<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30,
1996 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from to
-------- ---------
Commission File Number:
0-20971
STAFFMARK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 71-0788538
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
302 EAST MILLSAP ROAD
FAYETTEVILLE, ARKANSAS 72703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501)973-6000
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
----- ----
The number of shares of Common Stock of the Registrant, par value $. 01
per share, outstanding at November 12, 1996 was 13,298,249.
1
<PAGE> 2
STAFFMARK INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION> Index
-----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
STAFFMARK, INC. CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Condensed Pro Forma Combined Financial
Statements 4
Condensed Pro Forma Combined Statements of Income 5
Condensed Pro Forma Combined Balance Sheet 6
Notes to Condensed Pro Forma Combined Financial
Statements 7
STAFFMARK, INC.
Condensed Balance Sheet 9
Notes to Condensed Balance Sheet 10
FOUNDING COMPANY FINANCIAL STATEMENTS
BREWER PERSONNEL SERVICES, INC.
Statements of Income 11
Balance Sheets 12
Statements of Cash Flows 13
Notes to Financial Statements 14
THE PROSTAFF COMPANIES
Combined Statements of Income 15
Combined Balance Sheets 16
Combined Statements of Cash Flows 17
Notes to Combined Financial Statements 18
THE MAXWELL COMPANIES
Combined Statements of Income 19
Combined Balance Sheets 20
Combined Statements of Cash Flows 21
Notes to Combined Financial Statements 22
HRA, INC.
Statements of Income 23
Balance Sheets 24
Statements of Cash Flows 25
Notes to Financial Statements 26
FIRST CHOICE STAFFING, INC.
Statements of Income 27
Balance Sheets 28
Statements of Cash Flows 29
Notes to Financial Statements 30
THE BLETHEN GROUP
Combined Statements of Income 31
Combined Balance Sheets 32
Combined Statements of Cash Flows 33
Notes to Combined Financial Statements 34
Item II - Management's Discussion and Analysis of Financial
Condition and Results of Operations 36
PART II - OTHER INFORMATION
</TABLE>
2
<PAGE> 3
Item 1 - Legal Proceedings 42
Item 6 - Exhibits and Reports on Form 8-K 42
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
Signatures 43
3
<PAGE> 4
STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
INTRODUCTION TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
StaffMark, Inc. (the "Company" or "StaffMark") was founded in March 1996 to
create a leading provider of diversified staffing services to businesses,
healthcare providers, professional and service organizations and governmental
agencies, primarily in growth markets in the southeastern and southwestern
United States. On October 2, 1996, StaffMark and six staffing service
businesses, Brewer Personnel Services, Inc. ("Brewer"), Prostaff Personnel, Inc.
and its related entities ("Prostaff"), Maxwell Staffing, Inc. and its related
entities ("Maxwell"), HRA, Inc. ("HRA"), First Choice Staffing, Inc. ("First
Choice") and Blethen Temporaries, Inc. and its related entities ("Blethen"),
(each a "Founding Company" and collectively, the "Founding Companies"), merged
through a series of separate transactions (the "Merger") simultaneously with the
closing of the Company's initial public offering (the "Offering"). The
consideration for the stock of the Founding Companies consisted of a combination
of cash and common stock of the Company.
Between March 1996 and the consummation of the Offering, the Company had
not conducted any operations and all activities prior to the Offering related
to the Merger and the Offering. Pursuant to the requirements of the Securities
and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB 97"),
which was issued and became effective July 31, 1996, Brewer was designated as
the acquirer, for financial reporting purposes, of Prostaff, Maxwell, HRA,
First Choice, and Blethen. For purposes of the presentation of the financial
statements herein, September 30, 1996 has been used as the effective date of
the Merger.
Based upon the provisions of SAB 97, these acquisitions were accounted for
as combinations at historical cost because: (i) the Founding Companies'
stockholders transferred assets to StaffMark in exchange for common stock
simultaneously with the Company's initial public offering; (ii) the nature of
future operations of the Company will be substantially identical to the combined
operations of the Founding Companies; (iii) the stockholders of each of the
Founding Companies may be considered promoters; and (iv) no former stockholder
group of any of the Founding Companies obtained a majority of the outstanding
voting shares of the Company. Accordingly, for financial reporting purposes,
the historical financial statements of the Founding Companies have been combined
throughout all relevant periods as if the Founding Companies had always been
members of the same operating group. However, since the Founding Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance.
The following unaudited pro forma combined financial statements present
Brewer combined with StaffMark and give effect to the following pro forma
adjustments: (i) the acquisition of the other Founding Companies at historical
cost in accordance with applicable provisions of SAB 97; (ii) the effect of the
acquisitions of Caldwell Services, Inc. ("Caldwell"), On Call Employment
Services, Inc. ("On Call") and Strategic Sourcing, Inc. ("SSI") made by Brewer,
Brewer, and First Choice, respectively; (iii) the adjustment to reflect
reductions in salaries to certain owners of the Founding Companies which have
been agreed to in connection with the Merger; (iv) federal and state income
taxes have been provided for at an effective combined tax rate of 39%, adjusted
for nondeductible goodwill amortization; (v) the 1,326,000 shares of common
stock used for the cash consideration paid to the stockholders of the Founding
Companies; (vi) the issuance of 5,618,249 shares of common stock to stockholders
of the Founding Companies in connection with the Merger; (vii) the issuance of
1,355,000 shares of common stock by StaffMark prior to the Offering; and (viii)
the adjustment to record the net deferred income tax liabilities attributable to
the temporary differences between the financial reporting and income tax basis
of assets and liabilities held in S Corporations as of September 30, 1996. In
addition, the condensed pro forma combined balance sheet of StaffMark includes
post merger adjustments for the sale of 6,325,000 shares of common stock and the
application of the estimated net proceeds.
These condensed pro forma combined financial statements should be read in
conjunction with the combined financial statements of the Company and the
Founding Companies and the notes thereto included in Staffmark's Registration
Statement on Form S-1 (Reg. No. 333-7513) related to the Offering.
4
<PAGE> 5
STAFFMARK, INC.
CONDENSED PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 45,874 $ 52,689 $ 128,414 $ 144,119
COST OF SERVICES 36,643 41,321 102,399 113,313
--------- --------- --------- ---------
Gross profit 9,231 11,368 26,015 30,806
--------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and
administrative 6,267 7,354 18,352 21,547
Depreciation and
amortization 462 484 1,271 1,443
--------- --------- --------- ---------
Operating income 2,502 3,530 6,392 7,816
--------- --------- --------- ---------
OTHER INCOME
(EXPENSE):
Interest expense (608) (660) (1,752) (1,774)
Other, net 44 44 118 428
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,938 2,914 4,758 6,470
INCOME TAX PROVISION 806 1,196 1,905 2,699
--------- --------- --------- ---------
NET INCOME $ 1,132 $ 1,718 $ 2,853 $ 3,771
========= ========= ========= =========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,300 8,300 8,300 8,300
========= ========= ========= =========
PRO FORMA EARNINGS PER SHARE $ 0.14 $ 0.21 $ 0.34 $ 0.45
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
STAFFMARK, INC.
CONDENSED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(In Thousands, Except Share Data)
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 22,881
Restricted cash and certificates of deposit 50
Accounts receivable, net 20,285
Prepaid expenses 1,265
Investments 36
--------
Total current assets 44,517
PROPERTY AND EQUIPMENT, net 2,912
INTANGIBLE ASSETS, net 19,508
OTHER ASSETS 791
--------
$ 67,728
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,670
Outstanding checks 256
Payroll and related liabilities 5,476
Reserve for workers' compensation claims 3,544
Income taxes payable 400
Deferred income taxes 988
--------
Total current liabilities 12,334
LONG TERM DEBT, less current maturities --
DEFERRED INCOME TAXES 112
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized shares of 1,000,000;
no shares issued or outstanding --
Common stock, $.01 par value;
authorized shares of 26,000,000; shares issued
and outstanding of 13,298,249 133
Paid-in capital 55,294
Retained earnings (145)
--------
Total stockholders' equity 55,282
--------
$ 67,728
========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
6
<PAGE> 7
STAFFMARK, INC.
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
StaffMark was founded in March 1996 to create a leading provider of
diversified staffing services to businesses, healthcare providers, professional
and service organizations and governmental agencies, primarily in growth
markets in the southeastern and southwestern United States. On October 2,
1996, StaffMark merged through a series of separate transactions simultaneously
with the closing of an initial public offering with the following six companies
(each a Founding Company and collectively, the Founding Companies): Brewer,
Prostaff, Maxwell, HRA, First Choice, and Blethen. The Merger has been
effected by StaffMark through issuance of common stock and cash. The
consideration for the stock of the Founding Companies consisted of a
combination of cash and common stock of the Company.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER
On October 2, 1996, the Company completed the Offering, which involved
the public sale of 6.325 million shares (including underwriters' over-allotment)
of common stock at a price of $12.00 per share. The proceeds from the
transaction, net of underwriting discounts and commissions and after deducting
expenses of the Offering, were approximately $67.0 million. Of this amount,
$15.9 million was used to pay the cash portion of the purchase price for the
Founding Companies and approximately $29.5 million of the net proceeds was used
to repay indebtedness of the Founding Companies and approximately $4.1 million
was used for S Corporation distributions to stockholders of the Founding
Companies. The remaining net proceeds will be used for working capital and for
general corporate purposes, which are expected to include future acquisitions.
Concurrent with the completion of the Offering discussed above, the
Company issued 5.618 million shares of common stock to the stockholders of the
Founding Companies, in addition to the cash consideration discussed above, to
the effect the Merger.
3. BASIS OF PRESENTATION
Between March 1996 and the consummation of the Offering, the Company
had not conducted any operations and all activities prior to the Offering
related to the Merger and the Offering.
Interim Financial Information
The financial information included herein includes the financial
results of StaffMark and the Founding Companies and is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods. The results of operations for
the three and nine-month periods ended September 30, 1995 and 1996 are not
necessarily indicative of the results to be expected for the full year. It is
suggested that these condensed pro forma combined financial statements be read
in conjunction with the audited financial statements and notes thereto of the
combined Founding Companies included in StaffMark's Registration Statement on
Form S-1 (Reg. No. 333-7513) related to the Offering.
Seasonality
The timing of certain holidays, weather conditions and seasonal
vacation patterns may cause the Company's quarterly results of operations to
fluctuate. The Company expects to realize higher revenues, operating income and
net income during the second and third quarters and lower revenues, operating
income and net income during the first and fourth quarters.
4. INCOME TAXES
Certain of the Founding Companies were S Corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the Merger are the responsibility of the respective stockholders. Effective
with the Merger, these S Corporations converted to C Corporation status which
will require them to recognize the tax consequences of operations in their
respective statements of income. For purposes of these condensed pro forma
combined financial statements, federal and state income taxes have been provided
for at an estimated effective combined tax rate of 39%, adjusted for
nondeductible goodwill amortization.
7
<PAGE> 8
5. EARNINGS PER COMMON SHARE
The computation of earnings per common share for the three and nine
months ended September 30, 1996 is based upon 8,299,708 weighted average shares
outstanding which includes (i) 1,355,000 shares issued by StaffMark prior to
the Offering; (ii) 5,618,249 shares issued to the stockholders of the Founding
Companies in connection with the Merger; and (iii) 1,326,459 shares issued in
connection with the Offering to pay the cash portion of the consideration for
the Founding Companies, but excludes 4,173,541 shares sold to the public on
October 2, 1996 (in conjunction with the Offering), the 825,000 shares issued
representing the underwriters' over-allotment and up to 935,494 shares subject
to options to be issued under the Company's 1996 Stock Option Plan.
Fully diluted earnings per common equivalent share is equal to primary
earnings per share for all periods presented.
8
<PAGE> 9
STAFFMARK, INC.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Cash and cash equivalents $ 36,813
Property and equipment, net 20,011
Deferred offering costs 3,710,601
----------
Total assets $3,767,425
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable $2,892,484
Line of credit 155,000
Advances from Founding Companies 685,708
----------
Total liabilities 3,733,192
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized shares of 1,000,000;
no shares issued or outstanding --
Common stock, $.01 par value; authorized shares of 26,000,000;
shares issued and outstanding of 1,355,000 13,550
Paid-in capital 17,710
Retained earnings 2,973
----------
Total stockholders' equity 34,233
----------
$3,767,425
==========
</TABLE>
The accompanying notes are an integral
part of this balance sheet.
9
<PAGE> 10
STAFFMARK, INC.
NOTES TO CONDENSED BALANCE SHEET
(UNAUDITED)
1. ORGANIZATION
StaffMark was originally founded as One Source Staffing, Inc. on March 12,
1996, to create a nationwide provider of temporary staffing services. On June
14, 1996, the Company changed its name to StaffMark, Inc. On October 2, 1996,
StaffMark merged with the following six Founding Companies: Brewer, Prostaff,
Maxwell, HRA, First Choice, and Blethen. The Merger has been effected by
StaffMark through issuance of its common stock and cash.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER
On October 2, 1996, the Company completed the Offering, which involved the
public sale of 6.325 million shares (which includes the underwriters'
over-allotment as of October 18, 1996) of common stock at a price of $12.00 per
share. The proceeds from the transaction, net of underwriting discounts and
commissions and after deducting expenses of the Offering, were approximately
$67.2 million. Of this amount, $15.9 million was used to pay the cash portion
of the purchase price for the Founding Companies.
Concurrent with the completion of the Offering discussed above, the Company
issued 5.618 million shares of common stock to the stockholders of the Founding
Companies, in addition to the cash consideration discussed above, to effect the
Merger.
3. BASIS OF PRESENTATION
The unaudited condensed balance sheet has been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the audited financial statements and notes thereto included
in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to
the Offering.
Between March 1996 and the consummation of the Offering, the Company did
not conduct any operations and all activities prior to the Offering related to
the Merger and the Offering. Accordingly, statements of operations and cash
flows would not provide meaningful information and have been omitted.
10
<PAGE> 11
BREWER PERSONNEL SERVICES, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 14,627,786 $ 18,018,255 $ 30,555,854 $ 48,574,636
COST OF SERVICES 11,576,433 14,235,121 24,545,243 38,263,006
------------ ------------ ------------ ------------
Gross profit 3,051,353 3,783,134 6,010,611 10,311,630
OPERATING EXPENSES:
Selling, general and
administrative 1,515,867 2,206,726 3,634,760 6,652,188
Depreciation and amortization 203,230 298,830 339,693 864,804
------------ ------------ ------------ ------------
Operating income 1,332,256 1,277,578 2,036,158 2,794,638
OTHER INCOME
(EXPENSE):
Interest expense (383,759) (485,402) (415,831) (1,365,326)
Interest and other income
(expense) (2,983) 147 16,221 (3,035)
------------ ------------ ------------ ------------
Net income $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277
============ ============ ============ ============
PRO FORMA DATA:
Historical income before
income taxes $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277
Less pro forma provision for
income taxes 418,475 368,806 687,978 732,290
------------ ------------ ------------ ------------
PRO FORMA NET
INCOME $ 527,039 $ 423,517 $ 948,570 $ 693,987
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
11
<PAGE> 12
BREWER PERSONNEL SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 29,
1995 1996
----------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 319,159 $ 397,459
Accounts receivable, net 4,798,476 6,868,193
Prepaid expenses and other 253,143 199,985
----------- -----------
Total current assets 5,370,778 7,465,637
PROPERTY AND EQUIPMENT, net 796,930 956,481
INTANGIBLE ASSETS, net 15,555,459 18,449,821
OTHER ASSETS:
Advance to StaffMark -- 519,454
Other 29,192 40,799
----------- -----------
Total other assets 29,192 560,253
----------- -----------
$21,752,359 $27,432,192
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 272,329 $ 580,472
Outstanding checks 226,307 --
Payroll and related liabilities 1,020,973 1,719,718
Reserve for workers' compensation claims 775,801 709,013
Line of credit 309,068 2,684,175
Current maturities of long-term debt 882,487 2,473,387
Accrued interest and other 375,777 135,344
----------- -----------
Total current liabilities 3,862,742 8,302,109
LONG-TERM DEBT, less current maturities 15,103,831 15,607,663
STOCKHOLDERS' EQUITY:
Common stock,
$.01 par value at December 31, 1995
and September 29, 1996; authorized
shares of 10,000 at December 31, 1995
and September 29, 1996; shares
issued and outstanding of 117.5
at December 31, 1995 and
132.5 at September 29, 1996 1 1
Paid-in capital 98,059 497,208
Retained earnings 2,687,726 3,025,211
----------- -----------
Total stockholders' equity 2,785,786 3,522,420
----------- -----------
$21,752,359 $27,432,192
=========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
12
<PAGE> 13
BREWER PERSONNEL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 203,230 298,830 339,692 864,804
Provision for bad debts 253 14,396 142 72,328
Net loss on sale of property and equipment -- -- 4,968 --
Change in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (1,026,082) (622,307) (1,409,205) (1,868,978)
Prepaid expenses and other (144,750) 32,491 (123,873) 10,228
Other assets (1,145) (634) (5,700) (2,729)
Accounts payable 182,923 182,831 (33,898) 197,987
Bank overdrafts (744,810) (341,652) (396,304) (226,307)
Payroll and related liabilities 15,258 150,645 227,528 401,378
Reserve for workers' compensation claims (89,321) (40,384) 82,155 (66,788)
Accrued interest and other (245,141) (95,115) (217,962) (359,423)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (904,071) 371,424 104,091 448,777
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Caldwell (11,620,714) -- -- --
Acquisition of On Call -- -- (11,500,000) (3,000,000)
Capital expenditures (195,014) (121,027) (290,932) (355,170)
Acquisition of training licenses and rights (65,262) -- (65,262) --
Proceeds from the sale of property and equipment 16,652 -- 16,652 --
Advances to StaffMark -- (289,024) -- (476,524)
Advances of notes receivable (8,504) -- (81,649) --
------------ ------------ ------------ ------------
Net cash used in investing activities (11,872,842) (410,051) (11,921,191) (3,831,694)
------------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 13,795,611 1,138,312 13,366,512 5,875,106
Payment on note payable
to a stockholder (1,172,580) (562,343) (835,851) (1,422,547)
Cash dividends (25,500) (998,092) (597,984) (1,015,092)
Contributions from stockholder 57,636 80,000 57,636 80,000
Deferred financing costs -- -- (271,750) (56,250)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 12,655,167 (342,123) 11,718,563 3,461,217
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (121,746) (380,750) (98,537) 78,300
CASH AND CASH EQUIVALENTS, beginning of
period 131,275 778,209 108,066 319,159
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 9,529 $ 397,459 $ 9,529 $ 397,459
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 224,542 $ 591,723 $ 243,315 $ 1,613,962
============ ============ ============ ============
Non-cash transactions:
Notes payable issued in conjunction with
certain acquisitions $ 3,100,000 $ -- $ 3,100,000 $ --
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
13
<PAGE> 14
BREWER PERSONNEL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Brewer was incorporated in the state of Arkansas on June 27, 1988. The
Company's primary business purpose is to provide temporary personnel services.
The Company is headquartered in Fayetteville, Arkansas and as of September 29,
1996, operated staffing services offices in Arkansas, Georgia, Colorado,
Virginia, and Tennessee.
Brewer and its stockholders entered into a definitive agreement to
merge with StaffMark in conjunction with the Offering. All outstanding
shares of Brewer's common stock were exchanged for cash and shares of
StaffMark's common stock concurrent with the consummation of the Offering on
October 2, 1996.
2. BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations, although Brewer believes that the disclosures
made are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
audited financial statements and notes thereto included in StaffMark's
Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering.
Interim Financial Information
The interim financial statements as of September 29, 1996 and for the
three and nine months ended October 1, 1995 and September 29, 1996, are
unaudited, and certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been omitted. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position of Brewer and the results of operations
and cash flows with respect to the interim financial statements, have been
included. The operating results for the interim periods are not necessarily
indicative of results for the full year.
3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION
In conjunction with the merger with StaffMark, Brewer changed from an
S Corporation to a C Corporation for federal and state income tax reporting
purposes, which requires Brewer to recognize the tax consequences of operations
in its statements of income. The supplemental pro forma information included
in the accompanying statements of income reflect the estimated impact of
recognizing income tax expense as if Brewer had been a C Corporation for tax
reporting purposes during the three and nine months ended October 1, 1995 and
September 29, 1996, respectively.
14
<PAGE> 15
THE PROSTAFF COMPANIES
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 9,777,292 $ 10,590,194 $ 25,840,311 $ 29,509,631
COST OF SERVICES 8,100,662 8,650,927 21,339,195 24,034,483
------------ ------------ ------------ ------------
Gross profit 1,676,630 1,939,267 4,501,116 5,475,148
OPERATING EXPENSES:
Selling, general and
administrative 1,365,793 1,276,494 3,796,754 4,043,409
Depreciation and amortization 57,695 58,220 160,700 186,171
------------ ------------ ------------ ------------
Operating income 253,142 604,553 543,662 1,245,568
------------ ------------ ------------ ------------
OTHER INCOME
(EXPENSE):
Interest expense (6,032) (20,490) (16,088) (49,443)
Interest and other income 7,284 17,544 20,949 28,515
------------ ------------ ------------ ------------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 254,394 601,607 548,523 1,224,640
PROVISION FOR
INCOME TAXES -- -- 96,716 --
------------ ------------ ------------ ------------
Net income $ 254,394 $ 601,607 $ 451,807 $ 1,224,640
============ ============ ============ ============
PRO FORMA DATA:
Historical income before
income taxes $ 254,394 $ 601,607 $ 548,523 $ 1,224,640
Less pro forma provision for
income taxes 99,213 234,626 213,924 477,609
------------ ------------ ------------ ------------
PRO FORMA NET
INCOME $ 155,181 $ 366,981 $ 334,599 $ 747,031
============ ============ ============ ============
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
15
<PAGE> 16
THE PROSTAFF COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------- ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 188,145 $ 69,587
Certificates of deposit 155,154 --
Accounts receivable, net 3,020,622 3,952,688
Prepaid expenses and other 135,673 120,604
---------- ----------
Total current assets 3,499,594 4,142,879
PROPERTY AND EQUIPMENT, net 756,983 735,737
OTHER ASSETS:
Cash surrender value of
officer's life insurance 41,280 --
Advance to StaffMark -- 40,703
Other 4,730 7,440
---------- ----------
Total other assets 46,010 48,143
---------- ----------
$4,302,587 $4,926,759
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 20,000 $1,554,005
Current maturities of long-term debt 64,872 67,598
Note payable to stockholder 30,000 30,000
Accounts payable and accrued liabilities 117,339 84,911
Outstanding checks -- 71,212
Payroll and related liabilities 1,129,777 1,116,619
Reserve for workers' compensation claims 635,290 671,640
---------- ----------
Total current liabilities 1,997,278 3,595,985
LONG TERM DEBT, less current maturities 111,459 65,874
STOCKHOLDERS' EQUITY:
Common stock, (par values of $ .20 to $ 1.00)
authorized shares of 201,000 in 1995
and at September 30, 1996,
shares issued and outstanding of 55,000 at
December 31, 1995 and at September 30, 1996 11,100 11,100
Retained earnings 2,182,750 1,253,800
---------- ----------
Total stockholders' equity 2,193,850 1,264,900
---------- ----------
$4,302,587 $4,926,759
========== ==========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
16
<PAGE> 17
THE PROSTAFF COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 254,394 $ 601,607 $ 451,807 $ 1,224,640
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 57,695 56,761 160,700 186,171
Provision for deferred income
taxes -- -- 96,716 --
Provision for bad debts 8,200 20,000 20,300 45,659
Net gain on sale of property and
equipment -- (18,631) -- (14,854)
Change in operating assets
and liabilities, net of
effects of acquisition:
Accounts receivable (657,355) (21,108) (1,243,341) (977,725)
Prepaid expenses and other 29,528 30,329 18,555 15,069
Other assets -- 50,020 (6,647) 39,875
Accounts payable and accrued
liabilities (13,307) (12,687) (22,994) (32,428)
Outstanding checks -- (178,626) (109,084) 71,212
Payroll and related liabilities 317,085 (116,647) 1,188,217 (13,158)
Reserve for workers'
compensation claims 51,750 33,640 144,306 36,350
Income taxes payable -- -- (54,883) --
------------ ----------- ----------- -----------
Net cash provided by
operating activities 47,990 444,658 643,652 580,811
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Advances to StaffMark -- (9,453) -- (40,703)
Capital expenditures (43,620) (14,353) (279,848) (220,476)
Other -- -- -- 155,154
----------- ----------- ----------- -----------
Net cash used in
investing activities (43,620) (23,806) (279,848) (106,025)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net (payments) borrowings
under line of credit 47,005 376,705 (369,995) 1,534,005
Payments on long-term debt (15,434) (10,841) (39,828) (42,859)
Dividends -- (791,758) -- (2,084,490)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 31,571 (425,894) (409,823) (593,344)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 35,941 (5,042) (46,019) (118,558)
CASH AND CASH EQUIVALENTS,
beginning of period 146,412 74,629 228,372 188,145
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 182,353 $ 69,587 $ 182,353 $ 69,587
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 30,549 $ 21,006 $ 10,056 $ 28,953
=========== =========== =========== ===========
Income taxes paid $ 284,847 $ -- $ 54,883 $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
17
<PAGE> 18
THE PROSTAFF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
The combined financial statements of Prostaff include the
activities of Prostaff Personnel, Inc. ("Prostaff PI"), d.b.a. Prostaff
Staffing Services, Office Staffing and Medical Staffing, Excel Temporary
Staffing, Inc. ("Excel") and Professional Resources, Inc. ("Professional"),
d.b.a. Performance Staffing, which have common ownership. All intercompany
transactions have been eliminated in the combined financial statements.
Prostaff PI was originally incorporated in the state of Arkansas in
1973 as Dunhill Personnel Agency of Little Rock, Inc. ("Dunhill"). Dunhill
changed its name to Prostaff PI in 1988. Prostaff PI's primary business
purpose is to provide temporary personnel services. At September 30, 1996,
Prostaff PI operated staffing offices in 23 locations in Arkansas. Excel was
incorporated in the state of Arkansas on October 25, 1990 and is engaged in
providing temporary personnel services to one large cosmetic manufacturer in
Little Rock, Arkansas which represents 100% of the revenue and accounts
receivable of Excel. Professional was incorporated in the State of Arkansas on
October 24, 1995 ("inception date"). On October 31, 1995, Professional
purchased the assets of an existing temporary personnel service business in
Little Rock, Arkansas. The combined financial statements of Prostaff include
the results of operations of Professional from the inception date.
Prostaff and its stockholders entered into a definitive agreement to
merge with StaffMark in conjunction with the Offering. All outstanding shares
of Prostaff's common stock were exchanged for cash and shares of StaffMark's
common stock concurrent with the consummation of the Offering on October 2,
1996.
2. BASIS OF PRESENTATION:
The unaudited combined financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although Prostaff believes
that the disclosures made are adequate to make the information presented not
misleading. It is suggested that these combined financial statements be read
in conjunction with the audited financial statements and notes thereto included
in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related
to the Offering.
Interim Financial Information
The interim financial statements as of September 30, 1996 and for the
three and nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of Prostaff and the results of operations and cash flows
with respect to the combined interim financial statements, have been included.
The operating results for the interim periods are not necessarily indicative of
results for the full year.
3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION:
In conjunction with the merger with StaffMark, Prostaff changed from
an S Corporation to a C Corporation for federal and state income tax reporting
purposes, which requires Prostaff to recognize the tax consequences of
operations in its statements of income. The supplemental pro forma information
included in the accompanying statements of income reflect the estimated impact
of recognizing income tax expense as if Prostaff had been a C Corporation for
tax reporting purposes during the three and nine months ended September 30,
1995 and 1996, respectively.
18
<PAGE> 19
THE MAXWELL COMPANIES
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 5,621,701 $ 7,196,814 $ 17,154,803 $ 20,428,988
COST OF SERVICES 4,364,844 5,493,219 13,009,183 15,385,451
------------ ------------ ------------ ------------
Gross profit 1,256,857 1,703,595 4,145,620 5,043,537
OPERATING EXPENSES:
Selling, general and
administrative 989,048 1,334,828 3,233,692 3,815,406
Depreciation and amortization 37,497 26,490 107,187 98,997
------------ ------------ ------------ ------------
Operating income 230,312 342,277 804,741 1,129,134
------------ ------------ ------------ ------------
OTHER INCOME
(EXPENSE):
Interest expense -- (62,540) -- (62,540)
Other, net 8,562 34,648 960 68,109
------------ ------------ ------------ ------------
Net income $ 238,874 $ 314,385 $ 805,701 $ 1,134,703
============ ============ ============ ============
PRO FORMA DATA:
Historical income before
income taxes $ 238,874 $ 314,385 $ 805,701 $ 1,134,703
Less pro forma provision for
income taxes 93,161 122,610 314,223 442,534
------------ ------------ ------------ ------------
PRO FORMA NET
INCOME $ 145,713 $ 191,775 $ 491,478 $ 692,169
============ ============ ============ ============
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
19
<PAGE> 20
THE MAXWELL COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,041,373 $ 162,562
Restricted cash 253,171 50,279
Investments 273,354 --
Accounts receivable, net 2,536,603 2,898,083
Prepaid expenses and other 24,628 153,609
----------- -----------
Total current assets 4,129,129 3,264,533
PROPERTY AND EQUIPMENT, net 499,792 337,774
INTANGIBLE ASSETS, net -- 294,632
ADVANCE TO STAFFMARK -- 31,250
----------- -----------
$ 4,628,921 $ 3,928,189
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 169,250 $ 327,728
Payroll and related liabilities 570,444 851,469
Reserve for workers' compensation claims 1,153,000 912,000
Current maturities of long-term debt -- 1,827,361
Accrued dividends 151,000 --
Other accrued liabilities 25,462 18,993
----------- -----------
Total current liabilities 2,069,156 3,937,551
LONG-TERM DEBT, less current maturities -- 77,562
STOCKHOLDERS' EQUITY:
Common stock, $ 1.00 par value in 1995 and 1996; authorized shares of
110,000 in 1995 and 160,000 at September 30, 1996; shares issued and
outstanding of 4,000 at December 31, 1995 and 5,000 at
September 30, 1996 4,000 5,000
Unrealized gain on investments 43,296 --
Retained earnings 2,512,469 (91,924)
----------- -----------
Total stockholders' equity 2,559,765 (86,924)
----------- -----------
$ 4,628,921 $ 3,928,189
=========== ===========
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these balance sheets.
20
<PAGE> 21
THE MAXWELL COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 238,874 $ 314,385 $ 805,701 $ 1,134,703
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 37,497 26,490 107,187 98,997
Provision for bad debts 77,450 4,136 274,187 50,056
Change in operating assets
and liabilities, net of
effects of acquisitions:
Restricted cash (62,901) 58,902 (34,096) 202,892
Accounts receivable (246,436) (225,968) (77,936) (411,536)
Prepaid expanses and other (950) (16,925) 60,524 (128,981)
Accounts payable (78,394) 89,692 (23,898) 158,478
Payroll and related
liabilities (255,239) (34,335) 49,385 281,025
Reserve for workers' compensation claims 75,750 -- 520,250 (241,000)
Other accrued liabilities 52,375 14,866 (8,827) (726)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (161,974) 231,243 1,672,477 1,143,908
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Sumner-Ray -- -- -- (168,000)
Capital expenditures (112,676) (66,436) (164,168) (135,246)
Purchase of investments (106,371) -- (117,847) --
Advances to StaffMark -- -- -- (31,250)
----------- ----------- ----------- -----------
Net cash used in
investing activities (219,047) (66,436) (282,015) (334,496)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (119,397) (667,884) (1,176,956) (3,439,223)
Proceeds from (payments on)
long-term debt -- -- -- 1,750,000
Issuance of stock -- -- -- 1,000
----------- ----------- ----------- -----------
Net cash used in
financing activities (119,397) (667,884) (1,176,956) (1,688,223)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (500,418) (503,077) 213,506 (878,811)
CASH AND CASH EQUIVALENTS,
beginning of period 1,270,468 665,639 556,544 1,041,373
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 770,050 $ 162,562 $ 770,050 $ 162,562
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest paid $ -- $ 30,038 $ -- $ 48,085
=========== =========== =========== ===========
Non-cash transactions:
Notes payable issued in conjunction
with acquisitions $ -- $ -- $ -- $ 149,180
=========== =========== =========== ===========
Transfer of investment to stockholders $ -- $ -- $ -- $ 273,354
=========== =========== =========== ===========
Transfer of property to stockholders $ -- $ -- $ -- $ 220,815
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
21
<PAGE> 22
THE MAXWELL COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
The combined financial statements of Maxwell include the activities of
Maxwell Staffing, Inc. ("Staffing"), Maxwell Staffing of Bristow, Inc.
("Bristow"), Maxwell/Healthcare, Inc. ("Healthcare"), Square One Rehab, Inc.
("Square One") and Technical Staffing, Inc. ("Technical"), all of which are
incorporated in Oklahoma and primarily have common ownership. All significant
intercompany transactions and balances have been eliminated.
Staffing, which was incorporated in 1979, and Bristow, which was
incorporated in 1993, both provide temporary personnel services in the
northeastern Oklahoma area to the clerical, industrial and medical fields.
Healthcare, which was incorporated in 1989 to provide foreign-trained temporary
and permanent physical and occupational therapists services, is licensed to do
business in 22 states. Square One, which was incorporated in 1991, provides
contract management and physical and occupational therapists services to
companies located in the midwestern and southwestern United States. Technical,
which was incorporated in 1996, provides permanent and temporary personnel
services to companies located primarily in Oklahoma.
Maxwell and its stockholders entered into a definitive agreement to
merge with StaffMark in conjunction with the Offering. All outstanding shares
of Maxwell's common stock were exchanged for cash and shares of StaffMark's
common stock concurrent with the consummation of the Offering on October 2,
1996.
2. BASIS OF PRESENTATION:
The unaudited combined financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although Maxwell believes that
the disclosures made are adequate to make the information presented not
misleading. It is suggested that these combined financial statements be read
in conjunction with the audited financial statements and notes thereto included
in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related
to the Offering.
Interim Financial Information
The interim financial statements as of September 30, 1996 and for the
three and nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of Maxwell and the results of operations and cash flows
with respect to the combined interim financial statements, have been included.
The operating results for the interim periods are not necessarily indicative of
results for the full year.
3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION:
In conjunction with the merger with StaffMark, Maxwell changed from an
S Corporation to a C Corporation for federal and state income tax reporting
purposes, which requires Maxwell to recognize the tax consequences of
operations in its statements of income. The supplemental pro forma information
included in the accompanying statements of income reflect the estimated impact
of recognizing income tax expense as if Maxwell had been a C Corporation for
tax reporting purposes during the three and nine months ended September 30,
1995 and 1996, respectively.
22
<PAGE> 23
HRA, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 5,132,591 $ 7,746,565 $ 14,064,083 $ 19,286,664
COST OF SERVICES 4,194,124 5,975,131 11,469,095 15,173,991
------------ ------------ ------------ ------------
Gross profit 938,467 1,771,434 2,594,988 4,112,673
OPERATING EXPENSES:
Selling, general and
administrative 1,053,999 1,238,978 2,762,502 3,302,853
Depreciation and amortization 31,859 39,797 57,115 89,702
------------ ------------ ------------ ------------
Operating income (147,391) 492,659 (224,629) 720,118
------------ ------------ ------------ ------------
OTHER INCOME
(EXPENSE):
Interest expense (37,422) (41,725) (97,831) (95,664)
Interest and other, net 7,202 2,061 10,126 335,930
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
PROVISION (BENEFIT) FOR
INCOME TAXES (177,611) 452,995 (312,334) 960,384
PROVISION (BENEFIT) FOR
INCOME TAXES (66,253) 178,633 (108,970) 388,371
------------ ------------ ------------ ------------
Net income (loss) $ (111,358) $ 274,362 $ (203,364) $ 572,013
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
23
<PAGE> 24
HRA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 367,978 $ 354,417
Restricted cash 50,251 --
Accounts receivable, net 1,998,724 2,944,791
Prepaid expenses and other 467,002 756,836
Income taxes receivable 25,125 --
Deferred income taxes 160,000 281,300
---------- ----------
Total current assets 3,069,080 4,337,344
PROPERTY AND EQUIPMENT, net 144,179 258,087
INTANGIBLE ASSETS, net 37,156 1,001,308
OTHER ASSETS:
Advance to StaffMark -- 31,250
Deferred income taxes 65,000 55,300
Other 21,071 1,423
---------- ----------
Total other assets 86,071 87,973
---------- ----------
$3,336,486 $5,684,712
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowing under accounts receivable financing agreement $ 502,512 $ --
Accounts payable 193,096 164,199
Income tax payable -- 443,896
Outstanding checks 166,761 184,558
Current portion of deferred compensation arrangements 43,699 108,939
Payroll and related liabilities 621,317 766,417
Reserve for workers' compensation claims 1,390,351 1,224,378
Line of credit -- 1,340,000
Current maturities of long-term debt -- 255,238
Accrued expenses 138,416 169,594
---------- ----------
Total current liabilities 3,056,152 4,657,219
LONG-TERM DEBT, less current maturities -- 386,156
DEFERRED COMPENSATION ARRANGEMENTS, less
current portion 127,332 247,383
NOTE PAYABLE TO STOCKHOLDER 122,000 116,000
STOCKHOLDERS' EQUITY:
Common stock, no par value,
1,000 shares authorized,
790 shares issued and outstanding 12,600 12,600
Retained earnings 18,402 265,354
---------- ----------
Total stockholders' equity 31,002 277,954
---------- ----------
$3,336,486 $5,684,712
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
24
<PAGE> 25
HRA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (111,358) $ 274,362 $ (203,364) $ 572,013
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation and amortization 31,859 39,797 57,115 89,702
Provision for bad debts 847 (31,000) 2,041 (5,581)
Provision for deferred income taxes (28,050) (53,200) (135,500) (77,350)
Change in operating assets
and liabilities:
Restricted cash (12,975) -- (49,981) --
Accounts receivable (114,628) (130,174) 114,722 (989,015)
Income taxes receivable (25,125) -- (22,752) 44,240
Prepaid expenses and other (46,206) 18,499 (467,002) (149,386)
Other assets (19,648) -- (19,648) --
Outstanding checks 5,188 (76,682) 166,761 (13,109)
Accounts payable 79,226 (31,825) 20,222 150,257
Notes and other payables -- 254,248 -- --
Payroll and related liabilities 116,522 56,135 331,455 406,689
Reserve for workers'
compensation claims 162,987 103,131 757,629 250,172
Accrued expenses 38,666 19,445 139,897 3,565
Income taxes payable (72,207) -- -- 443,896
----------- ----------- ----------- -----------
Net cash provided by
operating activities 5,098 442,736 691,595 726,093
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (2,895) (74,454) (119,350) (161,613)
Purchase of business -- (863,151) -- (863,151)
Advances to StaffMark -- -- -- (31,250)
Other (16,000) -- (16,000) --
----------- ----------- ----------- -----------
Net cash used in investing
activities (18,895) (937,605) (135,350) (1,056,014)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on deferred
compensation arrangements (5,302) (19,324) (24,961) (55,378)
Net borrowings (payments)
under an accounts receivable
financing agreement 129,757 -- (379,621) --
Net borrowings under a
revolving line of credit -- 320,000 -- 745,000
Principal payments on note
payable to a stockholder (6,295) -- (24,295) --
Advances to stockholders 25,988 340,089 -- 250,000
Distributions to stockholders -- (297,289) -- (297,289)
----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities 144,148 343,476 (428,877) 642,333
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 130,351 (151,393) 127,368 312,412
CASH AND CASH EQUIVALENTS,
beginning of period 237,627 505,810 240,610 42,005
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 367,978 $ 354,417 $ 367,978 $ 354,417
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 45,699 $ 39,295 $ 60,768 $ 76,866
=========== =========== =========== ===========
Taxes paid $ 61,324 -- $ 206,298 $ 18,000
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
</TABLE>
During the nine month period ended September 30,1996, HRA recorded a deferred
compensation arrangement liability for the purchase of a noncompete agreement
with a former stockholder totaling $139,637.
The accompanying notes to financial statements
are an integral part of these statements.
25
<PAGE> 26
HRA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
HRA was incorporated on November 20, 1991, in the state of Tennessee
and provides temporary personnel services throughout central Tennessee.
Headquartered in Nashville, Tennessee, HRA does business under the name of
Human Resources and operates staffing offices in the following Tennessee
locations: Clarksville, Columbia, Franklin, Gallatin, Lebanon, Lewisburg,
Murfreesboro, Nashville, Pulaski, Portland, Smyrna, Springfield and Tullahoma.
HRA and its stockholders entered into a definitive agreement to merge
with StaffMark in conjunction with the Offering. All outstanding shares of
HRA's common stock were exchanged for cash and shares of StaffMark's common
stock concurrent with the consummation of the Offering on October 2, 1996.
2. BASIS OF PRESENTATION:
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although HRA believes that the
disclosures made are adequate to make the information presented not misleading.
It is suggested that these financial statements be read in conjunction with the
audited financial statements and notes thereto included in StaffMark's
Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering.
On July 11, 1996, HRA completed the purchase of the assets and
intellectual property of Dorothy Johnson's Career Consultants, Inc. ("Career
Consultants"). Career Consultants provides permanent placement services on a
fee basis to companies primarily in the Nashville, Tennessee area. The
purchase price was $850,000 and included a payment for assets and a non-compete
agreement with the principal stockholder of Career Consultants. The purchase
was financed with borrowings under HRA's line of credit, which was extended in
contemplation of this transaction. The acquisition was accounted for as a
purchase business combination. The operations of Career Consultants were not
significant to HRA's historical operating results.
Interim Financial Information
The interim financial statements as of September 30, 1996 and the
three and nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of HRA and the results of operations and cash flows with
respect to the interim financial statements, have been included. The operating
results for the interim periods are not necessarily indicative of results for
the full year.
3. LITIGATION:
On September 27, 1996, HRA settled a lawsuit with its former workers'
compensation insurance carrier, in which HRA had disputed the amount of
insurance premiums owed for fiscal years 1993 and 1994 and a portion on fiscal
year 1995. The settlement totaled $641,394 and calls for HRA to make an initial
payment of $100,000, with the balance due in 36 monthly installments of
$16,470, including interest at 6%. The note may be prepaid in whole or in part
at any time without penalty. In the event that HRA elects to prepay the note,
HRA will be entitled to a 10% discount of the present value of the balance
outstanding at prepayment date. HRA had accrued for these disputed amounts in
the fiscal years in which such amounts arose. Annual maturities pursuant to
this note are as follows:
<TABLE>
<S> <C>
1997 $ 255,238
1998 179,353
1999 190,415
2000 16,388
----------
$ 641,394
==========
</TABLE>
26
<PAGE> 27
FIRST CHOICE STAFFING, INC.
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 3,316,224 $ 4,811,081 $ 9,956,709 $ 12,695,551
COST OF SERVICES 2,701,431 3,800,236 8,105,090 10,186,083
------------ ------------ ------------ ------------
Gross profit 614,793 1,010,845 1,851,619 2,509,468
OPERATING EXPENSES:
Selling, general and
administrative 577,588 642,960 1,605,478 1,780,660
Depreciation and amortization 8,241 32,533 24,693 79,068
------------ ------------ ------------ ------------
Operating income 28,964 335,352 221,448 649,740
------------ ------------ ------------ ------------
OTHER INCOME
(EXPENSE):
Interest expense (4,490) (19,649) (15,717) (33,416)
Other expense -- (1,053) -- (1,053)
------------ ------------ ------------ ------------
Net income $ 24,474 $ 314,650 $ 205,731 $ 615,271
============ ============ ============ ============
PRO FORMA DATA:
Historical income before
income taxes $ 24,474 $ 314,650 $ 205,731 $ 615,271
Less pro forma provision for
income taxes 9,545 122,713 80,235 239,956
------------ ------------ ------------ ------------
PRO FORMA NET
INCOME $ 14,929 $ 191,937 $ 125,496 $ 375,315
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
27
<PAGE> 28
FIRST CHOICE STAFFING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 268,440 $ 174,946
Accounts receivable, net 1,145,532 1,835,493
Prepaid expenses and other 72,171 31,467
---------- ----------
Total current assets 1,486,143 2,041,906
---------- ----------
PROPERTY AND EQUIPMENT, net 327,240 348,628
OTHER ASSETS:
Investment in captive insurance pool 36,000 36,000
Advance to StaffMark -- 31,801
Other -- 727,194
---------- ----------
Total other assets 36,000 794,995
---------- ----------
$1,849,383 $3,185,529
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 65,608 $ 99,853
Payroll and related benefits 534,047 510,688
Accrued workers' compensation 46,359 27,083
Line of credit 200,000 225,000
Current maturities of long-term debt -- 1,488,754
Note payable to stockholder 180,000 --
Other accrued expenses 5,735 --
---------- ----------
Total current liabilities 1,031,749 2,351,378
---------- ----------
LONG-TERM DEBT, less current maturities -- 500,000
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 100,000 shares
authorized, 10,000 shares issued and
outstanding 10,000 10,000
Retained earnings 807,634 324,151
---------- ----------
Total stockholders' equity 817,634 334,151
---------- ----------
$1,849,383 $3,185,529
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
28
<PAGE> 29
FIRST CHOICE STAFFING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1996 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,474 $ 314,650 $ 205,731 $ 615,271
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 8,241 32,533 24,693 79,068
Net loss on sale of property and equipment -- 1,053 -- 1,053
Change in operating assets and liabilities:
Accounts receivable, net (157,097) (163,699) (67,512) (689,961)
Prepaid expanses and other 3,141 7,505 42,486 40,704
Other assets -- (721,055) -- (735,406)
Accounts payable 37,819 3,313 46,555 34,245
Accrued workers' compensation (90,109) (22,880) (132,269) (19,276)
Payroll and related liabilities 51,144 10,213 (3,820) (23,359)
Other accrued expenses -- -- (7,000) (5,735)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (122,387) (538,367) 108,864 (703,396)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (81,211) (23,164) (150,833) (93,297)
Advances to StaffMark -- (551) -- (31,801)
----------- ----------- ----------- -----------
Net cash used in investing activities (81,211) (23,715) (150,833) (125,098)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) line of credit -- (25,000) -- 25,000
Proceeds from long term debt -- 1,988,754 -- 1,988,754
Payments on note payable to stockholder (70,000) (140,000) (70,000) (180,000)
Cash distributions to stockholders -- (1,098,754) -- (1,098,754)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (70,000) 725,000 (70,000) 735,000
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (273,598) 162,918 (111,969) (93,494)
CASH AND CASH EQUIVALENTS,
Beginning of period 355,740 12,028 194,111 268,440
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
End of period $ 82,142 $ 174,946 $ 82,142 $ 174,946
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ -- $ 5,551 $ 6,285 $ 19,502
=========== =========== =========== ===========
Taxes paid $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
29
<PAGE> 30
FIRST CHOICE STAFFING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
First Choice, a South Carolina corporation, provides temporary
personnel services primarily for industrial and clerical needs in the greater
Charlotte, North Carolina, metropolitan region. The business was initially
founded and incorporated in 1986 as a Dunhill Temporary Systems franchise. In
1989, the founders bought out the Dunhill franchise contract and formed First
Choice Temporary Staffing, Inc. In 1993, First Choice Temporary Staffing, Inc.
changed its name to First Choice Staffing, Inc.
Prior to reorganization on April 1, 1994, First Choice was a wholly
owned subsidiary of Gregory Personnel, Inc. ("Gregory Personnel"). Gregory
Personnel was formed as a holding company in connection with the acquisition by
one 50% stockholder of the other 50% stockholder's interest in First Choice in
1990. Gregory Personnel had no operations and had assets consisting primarily
on a noncompete agreement arising from the acquisition of the former 50%
stockholder's interest in First Choice. The noncompete agreement was amortized
over three years. On April 1, 1994, Gregory Personnel was merged downstream
with First Choice, leaving First Choice as the surviving entity.
First Choice and its stockholders entered into a definitive agreement
to merge with StaffMark in conjunction with the Offering. All outstanding
shares of First Choice's common stock were exchanged for cash and shares of
StaffMark's common stock concurrent with the consummation of the Offering on
October 2, 1996.
2. BASIS OF PRESENTATION:
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the SEC. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to those rules and regulations, although First Choice believes that
the disclosures made are adequate to make the information presented not
misleading. It is suggested that these financial statements be read in
conjunction with the audited financial statements and notes thereto included
in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related
to the Offering.
On July 1, 1996, First Choice acquired certain of the operating assets
of SSI, a provider of permanent and temporary placement services to companies
in the market for information technology professionals. SSI was incorporated
in May 1993 and is located in Charlotte, North Carolina. The total purchase
price of $700,000 and noncompete agreement with the seller of $50,000 were
financed through borrowings from a bank and execution of a promissory note
payable to the seller. All financing related to this acquisition is secured by
the personal guaranty of the majority stockholder. The acquisition was
accounted for using the purchase method of accounting.
Interim Financial Information
The interim financial statements as of September 30, 1996 and for the
three and nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of First Choice and the results of operations and cash
flows with respect to the interim financial statements, have been included.
The operating results for the interim periods are not necessarily indicative of
results for the full year.
3. S CORPORATION DISTRIBUTIONS:
On September 25, 1996, First Choice borrowed $1.2 million and made
distributions to its owners equal to First Choice's S Corporation Accumulated
Adjustment Account.
4. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION:
In conjunction with the merger with StaffMark, First Choice changed
from an S Corporation to a C Corporation for federal and state income tax
reporting purposes, which requires First Choice to recognize the tax
consequences of operations in its statements of income. The supplemental pro
forma information included in the accompanying statements of income reflect
the estimated impact of recognizing income tax expense as if First Choice had
been a C Corporation for tax reporting purposes during the three and nine
months ended September 30, 1995 and 1996, respectively.
30
<PAGE> 31
THE BLETHEN GROUP
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 3,283,065 $ 4,326,533 $ 9,743,890 $ 12,047,667
COST OF SERVICES 2,444,637 3,166,415 7,341,899 9,084,803
------------ ------------ ------------ ------------
Gross profit 838,428 1,160,118 2,401,991 2,962,864
OPERATING EXPENSES:
Selling, general and
administrative 659,659 972,048 1,985,510 2,274,816
Depreciation and amortization 29,386 27,849 83,578 83,475
------------ ------------ ------------ ------------
Operating income 149,383 160,221 332,903 604,573
------------ ------------ ------------ ------------
OTHER INCOME
(EXPENSE):
Interest expense (31,979) (30,330) (100,702) (112,958)
Interest and other income
(expense) 8,231 (9,553) 4,760 (8,392)
------------ ------------ ------------ ------------
INCOME BEFORE
PROVISION FOR
INCOME TAXES 125,635 120,338 236,961 483,223
PROVISION FOR
INCOME TAXES 34,000 16,596 71,000 76,755
------------ ------------ ------------ ------------
Net income $ 91,635 $ 103,742 $ 165,961 $ 406,468
============ ============ ============ ============
PRO FORMA DATA:
Historical income before
income taxes $ 125,635 $ 120,338 $ 236,961 $ 483,223
Less pro forma provision for
income taxes 48,998 46,932 92,415 188,457
------------ ------------ ------------ ------------
PRO FORMA NET
INCOME $ 76,637 $ 73,406 $ 144,546 $ 294,766
============ ============ ============ ============
</TABLE>
The accompanying notes to combined financial statements
are an integral part of these statements.
31
<PAGE> 32
THE BLETHEN GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 44,644 $ 115,773
Accounts receivable, net 1,377,799 1,785,287
Deferred tax asset 11,000 16,000
Prepaid expenses and other 14,510 2,776
---------- ----------
Total current assets 1,447,953 1,919,836
PROPERTY AND EQUIPMENT, NET 307,286 255,298
OTHER ASSETS:
Due from stockholders 194,163 --
Deferred tax asset 20,760 --
Advance to StaffMark -- 31,250
Other 12,232 14,492
---------- ----------
Total other assets 227,155 45,742
---------- ----------
$1,982,394 $2,220,876
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 105,648 $ 62,446
Outstanding checks 25,329 --
Payroll and related liabilities 301,258 511,412
Line of credit 971,436 1,175,203
Note payable to shareholder -- 105,582
Current maturities of long-term debt 10,151 10,678
Current maturities of capital lease obligations 47,148 --
Current maturities of notes payable to related parties 62,813 --
Income taxes payable 82,583 49,638
Accrued interest and other 55,043 25,967
---------- ----------
Total current liabilities 1,661,409 1,940,926
LONG-TERM DEBT, less current maturities 24,922 17,057
CAPITAL LEASE OBLIGATIONS, less current maturities 22,475 --
NOTES PAYABLE TO RELATED PARTIES,
less current maturities 45,271 --
DEFERRED TAX LIABILITY -- 26,300
STOCKHOLDERS' EQUITY:
Common stock 8,399 8,399
Paid-in capital 8,940 8,940
Retained earnings 210,978 219,254
---------- ----------
Total stockholders' equity 228,317 236,593
---------- ----------
$1,982,394 $2,220,876
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
32
<PAGE> 33
THE BLETHEN GROUP
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 91,635 $ 103,742 $ 165,961 $ 406,468
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 29,386 27,849 83,578 83,475
Provision for bad debts (500) 8,300 (1,400) 42,060
Change in operating assets
and liabilities:
Accounts receivable 107,263 (99,218) (211,584) (404,490)
Prepaid expenses and other (17,630) 12,775 (26,299) 11,734
Other assets 11,750 (2,308) 11,750 (2,260)
Accounts payable (233,716) (1,998) 10,471 (43,202)
Notes payable 17,383 -- -- --
Outstanding checks -- -- -- (25,329)
Payroll and related liabilities 7,222 6,842 1,099 210,154
Income taxes payable (receivable) -- (29,173) 56,040 (32,945)
Accrued interest and other 83,078 (16,931) 98,575 (29,076)
--------- --------- --------- ---------
Net cash provided by operating
activities 95,871 9,880 188,191 216,589
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,395) (4,666) (6,396) (31,487)
Advances to StaffMark -- -- -- (31,250)
--------- --------- --------- ---------
Net cash used in investing
activities (6,395) (4,666) (6,396) (62,737)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from
lines of credit (177,462) 122,436 48,151 203,767
Proceeds from issuance of
long-term debt -- -- -- --
Payments on long-term debt (2,263) (1,851) (5,170) (7,338)
Payments on capital lease obligations (19,297) -- (61,240) (69,623)
Change in note payable to related parties 79,025 (23,767) (8,049) (2,502)
Cash distributions to stockholders (31,291) (353,325) (94,181) --
Cash contributions by stockholders -- -- -- (398,192)
Change in due from stockholders (72,917) 247,754 (40,126) 191,165
--------- --------- --------- ---------
Net cash used in
financing activities (224,205) (8,753) (160,615) (82,723)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (134,729) (3,539) 21,180 71,129
CASH AND CASH EQUIVALENTS,
beginning of period 187,830 119,312 31,921 44,644
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of period $ 53,101 $ 115,773 $ 53,101 $ 115,773
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 63,725 $ 51,422 $ 122,591 $ 131,963
========= ========= ========= =========
Taxes paid $ 18,551 $ 33,930 $ 41,476 $ 66,939
========= ========= ========= =========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
33
<PAGE> 34
THE BLETHEN GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
Blethen's primary business purpose is to provide temporary personnel
services. Blethen's administrative headquarters are in Burlington, North
Carolina, and as of September 30, 1996, Blethen operated staffing offices in
Burlington, Henderson, Durham, West End, Research Triangle Park and
Winston-Salem, North Carolina.
The accompanying combined financial statements include the accounts of
the following separate entities which comprise Blethen:
<TABLE>
<CAPTION>
FORM OF
CORPORATION
DATE OF INCORPORATION FOR INCOME
ENTITY IN NORTH CAROLINA TAX PURPOSES SERVICE TYPE
- ------ --------------------- ------------ ------------
<S> <C> <C> <C>
Blethen Temporaries, Inc. . . . . . October 6, 1981 S Corporation Clerical and light industrial
Dixon Enterprises of Burlington,
Inc. . . . . . . . . . . . . . . February 7, 1992 C Corporation Clerical and light industrial
DP Pros of Burlington, Inc. . . . . June 6, 1985 C Corporation Information technology
and clinical
Personnel Placement, Inc. . . . . . October 6, 1981 C Corporation Permanent Placement
TRASEC Corp. . . . . . . . . . . . . February 7, 1992 C Corporation Clerical and light industrial
Jaeger Personnel Services, Ltd. . . December 20, 1985 S Corporation Clerical and light industrial
</TABLE>
All significant intercompany transactions and balances have been eliminated.
Blethen and its stockholders entered into a definitive agreement to
merge with StaffMark in conjunction with the Offering. All outstanding shares
of Blethen's common stock were exchanged for cash and shares of StaffMark's
common stock concurrent with the consummation of the Offering on October 2,
1996.
2. BASIS OF PRESENTATION:
The unaudited combined financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although Blethen believes that
the disclosures made are adequate to make the information presented not
misleading. It is suggested that these combined financial statements be read
in conjunction with the audited financial statements and notes thereto included
in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related
to the Offering.
Interim Financial Information
The interim financial statements as of September 30, 1996 and for the
three and nine months ended September 30, 1995 and 1996, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of Blethen and the results of operations and cash flows
with respect to the combined interim financial statements, have been included.
The operating results for the interim periods are not necessarily indicative of
results for the full year.
34
<PAGE> 35
3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION:
In conjunction with the merger with StaffMark, Blethen changed from an
S Corporation to a C Corporation for federal and state income tax reporting
purposes, which requires Blethen to recognize the tax consequences of
operations in its statements of income. The supplemental pro forma information
included in the accompanying statements of income reflect the estimated impact
of recognizing income tax expense as if Blethen had been a C Corporation for
tax reporting purposes during the three and nine months ended September 30,
1995 and 1996, respectively.
35
<PAGE> 36
PART I ITEM II-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
On October 2, 1996, StaffMark acquired simultaneously with the closing
of the Offering, the Founding Companies. Pursuant to the requirements of SAB
97, which was issued and became effective July 31, 1996, Brewer was designated
as the acquirer of the other Founding Companies for financial reporting
purposes. The information below is intended to discuss the pro forma and
combined results of operations as well as the results of operations for Brewer
and each of the other Founding Companies for the three months ended September
30, 1996 compared to the three months ended September 30, 1995, and for the nine
months ended September 30, 1996 compared to the nine months ended September 30,
1995.
The Company's revenues are derived from temporary staffing and
permanent placement services provided to its clients. Because the Company
compensates its temporary employees only for the hours actually worked, wages
for the Company's temporary personnel are a variable cost that increase or
decrease in proportion to revenues. Cost of services consists primarily of
wages paid to temporary employees, workers' compensation expenses and payroll
taxes related to temporary employees. Selling, general and administrative
expenses consist primarily of compensation and related benefits to the Founding
Companies' owners, administrative salaries and benefits, marketing and rent.
The Founding Companies have been managed throughout the periods
presented as independent private companies, and, as such, their results of
operations reflect two tax structures, S Corporations and C Corporations, which
have influenced, among other things the historical levels of their owners'
compensation. Certain owners have agreed to reductions in their compensation
and benefits in connection with the Merger. The compensation differential and
the related income tax effects have been reflected as pro forma adjustments in
the accompanying pro forma financial information.
The Company has analyzed the savings that it expects to realize as a
result of: (i) consolidating certain general and administrative functions,
including workers' compensation insurance programs, (ii) the reduction in
interest payments related to the prepayment of the Founding Companies' debt,
and (iii) its ability to borrow at lower interest rates than the Founding
Companies. The Company cannot currently quantify these savings. It is
anticipated that these savings will be partially offset by the costs of being a
public company and the incremental increase in costs related to the Company's
new corporate management. However, these costs also cannot be accurately
quantified. Accordingly, neither the anticipated savings nor the anticipated
costs have been included in the pro forma financial information included
herein. As a result, historical combined results may not be comparable to, or
indicative of, future performance.
The timing of certain holidays, weather conditions and seasonal
vacation patterns may cause the Company's quarterly results of operations to
fluctuate. The Company expects to realize higher revenues, operating income and
net income during the second and third quarters and lower revenues, operating
income and net income during the first and fourth quarters.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages provided below are
calculated using the detailed financial information contained in the financial
statements, the notes thereto and the other financial data included elsewhere in
this document. Also, the pro forma combined results discussed below occurred
when the combined companies were not under common control or management and may
not be comparable to, or indicative of future performance.
PRO FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995.
RESULTS OF OPERATIONS - PRO FORMA COMBINED
PRO FORMA COMBINED REVENUES
Pro forma combined revenues increased $6.8 million or 14.9% to $52.7
million for the three months ended September 30, 1996 as compared to the three
months ended September 30, 1995. This increase was largely attributable to an
increase in HRA's revenues of $2.6 million primarily related to the opening of
several new branches. Also contributing to the increase in pro forma combined
revenues was an increase in Maxwell's, Blethen's, and First Choice's revenues of
$1.6 million, $1.0 million, and $1.5 million, respectively.
PRO FORMA COMBINED GROSS PROFIT
Pro forma combined gross profit increased $2.1 million or 23.2% to
$11.4 million for the three months ended September 30, 1996 as compared to three
months ended September 30, 1995. Pro forma combined gross profit as a
percentage of revenues increased to 21.6% at September 30, 1996 from 20.1% at
September 30, 1995. These increases are primarily attributable to an increase
in Brewer's gross margin, exclusive of acquisitions.
36
<PAGE> 37
PRO FORMA COMBINED OPERATING EXPENSES
Pro forma combined selling, general and administrative ("SG&A")
expenses increased $1.1 million or 17.3% to $7.4 million for the three months
ended September 30, 1996 as compared to the three months ended September 30,
1995. This increase was primarily attributable to the opening of several new
branches in the Founding Companies. Pro forma combined SG&A as a percentage of
revenues increased to 14.0% for the three months ended September 30, 1996
compared to 13.7% for the three months ended September 30, 1995. Pro forma
combined depreciation and amortization expense remained relatively consistent.
PRO FORMA COMBINED OPERATING INCOME
Pro forma combined operating income increased $1.0 million or 41.1% to
$3.5 million for the three months ended September 30, 1996 as compared to three
months ended September 30, 1995. Pro forma combined operating income as a
percentage of revenues increased to 6.7% for the three months ended September
30, 1996 as compared to 5.5% for the three months ended September 30, 1995.
These increases are primarily attributable to the increased gross profit and
gross profit as a percentage of revenues as discussed above while operating
expenses remained relatively stable.
PRO FORMA COMBINED INTEREST EXPENSE
Pro forma combined interest expense was $.7 million for the three
months ended September 30, 1996 as compared to $.6 million for the three months
ended September 30, 1995. Concurrent with the Merger, all debt was repaid.
PRO FORMA COMBINED NET INCOME
Pro forma combined net income increased $.6 million or 51.8% to $1.7
million for three months ended September 30, 1996 compared to $1.1 million for
the three months ended September 30, 1995. Pro forma combined net income as a
percentage of revenues increased to 3.3% for the three months ended September
30, 1996 compared to 2.5% for the three months ended September 30, 1995.
PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995.
PRO FORMA COMBINED REVENUES
Pro forma combined revenues increased $15.7 million or 12.2% to $144.1
million for the nine months ended September 30, 1996 compared to $128.4 million
for the nine months ended September 30, 1995. This increase was largely
attributable to an increase in Prostaff's revenues of $3.7 million primarily due
to the opening of new branches and an increase in the amount of business
conducted with a significant client and an increase in HRA's revenues of $5.2
million primarily attributable to the opening of several new branches. Also
contributing to the increase in pro forma combined revenues was an increase
Maxwell's, Blethen's, and First Choice's revenues of $3.3 million, $2.3 million,
and $1.7 million, respectively.
PRO FORMA COMBINED GROSS PROFIT
Pro forma combined gross profit increased $4.8 million or 18.4% to
$30.8 million for the nine months ended September 30, 1996 as compared to $26.0
million for the nine months ended September 30, 1995. Pro forma combined gross
profit as a percentage of revenues increased to 21.4% at September 30, 1996 from
20.3% at September 30, 1995. These increases are primarily attributable to an
increase in Brewer's gross margin, exclusive of acquisitions and the opening of
several new branches in the Founding Companies.
PRO FORMA COMBINED OPERATING EXPENSES
Pro forma combined SG&A expenses increased $3.2 million or 17.4% to
$21.5 million for the nine months ended September 30, 1996 as compared to $18.4
million for the nine months ended September 30, 1995. This increase was
primarily attributable to the opening of several new branches in the Founding
Companies. Pro forma combined SG&A as a percentage of revenues increased to
15.0% for the nine months ended September 30, 1996 compared to 14.3% for the
nine months ended September 30, 1995. Pro forma combined depreciation and
amortization expense increased $.2 million or 13.5% to $1.4 million for the nine
months ended September 30, 1996 compared to $1.3 million for the nine months
ended September 30, 1995.
37
<PAGE> 38
PRO FORMA COMBINED OPERATING INCOME
Pro forma combined operating income increased $1.4 million or 22.3% to
$7.8 million for the nine months ended September 30, 1996 as compared to $6.4
million for the nine months ended September 30, 1995. Pro forma combined
operating income as a percentage of revenues increased to 5.4% for the nine
months ended September 30, 1996 as compared to 5.0% for the nine months ended
September 30, 1995. These increases are primarily attributable to the increased
gross profit and gross profit as a percentage of revenues as discussed above,
offset somewhat by the increase in SG&A expense.
PRO FORMA COMBINED INTEREST EXPENSE
Pro forma combined interest expense was $1.8 million for the nine
months ended September 30, 1996 and September 30, 1995. Concurrent with the
Merger, all debt was repaid.
PRO FORMA COMBINED NET INCOME
Pro forma combined net income increased $.9 million or 32.2% to $3.8
million during the nine months ended September 30, 1996 as compared to $2.9
million for the nine months ended September 30, 1995.
COMBINED RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
====================================== ========================================
1995 % 1996 % 1995 % 1996 %
====================================== ========================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 41,759 100.0% $ 52,689 100.0% $ 107,316 100.0% $142,543 100.0%
COST OF SERVICES 33,398 80.0 41,429 78.6 85,810 80.0 112,128 78.7
-------- ------- -------- ------- --------- -------- -------- -------
Gross profit 8,361 20.0 11,260 21.4 21,506 20.0 30,415 21.3
OPERATING EXPENSES:
Selling, general and administrative 6,211 14.9 7,563 14.4 17,019 15.9 21,869 15.3
Depreciation and amortization 368 0.8 485 0.9 773 0.7 1,402 1.0
-------- ------- -------- ------- --------- -------- -------- -------
Operating income $ 1,782 4.3% $ 3,212 6.1% $ 3,714 3.4% $ 7,144 5.0%
======== ======= ======== ======= ========= ======== ======== =======
</TABLE>
COMBINED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1995.
COMBINED REVENUES
Combined revenues increased $10.9 million or 26.2% to $52.7 million for
the three months ended September 30, 1996 compared to $41.8 million for the
three months ended September 30, 1995. This increase was largely attributable
to (i) an increase in Brewer's revenues of $3.4 million primarily attributable
to the acquisition of On Call in February 1996, (ii) an increase in Prostaff's
revenues of $.8 million primarily due to the opening of new branches and an
increase in business conducted with a significant client, and (iii) an increase
in HRA's revenues of $2.6 million primarily attributable to the opening of
several new branches. Also contributing to the increase in combined revenues
was an increase in Maxwell's, Blethen's, and First Choice's revenues of $1.6
million, $1.0 million, and $1.5 million respectively.
COMBINED GROSS PROFIT
Combined gross profit increased $2.9 million or 34.7% to $11.3 million
for the three months ended September 30, 1996 as compared to $8.4 million for
the three months ended September 30, 1995. Combined gross profit as a
percentage of revenues increased to 21.4% at September 30, 1996 from 20.0% at
September 30, 1995. These increases are primarily attributable to Brewer's
acquisition of Caldwell, as well as an increase in Brewer's gross profit as a
percentage of revenues as the result of lower expenses in workers' compensation
and state unemployment taxes.
COMBINED OPERATING EXPENSES
Combined SG&A expenses increased $1.4 million or 21.8% to $7.6 million
for the three months ended September 30, 1996 compared to $6.2 million for the
three months ended September 30, 1995. This increase was primarily attributable
to the opening of several new branches in the Founding Companies as well as an
increase in Brewer's SG&A of $.7 million primarily attributable to the
acquisition of On Call. Combined SG&A as a percentage of revenues decreased to
14.4% for the three months ended September 30, 1996 compared to 14.9% for the
three months ended September 30, 1995. Combined depreciation and amortization
expense increased $.1 million or 31.8% to $.5 million for the three months ended
September 30, 1996 compared to $.4 million for the three months ended September
30, 1995.
COMBINED OPERATING INCOME
Combined operating income increased $1.4 million or 80.3% to $3.2
million for the three months ended September 30, 1996 as compared to $1.8
million for the three months ended September 30, 1995. Combined operating
income as a percentage of revenues increased to 6.1% for the three months ended
September 30, 1996 as compared to 4.3% for the three months ended September 30,
1995. These increases are primarily attributable to the increased gross profit
and gross profit as a percentage of revenues, offset by a small increase in SG&A
expense as discussed above.
38
<PAGE> 39
COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1995.
COMBINED REVENUES
Combined revenues increased $35.2 million or 32.8% to $142.5 million for
the nine months ended September 30, 1996 compared to $107.3 million for the
nine months ended September 30, 1995. This increase was largely attributable
to (i) an increase in Brewer's revenues of $18.0 million primarily attributable
to the acquisitions of Caldwell in July 1995 and On Call in February 1996, (ii)
an increase in Prostaff's revenues of $3.7 million primarily due to the opening
of new branches and an increase in the amount of business conducted with a
significant client, and (iii) an increase in HRA's revenues of $5.2 million
primarily attributable to the opening of several new branches. Also
contributing to the increase in combined revenues was an increase in Maxwell's,
Blethen's, and First Choice's revenues of $3.3 million, $2.3 million, and $2.7
million, respectively.
COMBINED GROSS PROFIT
Combined gross profit increased $8.9 million or 41.4% to $30.4 million
for the three months ended September 30, 1996 as compared to $21.5 million for
the three months ended September 30, 1995. Combined gross profit as a
percentage of revenues increased to 21.3% at September 30, 1996 from 20.0% at
September 30, 1995. These increases are primarily attributable to Brewer's
acquisition of Caldwell, as well as an increase in Brewer's gross margin,
exclusive of acquisitions.
COMBINED OPERATING EXPENSES
Combined SG&A increased $4.9 million or 28.5% to $21.9 million for the
nine months ended September 30, 1996 compared to $17.0 million for the nine
months ended September 30, 1995. This increase was primarily attributable to
the opening of several new branches by many of the Founding Companies as well as
an increase of Brewer's SG&A of $3.0 million primarily attributable to the
acquisitions of Caldwell and On Call. Combined SG&A as a percentage of revenues
decreased to 15.3% for the nine months ended September 30, 1996 compared to
15.9% for the nine months ended September 30, 1995. Combined depreciation and
amortization expense increased $.6 million or 81.4% to $1.4 million for the nine
months ended September 30, 1996 compared to $.8 million for the nine months
ended September 30, 1995. This increase was primarily attributable to an
increase of Brewer's depreciation and amortization of $.5 million largely due to
increased amortization of intangibles which resulted from the acquisitions of
Caldwell and On Call.
COMBINED OPERATING INCOME
Combined operating income increased $3.4 million or 92.4% to $7.1
million for the nine months ended September 30, 1996 as compared to $3.7
million for the nine months ended September 30, 1995. Combined operating
income as a percentage of revenues increased to 5.0% for the nine months
ended September 30, 1996 as compared to 3.5% for the nine months ended
September 30, 1995. These increases are primarily attributable to the increased
gross profit and gross profit margin offset somewhat by the increase in SG&A
expense as discussed above.
39
<PAGE> 40
COMBINED LIQUIDITY AND CAPITAL RESOURCES
On October 2, 1996, the Company completed the Offering which involved the
public sale of 6.325 million shares of common stock (including the
underwriters' over-allotment) at a price of $12.00 per share. The proceeds from
the transaction, net of underwriting discounts and commissions and after
deducting expenses of the Offering were approximately $67.0 million. Of this
amount $15.9 million was used to pay the cash portion of the purchase price for
the Founding Companies. In addition, approximately $29.5 million of the net
proceeds was used to repay indebtedness of the Founding Companies. The
remaining net proceeds will be used for working capital and for general
corporate purposes, which are expected to include future acquisitions.
On October 4, 1996, the Company completed a $50 million credit facility
with Mercantile Bank of St. Louis to be used for working capital and other
general corporate purposes, including future acquisitions. The facility
includes a $20 million revolving credit facility and $30 million acquisition
facility. The maturity of the facility is October 1, 2001 and the interest will
be computed at the Company's option at either LIBOR or the bank's prime rate and
incrementally adjusted based on certain of the Company's operating leverage
ratios. The credit facility is secured by all assets of the Company and a
pledge of 100% of the stock of all subsidiaries.
The Company has also recently registered an additional 4.0 million
shares of its common stock for use as consideration for future acquisitions.
While there can be no assurance, management believes that the funds currently
on hand, funds to be provided by operations and funds available through the
existing credit facility, coupled with management's assessment of the Founding
Companies additional borrowing capacity will be sufficient to meet the
Company's additional anticipated needs for working capital, capital
expenditures, and future acquisitions through the expiration date of the credit
facility discussed above. Management plans to periodically reassess the
adequacy of the Company's credit facility, taking into consideration current
and anticipated operating cash flow, anticipated capital expenditures, and
acquisition plans, in order to ensure the Company's negotiated credit
facilities are adequate to meet the Company's liquidity needs on a short-term
and long-term basis.
RESULTS OF OPERATIONS -- FOUNDING COMPANIES
INTERIM RESULTS -- BREWER
Revenues increased $3.4 million or 23.2% and $18.0 million or 59.0% to
$18.0 million and $48.6 million, respectively for the three and nine months
ended September 29, 1996 as compared to the three and nine months ended October
1, 1995. This increase is primarily due to the acquisitions of Caldwell in July
1995 and On Call in February 1996. Gross profit increased $.7 million or 24.0%
and $4.3 million or 71.6% to $3.8 million and $10.3 million, respectively for
the three and nine months ended September 29, 1996 as compared to the three and
nine months ended October 1, 1995. Gross margin increased to 21.2% during the
first nine months of 1996 compared to 19.7% during the first nine months of
1995. These increases were primarily attributable to the acquisition of
Caldwell, as well as the increase in Brewer's gross margin resulting from a
decrease in the Arkansas state unemployment tax rate. Operating expenses
increased $.8 million or 45.8% and $3.5 million or 89.1% to $2.5 million and
$7.5 million, respectively for the three and nine months ended September 29,
1996 as compared to the three and nine months ended October 1, 1995. This
increase was primarily attributable to the acquisitions of Caldwell and On Call
and was also influenced by Brewer's decision to enhance its organizational
structure in order to achieve its growth strategy which resulted in an increase
in personnel costs and costs associated with moving into its new corporate
headquarters. Operating income increased/(decreased) ($.1) million or (4.1%)
and $.8 million or 37.3% to $1.3 million and $2.8 million, respectively for the
three and nine months ended September 29, 1996 as compared to the three and nine
months ended October 1, 1995. As a percentage of revenues operating income
decreased to 5.8% for the nine months ended September 29, 1996 from 6.7% for the
nine months ended October 1, 1995. Net income decreased $.2 million or 16.2%
and $.2 million or 12.9% to $.8 million and $1.4 million, respectively for the
three and nine months ended September 29, 1996 as compared to the three and nine
months ended October 1, 1995 as a result of the increase in SG&A costs discussed
above.
INTERIM RESULTS -- PROSTAFF
Revenues increased $.8 million or 8.3% and $3.7 million or 14.2% to
$10.6 million and $29.5 million, respectively for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. This increase is primarily due to the opening of several
new branches during 1995 and during the first nine months of 1996, a significant
increase in business conducted with its largest client and the addition of a new
significant client in 1996. Gross margin increased to 18.6% during the first
nine months of 1996 compared to 17.4% during the first nine months of 1995.
This increase was primarily attributable to a decrease in the Arkansas state
unemployment tax rate. Operating expenses decreased $.1 million or 6.2% and
increased $.3 million or 6.9% to $1.3 million and $4.2 million, respectively for
the three and nine months ended September 30, 1996 as compared to the three and
nine months ended September 30, 1995. The increase for the nine months ended
September 30, 1996 was primarily attributable to the opening of several new
branches in 1995 and the hiring of a significant number of new employees,
partially offset by a decrease in bonuses to the owners of Prostaff. Operating
income increased $.4 million or 138.8% and $.7 million or 129.1% to $.6 million
and $1.2 million, respectively for the three and nine months ended September 30,
40
<PAGE> 41
1996 as compared to the three and nine months ended September 30, 1995. As a
percentage of revenues, operating income increased to 4.2% for the nine months
ended September 30, 1996 from 2.1% for the nine months ended September 30, 1995.
Net income increased $.3 million or 136.5% and $.8 million or 171.1% to $.6
million and $1.2 million, respectively for the three and nine months ended
September 30, 1996 as compared to the three and nine months ended September 30,
1995.
INTERIM RESULTS -- MAXWELL
Revenues increased $1.6 million or 28.0% and $3.3 million or 19.1% to
$7.2 million and $20.4 million, respectively for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. This increase is primarily due to a significant client
contract, which began in July 1995, and the acquisition of Sumner-Ray Technical
Resources, Inc. in February 1996. This increase was partially offset by a
decrease in the staffing needs of another client and the result of government
shutdowns in December 1996 and January 1996, which caused delays in the
issuance of H1-B Visas to foreign-trained therapists and delays in the
therapists' arrival in the U.S. Gross profit increased $.4 million or 35.5% and
$.9 million or 21.7% to $1.7 million and $5.0 million, respectively for the
three and nine months ended September 30, 1996 as compared to the three and
nine months ended September 30, 1995. Gross margin increased to 24.7% during
the first nine months of 1996 compared to 24.2% during the first nine months of
1995. This increase was primarily attributable to increased revenues and a
reduction in workers' compensation expense of approximately $.6 million due to
a reduction in the actuarially determined reserves. The reduction was
partially offset by an increase of approximately $.2 million in compensation
paid to the Company's foreign-trained therapists resulting from a one-time
change in the Company's orientation policy. Operating expenses increased $.3
million or 32.6% and $.6 million or 17.2% to $1.4 million and $3.9 million,
respectively for the three and nine months ended September 30, 1996 as compared
to the three and nine months ended September 30, 1995. Net income increased
$.1 million or 31.6% and $.3 million or 40.8% to $.3 million and $1.1 million,
respectively for the three and nine months ended September 30, 1996 as compared
to the three and nine months ended September 30, 1995.
INTERIM RESULTS -- HRA
Revenues increased $2.6 million or 50.9% and $5.2 million or 37.2% to
$7.7 million and $19.3 million, respectively for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. This increase is primarily due to the opening of new
branches and the acquisition of Dorothy Johnson's Career Consultants, Inc. in
July 1996. Gross profit increased $.8 million or 88.8% and $1.5 million or
58.5% to $1.8 million and $4.1 million, respectively for the three and nine
months ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. Gross margin increased to 21.3% for the nine months ended
September 30, 1996 compared to 18.5% for the nine months ended September 30,
1995. This increase was primarily attributable to the opening of new branches.
Operating expenses increased $.2 million or 17.8% and $.6 million or 20.3% to
$1.3 million and $3.4 million, respectively for the three and nine months ended
September 30, 1996 as compared to the three and nine months ended September 30,
1995. These increases were primarily attributable to the opening of new
branches. In addition, HRA expensed a severance arrangement of approximately
$.1 million during the nine months ended September 30, 1996. Operating income
increased $.6 million or 434.3% and $.9 million or 420.6% to $.5 million and
$.7 million, respectively for the three and nine months ended September 30,
1996 as compared to the three and nine months ended September 30, 1995. As a
percentage of revenues operating income increased to 3.7% for the nine months
ended September 30, 1996 from (1.6)% for the nine months ended September 30,
1995. Net income increased $.4 million or 346.4% and $.8 million or 381.3% to
$.3 million and $.6 million, respectively for the three and nine months ended
September 30, 1996 as compared to the three and nine months ended September 30,
1995.
INTERIM RESULTS -- FIRST CHOICE
Revenues increased $1.5 million or 45.1% and $2.7 million or 27.5% to
$4.8 million and $12.7 million, respectively for the three and nine months
ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. This increase is primarily due to the opening of a new
branch location in the first quarter of 1996 and the acquisition of SSI in July
1996. Gross profit increased $.4 million or 64.4% and $.7 million or 35.5% to
$1.0 million and $2.5 million, respectively for the three and nine months ended
September 30, 1996 as compared to the three and nine months ended September 30,
1995. Gross margin increased to 19.8% during the first nine months of 1996
compared to 18.6% during the first nine months of 1995. This increase was
primarily attributable to increased revenues partially offset by a decrease in
workers' compensation expense. Operating expenses increased $0.1 million or
15.3% and $.2 million or 14.1% to $.7 million and $1.9 million, respectively
for the three and nine months ended September 30, 1996 as compared to the three
and nine months ended September 30, 1995. These increases were primarily
attributable to an increase in recruiting and testing expenses, communication
costs and occupancy costs. These increases were partially offset by decreases
in training costs. Operating income increased $.3 million or 1,057.8% and $.4
million or 193.4% to $.3 million and $.6 million, respectively for the three
and nine months ended September 30, 1996 as compared to the three and nine
months ended September 30, 1995. As a percentage of revenues, operating income
41
<PAGE> 42
increased to 5.1% for the nine months ended September 30, 1996 from 2.2% for
the nine months ended September 30, 1995. Net income increased $.3 million or
1185.7% and $.4 million or 199.1% to $.3 million and $.6 million,
respectively for the three and nine months ended September 30, 1996 as compared
to the three and nine months ended September 30, 1995.
INTERIM RESULTS -- BLETHEN
Revenues increased $1.0 million or 31.8% and $2.3 million or 23.6% to
$4.3 million and $12.0 million, respectively for the three and nine months ended
September 30, 1996 as compared to the three and nine months ended September 30,
1995. This increase is primarily due to increased demand for clinical trial
support services. Gross profit increased $.3 million or 38.4% and $.6 million or
23.4% to $1.2 million and $3.0 million, respectively for the three and nine
months ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. Gross margin remained relatively consistent at 24.6% during
the first nine months of 1996 compared to 24.7% during the first nine months of
1995. Operating expenses increased $.3 million or 45.1% and $0.3 million or
14.0% to $1.0 million and $2.4 million, respectively for the three and nine
months ended September 30, 1996 as compared to the three and nine months ended
September 30, 1995. Operating income increased $.01 million or 7.3% and $.3
million or 81.6% to $.2 million and $.6 million, respectively for the three and
nine months ended September 30, 1996 as compared to the three and nine months
ended September 30, 1995. As a percentage of revenues, operating income
increased to 5.0% for the nine months ended September 30, 1996 from 3.4% for
the nine months ended September 30, 1995. Net income increased $.01 million
or 13.2% and $.2 million or 144.9% to $.1 million and $.4 million, respectively
for the three and nine months ended September 30, 1996 as compared to the
three and nine months ended September 30, 1995.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On September 27, 1996, HRA settled a lawsuit with its former workers'
compensation insurance carrier, in which HRA had disputed the amount of
insurance premiums owed for fiscal years 1993 and 1994 and a portion of fiscal
year 1995. The settlement totaled $641,394 and calls for HRA to make an initial
payment of $100,000, with the balance due in 36 monthly installments of
$16,470, including interest at 6%. The note may be prepaid in whole or in part
at any time without penalty. In the event that HRA elects to prepay the note,
HRA will be entitled to a 10% discount of the present value of the balance
outstanding at prepayment date. HRA had accrued for these disputed amounts in
the fiscal years in which such amounts arose. Annual maturities pursuant to
this note are as follows:
<TABLE>
<S> <C>
1997 $ 255,238
1998 179,353
1999 190,415
2000 16,388
----------
$ 641,394
==========
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
42
<PAGE> 43
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.
STAFFMARK, INC.
Date: November 12, 1996 /s/ CLETE T. BREWER
------------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: November 12, 1996 /s/ TERRY C. BELLORA
------------------------------------
Terry C. Bellora
Chief Financial Officer
<PAGE> 44
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,931
<SECURITIES> 36
<RECEIVABLES> 20,729
<ALLOWANCES> 444
<INVENTORY> 0
<CURRENT-ASSETS> 44,517
<PP&E> 5,964
<DEPRECIATION> 3,052
<TOTAL-ASSETS> 67,728
<CURRENT-LIABILITIES> 12,334
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 55,149
<TOTAL-LIABILITY-AND-EQUITY> 67,728
<SALES> 144,119
<TOTAL-REVENUES> 144,119
<CGS> 113,313
<TOTAL-COSTS> 113,313
<OTHER-EXPENSES> 22,357
<LOSS-PROVISION> 205
<INTEREST-EXPENSE> 1,774
<INCOME-PRETAX> 6,470
<INCOME-TAX> 2,699
<INCOME-CONTINUING> 3,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,771
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
