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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
--------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File Number 0-15539
-------
RIGHT MANAGEMENT CONSULTANTS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2153729
-------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1818 Market Street, Philadelphia, Pennsylvania 19103
---------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-1588
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 the number of shares outstanding of each of the issuer's
classes of common stock as of July 31, 2002:
Common Stock, $0.01 par value 15,101,075
----------------------------- --------------------
Class Number of Shares
Right Management Consultants, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
June 30, December 31,
2002 2001
---- ----
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 43,094 $ 48,655
Accounts receivable, trade, net of allowance for doubtful accounts
of $4,333 and $2,835 in 2002 and 2001, respectively 85,006 80,225
Royalties and fees receivable from Affiliates 9,920 10,507
Prepaid expenses and other current assets 11,517 5,709
Deferred income taxes 1,220 1,237
--------- ---------
Total Current Assets 150,757 146,333
Property and equipment, net of accumulated depreciation of $49,671
and $43,637 in 2002 and 2001 respectively 30,543 23,294
Goodwill, net of accumulated amortization of $21,587 and
$20,930 in 2002 and 2001, respectively 183,193 78,068
Amortizable intangibles, net of accumulated amortization of $2,869
and $1,064 in 2002 and 2001, respectively 27,096 4,681
Deferred income taxes 3,742 3,765
Other 12,217 4,974
--------- ---------
Total Assets $ 407,548 $ 261,115
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt and other obligations $ 24,071 $ 590
Accounts payable 23,836 13,565
Fees payable to Affiliates 4,396 5,374
Accrued incentive compensation and benefits 20,252 35,569
Other accrued expenses 24,499 19,636
Deferred revenue 82,540 60,646
--------- ---------
Total Current Liabilities 179,594 135,380
Long-term debt and other obligations 108,096 41,426
Deferred compensation and other long term liabilities 9,598 5,175
Minority interest in subsidiaries 4,629 2,410
Shareholders' Equity:
Preferred stock, no par value; 1,000,000 shares authorized; no
shares issued -- --
Common stock, $.01 par value; 30,000,000 shares authorized;
18,003,620 and 17,848,982 shares issued in 2002 and 2001, respectively 180 178
Additional paid-in capital 31,378 29,241
Retained earnings 89,437 69,641
Accumulated other comprehensive (loss) (1,459) (8,431)
--------- ---------
119,536 90,629
Less treasury stock, at cost, 2,916,756 shares
in 2002 and 2001 (13,905) (13,905)
--------- ---------
Total Shareholders' Equity 105,631 76,724
--------- ---------
Total Liabilities and Shareholders' Equity $ 407,548 $ 261,115
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Right Management Consultants, Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Earnings per Share Data)
(Unaudited)
Three Months Ended June 30,
2002 2001
----- ----
Revenue:
Company office revenue $ 124,032 $ 77,625
Affiliate royalties 1,792 2,117
-------------------- --------------------
Total revenue 125,824 79,742
-------------------- --------------------
Expenses:
Consultants' compensation 48,486 30,010
Office administration 32,179 19,905
Office sales and consulting support 9,635 6,591
Office depreciation 2,149 1,844
General sales and administration 7,933 8,157
Depreciation and amortization 2,529 2,248
-------------------- --------------------
Total expenses 102,911 68,755
-------------------- --------------------
Income from operations 22,913 10,987
Net interest expense 1,318 931
-------------------- --------------------
Income before income taxes 21,595 10,056
Provision for income taxes 10,427 4,530
Minority interest in net income of subsidiaries 584 154
-------------------- --------------------
Net income $ 10,584 $ 5,372
==================== ====================
Basic earnings per share $ 0.70 $ 0.38
==================== ====================
Diluted earnings per share $ 0.65 $ 0.35
==================== ====================
Basic weighted average shares outstanding 15,076,000 14,223,000
==================== ====================
Diluted weighted average shares outstanding 16,325,000 15,186,000
==================== ====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Right Management Consultants, Inc.
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Earnings per Share Data)
(Unaudited)
Six Months Ended June 30,
2002 2001
----- ----
Revenue:
Company office revenue $ 219,371 $ 137,350
Affiliate royalties 3,716 3,551
---------------------- ---------------------
Total revenue 223,087 140,901
---------------------- ---------------------
Expenses:
Consultants' compensation 86,544 55,038
Office administration 54,404 36,931
Office sales and consulting support 16,026 10,869
Office depreciation 3,948 3,570
General sales and administration 18,594 12,345
Depreciation and amortization 3,475 4,283
---------------------- ---------------------
Total expenses 182,991 123,036
---------------------- ---------------------
Income from operations 40,096 17,865
Net interest expense 1,885 1,721
---------------------- ---------------------
Income before income taxes 38,211 16,144
Provision for income taxes 17,577 7,199
Minority interest in net income of subsidiaries 838 414
---------------------- ---------------------
Net income $ 19,796 $ 8,531
====================== =====================
Basic earnings per share $ 1.32 $ 0.60
====================== =====================
Diluted earnings per share $ 1.22 $ 0.57
====================== =====================
Basic weighted average shares outstanding 15,034,000 14,160,000
====================== =====================
Diluted weighted average shares outstanding 16,236,000 14,978,000
====================== =====================
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Right Management Consultants, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
--------- ---------
Operating Activities:
Net income $ 19,796 $ 8,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,410 7,853
Deferred income taxes 27 (84)
Minority interest in net income of subsidiaries 838 414
Provision for doubtful accounts 1,752 605
Tax benefit from the exercise of stock options 867 418
Stock option compensation 42 113
Foreign exchange gains and losses on transactions (698) 161
Other non-cash items (66) 336
Changes in operating accounts, net of acquired businesses:
Accounts receivable, trade and from Affiliates 17,622 (24,330)
Income taxes receivable -- 3,253
Prepaid expenses and other assets (3,316) 2,688
Accounts payable (1,454) (657)
Accrued incentive compensation, benefits and other expenses (15,579) 5,751
Fees payable to Affiliates and other liabilities (1,096) 2,165
Deferred revenue (5,258) 15,758
--------- ---------
Net cash provided by operating activities 20,887 22,975
--------- ---------
Investing Activities:
Purchase of property and equipment (8,024) (7,990)
Acquisitions, net of cash acquired (106,519) (7,746)
Increase in cash surrender value of
company-owned life insurance (586) --
--------- ---------
Net cash utilized in investing activities (115,129) (15,736)
--------- ---------
Financing Activities:
Borrowings under credit agreements 135,432 8,359
Payment of long-term debt and other obligations (45,806) (10,968)
Termination value of swap agreements 358 --
Debt commitment fees and other fees related to the New Credit Agreement (3,278) --
Proceeds from stock issuances from the exercise of stock options 1,232 1,621
--------- ---------
Net cash provided by (utilized in) financing activities 87,938 (988)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 743 (890)
(Decrease) increase in cash and cash equivalents (5,561) 5,361
Cash and cash equivalents, beginning of period 48,655 13,157
--------- ---------
Cash and cash equivalents, end of period $ 43,094 $ 18,518
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnote disclosures necessary for a fair presentation of
consolidated financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the financial statements
and footnotes thereto included in Right Management Consultants, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 2001.
Principles of Consolidation
The consolidated financial statements include the accounts of Right Management
Consultants, Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Revenue Recognition
The Company recognizes revenue under the provisions of Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101
expresses the views of the Securities and Exchange Commission in applying
accounting principles generally accepted in the United States to revenue
recognition for certain transactions. Under SAB No. 101, the Company recognizes
all career transition revenue on a straight-line basis over the average length
of time for candidates to find jobs based on statistically valid data for the
specific type of program. If statistically valid data is not available, then the
Company recognizes career transition revenue on a straight-line basis over the
nominal life of the agreements. The difference between the amount billed for
career transition services and the amount recognized as revenue is carried on
the Company's balance sheet as deferred revenue.
For the Company's organizational consulting line of business, SAB No. 101 has
minimal impact on its revenue recognition policy. The Company generally
recognizes consulting contract revenue upon the performance of its obligations
under consulting service contracts.
6
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. At the time of an acquisition, using
the criteria of SFAS No. 141, the Company will identify and recognize intangible
assets separate from goodwill. The Company has applied SFAS No. 141 in its
preliminary allocation of the purchase price for Coutts Consulting Group Limited
("Coutts") (see Note D). Accordingly, based on management's estimates, a value
of $23,970,000 was allocated to amortizable intangible assets, primarily client
lists.
Also effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 also establishes a new method of testing
goodwill for impairment and requires this testing on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the
fair value of a reporting unit below its carrying value. Pursuant to SFAS No.
142, the Company discontinued the amortization of its goodwill as of January 1,
2002, and completed its transitional impairment testing of its goodwill and
found no indication of impairment. The Company is in the process of performing
impairment testing of its goodwill, including new acquisitions. Impairment
testing of goodwill may result in future, periodic write-downs of its goodwill.
The Company's net income and earnings per share for the three and six months
ended June 30, 2002 and 2001, adjusted to exclude goodwill amortization, was as
follows:
(Dollars in Thousands Except Per Share Data)
Three Months Six Months
------------- ----------
Ended June 30, Ended June 30,
------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net income as reported $ 10,584 $ 5,372 $ 19,796 $ 8,531
Add back amortization of
goodwill, net of tax -- 1,106 -- 2,148
---------- --------- ---------- ----------
Adjusted net income $ 10,584 $ 6,478 $ 19,796 $ 10,679
========== ========= ========== ==========
Basic earnings per share as reported $ 0.70 $ 0.38 $ 1.32 $ 0.60
Amortization of goodwill, net of tax -- 0.08 -- $ 0.15
---------- --------- ---------- ----------
Adjusted basic earnings per share $ 0.70 $ 0.46 $ 1.32 $ 0.75
========== ========= ========== ==========
Diluted earnings per share as reported $ 0.65 $ 0.35 $ 1.22 $ 0.57
Amortization of goodwill, net of tax -- 0.07 -- $ 0.14
---------- --------- ---------- ----------
Adjusted diluted earnings per share $ 0.65 $ 0.42 $ 1.22 $ 0.71
========== ========= ========== ==========
7
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain amounts have been reclassified in the prior year's Condensed
Consolidated Statement of Cash Flows to conform with the current year
presentation.
NOTE B - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company accounts for derivative instruments and hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133." The Company
recognizes derivatives on the balance sheet at fair value.
During January 2002, the Company had an interest rate swap agreement in place,
designated as a cash flow derivative, to effectively convert variable-rate debt
to fixed-rate debt. This swap agreement entailed the exchange of fixed- and
floating-rate interest payments periodically over the life of the agreement.
Changes in the fair value of this cash flow derivative were recorded in
accumulated other comprehensive income.
Also during January 2002, the Company had two separate cross currency interest
rate swap agreements in place in order to hedge the foreign currency risks
associated with the Company's 71% ownership in Right WayStation, Inc. ("Right
WayStation"), its Japanese subsidiary, and to hedge against fluctuations in
interest rates. In accounting for one of these swap agreements, the Company
separated it into two components, a foreign currency derivative and an interest
rate cash flow derivative. Changes in the foreign currency derivative and in the
fair value of this cash flow derivative were recorded in accumulated other
comprehensive income. Changes in the fair value of the other cross currency
interest rate swap agreement were recorded directly to the current period
earnings, as it did not qualify as a cash flow derivative.
During the first quarter 2002, the Company terminated its fixed interest rate
swap agreement and its cross currency interest rate swap agreements. As of June
30, 2002 the Company had no derivative or hedging instruments. (See Note E.)
The amounts recorded to accumulated other comprehensive income and earnings,
related to the changes in the fair value of the fixed interest rate swap
agreement and the cross currency interest rate swap agreements, for the period
during 2002 that the Company had these agreements in place, were not
significant.
8
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE C - ACCUMULATED OTHER COMPREHENSIVE INCOME AND COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) are as follows
(dollars in thousands):
Currency Derivative and
Translation Hedging Instruments
Adjustments Gains (Losses) Total
Balance at December 31, 2001 $(7,625) $ (806) $(8,431)
Change in fair value of derivatives
and hedging instruments,
net of tax benefit of $25 -- (38) (38)
Termination of derivatives
and hedging instruments (661) 844 183
Currency translation adjustment 6,827 -- 6,827
------- ------- -------
Balance at June 30, 2002 $(1,459) $ -- $(1,459)
======= ======= =======
During the first quarter 2002, the effect of the Company's termination of its
derivative and hedging instruments resulted in a charge to income of $183,000,
included in general sales and administration expense for the six months ended
June 30, 2002 for the deferred losses related to the cumulative change in fair
value of these cash flow derivatives over time.
The earnings associated with the Company's investment in its foreign
subsidiaries are considered to be permanently invested and no provision for U.S.
federal and state income taxes has been made on these foreign currency
translation adjustments. Total comprehensive income, including the components of
accumulated other comprehensive income, for the three months ended June 30, 2002
and 2001 was $17,185,000 and $4,516,000, respectively. Total comprehensive
income, including the components of accumulated other comprehensive income, for
the six months ended June 30, 2002 and 2001 was $26,768,000 and $3,671,000,
respectively. Total comprehensive income in 2002 reflects increased currency
exchange rate fluctuations resulting from the weakening U.S. dollar as compared
to foreign currencies.
NOTE D - ACQUISITIONS
Effective January 1, 2002, the Company acquired for cash an additional 20%
interest in its Japanese subsidiary, Right WayStation, increasing its total
interest in the subsidiary to 71%. This additional 20% interest was purchased
from Keiichi Iwao, the founder of Right WayStation and, at that time, a Director
of the Company. The purchase price totaled $3,285,000.
On March 22, 2002 the Company completed its acquisition of all of the shares of
Atlas Group Holdings Limited, the parent company of Coutts. Coutts is a London
based career transition and organizational consulting firm with operations in
Europe, Japan and Canada. The transaction was effective March 22, 2002.
9
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - ACQUISITIONS (Continued)
The consideration paid for Coutts, including costs of the transaction, was
approximately $105,574,000. Of this amount, $53,808,000 was paid in cash to the
sellers and an aggregate of $5,432,000 was paid by the issuance of notes by one
of the Company's subsidiaries to four individual sellers of Coutts' parent
company shares. The notes are payable in seven years and bear interest at the
rate of 4% per annum. Transaction costs, including legal fees and other
professional fees related to the transaction totaled approximately $1,543,000.
The Company also funded the repayment of approximately $44,791,000 of the
pre-existing debt of Coutts' parent company. The purchase price allocation for
this acquisition is tentative and is based upon information available at this
time, and is subject to change, including the valuation of Coutts' amortizable
intangibles. The Company acquired $4,383,000 in cash and cash equivalents in
this acquisition.
Coutts owned a majority interest of 89% in its Japanese subsidiary at the time
the Company acquired Coutts. In June 2002, the Company increased its ownership
in the Coutts Japanese subsidiary to 93% for a purchase price of approximately
$810,000. As part of the integration of Coutts, the Company has merged its two
majority-owned subsidiaries in Japan, Right WayStation and the Coutts Japanese
subsidiary, effective July 1, 2002, resulting in the Company's ownership of
approximately 82% of the combined entity named Right Management Consultants -
Japan.
During the latter portion of June, the Company completed its acquisition of the
outstanding stock of five of Coutts' franchises in Canada, trading as "Murray
Axmith", with an effective date of July 1, 2002 for financial reporting purposes
for a combination of cash and future defined contingent payments. The total
upfront cash paid as part of the purchase price for these acquisitions was
approximately $3,542,000. In June 2002, $976,000 of this cash payment was paid
and the remaining $2,566,000 was paid in July 2002.
For the six months ended June 30, 2002, the Company paid approximately $497,000
in earnouts related to acquisitions made in prior years.
10
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - ACQUISITIONS (Continued)
The following table represents the assets acquired and liabilities assumed to
arrive at net cash paid for the acquisitions discussed above, as well as for
earnout payments related to prior acquisitions, for the six months ended June
30, 2002 and 2001. The portion of the purchase price of $976,000 that was paid
in June for the purchase of Coutts' Canadian franchises effective July 1, 2002,
is included in goodwill below.
(Dollars in Thousands)
Six Months Ended June 30,
2002 2001
---- ----
Assets acquired:
Accounts receivable $ 19,550 $ 2,479
Prepaid expenses and other assets 5,739 3,957
Fixed assets 3,645 2,452
Non-amortizable goodwill 97,268 15,219
Amortizable intangibles 23,970 1,650
Additional equity acquired in Japan 1,704 --
Other non-current -- 2,274
--------- ---------
151,876 28,031
Less liabilities acquired:
Current portion of long-term debt (143) (1,054)
Accounts payable and accrued expenses (18,094) (3,580)
Assumption of incomplete contracts (23,436) (3,151)
Long-term debt (192) (1,010)
Deferred compensation and other long-term liabilities (480) --
--------- ---------
(42,345) (8,795)
Less payments made in 2000 for acquisitions effective in 2001 -- (8,081)
Less Common Shares from treasury shares issued for acquisition -- (440)
Less minority shareholder interests in Japan (3,012) (2,969)
--------- ---------
Cash paid for acquisitions, net of cash acquired $ 106,519 $ 7,746
========= =========
As of June 30, 2002, the Company estimates that the amount of future contingent
earnout payments related to acquisitions will range between $9,000,000 and
$12,000,000 in total.
11
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - ACQUISITIONS (Continued)
The unaudited pro-forma results of operations for the three and six months ended
June 30, 2002 and 2001, reflecting the combined results of the Company and
acquisitions made subsequent to December 31, 2000, (but excluding the
acquisitions of Coutts' Canadian franchises) as if the acquisitions had been
consummated at the beginning of each period presented, and assuming no
amortization of goodwill from those acquisitions in 2001, are as follows:
(Dollars in Thousands Except Earnings per Share Data)
Three Months Six Months
------------ ----------
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Revenue $ 125,824 $ 105,417 $ 248,870 $ 191,245
========== ========== ========== ===========
Income before income taxes $ 21,595 $ 11,149 $ 39,220 $ 15,235
========== ========== ========== ===========
Net income $ 10,706 $ 6,029 $ 20,466 $ 8,143
========== ========== ========== ===========
Diluted earnings per share $ 0.66 $ 0.40 $ 1.26 $ 0.54
========== ========== ========== ===========
Diluted weighted average
number of shares outstanding 16,325,000 15,186,000 16,236,000 14,978,000
========== ========== ========== ===========
The pro-forma amortization of goodwill for 2001 for the acquisitions made
subsequent to December 31, 2000 (but excluding the acquisitions of Coutts'
Canadian franchises) would have been $1,649,000 and $3,374,000 for the three and
six months ended June 30, 2001, respectively. Had the pro-forma results of
operations above for 2001 assumed this amortization of goodwill, the net income
and diluted earnings per share would have been $5,122,000 and $0.34,
respectively, for the three months ended June 30, 2001 and the net income and
diluted earnings per share would have been $6,273,000 and $0.42, respectively,
for the six months ended June 30, 2001.
NOTE E - DEBT AND OTHER OBLIGATIONS
Effective January 25, 2002, the Company terminated its fixed interest rate swap
agreement, with an aggregate notional principal of $30,000,000. Effective this
same day, the Company also terminated its two cross currency interest rate swap
agreements related to its investment in Right WayStation, one with an aggregate
notional principal of $8,000,000 and the other for $3,000,000. The Company
received a net cash amount of $358,000 for the termination value and accrued
interest related to these swap agreements. The Company also recorded a charge to
income of $183,000 related to the deferred losses on the changes in the fair
value of these cash flow derivatives, which had previously been recorded to
accumulated other comprehensive income. (See Note C.)
12
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - DEBT AND OTHER OBLIGATIONS (Continued)
On March 22, 2002, in connection with the Company's acquisition of Coutts, the
Company entered into a Credit Agreement with a syndicate of banks including
First Union National Bank, as Administrative Agent (the "New Credit Agreement").
The New Credit Agreement provides for a maximum $180,000,000 of total
borrowings, consisting of a revolving loan commitment of $90,000,000 (the
"Revolving Loan"), and a term loan of $90,000,000 (the "Term Loan"). The
Revolving Loan and Term Loan are together referred to herein as the "Loans". The
Loans require the Company to meet certain financial and non-financial covenants
as defined in the New Credit Agreement.
Initial proceeds of the Loans of $130,000,000 together with Company cash were
used to finance the Coutts acquisition and repay the Company's outstanding
indebtedness of $41,038,000 under its previous credit agreement which has been
terminated. The Company may borrow, repay and re-borrow funds during the
five-year term of the Revolving Loan, subject to the financial covenants of the
New Credit Agreement. As of June 30, 2002, approximately $28,629,000 remained
available under the Revolving Loan. Future borrowings under the Revolving Loan
will be used to finance working capital and other general corporate purposes,
including permitted acquisitions. The Term Loan provides for equal, mandatory
principal repayments made quarterly over its five-year term, and provides for
additional voluntary prepayments during its term as defined in the New Credit
Agreement. During the second quarter 2002, the Company made a mandatory
principal payment of $4,500,000 under the Term Loan. The principal balance
outstanding under the Loans as of June 30, 2002 was $125,500,000, of which
$18,000,000 was included in the current portion of long term debt based on the
mandatory principal payments.
The Loans are secured by a pledge of substantially all of the tangible and
intangible assets of the Company, including the pledge of shares of certain
principal subsidiaries. Under the New Credit Agreement, future acquisitions may
be subject to certain dollar amount limits. As of June 30, 2002, the annual
limit for permitted acquisitions was $15,000,000, which excludes the July 1,
2002 acquisitions of Coutts' Canadian franchises.
Interest on the Loans is variable and will be determined by London interbank
offered rates (LIBOR) plus a margin ranging from 1.50% to 2.25% based on the
relationship of funded debt to the Company's EBITDA, as defined in the New
Credit Agreement. Alternatively, the interest on the Loans will be determined by
the greater of prime or the Federal Funds Effective Rate plus one half of 1%
plus a margin of up to 0.75% based on the relationship of funded debt to the
Company's EBITDA, as defined in the New Credit Agreement. The weighted average
interest rate on the loans as of June 30, 2002 was 4.13%.
In connection with the acquisition of Coutts, the Company issued loan notes for
an aggregate of $5,432,000, and recorded the notes in the current portion of
long-term debt. The notes are payable in seven years and bear interest at the
rate of 4% per annum. Provisions of these loan notes allow the note-holders to
redeem the notes after six months of the issuance date of the notes. (See Note
D.)
13
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - EARNINGS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share" to calculate its
earnings per share ("EPS"). The calculation of EPS under SFAS No. 128 for June
30, 2002 and 2001 are detailed as follows:
For the three months For the three months
ended June 30, 2002 ended June 30, 2001
Income Shares EPS Income Shares EPS
Basic EPS:
Net income $10,584,000 15,076,000 $0.70 $5,372,000 14,223,000 $0.38
===== =====
Impact of options -- 1,249,000 -- 963,000
----------- ---------- ---------- ----------
Diluted EPS:
Net income $10,584,000 16,325,000 $0.65 $5,372,000 15,186,000 $0.35
=========== ========== ===== ========== ========== =====
For the six months For the six months
ended June 30, 2002 ended June 30, 2001
Income Shares EPS Income Shares EPS
Basic EPS:
Net income $19,796,000 15,034,000 $1.32 $8,531,000 14,160,000 $0.60
===== =====
Impact of options -- 1,202,000 -- 818,000
----------- ---------- ---------- ----------
Diluted EPS:
Net income $19,796,000 16,236,000 $1.22 $8,531,000 14,978,000 $0.57
=========== ========== ===== ========== ========== =====
For the three and six months ended June 30, 2002, outstanding options to
purchase 17,500 shares of Company Common Shares at an option exercise price of
$26.40 per share were excluded from the computation of diluted EPS, as the
exercise price of these options was greater than the average market price of the
Common Shares. For the three and six months ended June 30, 2001, outstanding
options to purchase 9,000 shares of Company Common Shares at option exercise
prices ranging from $12.67 to $14.22 per share were excluded from the
computation of diluted EPS, as the exercise price of these options was greater
than the average market price of the Common Shares.
NOTE G - SEGMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," provides standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Company's operations are segregated into two lines of business: career
transition and organizational consulting. The Company operates these lines of
business across the geographic areas of the United States, Canada, Europe,
Asia-Pacific, Japan and Brazil. These operations
14
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - SEGMENTS (Continued)
offer different services and require different marketing strategies. Career
transition offers support for organizations separating employees, including
assistance in handling the initial difficulties of termination, identifying
continuing career goals and options, and aiding in developing skills for the
search for a new job. Organizational consulting offers companies assistance in
the areas of organizational performance, leadership development and talent
management. With more than 300 service locations worldwide, the Company manages
operations by geographic areas to enhance global growth and establish major
accounts with global clients. The Company primarily delivers its services to
mid-size and large companies, with no concentration in specific companies or
industries.
Summarized operations of each of the Company's geographic areas as of June 30,
2002 and 2001 and for the three and six months then ended are presented below.
(Dollars in Thousands)
Asia-
June 30, 2002 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------- ---- ------ ------ ------- ----- ------ ------------
Identifiable assets $ 124,470 $ 21,252 $198,944 $15,068 $45,584 $2,230 $407,548
--------- -------- -------- ------- ------- ------ --------
June 30, 2001
- -------------
Identifiable assets 116,374 14,208 35,437 13,282 21,199 1,899 202,399
--------- -------- -------- ------- ------- ------ --------
For the three
months ended
June 30, 2002
- -------------
Revenue 61,067 6,502 37,621 5,009 14,844 781 125,824
--------- -------- -------- ------- ------- ------ --------
Operating
income (1) 12,329 2,191 3,353 1,230 3,699 111 22,913
--------- -------- -------- ------- ------- ------ --------
Depreciation and
amortization 2,112 162 1,695 142 548 19 4,678
--------- -------- -------- ------- ------- ------ --------
Capital expenditures (2) 2,966 28 637 96 267 123 4,117
--------- -------- -------- ------- ------- ------ --------
(1) The operating income reported for the U. S. segment includes total general
sales and administration expenses and applicable depreciation and
amortization expenses reported on the Condensed Consolidated Statements of
Operations.
(2) The capital expenditures reported excludes fixed assets acquired from
acquisitions.
15
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - SEGMENTS (Continued)
For the three
months ended Asia-
June 30, 2001 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------- ---- ------ ------ ------- ----- ------ ------------
Revenue $53,024 $6,660 $9,491 $3,784 $6,153 $ 630 $79,742
------- ------ ------ ------ ------ ----- -------
Operating
income (loss) (1) 5,425 2,946 1,054 736 850 (24) 10,987
------- ------ ------ ------ ------ ----- -------
Depreciation and
amortization 2,599 243 567 329 340 14 4,092
------- ------ ------ ------ ------ ----- -------
Capital expenditures (2) 4,363 125 99 51 342 1 4,981
------- ------ ------ ------ ------ ----- -------
For the six
months ended
June 30, 2002
- -------------
Revenue 125,405 12,649 52,825 9,734 20,653 1,821 223,087
------- ------ ------ ------ ------ ----- -------
Operating
income (1) 23,466 4,572 4,917 2,443 4,156 542 40,096
------- ------ ------ ------ ------ ----- -------
Depreciation and
amortization 4,017 241 2,035 326 767 37 7,423
------- ------ ------ ------ ------ ----- -------
Capital expenditures (2) 5,012 211 1,846 244 370 241 7,924
------- ------ ------ ------ ------ ----- -------
For the six
months ended
June 30, 2001
- -------------
Revenue 93,396 10,346 18,046 7,149 10,839 1,125 140,901
------- ------ ------ ------ ------ ----- -------
Operating
income (loss) (1) 10,154 3,531 1,852 1,276 1,126 (74) 17,865
------- ------ ------ ------ ------ ----- -------
Depreciation and
amortization 5,015 485 1,037 646 618 52 7,853
------- ------ ------ ------ ------ ----- -------
Capital expenditures (2) 7,087 245 215 82 351 10 7,990
------- ------ ------ ------ ------ ----- -------
(1) The operating income reported for the U. S. segment includes total general
sales and administration expenses and applicable depreciation and
amortization expenses reported on the Condensed Consolidated Statements of
Operations.
(2) The capital expenditures reported excludes fixed assets acquired from
acquisitions.
16
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - SEGMENTS (Continued)
Revenues and expenses of the Company's lines of business for Company offices,
excluding the total general sales and administration expenses and depreciation
and amortization expenses ("G & A Expenses") and Affiliate royalties, are
evaluated by management. The Company does not measure assets by lines of
business as assets are generally not distinctive to a particular line of
business and they are not fundamental in assessing segment performance. Revenue
and Company office operating income for each of the Company's lines of business
in the aggregate for the three and six months ended June 30, 2002 and 2001 are
as follows:
(Dollars in Thousands)
For the three months For the six months
ended June 30, ended June 30,
Career Career
Transition Consulting Consolidated Transition Consulting Consolidated
2002
----
Company office
revenue $104,589 $ 19,443 $124,032 $186,463 $ 32,908 $219,371
======== ======== ======== ======== ======== ========
Company office
operating income 29,521 2,062 31,583 56,581 1,868 58,449
======== ======== ======== ======== ======== ========
2001
----
Company office
revenue 64,753 12,872 77,625 111,161 26,189 137,350
======== ======== ======== ======== ======== ========
Company office
operating income 19,192 83 19,275 29,986 956 30,942
======== ======== ======== ======== ======== ========
NOTE H - SUBSEQUENT EVENT
Effective July 1, 2002, the Company acquired the outstanding shares of
Assessment and Development Consult Holding B.V. ("ADC Consulting"), an
organizational consulting firm specializing in assessment, competency and
performance management, with three offices in the Netherlands. The transaction
had a purchase price of approximately $7,382,000 and was funded with cash from
operations. In addition to the purchase price, the Company has committed to
paying $1,000,000 in retention bonuses to key personnel of ADC Consulting over
three years.
17
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are described in Note A in the
Notes to the Consolidated Financial Statements included in the Company's Form
10-K as of December 31, 2001, and are supplemented with Note A in the Notes to
the Condensed Consolidated Financial Statements in this Form 10-Q. Some of these
significant accounting policies require management to make difficult, subjective
or complex judgments or estimates. Management believes the Company's most
critical accounting policies include revenue recognition and estimates used in
applying purchase accounting and in testing the impairment of its goodwill.
Revenue Recognition
- -------------------
The Company recognizes revenue in its career transition line of business under
the provisions of SAB No. 101. SAB No. 101 generally provides that revenue for
time-based services be recognized over the average length of the services being
provided. For its organizational consulting line of business, the Company
generally bills and recognizes consulting contract revenue upon the performance
of its obligations under consulting service contracts. Therefore, organizational
consulting services typically do not generate deferred revenue. For its career
transition line of business, the Company recognizes revenue on a straight-line
basis over the average length of time it takes candidates to find jobs based on
statistically valid data for the specific type of program. If statistically
valid data is not available, then the Company recognizes career transition
revenue on a straight-line basis over the nominal life of the agreements.
In general, the Company bills for its services in advance at the start of the
service, resulting initially in deferred revenue. The Company then recognizes
this deferred revenue into income over the average period its programs remain
open. This average program period is based on comprehensive statistics
maintained by the Company. The Company reviews on a quarterly basis the
statistics surrounding the current length of its programs, and updates the
periods it uses to recognize its deferred revenue prospectively. Historically,
the average length of programs has not changed significantly from quarter to
quarter.
The significant factors impacting deferred revenue are the type of programs
sold, the level of current billings for new programs and projects, and the
average length of its programs. Over time, an increasing volume of new billings
will result in higher amounts of deferred revenue, while decreasing levels of
new billings will result in lower amounts of deferred revenue. Similarly, an
increase in the length of time programs remain open will decrease the
recognition of deferred revenue into income, while a decrease in the length of
time programs remain open will increase the recognition of deferred revenue into
income.
Valuation of Intangible Assets and Goodwill
- -------------------------------------------
SFAS No. 141, "Business Combinations," requires the use of the purchase method
of accounting for all business combinations and broadens the criteria for
recording intangible assets separate
18
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
from goodwill. SFAS No. 142, "Goodwill and Other Intangible Assets," requires
that goodwill and other intangibles determined to have an indefinite life are no
longer to be amortized but are to be tested for impairment at least annually.
The Company has applied SFAS No. 141 in its preliminary allocation of the
purchase price for Coutts. Accordingly, a value of $23,970,000 was estimated and
allocated to amortizable intangible assets, primarily client lists. The
valuation of these amortizable intangible assets required the Company to use its
judgement. Non-amortizable goodwill of $93,893,000 related to the acquisition of
Coutts and the purchase of additional ownership in its Japanese subsidiary was
also recorded. The purchase price allocation for this acquisition is tentative
and is based upon information available at this time, and is subject to change,
including the valuation of Coutts' amortizable intangibles. The annual
impairment testing required by SFAS No. 142 will require the Company to use its
judgement and estimates about market conditions and operational performance of
acquired businesses.
Results of Operations
- ---------------------
The following table sets forth results of operations for the three and six
months ended June 30, 2002 and 2001. This discussion and analysis should be read
together with the condensed consolidated financial statements and accompanying
notes thereto.
(Dollars in Thousands)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Company office revenue $124,032 $77,625 $219,371 $137,350
Company office expenses 92,449 58,350 160,922 106,408
-------- ------- -------- -------
Company office operating income 31,583 19,275 58,449 30,942
Affiliate royalties 1,792 2,117 3,716 3,551
General sales and administration 7,933 8,157 18,594 12,345
Depreciation and amortization 2,529 2,248 3,475 4,283
Interest expense, net 1,318 931 1,885 1,721
-------- ------- -------- -------
Income before income taxes 21,595 10,056 38,211 16,144
Provision for income taxes 10,427 4,530 17,577 7,199
Minority interest in net
income of subsidiaries 584 154 838 414
-------- ------- -------- -------
Net income $ 10,584 $ 5,372 $ 19,796 $ 8,531
======== ======= ======== =======
Second Quarter 2002 Compared to Second Quarter 2001
- ---------------------------------------------------
For the three months ended June 30, 2002, revenue generated by Company offices
increased by 60%, or $46,407,000, from the corresponding quarter in 2001. This
increase is due to $31,770,000 in incremental revenues from acquisitions
consummated subsequent to the second quarter 2001, and to a same office revenue
increase of 19%, or $14,637,000.
Career transition revenue generated by Company offices for the three months
ended June 30, 2002, increased by 62%, or $39,836,000, from the same period in
the prior year. This career transition revenue increase is due to $26,909,000 in
incremental revenues from acquisitions
19
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
and a same office revenue increase of 20%, or $12,927,000. The same office
revenue increase reflects a higher volume of business across all geographic
locations, as the demand for career transition services escalates due to
corporations downsizing and restructuring in a weak economy.
Organizational consulting revenue generated by Company offices for the three
months ended June 30, 2002, increased by 51%, or $6,571,000, from the same
period in the prior year. This increase includes $4,861,000 in incremental
revenues from acquisitions, a majority of which was attributable to Coutts'
European operations. The organizational consulting same office revenue increased
13%, or $1,710,000.
For the three months ended June 30, 2002, Affiliate royalties decreased 15%, or
$325,000, from the corresponding quarter in 2001.
For the three months ended June 30, 2002, total Company office expenses
increased 58% or $34,099,000, from the corresponding quarter in 2001. This
increase is due primarily to incremental costs from acquisitions consummated
subsequent to the second quarter 2001, totaling $27,552,000 and to increases in
outside staffing costs to deliver services, salaries of sales personnel and rent
expense.
Company office operating income for the three months ended June 30, 2002 was
$31,583,000 with a Company office margin of 25%, compared to operating income of
$19,275,000 and a margin of 25% for the same quarter in the prior year. The
increase in Company office operating income is primarily due to the increase in
the volume of career transition revenues in 2002 as compared to 2001. Higher
profit margins in the organizational consulting business and incremental profits
of $4,218,000 from acquisitions consummated subsequent to the second quarter
2001, also contributed to this increase.
For the three months ended June 30, 2002, G & A Expenses were flat as compared
to the same quarter in the previous year. These expenses as a percentage of
total revenue were 8% and 13% for the second quarter 2002 and 2001,
respectively. The G & A Expenses in the current year for the second quarter
include an increase in incentive costs, as the Company is exceeding it's
internal operating goals, and a decrease in translation expense resulting from
the weakening U.S. dollar relative to foreign currencies.
Net interest expense for the three months ended June 30, 2002 increased $387,000
as compared to the same period in the prior year. The increase is due to a
higher principal balance in the current year, resulting from borrowings to fund
the acquisition of Coutts, offset by lower effective interest rates.
20
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
The minority interest in net income of subsidiaries for the three months ended
June 30, 2002 was $584,000 for the minority interests related to Right
WayStation and Coutts in Japan, Saad Fellipelli and Coaching in Brazil and
Glenoit SL in Spain. The minority interest in net income of subsidiaries for the
three months ended June 30, 2001 was $154,000 for the minority interests related
to Right WayStation in Japan and Saad Fellipelli and Coaching in Brazil. Despite
the Company's larger ownership in the current year for Right WayStation,
minority interest expense related to Right WayStation increased due to higher
net income in that geography.
The Company's effective tax rates for the three months ended June 30, 2002 and
2001 were 48% and 45%, respectively. The higher tax rate in 2002 is due to
non-deductible amortization and compensation in the current year.
First Six Months of 2002 Compared to the First Six Months of 2001
- -----------------------------------------------------------------
For the six months ended, June 30, 2002, revenue generated by Company offices
increased 60% or $82,021,000, from the corresponding period in 2001. Incremental
revenues from acquisitions consummated subsequent to the second quarter 2001
totaled $34,818,000, and same office revenue increased 34% or $47,203,000 for
the six months ended June 30, 2002, as compared to the corresponding period in
2001.
Career transition revenue generated by Company offices for the six months ended
June 30, 2002, increased by 68%, or $75,302,000, from the same period in the
prior year. This career transition revenue increase is due to $28,932,000 in
incremental revenues from acquisitions and a same office revenue increase of
42%, or $46,370,000. The same office revenue increase reflects a higher volume
of business across all geographic locations.
Organizational consulting revenue generated by Company offices for the six
months ended June 30, 2002, increased by 26%, or $6,719,000, from the same
period in the prior year. This increase includes $5,886,000 in incremental
revenues from acquisitions, a majority of which was attributable to Coutts'
European operations. The organizational consulting same office revenue increased
3%, or $833,000.
For the six months ended June 30, 2002, Affiliate royalties increased 5%, or
$165,000, from the corresponding period in 2001.
For the six months ended June 30, 2002, total Company office expenses increased
51% or $54,514,000 from the corresponding period in 2001. This increase is due
primarily to incremental costs from acquisitions consummated subsequent to the
second quarter 2001, totaling $31,074,000 and to increases in incentive costs,
outside staffing costs to deliver services, payroll costs, Company matches on
employee benefit plans and rent expense.
21
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Company office operating income for the six months ended June 30, 2002 was
$58,449,000 with a Company office margin of 27%, compared to operating income of
$30,942,000 and a margin of 23% for the same period in the prior year. The
increase in Company office operating income is due to the aforementioned
increase in career transition revenues in 2002 as compared to 2001, leveraged
across the Company's fixed and managed variable cost structure. This increase is
also due to incremental profits from acquisitions consummated subsequent to
December 31, 2000 of $3,746,000.
For the six months ended June 30, 2002, G & A Expenses increased $5,441,000 from
the same period in the prior year. This increase in 2002 is due primarily to an
increase in incentive costs, the provision for bad debts, Company matches on
employee benefit plans, and payroll costs all of which is offset by a decrease
in amortization expense due to a change in accounting rules (See Note A in the
Notes to the Condensed Consolidated Financial Statements) and a decrease in
translation expense resulting from the weakening U.S. dollar relative to foreign
currencies. G & A Expenses as a percentage of total revenue were 10% and 12% for
the six months ended June 30, 2002 and 2001, respectively.
Net interest expense for the six months ended June 30, 2002 increased $164,000
as compared to the same period in the prior year. The increase is due to the
aforementioned higher principal balance in the current year, resulting from
borrowings to fund the acquisition of Coutts, offset by lower effective interest
rates in the current year.
The minority interest in net income of subsidiaries for the six months ended
June 30, 2002 was $838,000 for the minority interests related to Right
WayStation and Coutts in Japan, Saad Fellipelli and Coaching in Brazil and
Glenoit SL in Spain. The minority interest in net income of subsidiaries for the
six months ended June 30, 2001 was $414,000 for the minority interests related
to Right WayStation in Japan and Saad Fellipelli and Coaching in Brazil. The
increase is attributable to improved operating results from these entities and
the addition of Coutts in Japan.
The Company's effective tax rates for the six months ended June 30, 2002 and
2001 were consistent at 46% and 45%, respectively.
Capital Resources and Liquidity
- -------------------------------
As of June 30, 2002 and December 31, 2001, the Company had cash and cash
equivalents of $43,094,000 and $48,655,000, respectively. The decrease in cash
is primarily a result of paying incentive bonuses to employees in the first
quarter 2002 that related to 2001 performance and the funding of a portion of
the Coutts acquisition. As of June 30, 2002, the Company had a working capital
deficit of $28,837,000 due principally to $82,540,000 of deferred revenue and
$24,071,000 of current debt. Deferred revenue is eventually recognized into
income over time, with no cash utilization. At June 30, 2001, the Company had
positive working capital of $10,953,000.
22
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Net cash provided by operating activities amounted to $20,887,000 and
$22,975,000 for the six months ended June 30, 2002 and 2001, respectively. The
decrease in cash provided by operating activities is a result of the
aforementioned payment of 2001 incentive bonuses to employees in the first
quarter 2002, that were higher than the incentive bonuses paid in the comparable
period last year, resulting from the Company exceeding operating goals for 2001.
This decrease is offset by higher net income and improved accounts receivable
collections in the current year.
Net cash utilized in investing activities amounted to $115,129,000 and
$15,736,000 for the six months ended June 30, 2002 and 2001, respectively. This
increased investment activity is primarily the result of the acquisition of
Coutts which solidifies the Company's position as a leading provider of career
transition and organizational consulting services with the addition of
significant operations in the United Kingdom, France, Belgium and Japan. In
addition, Coutts has operations in Germany, Ireland, Italy and Switzerland, four
countries in which the Company did not have Company-owned operations prior to
the acquisition, and it adds additional volume to the Company's existing
businesses in the Netherlands, Spain and Canada. (See Note D to the Notes to the
Condensed Consolidated Financial Statements.)
Net cash provided by financing activities amounted to $87,938,000 for the six
months ended June 30, 2002 and net cash utilized in financing activities
amounted to $988,000 for the six months ended June 30, 2001. The financing
activity for 2002 was primarily the result of a New Credit Agreement under which
the Company borrowed $130,000,000 to finance the Coutts acquisition and to repay
outstanding indebtedness of $41,038,000 under a prior credit agreement that has
been terminated. In connection with the Coutts acquisition, the Company also
issued loan notes to four individual sellers of Coutts for an aggregate of
$5,432,000. Offsetting this increase in financing activities, the Company also
incurred debt commitment fees and other fees related to its New Credit Agreement
in the current year. (See Notes D and E in the Notes to the Condensed
Consolidated Financial Statements).
As of June 30, 2002, the Company had approximately $28,629,000 available under
the Revolving Loan of the New Credit Agreement. Future borrowings under the
Revolving Loan will be used to finance working capital and other general
corporate purposes, including permitted acquisitions.
During the second quarter 2002, the Company filed a Registration Statement with
the Securities and Exchange Commission for a public offering of 3,000,000 shares
of Common Stock with two selling shareholders offering an additional 850,000
shares of Common Stock. Proceeds from the offering would be used to make
principal payments under the New Credit Agreement, as defined in this Credit
Agreement. Subsequent to June 30, 2002, the Company postponed this public
offering due to poor capital market conditions. Management will continue to
review its capital structure in relation to existing equity market conditions.
As of June 30, 2002, the Company has deferred costs of $361,000 related to this
offering included in other assets on its Condensed Consolidated Balance Sheet,
and expects total costs of this offering to approximate $1,000,000.
23
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
These deferred costs would be expensed if the Company does not make the public
offering of its Common Stock.
The Company anticipates that its cash generation and borrowing capacity will be
sufficient to service its existing debt, outstanding commitments and to maintain
Company operations at current levels for the foreseeable future. However,
operating cash flows could be impacted by a decrease in the demand for the
Company's services. The Company will continue to consider acquisitions and other
expansion opportunities as they arise, subject to access to capital on terms
acceptable to the Company. The economics of a proposed acquisition, the
provisions of permitted acquisitions under the New Credit Agreement, strategic
implications and other circumstances justifying the expansion will be key
factors in determining the amount and type of resources the Company will commit
to future acquisitions.
As of June 30, 2002, the Company's obligations and commitments include bank debt
commitments, loan notes to the sellers of Coutts, office leases and equipment
leases. For the periods subsequent to June 30, 2002, the aggregate maturities on
these obligations are as follows:
(Dollars in Thousands)
Less than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----- ----------- --------- --------- ---------
Bank debts $131,106 $ 23,606 $ 36,000 $ 36,000 $ 35,500
Capital leases $ 1,061 $ 465 $ 411 $ 185 $ --
Office &
equipment leases $118,368 $ 26,695 $ 42,959 $ 29,684 $ 19,030
As of June 30, 2002, the Company estimates that the amount of future contingent
earnout payments related to acquisitions will range between $9,000,000 and
$12,000,000 in total.
24
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Forward Looking Statements
- --------------------------
Statements included in this Report on Form 10-Q, including within this
Management's Discussion and Analysis of Financial Condition and Results of
Operations which are not historical in nature, are intended to be, and are
hereby identified as "forward looking statements" for purposes of the safe
harbor provided by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers that forward looking statements including, without
limitation, those relating to the Company's future business prospects, revenues,
working capital, goodwill impairment, public offerings, future earnout payments,
liquidity, capital needs, interest costs and income, are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those indicated in the forward looking statements due to several important
factors identified from time to time in the Company's reports filed with the
SEC. The Company hereby incorporates by reference the discussion concerning
forward looking statements set forth in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section of the Company's Annual
Report on Form 10-K for the year ended December 31, 2001 filed with the SEC, as
well as the risk factors identified within the same Annual Report on Form 10-K.
Readers of this Report are cautioned not to place undue reliance upon these
forward looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these forward
looking statements or reflect events or circumstances after the date hereof.
Quantitative and Qualitative Disclosures About Market Risks
- -----------------------------------------------------------
As of June 30, 2002, the Company had letters of credit totaling $7,312,000, of
which $5,432,000 guarantees the fixed rate loan notes to the sellers of Coutts,
and an aggregate notional principal of $125,500,000 outstanding under its New
Credit Agreement, that bears interest at variable rates. Based upon the variable
rate debt and including fixed interest rate swaps in place at any time during
the year, a 100 basis point (1.0%) increase in interest rates on variable rate
debt would increase interest expense for the three and six months ended June 30,
2002 by $347,000 and $414,000 respectively.
The Company's earnings and cash flow are subject to fluctuations due to changes
in foreign currency exchange rates. If the foreign currency exchange rates
strengthen relative to the U.S. dollar the result would be income to the Company
and an increase in cash flow. Likewise, if the foreign currency exchange rates
weaken relative to the U.S. dollar the result would be a loss to the Company and
a decrease in cash flow. The Company does not anticipate any material currency
risk to its business or financial condition resulting from other currency
fluctuations. As of June 30, 2002, the Company had no currency swap or hedge
instruments.
25
PART II - OTHER INFORMATION
Items 1, 2, 3 and 5 were not applicable in the three months ended June 30, 2002.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 2002 Annual Meeting of Shareholders of the Company was held on May 2, 2002.
At this meeting, the shareholders voted on the following two items: 1.)
The election of eleven directors to hold office until the Annual
Meeting of Shareholders in 2003 and until their respective successors
are duly elected and qualified. 2.) A proposal to ratify the selection
by the Board of Directors of Ernst & Young LLP as the Company's
independent public auditors for the current fiscal year.
Votes were cast for the election of directors as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Frank P. Louchheim 12,855,760 571,335
Richard J. Pinola 10,836,822 2,590,273
Joseph T. Smith 12,856,625 570,470
John J. Gavin 12,857,300 569,795
Larry A. Evans 12,848,860 578,235
John R. Bourbeau 12,849,535 577,560
Rebecca J. Maddox 12,848,550 578,545
Catherine Y. Selleck 12,846,375 580,720
Frederick R. Davidson 12,857,750 569,345
Oliver S. Franklin 12,855,090 572,005
Stephen Johnson 12,845,835 581,260
The ratification of the selection by the Board of Directors of Ernst &
Young LLP as the Company's independent public auditors for the current
fiscal year was approved as follows:
Votes For Votes Against Abstentions
--------- ------------- -----------
12,929,733 336,974 160,388
26
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits:
None
b. The Company filed two Form 8-K's and two Form 8-K/A's during the
period of April 1, 2002 to June 30, 2002. They are as follows:
- On April 5, 2002 the Company filed a Form 8-K for the
acquisition of all of the shares of Atlas Group Holdings Limited
("Atlas"), the parent company of Coutts. The acquisition of
Coutts was completed on March 22, 2002. This Form 8-K also
reported the Company's new $180,000,000 Credit Agreement with a
syndicate of banks. The financial statements of the business
acquired and the pro forma financial information was not included
in this From 8-K as it was impractical to provide this required
financial information at the date of the report. Exhibits
incorporated by reference include the purchase agreement related
to the acquisition of Coutts and the New Credit Agreement between
the Company and its U.S. subsidiaries and the syndicated banks.
- On April 12, 2002, the Company filed a Form 8-K for a change in
its certifying accountants. The Company's Board of Directors
approved on April 8, 2002 the engagement of Ernst & Young LLP as
the Company's independent public auditors for the current fiscal
year, to replace Arthur Andersen LLP. A letter from Arthur
Andersen LLP to the Securities and Exchange Commission was
included as an exhibit to this Form 8-K.
- On April 22, 2002, the Company filed a Form 8-K/A, amending the
exhibit to the Form 8-K filed on April 12, 2002 that announced
its change in certifying accountants. The exhibit of the letter
from Arthur Andersen LLP to the Securities and Exchange
Commission was amended and re-filed in this Form 8-K/A.
- On June 4, 2002, the Company filed a Form 8-K/A, amending the
Form 8-K filed on April 5, 2002 that reported the acquisition of
the shares of Atlas, the parent company of Coutts and the
Company's New Credit Agreement. The required financial statements
of the business acquired and the pro forma financial information
was included in this Form 8-K/A. Exhibits incorporated by
reference include the purchase agreement related to the
acquisition of Coutts and the Credit Agreement between the
Company and its U.S. subsidiaries and the syndicated banks.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RIGHT MANAGEMENT CONSULTANTS, INC.
BY:/S/ RICHARD J. PINOLA August 13, 2002
------------------------ ---------------
Richard J. Pinola Date
Chairman and Chief Executive Officer
BY :/S/ CHARLES J. MALLON August 13, 2002
------------------------ ---------------
Charles J. Mallon Date
Chief Financial Officer and
Principal Accounting Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND FINANCIAL OFFICERS
The undersigned chief executive officer and chief financial officer of the
Registrant, to the best of their knowledge, do hereby certify that this
Quarterly Report of Form 10-Q fully complies with the requirements of Section
13(a) or 15(d) of the Securities Act of 1934, as amended, and that the
information contained in this report fairly presents, in all material respects,
the financial condition and results of operations of the Registrant at the dates
and for the periods shown in such report.
BY:/S/ RICHARD J. PINOLA August 13, 2002
------------------------ ---------------
Richard J. Pinola Date
Chairman and Chief Executive Officer
BY :/S/ CHARLES J. MALLON August 13, 2002
------------------------ ---------------
Charles J. Mallon Date
Chief Financial Officer and
Principal Accounting Officer
28