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 September 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
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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
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(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 November 12, 2002:
Common Stock, $0.01 par value 22,672,967
----------------------------- ----------
Class Number of Shares
Right Management Consultants, Inc.
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Share Data)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 31,641 $ 48,655
Accounts receivable, trade, net of allowance for doubtful accounts
of $3,758 and $2,835 in 2002 and 2001, respectively 80,366 80,225
Royalties and fees receivable from Affiliates 5,963 10,507
Prepaid expenses and other current assets 9,105 5,709
Deferred income taxes 1,690 1,237
--------- ---------
Total Current Assets 128,765 146,333
Property and equipment, net of accumulated depreciation of $52,823
and $43,637 in 2002 and 2001, respectively 31,908 23,294
Goodwill, net of accumulated amortization of $21,877 and
$20,930 in 2002 and 2001, respectively 204,037 78,068
Amortizable intangibles, net of accumulated amortization of $3,871
and $1,064 in 2002 and 2001, respectively 22,506 4,681
Deferred income taxes 3,739 3,765
Other 15,234 4,974
--------- ---------
Total Assets $ 406,189 $ 261,115
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt and other obligations $ 23,824 $ 590
Accounts payable 19,350 13,565
Fees payable to Affiliates 2,881 5,374
Accrued incentive compensation and benefits 25,933 35,569
Other accrued expenses 29,800 19,636
Deferred revenue 74,608 60,646
--------- ---------
Total Current Liabilities 176,396 135,380
Long-term debt and other obligations 100,394 41,426
Deferred compensation and other long term liabilities 9,072 5,175
Minority interest in subsidiaries 5,282 2,410
Commitments and Contingencies
Shareholders' Equity:
Preferred stock, no par value; 1,000,000 shares authorized; no
shares issued - -
Common stock, $.01 par value; 45,000,000 shares authorized;
27,034,038 and 26,773,473 shares issued in 2002 and 2001, respectively 270 268
Additional paid-in capital 31,628 29,151
Retained earnings 98,005 69,641
Accumulated other comprehensive loss (953) (8,431)
--------- ---------
128,950 90,629
Less treasury stock, at cost, 4,375,134 shares
in 2002 and 2001 (13,905) (13,905)
--------- ---------
Total Shareholders' Equity 115,045 76,724
--------- ---------
Total Liabilities and Shareholders' Equity $ 406,189 $ 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 September 30,
--------------------------------
2002 2001
---- ----
Revenue:
Company office revenue $ 114,635 $ 76,116
Affiliate royalties 1,569 1,655
----------- -----------
Total revenue 116,204 77,771
----------- -----------
Expenses:
Consultants' compensation 44,732 31,960
Office administration 30,550 19,836
Office sales and consulting support 11,260 5,040
Office depreciation 2,323 1,802
General sales and administration 6,811 7,824
Depreciation and amortization 1,980 2,311
----------- -----------
Total expenses 97,656 68,773
----------- -----------
Income from operations 18,548 8,998
Net interest expense 1,415 613
----------- -----------
Income before income taxes 17,133 8,385
Provision for income taxes 7,882 3,840
Minority interest in net income of subsidiaries 682 188
----------- -----------
Net income $ 8,569 $ 4,357
=========== ===========
Basic earnings per share $ 0.38 $ 0.20
=========== ===========
Diluted earnings per share $ 0.35 $ 0.19
=========== ===========
Basic weighted average shares outstanding 22,646,000 21,743,000
=========== ===========
Diluted weighted average shares outstanding 24,375,000 23,481,000
=========== ===========
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)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Revenue:
Company office revenue $ 334,007 $ 213,466
Affiliate royalties 5,287 5,206
----------- -----------
Total revenue 339,294 218,672
----------- -----------
Expenses:
Consultants' compensation 131,276 86,999
Office administration 84,956 56,767
Office sales and consulting support 27,287 15,910
Office depreciation 6,269 5,372
General sales and administration 25,406 20,166
Depreciation and amortization 5,458 6,594
----------- -----------
Total expenses 280,652 191,808
----------- -----------
Income from operations 58,642 26,864
Net interest expense 3,299 2,334
----------- -----------
Income before income taxes 55,343 24,530
Provision for income taxes 25,459 11,039
Minority interest in net income of subsidiaries 1,520 602
----------- -----------
Net income $ 28,364 $ 12,889
=========== ===========
Basic earnings per share $ 1.26 $ 0.60
=========== ===========
Diluted earnings per share $ 1.16 $ 0.56
=========== ===========
Basic weighted average shares outstanding 22,583,000 21,410,000
=========== ===========
Diluted weighted average shares outstanding 24,377,000 23,021,000
=========== ===========
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)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Operating Activities:
Net income $ 28,364 $ 12,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,965 11,966
Deferred income taxes (407) (578)
Minority interest in net income of subsidiaries 1,520 602
Provision for doubtful accounts 1,556 1,759
Tax benefit from the exercise of stock options 938 1,296
Stock option compensation 42 113
Net foreign exchange gains on transactions (904) (124)
Other non-cash items 478 669
Changes in operating accounts, net of acquired businesses:
Accounts receivable, trade and from Affiliates 28,984 (36,663)
Income taxes receivable - 3,253
Prepaid expenses and other assets (4,140) 1,749
Accounts payable (7,887) (1,661)
Accrued incentive compensation, benefits and other expenses (7,873) 20,130
Fees payable to Affiliates and other liabilities (2,551) 2,234
Deferred revenue (13,225) 20,674
--------- ---------
Net cash provided by operating activities 36,860 38,308
--------- ---------
Investing Activities:
Purchase of property and equipment (12,723) (9,474)
Acquisitions, net of cash acquired (119,096) (8,437)
Increase in cash surrender value of
company-owned life insurance (603) (537)
--------- ---------
Net cash utilized in investing activities (132,422) (18,448)
--------- ---------
Financing Activities:
Borrowings under credit agreements 135,432 8,359
Payment of long-term debt and other obligations (53,413) (20,933)
Termination value of swap agreements 358 -
Debt commitment fees and other fees related to the New Credit Agreement (3,516) -
Proceeds from stock issuances from the exercise of stock options 1,499 3,131
--------- ---------
Net cash provided by (utilized in) financing activities 80,360 (9,443)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents (1,812) (563)
(Decrease) increase in cash and cash equivalents (17,014) 9,854
Cash and cash equivalents, beginning of period 48,655 13,157
--------- ---------
Cash and cash equivalents, end of period $ 31,641 $ 23,011
========= =========
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 nine months ended September 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 initial estimates in
March 2002, a value of $23,970,000 was allocated to amortizable assets,
primarily client lists. In September 2002, the Company adjusted this value to
$17,600,000 based on a valuation using the income approach as prepared by an
independent consulting firm.
Also effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 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. During the fourth quarter 2002, the Company
will perform its annual impairment testing of its goodwill, including new
acquisitions.
The Company's net income and earnings per share for the three and nine months
ended September 30, 2002 and 2001, adjusted to exclude goodwill amortization,
was as follows:
(Dollars in Thousands Except Per Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Net income as reported $ 8,569 $ 4,357 $ 28,364 $ 12,889
Add back amortization of
goodwill, net of tax -- 1,211 -- 3,359
---------- ---------- ---------- ----------
Adjusted net income $ 8,569 $ 5,568 $ 28,364 $ 16,248
========== ========== ========== ==========
Basic earnings per share as reported $ 0.38 $ 0.20 $ 1.26 $ 0.60
Amortization of goodwill, net of tax -- 0.06 -- 0.16
---------- ---------- ---------- ----------
Adjusted basic earnings per share $ 0.38 $ 0.26 $ 1.26 $ 0.76
========== ========== ========== ==========
7
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(Dollars in Thousands Except Per Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Diluted earnings per share as reported $0.35 $0.19 $1.16 $0.56
Amortization of goodwill, net of tax -- 0.05 -- 0.15
----- ----- ----- -----
Adjusted diluted earnings per share $0.35 $0.24 $1.16 $0.71
===== ===== ===== =====
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. Changes in the fair value of this cash flow derivative were
recorded in accumulated other comprehensive income. The Company terminated this
fixed interest rate swap agreement during the first quarter 2002.
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 then 71% ownership in Right WayStation, Inc.
("Right WayStation"), its Japanese subsidiary, and to hedge against fluctuations
in interest rates. The Company separated its accounting for one of these swap
agreements 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. The Company
terminated these cross currency interest rate swap agreements during the first
quarter 2002.
Effective September 30, 2002, the Company entered into a fixed interest rate
swap agreement in order to hedge against fluctuations in interest rates on
borrowings under its New Credit
8
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE B - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Agreement (See Note F). Changes in the fair value of this derivative will be
recorded to accumulated other comprehensive income, to the extent they are
deemed "effective." The Company will account for this derivative by testing for
ineffectiveness on a quarterly basis and recording any ineffectiveness directly
to earnings.
At September 30, 2002, the Company has no derivatives recorded on its balance
sheet.
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 -- (38) (38)
Termination of derivatives
and hedging instruments (661) 844 183
Currency translation adjustment 7,333 -- 7,333
------- ------- -------
Balance at September 30, 2002 $ (953) $ -- $ (953)
======= ======= =======
During the first quarter of 2002, the effect of the Company's termination of its
derivative and hedging instruments resulted in a charge to income of $183,000,
which amount is included in general sales and administration expense for the
nine months ended September 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 September 30,
2002 and 2001 was $9,075,000 and $5,567,000, respectively. Total comprehensive
income, including the components of accumulated other comprehensive income, for
the nine months ended September 30, 2002 and 2001 were $35,842,000 and
$9,239,000, respectively. Total comprehensive income in 2002 reflects increased
currency exchange rate fluctuations resulting from the weakening U.S. dollar as
compared to foreign currencies.
9
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
The consideration paid for Coutts, including costs of the transaction, was
approximately $107,949,000. 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 $1,778,000.
The Company also funded the repayment of approximately $44,791,000 of the
pre-existing debt of Coutts' parent company and recorded approximately
$2,140,000 in redundant costs related to office space and payroll. The purchase
price allocation for this acquisition is tentative and is based upon information
available at this time, and is subject to change. 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% in exchange of the payment of
approximately $815,000 to certain minority interest shareholders. The Company
then merged its two majority-owned subsidiaries in Japan, effective July 1,
2002, resulting in the Company's ownership of approximately 82% of the combined
entity renamed Right Management Consultants - Japan, Inc.
During June, the Company completed its acquisition of the outstanding stock of
five of Coutts' franchises in Canada, which had traded as "Murray Axmith". These
acquisitions had an effective date of July 1, 2002 for financial reporting
purposes, and were acquired for a combination of cash and future defined
contingent payments. The total upfront cash paid as part of the purchase price
for these acquisitions and related transaction costs totaled approximately
$3,467,000. The Company acquired $1,039,000 in cash and cash equivalents from
these acquisitions.
Effective July 1, 2002, the Company also purchased the outstanding shares of
Assessment & Development Consult Holding B.V. ("ADC Consulting"), an
organizational consulting firm with three offices in the Netherlands, for a
combination of cash and future defined contingent payments. The total upfront
cash paid as part of this purchase price and related transaction costs totaled
$8,200,000. In addition to the purchase price, the Company committed to paying
$1,000,000 in retention bonuses to key personnel of ADC Consulting over three
years which will be expensed ratably over that period.
10
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - ACQUISITIONS (Continued)
For the nine months ended September 30, 2002, the Company paid approximately
$988,000 in earnouts related to acquisitions made in prior years which has been
recorded as additional goodwill. At September 30, 2002, other accrued expenses
on the Condensed Consolidated Balance Sheet includes $2,787,000 in estimated
earnout payments for the fourth quarter 2002.
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 nine months ended
September 30, 2002 and 2001.
(Dollars in Thousands)
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Assets acquired:
Accounts receivable $ 22,276 $ 2,479
Prepaid expenses and other assets 3,320 3,957
Fixed assets 4,030 2,452
Non-amortizable goodwill 113,449 15,910
Amortizable intangibles 18,728 1,650
Additional equity acquired in Japan 1,704 --
Other non-current assets 2,159 2,274
--------- ---------
165,666 28,722
Less liabilities acquired:
Current portion of long-term debt (4) (1,054)
Accounts payable and accrued expenses (19,940) (3,580)
Deferred revenue (23,623) (3,151)
Long-term debt (17) (1,010)
--------- ---------
(43,584) (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 (2,986) (2,969)
--------- ---------
Cash paid for acquisitions, net of cash acquired $ 119,096 $ 8,437
========= =========
As of September 30, 2002, the Company estimates that the aggregate amount of
future contingent earnout payments related to completed acquisitions will range
between $12,500,000 and $15,500,000.
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 nine months
ended September 30, 2002 and 2001, reflecting the combined results of the
Company and acquisitions made subsequent to January 1, 2001, 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 Share Data)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited)
Revenue $ 116,204 $ 104,063 $ 370,631 $ 303,047
=========== =========== =========== ===========
Income before income taxes $ 17,133 $ 9,758 $ 57,351 $ 26,929
=========== =========== =========== ===========
Net income $ 8,569 $ 5,119 $ 29,405 $ 14,410
=========== =========== =========== ===========
Diluted earnings per share $ 0.35 $ 0.22 $ 1.21 $ 0.63
=========== =========== =========== ===========
Diluted weighted average
number of shares outstanding 24,375,000 23,481,000 24,377,000 23,021,000
=========== =========== =========== ===========
The pro-forma amortization of goodwill for 2001 for the acquisitions made
subsequent to January 1, 2001 would have been $1,841,000 and $5,609,000 for the
three and nine months ended September 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 $4,125,000 and $0.18,
respectively, for the three months ended September 30, 2001 and the net income
and diluted earnings per share would have been $11,325,000 and $0.49,
respectively, for the nine months ended September 30, 2001.
NOTE E - OTHER ASSETS
The increase in other assets on the Condensed Consolidated Balance Sheet at
September 30, 2002 was due to an increase in deposits for leased office space in
Japan, the addition of debt commitment fees on the Company's $180,000,000 credit
agreement entered into on March 22, 2002 (See Note F), and an increase in the
cash surrender value of the Company's life insurance policies for participants
in its non-qualified supplemental executive retirement plan.
12
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - 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 the
same day, the Company terminated 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 with a notional principal of
$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 in accumulated other comprehensive income. (See
Note C.)
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 which was filed as exhibit 10.26 in the
Company's Form 10-K for the fiscal year ended December 31, 2001.
Initial proceeds from 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 September 30, 2002, approximately $24,751,000
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 third quarter 2002, the Company made a
mandatory principal payment of $4,500,000 under the Term Loan and a voluntary
principal payment of $3,000,000 under the Revolving Loan. The principal balance
outstanding under the Loans as of September 30, 2002 was $118,000,000, 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 September 30, 2002, the
remaining annual limit for permitted acquisitions was approximately $6,800,000.
13
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - DEBT AND OTHER OBLIGATIONS (Continued)
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 for the third quarter of 2002 was 4.20%.
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.)
Effective September 30, 2002, the Company entered into a fixed interest rate
swap agreement with a termination date of March 22, 2007 for purposes of hedging
against interest rate fluctuations on a portion of its Term Loan. The swap
agreement is for a notional principal of $40,500,000 with scheduled reductions
in notional principal of $2,250,000 each quarter over the life of the swap.
Under the terms of this swap agreement, the Company pays interest at a fixed
rate of 2.815% plus a margin ranging from 1.50% to 2.25%, and its lenders pay
the Company interest at 90-day LIBOR. With an effective date of September 30,
2002, the swap had no impact on the financial statements for the third quarter
2002.
NOTE G - 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
September 30, 2002 and 2001 are as follows:
For the three months For the three months
ended September 30, 2002 ended September 30, 2001
------------------------ ------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic EPS:
Net income $8,569,000 22,646,000 $ 0.38 $4,357,000 21,743,000 $ 0.20
======== =============
Impact of options --- 1,729,000 --- 1,738,000
---------- ---------- ---------- ----------
Diluted EPS:
Net income $8,569,000 24,375,000 $ 0.35 $4,357,000 23,481,000 $ 0.19
========== ========== ======== ========== ========== =============
14
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - EARNINGS PER SHARE (Continued)
For the nine months For the nine months
ended September 30, 2002 ended September 30, 2001
------------------------ ------------------------
Income Shares EPS Income Shares EPS
------ ------ --- ------ ------ ---
Basic EPS:
Net income $28,364,000 22,583,000 $1.26 $12,889,000 21,410,000 $0.60
===== =====
Impact of options --- 1,794,000 --- 1,611,000
----------- ---------- ----------- ----------
Diluted EPS:
Net income $28,364,000 24,377,000 $1.16 $12,889,000 23,021,000 $0.56
=========== ========== ===== =========== ========== =====
For the three and nine months ended September 30, 2002, outstanding options to
purchase 26,250 of Company Common Shares at an option exercise price of $17.60
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 nine months ended September 30, 2001, outstanding
options to purchase 298,123 and 311,623 shares, respectively, of Company Common
Shares at option exercise prices ranging from $8.44 to $10.67 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.
As of September 30, 2002 and 2001, the Company's majority-owned Japanese
subsidiary has stock options and warrants outstanding that are convertible into
shares of this subsidiary's company stock. The dilutive impact of these stock
options and warrants is immaterial to earnings per share for the three and nine
months ended September 30, 2002 and 2001.
NOTE H - SHAREHOLDERS' EQUITY
Effective on October 15, 2002, Common Shares of the Company split into three
shares for every two shares outstanding. The stated par value per share of the
Common Shares was not changed from its existing amount of $0.01 per share. In
conjunction with this stock split, the Board of Directors approved an amendment
to the Articles of Incorporation of the Company to increase the amount of
authorized shares of Common Stock by 15,000,000 to a total of 45,000,000 Common
Shares authorized. All share and per share amounts referred to in the Condensed
Consolidated Financial Statements and Notes thereto have been restated to
reflect this split.
15
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - 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 offer some 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 September
30, 2002 and 2001 and for the three and nine months then ended are presented
below.
(Dollars in Thousands)
Asia-
September 30, 2002 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ ---- ------ ------ ------- ----- ------ ------------
Identifiable assets $118,989 $ 22,830 $210,395 $ 13,293 $ 38,652 $ 2,030 $406,189
======== ======== ======== ======== ======== ======== ========
September 30, 2001
- ------------------
Identifiable assets 129,201 17,225 38,278 12,743 22,763 1,874 222,084
======== ======== ======== ======== ======== ======== ========
16
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - SEGMENTS (Continued)
(Dollars in Thousands)
For the three
months ended Asia-
September 30, 2002 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ ---- ------ ------ ------- ----- ------ ------------
Revenue $ 51,663 $ 7,974 $ 32,078 $ 5,347 $ 18,453 $ 689 $116,204
======== ======== ======== ======== ======== ======== ========
Operating
income (1) 6,471 2,363 1,758 1,349 6,469 138 18,548
======== ======== ======== ======== ======== ======== ========
Depreciation and
Amortization 2,158 142 1,475 267 240 21 4,303
======== ======== ======== ======== ======== ======== ========
Capital expenditures (2) 2,310 889 1,192 35 336 37 4,799
======== ======== ======== ======== ======== ======== ========
For the three
months ended
September 30, 2001
- ------------------
Revenue 52,947 7,303 7,151 4,178 5,862 330 77,771
======== ======== ======== ======== ======== ======== ========
Operating
income (loss) (1) 5,624 3,352 (1,820) 1,221 294 327 8,998
======== ======== ======== ======== ======== ======== ========
Depreciation and
Amortization 2,553 242 652 374 272 20 4,113
======== ======== ======== ======== ======== ======== ========
Capital expenditures (2) 1,221 64 88 107 -- 4 1,484
======== ======== ======== ======== ======== ======== ========
For the nine
months ended
September 30, 2002
- ------------------
Revenue 177,071 20,540 84,159 15,081 39,933 2,510 339,294
======== ======== ======== ======== ======== ======== ========
Operating
income (1) 29,935 7,051 5,668 3,792 11,516 680 58,642
======== ======== ======== ======== ======== ======== ========
Depreciation and
Amortization 6,178 304 3,923 593 671 58 11,727
======== ======== ======== ======== ======== ======== ========
Capital expenditures (2) 7,322 1,100 3,038 279 706 278 12,723
======== ======== ======== ======== ======== ======== ========
(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 exclude fixed assets acquired from
acquisitions.
17
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - SEGMENTS (Continued)
(Dollars in Thousands)
For the nine
months ended Asia-
September 30, 2001 U.S. Canada Europe Pacific Japan Brazil Consolidated
- ------------------ ---- ------ ------ ------- ----- ------ ------------
Revenue $146,343 $ 17,648 $ 25,197 $ 11,328 $ 16,701 $ 1,455 $218,672
======== ======== ======== ======== ======== ======== ========
Operating
income (1) 15,790 6,883 32 2,497 1,410 252 26,864
======== ======== ======== ======== ======== ======== ========
Depreciation and
Amortization 7,555 727 1,689 1,020 901 74 11,966
======== ======== ======== ======== ======== ======== ========
Capital expenditures (2) 8,308 309 303 189 351 14 9,474
======== ======== ======== ======== ======== ======== ========
(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 exclude fixed assets acquired from
acquisitions.
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 nine months ended September 30, 2002 and 2001
are as follows:
(Dollars in Thousands)
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
Career Career
Transition Consulting Consolidated Transition Consulting Consolidated
---------- ---------- ------------ ---------- ---------- ------------
2002
- ----
Company office
revenue $ 96,417 $ 18,218 $114,635 $282,881 $ 51,126 $334,007
======== ======== ======== ======== ======== ========
Company office
operating income $ 25,129 $ 641 $ 25,770 $ 81,710 $ 2,509 $ 84,219
======== ======== ======== ======== ======== ========
18
RIGHT MANAGEMENT CONSULTANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - SEGMENTS (Continued)
(Dollars in Thousands)
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
Career Career
Transition Consulting Consolidated Transition Consulting Consolidated
---------- ---------- ------------ ---------- ---------- ------------
2001
- ----
Company office
revenue $ 64,581 $ 11,535 $ 76,116 $175,741 $ 37,725 $213,466
======== ======== ======== ======== ======== ========
Company office
operating
income (loss) $ 19,105 ($ 1,627) $ 17,478 $ 49,102 ($ 684) $ 48,418
======== ======== ======== ======== ======== ========
NOTE J - SUBSEQUENT EVENTS
The Company has signed a letter of intent to acquire the additional 49% minority
interest in its Spanish subsidiary, Right Glenoit, bringing the Company's total
ownership to 100%. This transaction is expected to be completed during the first
quarter 2003 with an effective date of January 1, 2003.
On October 24, 2002, the Company's Board of Director's approved the Company's
action to file an application for listing of its Common Stock on the New York
Stock Exchange. The Company expects its Common Stock to begin trading on the
NYSE on November 18, 2002 under the stock symbol "RHT." Until that time, the
Common Stock will continue trading on the Nasdaq National Market as "RMCI".
During October and November 2002, three of the individual sellers of Coutts who
held loan notes issued by the Company as part of the purchase price (see note
D), called on their loan notes. The total paid by the Company to the note
holders, including interest and net of taxes, was approximately $2,635,000. Of
this total, approximately $2,039,000 was paid to Mr. Stephen Johnson, a Director
of the Company. These loan notes are included in the current portion of
long-term debt and other obligations on the Company's Condensed Consolidated
Balance Sheet at September 30, 2002.
19
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 Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("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 deferred
revenue recognized into income, while a decrease in the length of time programs
remain open will increase the deferred revenue recognized 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
20
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 intangible assets 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. Based on a valuation done by an independent
consulting firm, a value of $17,600,000 was estimated and allocated to
amortizable intangible assets, primarily client lists. The valuation of these
amortizable intangible assets required the Company and the consulting firm to
use judgment. Non-amortizable goodwill of $103,102,000 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. 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 nine
months ended September 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Company office revenue $114,635 $ 76,116 $334,007 $213,466
Company office expenses 88,865 58,638 249,788 165,048
-------- -------- -------- --------
Company office operating income 25,770 17,478 84,219 48,418
Affiliate royalties 1,569 1,655 5,287 5,206
General sales and administration 6,811 7,824 25,406 20,166
Depreciation and amortization 1,980 2,311 5,458 6,594
Interest expense, net 1,415 613 3,299 2,334
-------- -------- -------- --------
Income before income taxes 17,133 8,385 55,343 24,530
Provision for income taxes 7,882 3,840 25,459 11,039
Minority interest in net
income of subsidiaries 682 188 1,520 602
-------- -------- -------- --------
Net income $ 8,569 $ 4,357 $ 28,364 $ 12,889
======== ======== ======== ========
Third Quarter 2002 Compared to Third Quarter 2001
- -------------------------------------------------
For the three months ended September 30, 2002, revenue generated by Company
offices increased by 51%, or $38,519,000, from the corresponding quarter in
2001. This increase is due to $34,696,000 in incremental revenues from
acquisitions consummated subsequent to the third quarter 2001, and to a same
office revenue increase of 5%, or $3,823,000.
Career transition revenue generated by Company offices for the three months
ended September 30, 2002, increased by 49%, or $31,836,000, from the same period
in the prior year. This career
21
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
transition revenue increase is due to $30,257,000 in incremental revenues from
acquisitions and a same office revenue increase of 2%, or $1,579,000.
Organizational consulting revenue generated by Company offices for the three
months ended September 30, 2002, increased by 58%, or $6,683,000, from the same
period in the prior year. This increase includes $4,439,000 in incremental
revenues from acquisitions. The organizational consulting same office revenue
increased 20%, or $2,244,000.
For the three months ended September 30, 2002, Affiliate royalties decreased 5%,
or $86,000, from the corresponding quarter in 2001.
For the three months ended September 30, 2002, total Company office expenses
increased 52% or $30,227,000, from the corresponding quarter in 2001. This
increase is due primarily to incremental costs from acquisitions of $29,335,000,
consummated subsequent to the third quarter 2001, and due to increases in sales
payroll, rent expense and advertising costs.
Company office operating income for the three months ended September 30, 2002
was $25,770,000 with a Company office margin of 22%, compared to operating
income of $17,478,000 and a margin of 23% for the same quarter in the prior
year. The increase in Company office operating income is primarily due to a
higher volume of career transition revenue in 2002 as compared to 2001.
Additionally, higher profit margins in the organizational consulting business
and incremental profits of $6,090,000 from acquisitions consummated subsequent
to the third quarter 2001 contributed to this increase in operating income.
For the three months ended September 30, 2002, general sales and administration
expenses and depreciation and amortization expenses, ("G & A Expenses")
decreased 13%, or $1,344,000, as compared to the same quarter in the previous
year. This decrease is due to less incentive costs in the current year, a
decrease in the provision for uncollectible accounts and less amortization
expense in the current year due to the adoption of SFAS No. 142 on January 1,
2002 that eliminates amortization of goodwill (See Note A in the Notes to the
Condensed Consolidated Financial Statements). This decrease is partially offset
by $630,000 in expenses recorded in the third quarter 2002 related to a planned
public offering of the Company's Common Stock that was withdrawn during the
third quarter. G & A Expenses as a percentage of total revenue were 8% and 13%
for the third quarter 2002 and 2001, respectively.
Net interest expense for the three months ended September 30, 2002 increased
$802,000 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, partially offset by lower effective interest
rates.
22
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
September 30, 2002 was $682,000 for the minority interests related to Right
Management Consultants - Japan, Right Saad Fellipelli and Coaching in Brazil and
Right Glenoit in Spain. The minority interest in net income of subsidiaries for
the three months ended September 30, 2001 was $188,000 for the minority
interests related to Right WayStation in Japan and Right Saad Fellipelli and
Coaching in Brazil. The minority interest expense related to the Company's
Japanese subsidiary increased in the current year due to the addition of Coutts
and significantly higher net income in that geography.
The Company's effective tax rates for the three months ended September 30, 2002
and 2001 were consistent at 46%.
First Nine Months of 2002 Compared to the First Nine Months of 2001
- -------------------------------------------------------------------
For the nine months ended, September 30, 2002, revenue generated by Company
offices increased 56% or $120,541,000, from the corresponding period in 2001.
Incremental revenues from acquisitions consummated subsequent to the third
quarter of 2001 totaled $69,517,000, and same office revenue increased 24% or
$51,024,000 for the nine months ended September 30, 2002, as compared to the
corresponding period in 2001.
Career transition revenue generated by Company offices for the nine months ended
September 30, 2002, increased by 61%, or $107,140,000, from the same period in
the prior year. This career transition revenue increase is due to $59,193,000 in
incremental revenues from acquisitions and a same office revenue increase of
27%, or $47,947,000. The same office revenue increase reflects a higher volume
of business across all geographic locations.
Organizational consulting revenue generated by Company offices for the nine
months ended September 30, 2002, increased by 36%, or $13,401,000, from the same
period in the prior year. This increase includes $10,324,000 in incremental
revenues from acquisitions, a majority of which was attributable to Coutts'
European operations. Organizational consulting same office revenue increased 8%,
or $3,077,000.
For the nine months ended September 30, 2002, Affiliate royalties were flat as
compared to the corresponding period in 2001.
For the nine months ended September 30, 2002, total Company office expenses
increased 51% or $84,740,000 from the corresponding period in 2001. This
increase is due primarily to incremental costs from acquisitions consummated
subsequent to the third quarter 2001, totaling $60,409,000, and to increases in
sales payroll, outside staffing costs to deliver services, rent expense and
incentive costs.
23
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
Company office operating income for the nine months ended September 30, 2002 was
$84,219,000 with a Company office margin of 25%, compared to operating income of
$48,418,000 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 $9,836,000.
For the nine months ended September 30, 2002, G & A Expenses increased
$4,104,000 from the same period in the prior year. This increase in 2002 is due
primarily to higher incentive costs and payroll costs, Company matches on
employee benefit plans, and costs of $630,000 related to the planned public
offering of the Company's Common Stock that was withdrawn during the third
quarter 2002. This increase is offset by a decrease in amortization expense due
to the adoption of SFAS No. 142 on January 1, 2002 (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 9% and 12% for the nine
months ended September 30, 2002 and 2001, respectively.
Net interest expense for the nine months ended September 30, 2002 increased
$965,000 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, partially offset by lower
effective interest rates in the current year.
The minority interest in net income of subsidiaries for the nine months ended
September 30, 2002 was $1,520,000 for the minority interests related to Right
Management Consultants - Japan, Right Saad Fellipelli and Coaching in Brazil and
Right Glenoit in Spain. The minority interest in net income of subsidiaries for
the nine months ended September 30, 2001 was $602,000 for the minority interests
related to Right WayStation in Japan and Right 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 nine months ended September 30, 2002
and 2001 were 46% and 45%, respectively.
Capital Resources and Liquidity
- -------------------------------
As of September 30, 2002 and December 31, 2001, the Company had cash and cash
equivalents of $31,641,000 and $48,655,000, respectively. The decrease in cash
is primarily a result of paying bonuses to employees in the first quarter 2002
that related to 2001 performance and the funding of acquisitions out of
operating cash. As of September 30, 2002, the Company had a working capital
deficit of $47,631,000 due principally to $74,608,000 of deferred revenue and
$23,824,000 of current debt. Deferred revenue is eventually recognized into
income over time,
24
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
with no cash utilization. At December 31, 2001, the Company had positive working
capital of $10,953,000.
Net cash provided by operating activities amounted to $36,860,000 and
$38,308,000 for the nine months ended September 30, 2002 and 2001, respectively.
The decrease in cash provided by operating activities in the current year,
despite higher net income, is a result of higher 2001 bonuses paid to employees
in the first quarter 2002, as compared to the same period last year, partially
offset by decreased working capital required for other operating assets and
liabilities. In particular, the Company experienced better collections of its
accounts receivable in 2002, but also provided more deferred revenue in the
current year than it did for the same period in the prior year.
Net cash utilized in investing activities amounted to $132,422,000 and
$18,448,000 for the nine months ended September 30, 2002 and 2001, respectively.
This increased investment activity is primarily the result of the acquisitions
of Coutts, ADC Consulting, and the five Murray Axmith Canadian franchisees of
Coutts. These acquisitions, in particular Coutts, 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 $80,360,000 for the nine
months ended September 30, 2002 and net cash utilized in financing activities
amounted to $9,443,000 for the nine months ended September 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. In connection with the New Credit Agreement, the
Company also incurred debt commitment fees and other fees related to its New
Credit Agreement in the current year. (See Notes D and F in the Notes to the
Condensed Consolidated Financial Statements).
As of September 30, 2002, the Company had approximately $24,751,000 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
25
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONTINUED
offering were to be used to make principal payments under the New Credit
Agreement, as defined in this Credit Agreement. In September 2002, the Company
withdrew this Registration Statement due to unfavorable equity market
conditions. The Company incurred costs of $630,000 related to this offering that
were expensed in G & A Expenses on its Condensed Consolidated Statement of
Operations during the third quarter of 2002.
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 prolonged 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 September 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 September 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 &
loan notes $123,585 $ 23,585 $ 36,000 $ 36,000 $ 28,000
Capital leases $ 634 $ 239 $ 395 $ - $ -
Office &
equipment leases $154,355 $ 26,970 $ 49,981 $ 38,441 $ 38,963
As of September 30, 2002, the Company estimates that the aggregate amount of
future contingent earnout payments related to completed acquisitions will range
between $12,500,000 and $15,500,000.
26
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.
27
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS
As of September 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 $118,000,000 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 nine months ended
September 30, 2002 by $339,000 and $757,000 respectively.
Effective September 30, 2002, the Company entered into a fixed interest rate
swap agreement with a termination date of March 22, 2007 for purposes of hedging
against interest rate fluctuations on a portion of its Term Loan. The swap
agreement is for a notional principal of $40,500,000 with scheduled reductions
in notional principal of $2,250,000 each quarter over the life of the swap.
Under the terms of this swap agreement, the Company pays interest at a fixed
rate of 2.815% plus a margin ranging from 1.50% to 2.25%, and its lenders pay
the Company interest at a 90-day LIBOR. As this swap is effective September 30,
2002, it had no impact on the financial statements for the third quarter 2002.
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. Historically the Company has not anticipated any
material currency risk to its business or financial condition resulting from
other currency fluctuations. The Company monitors the consensus outlook for the
Pound Sterling, the Euro and the Japanese Yen as its principal foreign currency
exposures. From time to time, the Company may consider entering into foreign
currency hedge derivatives to the extent of its perceived exposure to foreign
currency exchange rate fluctuation risk.
PART I - ITEM 4
CONTROLS AND PROCEDURES
As of September 30, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on that evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective as of September 30, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to September 30,
2002.
28
PART II - OTHER INFORMATION
Items 1, 2, 3, 4 and 5 were not applicable in the three months ended September
30, 2002.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits:
10.27 - Amendment to the Articles of Incorporation of the
Company to increase the amount of authorized shares of
Common Stock by 15,000,000 to a total of 45,000,000 Common
Shares authorized.
b. The Company filed one Form 8-K during the period of July 1, 2002
to September 30, 2002 as follows:
- On September 18, 2002 the Company filed a Form 8-K for the
3-for-2 Common Stock split, effective on October 15, 2002,
through a 50% stock dividend, for shareholders of record as
of October 1, 2002. In addition, the Company included in
this Form 8-K that it was withdrawing its Registration
Statement on Form S-3 for a 3,850,000 share offering that
was filed with the Securities and Exchange Commission on
June 4, 2002, and amended on June 17, 2002 and June 25,
2002. The Form 8-K also included the Company's third quarter
earnings release date.
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 November 12, 2002
--------------------------------- -----------------
Richard J. Pinola Date
Chairman and Chief Executive Officer
BY :/S/ CHARLES J. MALLON November 8, 2002
--------------------------------- -----------------
Charles J. Mallon Date
Chief Financial Officer and
Principal Accounting Officer
29
CERTIFICATION
-------------
I, Richard J. Pinola, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Right Management
Consultants, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects our financial condition, results of operations and cash flows as of and
for the periods presented in this quarterly report;
4. Our other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) and have:
a. designed such disclosure controls and procedures to ensure that
material information, including our consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Our other certifying officers and I have disclosed, based on our most recent
evaluation, to our auditors and the audit committee of our board of directors
(or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect our ability to record, process,
summarize and report financial data and have identified for our
auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in our internal controls;
and
6. Our other certifying officers and I have indicated in this quarterly report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 BY:/S/ RICHARD J. PINOLA
---------------------------------
Name: Richard J. Pinola
Title: Chairman and Chief Executive
Officer
30
CERTIFICATION
-------------
I, Charles J. Mallon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Right Management
Consultants, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects our financial condition, results of operations and cash flows as of and
for the periods presented in this quarterly report;
4. Our other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) and have:
a. designed such disclosure controls and procedures to ensure that
material information, including our consolidated subsidiaries, is made
known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. Our other certifying officers and I have disclosed, based on our most recent
evaluation, to our auditors and the audit committee of our board of directors
(or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect our ability to record, process,
summarize and report financial data and have identified for our
auditors any material weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in our internal controls;
and
6. Our other certifying officers and I have indicated in this quarterly report
whether there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 BY :/S/ CHARLES J. MALLON
--------------------------------
Name: Charles J. Mallon
Title: Chief Financial Officer
and Principal Accounting
Officer
31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
--------------------------------------------------------------------
The undersigned chief executive officer and chief financial officer of Right
Management Consultants, Inc., to the best of their knowledge, do hereby certify
that this Quarterly Report of Form 10-Q for the period ended September 30, 2002,
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 Quarterly
Report fairly presents, in all material respects, the financial condition and
results of operations of Right Management Consultants, Inc. at the dates and for
the periods shown in such Report.
BY:/S/ RICHARD J. PINOLA November 12, 2002
----------------------------------- -----------------
Richard J. Pinola Date
Chairman and Chief Executive Officer
BY :/S/ CHARLES J. MALLON November 8, 2002
----------------------------------- -----------------
Charles J. Mallon Date
Chief Financial Officer and
Principal Accounting Officer
32