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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ________
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Commission file number 0-26058
ROMAC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3264661
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
120 WEST HYDE PARK PLACE
SUITE 150
TAMPA, FLORIDA 33606
(Address of principal executive offices) (zip-code)
Registrant's telephone number, including area code: (813) 251-1700
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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) had been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
As of November 10, 1998, the registrant had 46,897,194 shares of common
stock, $.01 par value per share, issued and outstanding.
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ITEM 1. FINANCIAL STATEMENTS
ROMAC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
Assets:
Current Assets:
Cash and cash equivalents $ 76,552 $ 101,669
Short-term investments 14,666 1,953
Trade receivables, net of allowance for doubtful accounts of $6,813 and $5,423
respectively 113,043 84,729
Notes receivable from franchisees, current 32 109
Receivables from related parties, current 387 233
Deferred tax asset, current 3,138 3,141
Prepaid expenses and other current assets 3,093 2,519
--------- ---------
Total current assets 210,911 194,353
Note receivable from franchisees, less current portion -- 4
Receivables from related parties, less current portion 1,720 1,290
Deferred tax asset, less current portion 310 310
Furniture and equipment, net 23,840 15,921
Goodwill, net of accumulated amortization of $4,828 and $2,578, respectively 94,457 66,652
Other assets, net 5,428 4,878
--------- ---------
Total assets $ 336,666 $ 283,408
========= =========
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable and other accrued liabilities $ 13,371 $ 8,031
Accrued payroll costs 41,544 28,138
Income taxes payable 4,437 3,729
Current portion of capital lease obligations 743 731
Current portion of payables to related parties 14,649 4,265
Accrued merger and integration expenses 8,081 --
--------- ---------
Total current liabilities 82,825 44,894
Capital lease obligations, less current portion 686 1,260
Payables to related parties, less current portion 2,000 1,375
Other long-term liabilities, less current portion 4,832 3,175
--------- ---------
Total liabilities 90,343 50,704
--------- ---------
Commitments and contingencies -- --
Shareholders' Equity:
Preferred stock, par value $.01; 15,000 shares authorized, none issued and
outstanding -- --
Common stock, par value $.01; 250,000 shares authorized,
46,275 and 45,475 issued, respectively 462 455
Additional paid-in-capital 183,282 178,494
Retained earnings 63,476 54,723
Cumulative translation adjustment 28 (42)
Less reacquired stock at cost; 677 shares, respectively (925) (925)
--------- ---------
Total shareholders' equity 246,323 232,704
--------- ---------
Total liabilities and shareholders' equity $ 336,666 $ 283,408
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net service revenues $ 174,361 $ 122,326 $ 496,084 $ 333,279
Direct costs of service 100,182 64,804 281,820 175,468
--------- --------- --------- ---------
Gross profit 74,179 57,522 214,264 157,811
Selling, general and administrative expenses 56,278 46,499 166,906 130,691
Depreciation and amortization expense 2,353 1,395 6,425 3,616
Merger, restructuring, and integration expenses 3,272 -- 23,493 --
Other (income) expense, net (1,383) (543) (3,780) (1,825)
--------- --------- --------- ---------
Income before income taxes 13,659 10,171 21,220 25,329
Provision for income taxes 7,467 4,176 12,467 10,546
--------- --------- --------- ---------
Net income $ 6,192 $ 5,995 $ 8,753 $ 14,783
========= ========= ========= =========
Net income per share- Basic $ .14 $ 0.15 $ 0.19 $ 0.37
========= ========= ========= =========
Weighted average shares outstanding- Basic 45,498 40,066 45,307 39,714
========= ========= ========= =========
Net income per share- Diluted $ .13 $ 0.14 $ 0.18 $ 0.36
========= ========= ========= =========
Weighted average shares outstanding- Diluted 47,436 41,612 47,464 41,183
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 8,753 $ 14,783
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 6,425 3,992
Provision for losses on accounts and notes receivable 3,169 409
Deferred taxes 3 (98)
Loss on asset sales 66
(Increase) decrease in operating assets:
Trade receivables, net (31,483) (25,070)
Notes receivable from franchisees, current 77 71
Prepaid expenses and other current assets (574) (485)
Notes receivable from franchisees, less current portion 4 3
Other assets, net 1,293 (1,797)
Increase (decrease) in operating liabilities:
Accounts payable and other accrued liabilities 5,340 1,270
Accrued payroll costs 13,407 10,254
Income taxes payable 1,259 4,264
Other long-term liabilities 1,657 733
--------- ---------
Cash provided by operating activities 9,330 8,395
--------- ---------
Cash flows from investing activities:
Capital expenditures (11,982) (6,982)
Acquisition and earnout settlements (19,088) (51,576)
Accrued merger, restructuring and integration expenses 8,081
Proceeds from the sale of fixed assets 1,696
Proceeds from the sale of short-term investments 2,710
Increase in cash surrender value of life insurance policies (1,843)
Payments for the purchase of short-term investments (12,713) (3,023)
--------- ---------
Cash used in investing activities (37,545) (57,175)
--------- ---------
Cash flows from financing activities:
Payments on notes receivable from stock subscriptions 13
Proceeds from bank line of credit -- 6,070
Payments on capital lease obligations (562) (359)
Payments on receivables from related parties 234 56
Issuance of payables to related parties -- 5,837
Expenses from issuance of common stock (57)
Issuance of receivables from related parties (818) (504)
Proceeds from exercise of stock options 4,301 2,969
--------- ---------
Cash used in financing activities 3,098 14,082
--------- ---------
Decrease in cash and cash equivalents (25,117) (34,698)
Cash and cash equivalents at beginning of period 101,669 58,404
--------- ---------
Cash and cash equivalents at end of period $ 76,552 $ 23,706
--------- ---------
Supplemental Cash Flows Information
Cash paid during the period for:
Income Taxes $ 1,258 $ 2,338
Interest 166
Non cash investing and financing activity:
Capital lease transaction $ 2,526
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
COMMON STOCK: Shares Amounts
Balance at December 31, 1997 45,475 $ 455
Exercise of stock options 800 7
-------- ---------
Balance at September 30, 1998 46,275 $ 462
========= =========
ADDITIONAL PAID-IN CAPITAL:
Balance at December 31, 1997 $ 178,494
Issuance of common stock (57)
Exercise of stock options 4,294
Tax benefit related to employee stock options 551
---------
Balance at September 30, 1998 $ 183,282
=========
RETAINED EARNINGS:
Balance at December 31, 1997 $ 54,723
Net income 8,753
---------
Balance at September 30, 1998 $ 63,476
=========
REACQUIRED STOCK:
Balance at December 31, 1997 ($925)
---------
Balance at September 30, 1998 ($925)
---------
CUMULATIVE TRANSLATION ADJUSTMENT:
Balance at December 31, 1997 ($42)
Foreign currency translation adjustment 70
---------
Balance at September 30, 1998 $ 28
=========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
NOTE A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated Financial Statements
include the accounts of Romac International, Inc. (the "Company") and its
subsidiaries. The Company completed its merger with Source Services Corporation
("Source") on April 20, 1998. Source continues to operate as a separate
division of the Company. This merger was accounted for under the pooling of
interests method; accordingly all historical results have been restated to
reflect the merger. All material intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
Interim Financial Information. The consolidated Financial Statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in management's opinion, include all
adjustments necessary for a fair statement of results for such interim periods.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules or regulations; however,
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
Revenue Recognition. Net service revenues consist of sales, net of
credits and discounts. The Company recognizes Flexible Billings based on hours
worked by assigned personnel on a weekly basis. Search Fees are recognized in
contingency search engagements upon the successful completion of the
assignment. For the Source division, the search fee policy is that if an
individual fails to continue employment for a period of time as specified in
the placement agreement, generally a thirty-to-ninety day period, the Company
is not entitled to collect the search fee. Revenue from search fees is shown on
the Consolidated Statement of Operations net of amounts written off for
adjustments due to placed candidates not remaining in employment for the
guarantee period.
Franchise fees were determined based upon a contractual percentage of the
revenue billed by franchisees. Costs relating to the support of franchised
operations were included in the Company's selling, general and administrative
expenses. The last remaining franchisee and licensee agreement was terminated
at the end of the second quarter of 1997. The Company was the legal employer of
flexible personnel under its licensing arrangements, and accordingly, included
revenues and related direct costs of licensed offices in its net service
revenues and direct costs of services, respectively. Commissions paid to
licensees were based upon a percentage of the gross profit generated, and were
included in the Company's direct cost of services.
Cash and Cash Equivalents. The Company classifies all highly-liquid
investments with an initial maturity of three months or less as cash
equivalents.
Self-insurance. The Company offers an employee benefit program for
which it is self-insured for a portion of the cost. The Company is liable for
claims up to $100 per employee and aggregate
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claims up to a defined yearly payment limit. All full-time employees and
salaried consultants of the Source division are eligible to participate in the
program. Self-insurance costs are accrued using actuarial estimates to
approximate the liability for reported claims and claims incurred but not
reported.
Income Taxes. The Company accounts for income taxes under the
principles of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability
approach to the recognition of deferred tax assets and liabilities for the
expected future tax consequences of differences between the carrying amounts
and the tax bases of other assets and liabilities. The tax effects of
deductions attributable to employees' disqualifying dispositions of shares
obtained from incentive stock options were reflected in additional paid-in
capital.
Foreign Currency Translation. Foreign currency translation adjustments
arise from the activities of Source's Canadian operations. Results of
operations are translated using the average exchange rates during the period,
while assets and liabilities are translated into U.S. dollars using current
rates. Resulting foreign currency translation adjustments are recorded in
Stockholder's Equity.
Earnings Per Share. Options to purchase 2,917 shares of common stock
were outstanding during 1998, but were not included in the computation of
diluted earnings per share for the three or nine months ended September 30,
1998 because the options were anti-dilutive.
Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which will require the Company to disclose, in financial statement
format, all non-owner changes in equity. Such changes include cumulative
foreign currency translation adjustments and certain minimum pension
liabilities. Comprehensive income is materially the same as reported net
income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual financial statements
and interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997
and requires presentation of prior period financial statements for comparability
purposes. Romac is currently evaluating its required disclosures under SFAS No.
131 and expects to adopt this standard during the year ended December 31, 1998.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It also
requires that all derivatives and hedging activities be recognized as either
assets or liabilities in the Statement of Financial Position and be measured at
fair value. Romac does not believe adoption of this standard will have a
material impact on the Company's financial performance or reporting and expects
to adopt this standard during the year ended December 31, 2000.
Reclassifications. Certain amounts related to the three and nine month periods
ending September 30, 1997 have been reclassified to conform with current
period presentation. The amounts are not considered material to the overall
financial statement presentation.
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NOTE B---ACQUISITIONS
On April 20, 1998, the Company consummated a merger whereby Source
Services Corporation ("Source"), a Delaware corporation, was merged into the
Company pursuant to an Agreement and Plan of Merger ("the Merger Agreement")
dated February 1, 1998, as amended on February 11, 1998 and April 17, 1998. The
acquisition has been accounted for using the pooling of interests method;
accordingly, and historical results have been restated to reflect the merger.
The following unaudited, pro forma, selected income statement data has
been prepared to reflect the effect on the Company as if the acquisitions
(which were accounted for under the purchase method) of Uni-Quality Systems
Solutions, Inc ("UQ") and Sequent Associates, Inc. ("Sequent") (September 1997)
had been recorded as of January 1, 1997.
Nine Months Ended
September 30,
-------------
1998 Actual 1997 Proforma
------------ --------------
(unaudited) (unaudited)
Net service revenues $496,084 $361,847
Gross profit 214,264 165,123
Income before income taxes 21,220 25,577
Net income 8,753 14,856
Net income per share - Basic .19 .37
Weighted average shares outstanding - Basic 45,307 39,714
Net income per share - Diluted .18 .36
Weighted average shares outstanding - Diluted 47,464 41,183
NOTE C---MERGER, RESTRUCTURING, AND INTEGRATION EXPENSE
Pursuant to the terms of the Merger Agreement, each issued and outstanding
share of common stock, par value $.02, of Source was converted into the right
to receive 1.1351 shares of common stock, par value $.01 per share of the
Company's common stock. The Company issued approximately 15.6 million shares of
common stock upon conversion of the shares of Source common stock. In addition,
each option to purchase Source Common Stock outstanding under Source's stock
option plans was converted into an option to purchase the number of shares of
the Company's common stock subject to such option multiplied by the exchange
ratio for the merger.
In connection with the Merger, the Company recorded a $3.3 million before tax
charge for restructuring and other merger and integration related costs in the
three months ended September 30, 1998 and $23.5 million before tax charge for
the nine months ended September 30, 1998. The charge for the nine months ended
September 30, 1998 included $8.2 million of direct merger costs, which
consisted of professional fees and other transaction costs, $3.9 million of
severance to be incurred in connection with anticipated staff reductions, $4.6
million of planned termination of leased office facilities, and $6.8 million of
other expenses directly related to the Merger.
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The Company expects to incur an additional $8.5 million of merger,
restructuring, and integration related costs for training, lease termination,
and other costs to eliminate redundant back office and other operations. These
costs will be recognized as period expenses when incurred as these costs do not
qualify for immediate recognition under an existing accounting pronouncement and
will be classified as merger, restructuring, and integration expenses. The
estimate of the total merger, restructuring and integration costs related to
the Source merger is $32.0 million.
NOTE D---GOODWILL
During the third quarter of 1998, the Company settled the earnouts on certain
acquisitions during 1997 for approximately $12.9 million and accrued
approximately $11.1 million for earnouts achieved for certain 1996 and 1997
acquisitions. These amounts have been recorded as additional purchase price
consideration and are included in goodwill.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional written or oral forward-looking statements may be made by
the Company from time to time, in filings with the SEC or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934. Such statements may include, but not be limited to, projections of
revenue, income, losses, cash flows, capital expenditures, plans for future
operations, financing needs or plans, plans relating to products or services of
the Company, estimates concerning the effects of litigation or other disputes,
potential effects of Year 2000 issues, as well as assumptions to any of the
foregoing. In addition, when used in this discussion the words "anticipate",
"estimates", "expects", "intends", "plans", and variations thereof and similar
expressions are intended to identify forward looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which can not be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward looking statements. Readers are cautioned not to place undue reliance on
any forward looking statements contained in this report which speak only as of
the date of this report. The Company takes no obligation to publically publish
the results of any adjustments to these forward looking statements that may be
made to reflect events on or after the date of this report or to reflect the
occurrence of unexpected events.
Results of Operations
The following table sets forth certain items in Romac's consolidated
statement of operations, as a percentage of net service revenues, for the
indicated periods:
Nine months ended September 30,
1998 1997
---- ----
Flexible billings 79.5% 73.5%
Search Fees 20.5 26.5
Net service revenues 100.0 100.0
Gross profit 43.2 47.4
Selling, general, and administrative expenses 33.6 39.7
Merger and integration expenses 4.7
Income before taxes 4.3 7.6
Net income 1.8% 4.4%
Results of Operations for the Three and Nine Months Ended September 30, 1998
and 1997.
Net service revenues. Net service revenues increased 42.6% and 48.8%,
respectively, to $174.4 million and $496.1 million for the three and nine month
periods ending September 30, 1998 as compared to $122.3 and $333.3 million for
the same periods in 1997. These increases were comprised of a $49.1 million and
$149.3 million increase in Flexible Billings and a $3.0 million and $13.5
million increase in Search services for the three and nine month periods ending
September 30, 1998, as described below.
Flexible billings increased 53.8% and 61.0% respectively to $140.4
million and $394.2 million for the three and nine month periods ending
September 30, 1998 as compared to $91.3 million and $244.9 million for the same
periods in 1997.
Search services increased 9.7% and 15.3%, respectively to $34.0 million
and $101.9 million for the three and nine month periods ended September 30,
1998 as compared to $31.0 and $88.4 million for
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the same periods in 1997. The increase resulted primarily from an increase in
the number of search sales consultants, which increased the number of search
placements made during the three and nine month periods ended September 30,
1998 as compared to the same period in 1997. The average fee for each placement
made during the periods remained relatively constant.
Gross profit. Gross profit increased 29.0% and 35.8%, respectively, to
$74.2 million and $214.3 million during the three and nine month periods ended
September 30, 1998 as compared to $57.5 million and $157.8 million for the same
periods in 1997. Gross profit as a percentage of net service revenues decreased
to 42.5% and 43.2%, respectively, for the three and nine month periods ending
September 30, 1998 as compared to 47.0% and 47.4% for the same periods in 1997.
This decrease was primarily result of the continuing change in the Company's
business mix whereby revenues from Flexible Billings, traditionally lower gross
margins than Search services, increased to 80.5% and 79.5%, respectively, of
the Company's total revenues for the three and nine month periods ending
September 30, 1998 as compared to 74.7% and 73.5% respectively for the same
periods in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 19.8% and 26.2%, respectively to $56.3
million and $166.9 million for the three and nine month periods ended September
30, 1998 as compared to $47.0 million and $132.2 million for the same periods
in 1997. Selling, general and administrative expenses as a percentage of net
service revenues decreased to 32.3% and 33.6%, respectively, for the three and
nine month periods ended September 30, 1998 compared to 38.4% and 39.7% for the
same periods in 1997. This decrease in selling, general and administrative
expense as a percentage of net service revenues in the three and nine month
periods ended September 30, 1998 resulted from syncergies and operating
efficiencies obtained from the merger.
Depreciation and amortization expense. Depreciation and amortization
expense increased 71.4% and 77.8%, respectively, to approximately $2.4 million
and $6.4 million for the three and nine month periods ended September 30, 1998
compared to approximately $1.4 million and $3.6 million for the same periods in
1997. Depreciation and amortization expense as a percentage of net service
revenues increased to 1.4% and 1.3%, respectively, for the three and nine month
periods ended September 30, 1998 as compared to 1.1% for the each of the
periods in 1997. The increase as a percentage of net service revenues for both
periods in 1998 as compared to the same periods in 1997 is due primarily to the
additional goodwill amortization due to the earnout buyouts negotiated in 1998
and the acquisitions of UQ and Sequent in the third quarter of 1997.
Merger, restructuring, and integration expenses. Merger and integration
expenses for the three and nine month periods ended September 30, 1998
increased 100% compared to the same periods in 1997 due to the completion of
the Source merger in April 1998. Merger and integration expenses consisted of
$8.2 million of direct costs related to the merger in the nine months ended
September 30, 1998 and $3.3 million and $15.3 million, related to restructuring
and integration related expenses for the three and nine months ended September
30, 1998.
Other (income) expense, net. Other (income) expense, net, increased
180.0% and 111.1% for the three and nine months ended September 30, 1998
compared to the same periods in 1997. The increase in other income during both
periods in 1998 as compared to 1997 was due to interest earned on the
investment of the proceeds from the November 1997 stock offering.
Income Before Taxes. Income before taxes increased 34.3% for the three
months ended September 30, 1998 and decreased 16.2% for the nine months ended
September 30, 1998 to $13.7 million and $21.2 million, respectively, as
compared to $10.2 million and $25.3 million for the same periods in 1997,
primarily as a result of the merger and integration expenses explained above.
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Provision for income taxes. Provision for income taxes increased 78.6%
and 19.0%, respectively, to $7.5 million and $12.5 million for the three and
nine month periods ended September 30, 1998 compared to $4.2 million and $10.5
million for the same periods in 1997. The effective tax rate for the three
months ended September 30, 1998 was 54.7% compared to 41.2% for the comparable
period in 1997. The effective tax rate was 59.0% for the nine months ended
September 30, 1998 compared to 41.5% for the same period in 1997. The increase
in the effective tax rates in 1998 as compared to 1997 was due to certain
non-deductible merger related expenses.
Net Income. Net income increased approximately 3.3% to $6.2 million in
the three months ended September 30, 1998 and decreased 40.5% to $8.8 million
for the nine months ended September 30, 1998 as compared to the $6.0 million
and $14.8 million for the same periods in 1997 primarily as a result of the
merger, restructuring and integration expenses explained above.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's sources of liquidity included
approximately $76.6 million in cash and cash equivalents, $14.7 in short-term
investments, and approximately $128.1 million in additional net working
capital. In addition, as of September 30, 1998, there are no amounts
outstanding on the Company's line of credit and $30.0 million was available for
borrowing under the Company's line of credit. The Company entered into a new
Revolving Line of Credit Loan Agreement with NationsBank, N.A. (the "Line of
Credit") during September 1997. The Line of Credit expires on March 31, 2000.
Amounts outstanding under the line of credit accrue interest at an annual rate
equal to 150 basis points above the 90-day London Interbank Offering interest
rate ("LIBOR"). As of September 30, 1998, the interest rate on the Line of
Credit was 5.96%.
During the nine months ended September 30, 1998, cash flow provided by
operations was approximately $9.3 million, resulting primarily from net income,
non-cash expenses (depreciation and amortization) and increases in operating
payroll liabilities, offset by an increase in accounts receivable. The increase
in accounts receivable reflects the increased volume of business during the
nine months ended September 30, 1998 from existing locations and the initial
funding of the accounts receivable base in acquired operations.
During the nine months ended September 30, 1998, cash flow used in
investing activities was approximately $37.5 million, resulting primarily from
the Company's use of approximately $12.0 million for capital expenditures,
$19.1 million for earnouts from certain acquisitions in 1996 and 1998, and
$12.7 million for purchase of short-term investments.
In November and December 1997, the Company received approximately $86.5
million as net proceeds of its common stock offering, part of which was used to
repay the indebtedness outstanding under the Line of Credit. The Company
intends to use the remaining net proceeds for general corporate purposes,
including possible acquisitions, expansion of the Company's operations and
certain capital expenditures related to the Company's expansion. Pending such
uses, the net proceeds will be invested in short term, investment grade
securities, certificates of deposit, or direct or guaranteed obligations of the
United States government.
The Company believes that cash flow from operations and borrowings
under the Company's Line of Credit, or other credit facilities that may become
available to the Company in the future will be adequate to meet the working
capital requirements of the Company's current operations for at least the next
12 months. The Company believes that the consummation of the merger with Source
which was effective April 20, 1998 will not adversely affect the Company's
liquidity. The Company's estimate of
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the period that existing resources will fund its working capital requirements
is a forward-looking statement that is subject to risks and uncertainties.
Actual results could differ from those indicated as a result of a number of
factors, including the use of such resources for possible acquisitions.
YEAR 2000 CONCERNS
Many computer systems in use today were designed and developed using
two digits, rather than four, to specify years. As a result, such systems will
recognize the year 2000 as 00 or 1900. This could cause many computer
applications to fail completely or to create erroneous results unless
corrective measures are taken.
The Company utilizes software and computer technologies that are
essential to its operations. The Company continuously evaluates the ongoing and
expected future business and industry requirements of its internally developed
and externally purchased applications. These applications and technology
equipment are updated on a regular basis. The Company has not accelerated its
plans to replace or update existing systems because of the Year 2000 issue.
Although, the Company currently believes all material systems are Year 2000
compliant and currently does not expect any future material costs to be
incurred to maintain Year 2000 compliance, there can be no assurance that the
Company will not experience material Year 2000 related problems or expenses.
The Company is working with key third party vendors to understand their
ability to continue to provide services and products through the change to
2000. The Company intends to continue to partner with its key third party
vendors to avoid any business interruptions in 2000. The Company is dependent
upon our customers for sales and cash flow. The Company currently does not
believe that it is subject to significant business risks related to its
customers' and suppliers' Year 2000 efforts, although if the Company's customer
or vendors experience Year 2000 problems, the Company's results of operations
could be materially adversely affected.
The effect of Year 2000 interruptions on the Company and our customer's
operations is difficult to predict because flexible staffing could be a vehicle
that that the Company's customer's will could use to correct the effect of Year
2000 disruptions in their business. The Company will continue to monitor the
status of our customers and key strategic partners as a means of determining
risks and alternatives. While the Company believes that all material systems
and equipment have been addressed related to the Year 2000 issue the Company
will continue to monitor and develop contingency plans with regards to the Year
2000 problem.
14
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Restated Financial Data Schedule for the nine months ended
September 30, 1997 (for SEC use only).
27.2 -- Financial Data Schedule for the nine months ended
September 30, 1998 (for SEC use only).
(b) Reports:
Current Reports on Form 8-K filed during the quarter ended
September 30, 1998 were as follows:
None.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROMAC INTERNATIONAL, INC.
(Registrant)
By: /s/ Peter Dominici
----------------------------------
Peter Dominici,
Chief Financial and
Accounting Officer
Date: November 16, 1998