingent Consideration
Prior year acquisitions
Further cash consideration may become payable in August 1999 and August
2000 in respect of the acquisition of S-Com Computer Systems Engineers
Limited, acquired in the year ended March 31, 1998, dependent upon the
gross profit of the group's technology businesses for the period to July
2000.
Recognition of contingent consideration
Contingent consideration is recognised when the outcome of the
contingency is beyond reasonable doubt. Accordingly, contingent
consideration of (pound)3.95m has been recognised as at March 31, 1999.
Where the outcome of the contingency is not beyond reasonable doubt, due
to the complexity of the earnout formulae or uncertainty as to future
performance, no liability has been recognised. Management do not
anticipate that the aggregate of such unrecognised contingent
consideration will exceed (pound)20m.
3. EARNINGS PER SHARE
The following table summarises the computations of share amounts used in
the computation of earnings per share presented in the accompanying
income statements.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
3. EARNINGS PER SHARE (CONTINUED)
1999 1998 1997
'000 '000 '000
Basic earnings per share:
Weighted average number of ordinary shares
outstanding during the period 8,929 5,864 4,968
=========== ========== ==========
Diluted earnings per share:
Weighted average number of ordinary shares
outstanding during the period 8,929 5,864 4,968
Dilutive effect of options 452 923 753
Assumed conversion convertible preferred shares - - 118
----------- ---------- ----------
Total fully diluted securities considered outstanding
during the year 9,381 6,787 5,839
=========== ========== ==========
(pound)'000 (pound)'000 (pound)'000
Net income 4,049 3,444 2,180
=========== ========== ==========
Basic earnings per share (pound)0.45 (pound)0.59 (pound)0.44
=========== ========== ==========
Diluted earnings per share (pound)0.43 (pound)0.51 (pound)0.38
=========== ========== ==========
Options to purchase 501,000 shares at exercise prices ranging from
$11.50 to $16.875 were outstanding at March 31, 1999 but have not been
included in the calculation of diluted earnings per share because the
exercise prices were greater than the average market price of the
ordinary shares.
4. PROPERTY AND EQUIPMENT
1999 1998
(pound)'000 (pound)'000
Freehold land and buildings 1,018 1,041
Motor vehicles 1,507 1,053
Fixtures, fittings and equipment 3,173 1,685
--------- ---------
5,698 3,779
Less: accumulated depreciation (2,372) (1,090)
--------- ---------
Property and equipment, net of accumulated
depreciation 3,326 2,689
========= =========
The Company leases motor vehicles under capital leases. Property and
equipment includes the following amounts for leases that have been
capitalised.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
4. PROPERTY AND EQUIPMENT (CONTINUED)
1999 1998
(pound)'000 (pound)'000
Motor vehicles 226 308
Less: accumulated depreciation (101) (159)
----------- -----------
125 149
=========== ===========
Depreciation of leased assets is included in depreciation and
amortization expense.
5. CONVERTIBLE PREFERRED SHARES
The convertible preferred shares carried the same voting rights as
ordinary shares, and the right (waived by the holders) to a gross
dividend of 10% per annum.
On June 1, 1996, the convertible preferred shares were converted into
1,875,000 2p ordinary shares issued at a premium of 18p.
6. SHARE OPTION PLAN
The Company operates two share option plans for the benefit of directors
and employees, an approved plan and an unapproved plan. Share options
granted allow for the purchase of ordinary shares at prices not less
than the fair market value of the ordinary shares at the date of grant.
The options vest over 3 years and are exercisable 7 to 10 years from the
date of grant.
The following table summarises the option activity under the share
option plans.
1999 1998 1997
No. No. No.
Options outstanding at 1 April 1,308,541 947,044 1,403,825
Options granted 632,000 525,198 75,000
Options exercised (281,732) (115,546) (500,375)
Options cancelled (231,954) (48,155) (31,406)
----------- ----------- -----------
Options outstanding at 31 March 1,426,855 1,308,541 947,044
=========== =========== ===========
Weighted-average exercise price per share:
Options granted $12.88 $10.58 $2.26
Options exercised $1.30 $0.55 $1.29
Options cancelled $11.27 $6.60 $1.66
=========== ============ ===========
Weighted-average exercise price per share of
options outstanding at end of the year $8.21 $4.94 $1.51
=========== ============ ===========
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
6. SHARE OPTION PLAN (CONTINUED)
Details of share options granted but not exercised at March 31, 1999 are
as follows:
Date of grant Number of options Exercise price Exercise period
April 1994 125,000 (pound)0.25 April 1997 - April 2004
April 1995 80,000 (pound)0.80 April 1998 - April 2005
October 1995 135,000 (pound)1.25 October 1998 - October 2005
February 1996 30,000 (pound)1.40 February 1999 - February 2003
March 1996 66,485 (pound)1.40 March 1999 - March 2006
April 1996 75,000 (pound)1.40 April 1999 - April 2006
April 1997 75,210 US$8.75 April 2000 - April 2007
May 1997 98,642 US$9.375 May 2000 - May 2007
June 1997 3,000 US$10.00 June 2000 - June 2007
July 1997 120,047 US$11.50 July 2000 - July 2007
October 1997 6,563 US$15.625 October 2000 - October 2007
January 1998 28,000 US$15.375 January 2001 - January 2005
May 1998 243,500 US$16.875 May 2001 - May 2008
June 1998 15,000 US$13.50 June 2001 - June 2008
July 1998 75,000 US$13.125 July 2001 - July 2008
July 1998 12,500 US$15.125 July 2001 - July 2008
October 1998 67,908 US$9.75 October 2001 - October 2008
October 1998 170,000 US$7.25 October 2001 - October 2008
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. The option price for each grant of options was
considered to be a reasonable estimate of the market value of shares at
that date. Consequently, no compensation expense has been recorded in
respect of these share options.
Statement of Financial Accounting Standards No.123 "Accounting for
Stock-based Compensation", ("SFAS 123") requires disclosure of pro forma
information regarding net income and earnings per share had compensation
cost been determined using the fair value method. The fair value of the
Company's stock-based awards to employees was estimated as of the date
of grant using the Black-Scholes option pricing model. Limitations on
the effectiveness of the Black-Scholes option valuation model are that
it was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable and that
the model requires the use of highly subjective assumptions including
expected stock price volatility. Because the Company's stock-based
awards to employees have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock-based awards. The
fair value of options granted was estimated assuming no dividends and
using the following weighted average assumptions:
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
6. SHARE OPTION PLAN (CONTINUED)
1999 1998 1997
Risk-free interest rate 4.7% 5.8% 6.3%
Expected term 3 years 3 years 3 years
Volatility 30.0% 20.0% 20.0%
Weighted-average fair value per share for options granted during
the year $3.38 $2.30 $0.51
======= ======= ===========
Had compensation cost for the Company's plans been recorded the
Company's net income and earnings per share would have been as indicated
below:
1999 1998 1997
Net income as reported 4,049 3,444 2,180
pro forma 3,733 3,296 2,150
=========== =========== ==========
Basic earnings per share as reported (pound)0.45 (pound)0.59 (pound)0.44
pro forma (pound)0.42 (pound)0.56 (pound)0.43
=========== =========== ==========
Diluted earning per share as reported (pound)0.43 (pound)0.51 (pound)0.38
pro forma (pound)0.40 (pound)0.49 (pound)0.37
=========== =========== ==========
7. INCOME TAXES
The Company's provision for United Kingdom income taxes resulted in
effective tax rates that varied from the United Kingdom statutory income
tax rate as follows:
1999 1998 1997
(pound)'000 (pound)'000 (pound)'000
Expected income tax provision at 31% / 31% / 33% 1,901 1,598 1,182
Amortization of goodwill 116 60 -
Expenses not deductible for tax purposes 67 53 62
Other - - 9
----------- ---------- -----------
Actual income tax provision 2,084 1,711 1,253
=========== ========== =========
Effective tax rate 34.0% 33.2% 34.9%
=========== ========== =========
There are no significant differences between the financial reporting and
tax bases of assets and consequently there are no deferred tax assets
and liabilities.
.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
8. SALES AND GEOGRAPHIC INFORMATION
Throughout the period the Company's revenue and income before interest
and income taxes derived primarily from the provision of temporary
staffing services.
Domestic and export revenues for the three years ended March 31, 1999
were as follows:
1999 1998 1997
(pound)'000 (pound)'000 (pound)'000
United Kingdom 61,671 45,414 19,666
Europe 28,045 12,348 -
United States 3,574 - -
Rest of the World 2,069 551 -
----------- ---------- ---------
95,359 58,313 19,666
=========== ========== =========
The location of the Company's net property and equipment as of March 31,
1999 is summarized below. Such information is not presented for 1998 or
1997 as net property and equipment was primarily located in the United
Kingdom.
1999
(pound)'000
United Kingdom 3,083
Europe 51
United States 192
----------
3,326
==========
The Company did not receive more than 10% of consolidated revenue from
any one customer in the year ended March 31, 1999 and 1998
((pound)2,359,000 and (pound)2,242,000 from two customers in 1997 each
of which exceeded 10% of consolidated revenues)
)
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases some of its facilities under non-cancelable operating
lease agreements. Future minimum lease payments under these operating
leases as of March 31, 1999 are as follows:
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1999, 1998 and 1997
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Year ending March 31, (pound)'000
2000 466
2001 466
2002 397
2003 339
2004 292
Thereafter 1,257
---------
Total minimum lease payments 3,217
=========
Rent expense of (pound)473,000, (pound)290,000 and (pound)103,000 was
incurred in 1999, 1998 and 1997 respectively.
Cross guarantee
The company's bankers hold a fixed and floating charge over the assets
of the company as security over any overdraft. As at March 31, 1999 the
company had no overdraft (1998 - (pound)68,000).
In addition, the company is subject to a cross guarantee covering
overdrafts of certain group companies. The company had a contingent
liability of (pound)8.20m at March 31, 1999 under this guarantee (1998 -
(pound)nil).
Security
The company pledged the assets and ordinary shares of The Woolf
Group, Inc. as security up to a maximum of $15m to the selling
shareholders of The Woolf Group, Inc. in respect of the aggregate
contingent consideration that may become payable in each of May 2000,
May 2001 and May 2002.
10. UNUSUAL ITEMS
The Company incurred the following non-recurring unusual items in the
year ended March 31, 1999 all recognized within Selling, general and
administrative expenses; (pound)403,000 relating to restructuring costs
at its Salisbury Consulting Group subsidiary and costs of integrating
its S-Com and EPL subsidiaries subsequent to acquisition; (pound)256,000
relating to costs expected to be incurred at S-Com EPL in collecting
certain international receivables and establishing general doubtful debt
reserves; and (pound)150,000 of costs associated with an aborted
acquisition.
11. CAPITAL STRUCTURE
In May 1998 the Company completed a secondary public offering of its
ordinary shares. The Company issued 3,052,500 ordinary shares at $17.25
raising (pound)28,778,000 net of issue costs. The proceeds were used to
fund acqusitions and working capital requirements.
During December 1998 and January 1999 the Company repurchased 762,000
ordinary shares at an average price of $8.64.
F-17