<PAGE> 1
UNITED STATES
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, 1997
[ ] 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, AR 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 14, 1997 was 18,997,736.
1
<PAGE> 2
STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
INDEX
<S> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Introduction 3
StaffMark, Inc. Pro Forma Financial Statements
Pro Forma Statements of Income 4
Notes to Pro Forma Statements of Income 5
StaffMark, Inc. Consolidated Financial Statements
Consolidated Statements of Income 7
Consolidated Balance Sheets 8
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction 15
Pro Forma Results for the Three and Nine Months Ended September 30, 1997 Compared to Pro Forma 15
Results for the Three and Nine Months Ended September 30, 1996
Results for the Three and Nine Months Ended September 30, 1997 Compared to Results for the 17
Three and Nine Months Ended September 30, 1996
Results for the Three and Nine Months Ended September 30, 1997 Compared to Combined Results 18
for the Three and Nine Months Ended September 30, 1996
Liquidity and Capital Resources 20
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 22
ITEM 2 -- CHANGES IN SECURITIES 22
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 22
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION
StaffMark, Inc. (the "Company" or "StaffMark") was founded in March 1996
to create a leading provider of diversified staffing, professional and
consulting services to businesses, professional and service organizations,
governmental agencies and medical niches. 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").
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. Pursuant to the requirements of the Securities and
Exchange Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB 97"),
Brewer was designated as the acquirer, for financial reporting purposes, of
Prostaff, Maxwell, HRA, First Choice, and Blethen (collectively, the "Other
Founding Companies"). Based on the applicable provisions of SAB 97, these
acquisitions were accounted for as combinations at historical cost.
Additionally, the consolidated financial information presented in this quarterly
report on Form 10-Q relates to Brewer through the date of the Offering and to
StaffMark on a consolidated basis for all periods subsequent to October 2, 1996.
Since the Offering, the Company has acquired 20 staffing and consulting
service businesses, allowing the Company to grow geographically and expand its
presence in the rapidly growing professional and information technology fields,
as well as in medical niches.
The following unaudited pro forma statements of income give effect to
the following pro forma adjustments: (i) Brewer's acquisition of the Other
Founding Companies at historical cost in accordance with the applicable
provisions of SAB 97; (ii) Brewer's February 1996 acquisition of On Call
Employment Services, Inc. ("On Call"); (iii) StaffMark's March 1997 acquisition
of Flexible Personnel, Inc., Great Lakes Search Associates, Inc., and HR
America, Inc. (collectively, "Flexible"); (iv) StaffMark's April 1997
acquisition of Global Dynamics, Inc. ("Global"); (v) StaffMark's August 1997
acquisition of Expert Business Systems, Incorporated ("EBS"); (vi) the
difference between the historical compensation paid to certain previous owners
of the Founding Companies, Flexible, Global and EBS and the employment contract
compensation negotiated in conjunction with the Merger and respective
acquisitions (the "Compensation Differential"); and (vii) the incremental
provision for income taxes attributable to the income of subchapter S
Corporations, net of the income tax provision related to the Compensation
Differential and adjusted for nondeductible goodwill amortization.
These pro forma statements of income should be read in conjunction with
the audited financial statements and the notes thereto included in StaffMark's
1996 Annual Report on Form 10-K, as amended, and the respective Form 8-K filings
prepared in conjunction with the respective acquisitions of Flexible, Global and
EBS. The pro forma financial data does not purport to represent what the
Company's results of operations would actually have been if such transactions in
fact had occurred at the beginning of 1996 or to project the Company's results
of operations for any future period.
3
<PAGE> 4
STAFFMARK, INC.
PRO FORMA STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 72,435,483 $ 121,557,009 $ 197,141,427 $ 303,983,063
COST OF SERVICES 56,698,048 94,637,419 154,847,054 235,791,251
------------- ------------- ------------- -------------
Gross profit 15,737,435 26,919,590 42,294,373 68,191,812
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 10,318,006 16,915,678 30,010,632 44,446,838
Depreciation and amortization 800,311 1,439,718 2,443,218 3,582,829
------------- ------------- ------------- -------------
Operating income 4,619,118 8,564,194 9,840,523 20,162,145
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (1,067,460) (435,099) (3,021,294) (1,439,379)
Other, net 43,794 153,638 420,074 407,262
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 3,595,452 8,282,733 7,239,303 19,130,028
PROVISION FOR INCOME TAXES 1,521,548 3,395,921 3,181,294 7,818,676
------------- ------------- ------------- -------------
NET INCOME $ 2,073,904 $ 4,886,812 $ 4,058,009 $ 11,311,352
============= ============= ============= =============
PRO FORMA PRIMARY EARNINGS
PER SHARE $ 0.22 $ 0.28 $ 0.44 $ 0.71
============= ============= ============= =============
PRO FORMA FULLY DILUTED EARNINGS PER SHARE $ 0.22 $ 0.28 $ 0.44 $ 0.70
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
STAFFMARK, INC.
NOTES TO PRO FORMA STATEMENTS OF INCOME
(UNAUDITED)
1. ORGANIZATION:
StaffMark was founded in March 1996 to create a leading provider of
diversified staffing, professional and consulting services to businesses,
professional and service organizations, governmental agencies and medical
niches. On October 2, 1996, StaffMark merged through a series of separate
transactions with the Founding Companies. The Merger was effected by StaffMark
simultaneously with the closing of the Offering. The consideration for the stock
of the Founding Companies consisted of a combination of cash and common stock of
the Company.
The Company recognizes revenues upon performance of services. The
Company generally compensates its temporary associates and consultants only for
hours actually worked, therefore wages of the temporary associates and
consultants are a variable cost that increase or decrease as revenues increase
or decrease. However, certain of the Company's professional and information
technology consultants are full-time, salaried employees. Cost of services
primarily consists of wages paid to temporary associates, payroll taxes,
workers' compensation and other related employee benefits. Selling, general and
administrative expenses are comprised primarily of administrative salaries,
benefits, marketing, rent and recruitment expenses.
2. BASIS OF PRESENTATION:
The pro forma financial information included herein is unaudited and
includes the financial results of StaffMark, the Founding Companies, On Call,
Flexible, Global and EBS as if these acquisitions had occurred at the beginning
of the periods presented. Other acquisitions made by the Company since the
Offering have not been significant and therefore have not been included in these
pro forma statements of income. Management believes this information reflects
all adjustments which are necessary for a fair presentation of results for the
interim periods. The pro forma results of operations for the three and nine
months ended September 30, 1996 and 1997 are not necessarily indicative of the
results to be expected for the full year. These pro forma statements of income
should be read in conjunction with the audited financial statements and notes
thereto included in StaffMark's Annual Report on Form 10-K, as amended, and the
respective Form 8-K filings prepared in conjunction with the respective
acquisitions of Flexible, Global and EBS.
3. 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 generally 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 and acquired companies were S
Corporations for income tax purposes and, accordingly, any income tax
liabilities for the periods prior to the Merger and respective acquisitions are
the responsibility of the respective stockholders. Effective with the Merger and
respective acquisitions, these S Corporations converted to C Corporation status
which required them to recognize the tax consequences of operations in their
respective statements of income. For purposes of preparing these pro forma
statements of income, federal and state income taxes have been provided for at
an estimated effective combined tax rate of 39%, adjusted for nondeductible
goodwill amortization.
5
<PAGE> 6
5. EARNINGS PER SHARE:
Primary and fully diluted earnings per share have been computed by
dividing net income by the weighted-average shares of common stock outstanding
during the periods presented, including the incremental shares that would have
been outstanding upon the assumed exercise of dilutive stock options even though
these options are not fully vested. The weighted-average shares used to compute
earnings per share were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Primary 9,297,886 17,337,449 9,297,886 15,836,951
========== ========== ========== ==========
Fully Diluted 9,297,886 17,473,151 9,297,886 16,144,178
========== ========== ========== ==========
</TABLE>
The computation of earnings per share for the three and nine months
ended September 30, 1996 was based upon 9,297,886 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; (iii) 1,326,459 shares issued in
connection with the Offering to pay the cash portion of the consideration for
the Founding Companies; (iv) 183,823 shares issued in conjunction with the March
1997 acquisition of Flexible; (v) 690,855 shares issued in conjunction with the
April 1997 acquisition of Global; and (vi) 123,500 shares issued in conjunction
with the August 1997 acquisition of EBS.
The computation of both primary and fully diluted earnings per share
for the three months ended September 30, 1997 was based upon the actual
weighted-average shares outstanding during the period since the Flexible, Global
and EBS acquisitions were effective on or before the beginning of the third
quarter.
The computation of both primary and fully diluted earnings per share
for the nine months ended September 30, 1997 was based upon the actual
weighted-average shares outstanding during the period adjusted to reflect the
acquisitions of Flexible, Global and EBS as if these acquisitions had occurred
on January 1, 1997.
6
<PAGE> 7
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $ 18,018,255 $ 121,557,009 $ 48,574,636 $ 287,262,762
COST OF SERVICES 14,235,121 94,637,419 38,263,006 223,383,622
------------- ------------- ------------- -------------
Gross profit 3,783,134 26,919,590 10,311,630 63,879,140
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 2,206,726 16,915,678 6,652,188 41,962,116
Depreciation and amortization 298,830 1,439,718 864,804 3,217,161
------------- ------------- ------------- -------------
Operating income 1,277,578 8,564,194 2,794,638 18,699,863
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (485,402) (435,099) (1,365,326) (978,452)
Other, net 147 153,638 (3,035) 407,177
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 792,323 8,282,733 1,426,277 18,128,588
PROVISION FOR INCOME TAXES -- 3,395,921 -- 7,432,722
------------- ------------- ------------- -------------
NET INCOME $ 792,323 $ 4,886,812 $ 1,426,277 $ 10,695,866
============= ============= ============= =============
PRIMARY EARNINGS PER SHARE $0.28 $0.69
============= =============
FULLY DILUTED EARNINGS PER SHARE
$0.28 $0.68
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,856,422 $ 31,204,529
Accounts receivable, net of allowance
for doubtful accounts 21,064,875 47,631,785
Deferred income taxes -- 1,116,984
Advances to stockholders -- 382,390
Prepaid expenses and other 1,577,508 1,823,054
------------ ------------
Total current assets 36,498,805 82,158,742
PROPERTY AND EQUIPMENT, net 4,003,638 7,679,190
INTANGIBLE ASSETS, net 30,512,571 114,720,456
ADVANCES TO STOCKHOLDERS 160,000 984,365
OTHER ASSETS 323,217 1,040,419
------------ ------------
$ 71,498,231 $206,583,172
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 1,907,331 $ 3,635,946
Outstanding checks 176,156 --
Payroll and related liabilities 3,515,743 12,869,489
Reserve for workers' compensation claims 3,771,398 6,818,097
Income taxes payable 2,415,203 3,004,861
Deferred income taxes 662,505 --
------------ ------------
Total current liabilities 12,448,336 26,328,393
LONG TERM LIABILITIES 518,669 59,645
DEFERRED INCOME TAXES 421,147 379,881
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized shares of
1,000,000; no shares issued or outstanding -- --
Common stock, $.01 par value in 1996 and 1997; authorized shares of
26,000,000 in 1996 and 1997; shares issued and
outstanding of 13,417,012 in 1996 and 18,680,346 in 1997 134,170 186,803
Paid-in capital 55,379,391 166,503,080
Retained earnings 2,596,518 13,125,370
------------ ------------
Total stockholders' equity 58,110,079 179,815,253
------------ ------------
$ 71,498,231 $206,583,172
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
8
<PAGE> 9
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 792,323 $ 4,886,812 $ 1,426,277 $ 10,695,866
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 298,830 1,439,718 864,804 3,217,161
Provision for bad debts 14,396 116,486 72,328 265,014
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (622,307) (2,020,419) (1,868,978) (11,980,918)
Prepaid expenses and other 32,491 150,661 10,228 99,854
Other assets (634) (72,433) (2,729) 585,540
Deferred income taxes -- (379,814) -- (2,657,955)
Accounts payable and other accrued 189,343 (143,879) 197,987 470,903
liabilities
Outstanding checks (341,652) -- (226,307) (176,156)
Payroll and related liabilities 150,645 (69,125) 401,378 5,749,091
Reserve for workers' compensation claims (40,384) 35,344 (66,788) 1,101,973
Income taxes payable/receivable -- 2,347,302 -- 421,893
Accrued interest and other (390,651) (2,209,788) (835,947) (3,568,667)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 82,400 4,080,865 (27,747) 4,223,599
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired -- (26,003,694) (3,000,000) (76,934,396)
Capital expenditures (121,027) (1,001,070) (355,170) (2,924,744)
------------ ------------ ------------ ------------
Net cash used in investing activities (121,027) (27,004,764) (3,355,170) (79,859,140)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs -- 94,918,892 -- 94,918,892
Proceeds from borrowings 1,138,312 7,919,818 5,875,106 51,349,818
Proceeds from exercise of stock options 80,000 -- 80,000 --
Payments on borrowings (562,343) (51,349,818) (1,422,547) (53,285,062)
Cash dividends (998,092) -- (1,015,092) --
Deferred financing costs -- -- (56,250) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (342,123) 51,488,892 3,461,217 92,983,648
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (380,750) 28,564,993 78,300 17,348,107
CASH AND CASH EQUIVALENTS, beginning of period 778,209 2,639,536 319,159 13,856,422
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 397,459 $ 31,204,529 $ 397,459 $ 31,204,529
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 571,056 $ 529,868 $ 1,613,962 $ 856,111
============ ============ ============ ============
Income taxes paid $ -- $ 2,714,425 $ -- $ 7,247,875
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE> 10
STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
In March 1996, StaffMark was founded to create a leading provider of
temporary staffing, professional and consulting services. Effective October 2,
1996, the Company acquired the Founding Companies and completed the Offering.
Based on the provisions of SAB 97, Brewer was designated as the acquirer, for
financial reporting purposes, of the Other Founding Companies. Accordingly, the
accompanying financial statements reflect the results of Brewer's operations for
the three and nine month periods ended September 30, 1996. Based on the
applicable provisions of SAB 97, the acquisition of assets and assumption of
liabilities of the Other Founding Companies are reflected at their historical
cost. All significant intercompany transactions have been eliminated in the
accompanying consolidated financial statements.
The Company provides diversified staffing, professional and consulting
services to businesses, professional and service organizations, governmental
agencies and medical niches. The Company recognizes revenues upon performance of
services. The Company generally compensates its temporary associates and
consultants only for hours actually worked, therefore wages of the temporary
associates and consultants are a variable cost that increase or decrease as
revenues increase or decrease. However, certain of the Company's professional
and information technology consultants are full-time, salaried employees. Cost
of services primarily consists of wages paid to temporary associates, payroll
taxes, workers' compensation and other related employee benefits. Selling,
general and administrative expenses are comprised primarily of administrative
salaries, benefits, marketing, rent and recruitment expenses.
As of September 30, 1997, StaffMark operated over 170 offices in 23
states, Canada and the United Kingdom and provides temporary staffing in the
commercial, professional/information technology and specialty niche areas.
StaffMark extends trade credit to customers representing a variety of
industries. There are no individual customers that account for more than 10% of
service revenues in any of the periods presented.
2. OFFERINGS OF COMMON STOCK:
On October 2, 1996, the Company completed the Offering, which involved
the public sale of 6,325,000 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, commissions and expenses, 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, approximately $31.0 million 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 were used for working capital and general
corporate purposes, including acquisitions. Concurrent with the completion of
the Offering, the Company issued 5,618,249 shares of Common Stock to the
stockholders of the Founding Companies, in addition to the cash consideration
discussed above, to effect the Merger.
10
<PAGE> 11
2. OFFERINGS OF COMMON STOCK (CONTINUED):
On August 26, 1997, the Company completed a secondary offering of its
common stock (the "Secondary"), which involved the public sale of 3,950,000
shares (including underwriters' over-allotment) of Common Stock at a price of
$27.50 per share. Approximately 285,000 of these shares were sold by certain
stockholders of the Company (the "Selling Stockholders"). The Company did not
receive any of the proceeds from the sale of these shares by the Selling
Stockholders. The net proceeds to the Company from the Secondary were
approximately $94.9 million, after deducting the underwriting discount and
offering expenses. The Company used approximately $51.3 million of those net
proceeds to repay indebtedness and accrued interest outstanding under its line
of credit facility (the "Credit Facility") with Mercantile Bank National
Association ("Mercantile"), which was incurred primarily in connection with the
Company's acquisitions subsequent to the Offering. The remaining net proceeds of
approximately $43.6 million have been designated for use in the acquisition of
staffing and professional service companies. The Company has invested these net
proceeds in investment grade, interest-bearing securities.
3. BASIS OF PRESENTATION:
The accompanying interim 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 omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures made are adequate to ensure the information presented is not
misleading. Additionally, certain reclassifications have been made to prior
period balances in order to conform with the current period presentation. These
financial statements should be read in conjunction with the audited financial
statements of the Company and the Founding Companies and notes thereto included
in StaffMark's Annual Report on Form 10-K, as amended.
4. 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 generally 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.
5. BUSINESS COMBINATIONS:
Advance Personnel Service, Inc. ("Advance") was acquired in February
1997. Advance, located in Memphis, Tennessee, provides clerical, light
industrial, assembly and packing services. Advance had 1996 revenues of
approximately $6.3 million and operates in the Commercial division. MRIC Medical
Recruiters International, L.T.D. ("MRIC") was also acquired in February 1997.
Located in Vancouver, British Columbia, MRIC provides physical therapists on a
direct placement and locum basis in Canada and the United States. MRIC had 1996
revenues of approximately $2.5 million and operates in the Specialty Medical
division. The aggregate consideration paid in these transactions consisted of
$2.5 million in cash.
Flexible, headquartered in Fort Wayne, Indiana, was acquired in March
1997 and operates a total of 40 offices in Indiana, Michigan and Ohio, providing
clerical, light industrial, professional/information technology, accounting and
staff leasing services. Flexible had 1996 revenues of approximately $49.3
million and operates in the Commercial and Professional/Information Technology
divisions. The consideration paid for Flexible included $7.5 million in cash and
183,823 shares of the Company's common stock.
Global was acquired in April 1997. Located in Walnut Creek, California,
Global provides information technology staffing services. Global had 1996
revenues of approximately $17.2 million and operates in the
Professional/Information Technology division. The consideration paid for Global
included $14.0 million in cash and 690,855 shares of the Company's common stock.
11
<PAGE> 12
5. BUSINESS COMBINATIONS (CONTINUED):
Lindenberg & Associates, Inc. ("Lindenberg") was acquired in April 1997.
Lindenberg, headquartered in St. Louis, Missouri, provides information
technology staffing services through offices in St. Louis, Missouri; Kansas
City, Kansas; Omaha, Nebraska and Minneapolis/St. Paul, Minnesota. Lindenberg
had 1996 revenues of approximately $18.0 million and operates in the
Professional/Information Technology division. TPS/Furr & Associates, Inc.
("TPS") was acquired in May 1997. TPS, located in Monroe, North Carolina,
provides clerical and light industrial services in the Charlotte area. TPS had
1996 revenues of approximately $4.5 million and operates in the Commercial
division. HR Alternatives, Inc. ("Alternatives") was acquired in June 1997.
Located in Kingsport, Tennessee, Alternatives provides clerical and light
industrial services through eight offices in the areas of Eastern Tennessee,
Western Carolina and Southwestern Virginia. Alternatives had 1996 revenues of
approximately $8.4 million and operates in the Commercial division. The Kleven
Group and Affiliates, Inc. ("Kleven") was acquired in June 1997. Located in
Lexington, Massachusetts, Kleven provides permanent placement services and
clerical and information technology services in the New England area and had
1996 revenues of approximately $5.0 million. Kleven operates in the Commercial
and Professional/Information Technology divisions. Sterling Human Resource
Company ("Sterling") was acquired in June 1997. Located in Phoenix, Arizona and
Boca Raton, Florida, Sterling provides clerical, light industrial and
information technology services and had 1996 revenues of approximately $19.0
million. Sterling operates in the Commercial and Professional/Information
Technology divisions. The aggregate consideration paid in these transactions
consisted of $28.7 million in cash and 217,123 shares of the Company's common
stock.
Baker Street Group, Inc. ("Baker Street") was acquired in July 1997.
Located in Houston, Texas, Baker Street provides professional and information
technology staffing, clerical services and staffing in niche areas such as
mortgage banking and real estate title searches. Baker Street had 1996 revenues
of approximately $11.0 million and operates in the Professional/Information
Technology and Commercial divisions. This transaction was accounted for as a
pooling-of-interests. Temp Technology, Inc. ("Temp Technology") was acquired in
July 1997. Located in Portland, Oregon, Temp Technology provides electronic
assembly, light industrial, office/clerical, and information technology staffing
services. Temp Technology had 1996 revenues of approximately $7.5 million and
operates in the Commercial division. Able Temps, Inc. ("Able") was acquired in
September 1997. Located in Lansing, Illinois, Able provides clerical and light
industrial services in the greater Chicago area and had 1996 revenues of
approximately $14.0 million. Able operates in the Commercial division. Also
acquired in September 1997 was H. Allen & Company, Inc. ("H. Allen"). Located in
Downers' Grove, Illinois, H. Allen provides information technology services in
the greater Chicago area and had 1996 revenues of approximately $5.8 million. H.
Allen operates in the Professional/Information Technology division. The
aggregate consideration paid in these transactions consisted of $20.0 million in
cash and 382,212 shares of the Company's common stock.
EBS was acquired in August 1997. Located in the Dallas/Fort Worth
metropolitan area, EBS provides information technology services, specialized
help desk support, distributed services and application development services.
EBS had revenues of approximately $5.7 million for the twelve months ended June
30, 1997 and operates in the Professional/Information Technology division. The
total consideration paid for EBS was approximately $8.0 million, consisting of
approximately $5.4 million in cash and 123,500 shares of the Company's common
stock.
In addition to the purchase prices disclosed above, certain of the
Company's acquisition agreements include provisions for the payment of
additional consideration which is contingent upon the achievement of certain
performance measures of the businesses acquired, typically during the twelve
months immediately following the respective acquisitions. Although the
contingent consideration could be significant to the accompanying financial
statements, the amounts are not currently determinable and, accordingly, have
not been reflected in the Company's financial statements. The obligations for
this contingent consideration, which will be payable in a combination of cash
and common stock, will be recorded in the Company's financial statements when
they become fixed and determinable.
12
<PAGE> 13
5. BUSINESS COMBINATIONS (CONTINUED):
The accompanying balance sheet as of September 30, 1997 includes
preliminary allocations of the respective purchase prices and are subject to
final adjustment. The excess of purchase price over net assets acquired has been
included in intangible assets and is being amortized over a period of 30 years.
The unaudited consolidated results of operations on a pro forma basis as
though Flexible, Global, Lindenberg, EBS and H. Allen had been acquired as of
the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1996 September 30, 1997
-------------------- --------------------
<S> <C> <C>
Revenues $217,162,806 $ 312,544,815
============ ===============
Net income $ 4,415,907 $ 11,808,938
============ ===============
Primary earnings per share $ 0.47 $ 0.74
============ ===============
Fully diluted earnings per share $ 0.47 $ 0.73
============ ===============
</TABLE>
The unaudited pro forma statements of income presented elsewhere in this
Form 10-Q have been prepared in accordance with the applicable SEC requirements
for presenting pro forma financial information and, accordingly, do not reflect
the pro forma impact of the Lindenberg and H. Allen acquisitions.
6. CREDIT FACILITY:
The Company maintains a line of credit of $100.0 million with
Mercantile, which includes a $30.0 million revolving credit facility and a $70.0
million acquisition facility. As of September 30, 1997, the Company had no
borrowings under either facility.
7. EARNINGS PER SHARE:
The weighted-average shares used to compute earnings per share were as
follows:
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, 1997 September 30, 1997
-------------------- -------------------
<S> <C> <C>
Primary 17,337,449 15,487,588
==================== ===================
Fully Diluted 17,473,151 15,794,815
==================== ===================
</TABLE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which requires the dual presentation of basic and diluted earnings per
share, as defined in SFAS 128, on the face of the statement of income beginning
with the year-end 1997 and subsequent quarterly reporting periods. Basic
earnings per share as computed under SFAS 128 were $0.30 and $0.71 for the three
and nine months ended September 30, 1997, respectively. Diluted earnings per
share as computed under SFAS 128 were $0.28 and $0.69 for the three and nine
months ended September 30, 1997, respectively.
13
<PAGE> 14
8. SUBSEQUENT EVENTS:
Subsequent to quarter-end, StaffMark acquired all of the issued and
outstanding equity securities of RHS Associates, Inc. ("RHS"). Located in
Birmingham, Alabama, RHS provides professional and information technology
staffing, consulting services and permanent placement services. With revenues
for the twelve months ended September 30, 1997 of approximately $8.6 million,
RHS operates in the Professional/Information Technology division.
Subsequent to quarter-end, StaffMark acquired certain assets of EMJAY
Contracts, L.P. and EMJAY Careers, L.P. (collectively "EMJAY"). Located in
Houston, Texas, EMJAY provides professional and information technology staffing,
consulting and permanent placement services. With revenues for the twelve months
ended September 30, 1997 of approximately $11.3 million, EMJAY operates in the
Professional/Information Technology division.
Subsequent to quarter-end, StaffMark acquired certain assets of
Structured Logic Company, Inc. ("SLC"). Located in New York City, SLC provides
professional and information staffing services and permanent placement services.
With revenues for the twelve months ended September 30, 1997 of approximately
$37.0 million, SLC operates in the Professional/Information Technology division.
14
<PAGE> 15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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 applicable
financial statements, the notes thereto and the other financial data included
elsewhere in this Form 10-Q. Additionally, the pro forma and combined results
for the three and nine months ended September 30, 1996 discussed below occurred
when the companies were not under common control or management and may not be
comparable to, or indicative of future performance.
This filing contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are based
on current plans and expectations of the Company and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results to
differ include, among others, risks associated with acquisitions, fluctuations
in operating results because of acquisitions and variations in stock prices,
changes in government regulations, competition, risks of operations and growth
of the newly acquired businesses.
PRO FORMA RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED TO PRO FORMA RESULTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996
The information below discusses the pro forma results of operations for
the three and nine months ended September 30, 1997 as compared to the pro forma
results for the three and nine months ended September 30, 1996. These pro forma
amounts include the effect of Brewer's February 1996 acquisition of On Call,
Brewer's October 1996 acquisition of the Other Founding Companies, StaffMark's
March 1997 acquisition of Flexible, StaffMark's April 1997 acquisition of
Global, StaffMark's August 1997 acquisition of EBS, adjustments to reflect the
Compensation Differential and adjustments to the provision for income taxes
relating to the income of subchapter S Corporations, net of the income tax
benefits related to the Compensation Differential and adjusted for nondeductible
goodwill.
Pro Forma Revenues. Pro forma revenues increased $49.1 million, or
67.8%, to $121.6 million for the three months ended September 30, 1997 as
compared to $72.4 million for the three months ended September 30, 1996. Pro
forma revenues increased $106.8 million, or 54.2%, to $304.0 million for the
nine months ended September 30, 1997 as compared to $197.1 million for the nine
months ended September 30, 1996. These increases were primarily attributable to
the acquisitions of The Technology Source L.L.C. ("Technology Source"), Chandler
Enterprises, Inc. d/b/a Advantage Staffing ("Advantage"), Tom Bain Personnel,
Inc. ("Tom Bain"), MRIC, Advance, Lindenberg, TPS, Alternatives, Kleven,
Sterling, Baker Street, Temp Technology, Able Temps and H. Allen which in the
aggregate totaled $32.4 million in revenue for the three months ended September
30, 1997 and $57.6 million for the nine months ended September 30, 1997. The
Company's internal growth accounted for $16.7 million and $49.2 million of the
increase in pro forma revenue for the three and nine months ended September 30,
1997, respectively, as a result of the Company's emphasis on customer
development and an overall increase in demand for staffing services from
existing and new customers.
Pro Forma Cost of Services. Pro forma cost of services increased $37.9
million, or 66.9%, to $94.6 million for the three months ended September 30,
1997 compared to $56.7 million for the three months ended September 30, 1996.
Pro forma cost of services increased $80.9 million, or 52.3%, to $235.8 million
for the nine months ended September 30, 1997 compared to $154.8 million for the
nine months ended September 30, 1996. These increases in staffing payroll,
employee benefits and other costs were related to the higher revenues resulting
from the increased demand for staffing services, the Company's internal growth
and the acquisitions discussed above.
15
<PAGE> 16
Pro Forma Gross Profit. Pro forma gross profit increased $11.2 million,
or 71.1%, to $26.9 million for the three months ended September 30, 1997 as
compared to $15.7 million for the three months ended September 30, 1996. Pro
forma gross profit increased $25.9 million, or 61.2%, to $68.2 million for the
nine months ended September 30, 1997 as compared to $42.3 million for the nine
months ended September 30, 1996. The increases in pro forma gross profit are
primarily attributable to the increased revenues from the Company's acquisitions
and internal growth. Pro forma gross margin increased to 22.1% for the three
months ended September 30, 1997 from 21.7% for the three months ended September
30, 1996. Pro forma gross margin increased to 22.4% for the nine months ended
September 30, 1997 from 21.5% for the nine months ended September 30, 1996. The
increases in pro forma gross margin are primarily attributable to the Company's
focus on increasing the Professional/Information Technology division revenues,
which generally provide higher profit margins than the Commercial division due
to the specialized expertise of the consultants. Emphasis on the reduction of
variable costs, such as workers' compensation expense, have also contributed to
increases in the Company's gross margin.
Pro Forma Operating Expenses. Pro forma selling, general and
administrative expenses ("SG&A") increased $6.6 million, or 63.9%, to $16.9
million for the three months ended September 30, 1997 as compared to $10.3
million for the three months ended September 30, 1996. Pro forma SG&A increased
$14.4 million, or 48.1%, to $44.4 million for the nine months ended September
30, 1997 as compared to $30.0 million for the nine months ended September 30,
1996. These increases were primarily attributable to the Company's acquisition
growth, as well as its internal growth. Pro forma SG&A as a percentage of
revenues decreased to 13.9% for the three months ended September 30, 1997
compared to 14.2% for the three months ended September 30, 1996. Pro forma SG&A
as a percentage of revenues decreased to 14.6% for the nine months ended
September 30, 1997 compared to 15.2% for the nine months ended September 30,
1996. These decreases relate to efficiencies the Company has begun to realize
from the Merger, in conjunction with an overall increase in revenues, somewhat
offset by higher SG&A associated with being a public company and costs
associated with maintaining the Company's acquisition program. Pro forma
depreciation and amortization expense increased $639,000, or 79.9%, to $1.4
million for the three months ended September 30, 1997 as compared to $800,000
for the three months ended September 30, 1996. Pro forma depreciation and
amortization expense increased $1.1 million, or 46.6%, to $3.6 million for the
nine months ended September 30, 1997 as compared to $2.4 million for the nine
months ended September 30, 1996. These increases are primarily related to the
amortization of goodwill resulting from the Company's acquisitions.
Pro Forma Operating Income. Pro forma operating income increased $3.9
million, or 85.4%, to $8.6 million for the three months ended September 30, 1997
as compared to $4.6 million for the three months ended September 30, 1996. Pro
forma operating income increased $10.3 million, or 104.9%, to $20.2 million for
the nine months ended September 30, 1997 as compared to $9.8 million for the
nine months ended September 30, 1996. Pro forma operating margin increased to
7.0% for the three months ended September 30, 1997 as compared to 6.4% for the
three months ended September 30, 1996. Pro forma operating margin increased to
6.6% for the nine months ended September 30, 1997 as compared to 5.0% for the
nine months ended September 30, 1996.
Pro Forma Interest Expense. Pro forma interest expense was $435,000 for
the three months ended September 30, 1997 as compared to $1.1 million for the
three months ended September 30, 1996. Pro forma interest expense was $1.4
million for the nine months ended September 30, 1997 as compared to $3.0 million
for the nine months ended September 30, 1996. The decrease in interest cost was
a result of all debt being repaid with proceeds from the Offering. Interest
expense for the three and nine months ended September 30, 1997 is primarily
related to borrowings made to fund the cash portion of several acquisitions.
These borrowings were repaid with proceeds from the Secondary completed August
26, 1997.
Pro Forma Net Income. Pro forma net income increased $2.8 million, or
135.6%, to $4.9 million for the three months ended September 30, 1997 compared
to $2.1 million for the three months ended September 30, 1996. Pro forma net
income increased $7.3 million, or 178.7%, to $11.3 million for the nine months
ended September 30, 1997 compared to $4.1 million for the nine months ended
September 30, 1996. Pro forma net income as a percentage of revenues increased
to 4.0% for the three months ended September 30, 1997 compared to 2.9% for the
three months ended September 30, 1996. Pro forma net income as a percentage of
revenues increased to 3.7% for the nine months ended September 30, 1997 compared
to 2.1% for the nine months ended September 30, 1996.
16
<PAGE> 17
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
The following is a discussion of the results of operations for the
three and nine months ended September 30, 1997 as compared to Brewer's results
of operations for the three and nine months ended September 30, 1996 which have
been reported in accordance with the provisions of SAB 97.
Revenues. Revenues increased $103.5 million, or 574.6%, to $121.6
million for the three months ended September 30, 1997 compared to $18.0 million
for the three months ended September 30, 1996. Revenues increased $238.7
million, or 491.4%, to $287.3 million for the nine months ended September 30,
1997 compared to $48.6 million for the nine months ended September 30, 1996.
These increases are largely attributable to the fourth quarter 1996 acquisitions
of the Other Founding Companies, Technology Source, Advantage and Tom Bain as
well as the 1997 acquisitions of Advance, MRIC, Flexible, Global, Lindenberg,
TPS, Alternatives, Kleven, Sterling, Baker Street, Temp Technology, EBS, Able
Temps and H. Allen. These acquisitions accounted for approximately $94.9 million
of the increase for the three months ended September 30, 1997 and $200.0 million
of the increase for the nine months ended September 30, 1997. The Company's
internal growth accounted for $8.6 million and $38.7 million of the increase for
the three and nine months ended September 30, 1997, respectively, as a result of
the Company's emphasis on customer development and an overall increase in the
demand for staffing services.
Cost of Services. Cost of services increased $80.4 million, or 564.8%,
to $94.6 million for the three months ended September 30, 1997 compared to $14.2
million for the three months ended September 30, 1996. Cost of services
increased $185.1 million, or 483.8%, to $223.4 million for the nine months ended
September 30, 1997 compared to $38.3 million for the nine months ended September
30, 1996. These increases were primarily attributable to the acquisitions of the
Other Founding Companies and the subsequent acquisitions discussed above which
accounted for approximately $74.0 million of the increase for the three months
ended September 30, 1997 and $168.8 million for the nine months ended September
30, 1997. Also contributing to these increases were increases in staffing
payroll, employee benefits and other costs associated with increased revenues
resulting from internal growth.
Gross Profit. Gross profit increased $23.1 million, or 611.6%, to $26.9
million for the three months ended September 30, 1997 compared to $3.8 million
for the three months ended September 30, 1996. Gross profit increased $53.6
million, or 519.5%, to $63.9 million for the nine months ended September 30,
1997 compared to $10.3 million for the nine months ended September 30, 1996.
These increases are primarily attributable to the internal growth and
acquisitions discussed above. Gross margin increased to 22.1% for the three
months ended September 30, 1997 compared to 21.0% for the three months ended
September 30, 1996. Gross margin increased to 22.2% for the nine months ended
September 30, 1997 compared to 21.2% for the nine months ended September 30,
1996. These increases in gross margin are primarily attributable to the
Company's focus on increasing the Professional/Information Technology division
revenues. The Professional/Information Technology division generally provides
higher profit margins than the Commercial division due to the specialized
expertise of the consultants. Control of variable costs, such as workers'
compensation expense, also contributed to the Company's increase in gross
margins.
Operating Expenses. SG&A increased $14.7 million, or 666.6%, to $16.9
million for the three months ended September 30, 1997 compared to $2.2 million
for the three months ended September 30, 1996. SG&A increased $35.3 million, or
530.8%, to $42.0 million for the nine months ended September 30, 1997 compared
to $6.7 million for the nine months ended September 30, 1996. These increases
were primarily attributable to the acquisitions discussed above which accounted
for approximately $12.1 million of the increase for the three months ended
September 30, 1997 and $27.8 million of the increase for the nine months ended
September 30, 1997. SG&A as a percentage of revenues increased to 13.9% for the
three months ended September 30, 1997 compared to 12.2% for the three months
ended September 30, 1996. SG&A as a percentage of revenues increased to 14.6%
for the nine months ended September 30, 1997 compared to 13.7% for the nine
months ended September 30, 1996. These increases primarily result from the
Merger, new costs associated with being a public company and costs associated
with the Company's other acquisitions. Depreciation and amortization expense
increased $1.1 million, or 381.8%, to $1.4 million for the three months ended
September 30, 1997 compared to $299,000 for the three months ended September 30,
1996. Depreciation and amortization expense increased $2.4 million, or 272.0%,
to
17
<PAGE> 18
$3.2 million for the nine months ended September 30, 1997 compared to
$865,000 for the nine months ended September 30, 1996. These increases are
primarily attributable to amortization of goodwill associated with the
acquisitions subsequent to the Offering.
Operating Income. Operating income increased $7.3 million, or 570.3%,
to $8.6 million for the three months ended September 30, 1997 compared to $1.3
million for the three months ended September 30, 1996. Operating income
increased $15.9 million, or 569.1%, to $18.7 million for the nine months ended
September 30, 1997 compared to $2.8 million for the nine months ended September
30, 1996. The Company's operating margin was 7.0% for the three months ended
September 30, 1997 compared to 7.1% for the three months ended September 30,
1996. The Company's operating margin increased to 6.5% for the nine months ended
September 30, 1997 compared to 5.8% for the nine months ended September 30,
1996.
Interest Expense. Interest expense was $435,000 for the three months
ended September 30, 1997 as compared to $485,000 for the three months ended
September 30, 1996. Interest expense was $978,000 for the nine months ended
September 30, 1997 as compared to $1.4 million for the nine months ended
September 30, 1996. Interest expense for the three and nine months ended
September 30, 1997 is primarily related to borrowings made to fund the cash
portion of several of the Company's acquisitions. These borrowings were repaid
with proceeds from the Secondary.
Net Income. Net income increased $4.1 million, or 516.8%, to $4.9
million for the three months ended September 30, 1997 compared to $792,000 for
the three months ended September 30, 1996. Net income increased $9.3 million, or
649.9%, to $10.7 million for the nine months ended September 30, 1997 compared
to $1.4 million for the nine months ended September 30, 1996. Net income as a
percentage of revenues decreased to 4.0% for the three months ended September
30, 1997 compared to 4.4% for the three months ended September 30, 1996. Net
income as a percentage of revenues increased to 3.7% for the nine months ended
September 30, 1997 compared to 2.9% for the nine months ended September 30,
1996. These changes are primarily the result of the factors described above and
the fact that no income tax expense was charged to Brewer as an S Corporation in
1996.
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE
COMBINED RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
The following information compares actual results for the three and nine
months ended September 30, 1997 to the combined results of the Founding
Companies for the three and nine months ended September 30, 1996 as if they had
been members of the same operating group. These combined amounts for the three
and nine months ended September 30, 1996 have not been adjusted for significant
acquisitions or reductions in salaries to certain owners of the Founding
Companies.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
========================================================================================
1996 1997 1996 1997
===================== ===================== ===================== =====================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ % $ % $ % $ %
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
SERVICE REVENUES 52,689 100.0 121,557 100.0 142,543 100.0 287,263 100.0
COST OF SERVICES 41,321 78.4 94,637 77.9 112,128 78.7 223,384 77.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 11,368 21.6 26,920 22.1 30,415 21.3 63,879 22.2
OPERATING EXPENSES:
Selling, general and 7,672 14.6 16,916 13.9 21,869 15.3 41,962 14.6
administrative
Depreciation and amortization 484 0.9 1,440 1.2 1,402 1.0 3,217 1.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income 3,212 6.1 8,564 7.0 7,144 5.0 18,700 6.5
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
18
<PAGE> 19
Combined Revenues. Revenues increased $68.9 million, or 130.7%, to
$121.6 million for the three months ended September 30, 1997 compared to
combined revenues of $52.7 million for the three months ended September 30,
1996. Revenues increased $144.7 million, or 101.5%, to $287.3 million for the
nine months ended September 30, 1997 compared to combined revenues of $142.5
million for the nine months ended September 30, 1996. These increases are
largely attributable to the acquisitions of Technology Source, Advantage, Tom
Bain, Advance, MRIC, Flexible, Global, Lindenberg, TPS, Alternatives, Kleven,
Sterling, Baker Street, Temp Technology, EBS, Able Temps and H. Allen. These
acquisitions accounted for $53.1 million of the increase for the three months
ended September 30, 1997 and $101.3 million of the increase for the nine months
ended September 30, 1997. The Company's internal growth accounted for $15.8
million and $43.4 million of the increase for the three and nine months ended
September 30, 1997 as a result of the Company's emphasis on customer development
and the increased demand from existing customers.
Combined Cost of Services. Cost of services increased $53.3 million, or
129.0%, to $94.6 million for the three months ended September 30, 1997 compared
to combined cost of services of $41.3 million for the three months ended
September 30, 1996. Cost of services increased $111.3 million, or 99.2%, to
$223.4 million for the nine months ended September 30, 1997 compared to combined
cost of services of $112.1 million for the nine months ended September 30, 1996.
These increases were primarily due to increased staffing, employee benefits and
other costs associated with the increase in revenue.
Combined Gross Profit. Gross profit increased $15.6 million, or 136.8%,
to $26.9 million for the three months ended September 30, 1997 as compared to
combined gross profit of $11.4 million for the three months ended September 30,
1996. Gross profit increased $33.5 million, or 110.0%, to $63.9 million for the
nine months ended September 30, 1997 as compared to combined gross profit of
$30.4 million for the nine months ended September 30, 1996. This increase is
attributable to higher revenues due to internal growth and the acquisitions
discussed above. Gross margin increased to 22.1% for the three months ended
September 30, 1997 as compared to combined gross margin of 21.6% for the three
months ended September 30, 1996. Gross margin increased to 22.2% for the nine
months ended September 30, 1997 as compared to combined gross margin of 21.3%
for the nine months ended September 30, 1996. The increases in gross margin are
primarily attributable to the Company's focus on increasing the
Professional/Information Technology division revenues, which generally provides
higher profit margins than the Commercial division due to the specialized
expertise of the consultants. Emphasis on controlling variable costs, such as
workers' compensation expenses, also contributed to the increase in gross
margin.
Combined Operating Expenses. SG&A increased $9.2 million, or 120.5%, to
$16.9 million for the three months ended September 30, 1997 compared to combined
SG&A of $7.7 million for the three months ended September 30, 1996. SG&A
increased $20.1 million, or 91.9%, to $42.0 million for the nine months ended
September 30, 1997 compared to combined SG&A of $21.9 million for the nine
months ended September 30, 1996. These increases were primarily attributable to
costs and expenses associated with the acquisitions as well as the new costs
associated with being a public company. SG&A as a percentage of revenues
decreased to 13.9% for the three months ended September 30, 1997 compared to
combined SG&A of 14.6% for the three months ended September 30, 1996. SG&A as a
percentage of revenues decreased to 14.6% for the nine months ended September
30, 1997 compared to combined SG&A of 15.3% for the nine months ended September
30, 1996. These decreases relate to efficiencies the Company has begun to
realize from the Merger, in conjunction with an overall increase in revenues,
somewhat offset by higher SG&A associated with being a public company and costs
associated with maintaining the Company's acquisition program. Depreciation and
amortization expense increased $956,000, or 197.5%, to $1.4 million for the
three months ended September 30, 1997 compared to combined depreciation and
amortization of $484,000 for the three months ended September 30, 1996.
Depreciation and amortization expense increased $1.8 million, or 129.5%, to $3.2
million for the nine months ended September 30, 1997 compared to combined
depreciation and amortization of $1.4 million for the nine months ended
September 30, 1996. These increases are primarily related to the amortization of
goodwill resulting from the Company's acquisitions.
19
<PAGE> 20
Combined Operating Income. Operating income increased $5.4 million, or
166.6%, to $8.6 million for the three months ended September 30, 1997 as
compared to combined operating income of $3.2 million for the three months ended
September 30, 1996. Operating income increased $11.6 million, or 161.8%, to
$18.7 million for the nine months ended September 30, 1997 as compared to
combined operating income of $7.1 million for the nine months ended September
30, 1996. Operating margin increased to 7.0% for the three months ended
September 30, 1997 as compared to combined operating margin of 6.1% for the
three months ended September 30, 1996. Operating margin increased to 6.5% for
the nine months ended September 30, 1997 as compared to combined operating
margin of 5.0% for the nine months ended September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company established a $50.0 million line of credit
with Mercantile to be used for working capital and other general corporate
purposes, including acquisitions. In May 1997, the Company expanded its Credit
Facility from $50.0 million to $100.0 million, which includes a $30.0 million
revolving credit facility and a $70.0 million acquisition facility. The Credit
Facility matures on April 1, 2002 and interest on any borrowings is computed at
the Company's option at either LIBOR or Mercantile's prime rate and
incrementally adjusted based on the Company's operating leverage ratios. For the
period ended March 31, 1997, the Company paid a quarterly commitment fee equal
to 0.25% of the revolving credit commitment. Subsequent to March 31, 1997, the
quarterly commitment fee is equal to 0.25% of the unused portion of the total
revolving credit commitment. The Credit Facility is secured by all assets of the
Company and a pledge of 100% of the stock of all of the Company's subsidiaries.
As of November 13, 1997, approximately $1.0 million was outstanding on the
revolving credit facility.
In August 1997, the Company completed a secondary offering of 3,950,000
shares of its common stock (including the underwriter's overallotment) of which
285,000 shares were sold by the Selling Stockholders. The Company did not
receive any proceeds from the sale of shares by the Selling Stockholders. The
net proceeds from the shares sold by the Company were approximately $94.9
million, after deducting the underwriting discount and offering expenses paid by
the Company. The Company used approximately $51.3 million of these net proceeds
to repay indebtedness and accrued interest outstanding under its Credit Facility
with Mercantile, which was incurred primarily in connection with the Company's
acquisitions. The remaining net proceeds of approximately $43.6 million have
been used to fund the cash consideration portion of the Able Temps, H. Allen,
RHS, EMJAY and SLC acquisitions. The Company had invested these net proceeds in
investment grade, interest-bearing securities.
The Company is obligated under various acquisition agreements to pay
additional consideration, which will be paid in a combination of cash and common
stock, to certain former stockholders of the acquired companies as discussed in
Note 5 to the consolidated financial statements. The Company cannot currently
estimate the total amount of these contingent payments; however, the Company
believes that the cash generated from operations, borrowings under the Credit
Facility and its ability to issue additional shares of common stock will provide
sufficient liquidity and capital to satisfy these obligations.
Net cash provided by (used in) operating activities was $4.1 million and
$82,000 for the three months ended September 30, 1997 and 1996, respectively,
and $4.2 million and ($28,000) for the nine months ended September 30, 1997 and
1996, respectively. The net cash provided by operating activities for the
periods presented was primarily attributable to net income adjusted for non-cash
expenses such as depreciation and amortization and changes in operating assets
and liabilities.
Net cash used in investing activities was $27.0 million and $121,000 for
the three months ended September 30, 1997 and 1996, respectively, and $79.9
million and $3.4 million for the nine months ended September 30, 1997 and 1996,
respectively. Cash used in investing activities in 1996 was largely for the
acquisition of On Call by Brewer for cash totaling $3.0 million. Cash used in
investing activities in 1997 was primarily related to the acquisition of
Advance, MRIC, Flexible, Global, Lindenberg, TPS, Alternatives, Kleven,
Sterling, Temp Technology, Able Temps and H. Allen for cash totaling $76.9
million and capital expenditures.
20
<PAGE> 21
Net cash provided by (used in) financing activities was $51.5 million,
and ($342,000) for the three months ended September 30, 1996 and 1997,
respectively, and $93.0 million and $3.5 million for the nine months ended
September 30, 1997 and 1996, respectively. Cash provided by financing activities
in 1996 was primarily attributable to the proceeds from debt issued by Brewer in
conjunction with the acquisition of On Call. Cash provided by financing
activities in 1997 was primarily attributable to the proceeds from debt issued
in conjunction with the acquisitions of Global, Lindenberg, TPS, Alternatives,
Kleven, Sterling and Temp Technology.
As a result of the foregoing, combined cash and cash equivalents
increased $28.5 million for the three months ended September 30, 1997, increased
$17.3 million for the nine months ended September 30, 1997, decreased $381,000
for the three months ended September 30, 1996, and increased $78,000 for the
nine months ended September 30, 1996, respectively.
Management believes that the Credit Facility, cash flows from the
Company's operations, and the issuance of shares of common stock in conjunction
with acquisitions will provide sufficient liquidity or acquisition currency to
execute the Company's acquisition and internal growth plans through the
expiration of the Credit Facility discussed above. Should the Company accelerate
its acquisition program, the Company may need to seek additional financing
through the public or private sale of equity or debt securities. There can be no
assurance that the Company could secure such financing if and when it is needed
or on terms the Company deems acceptable. Management plans to continue to
periodically reassess the adequacy of the Company's liquidity position, 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 needs on a
short-term and long-term basis.
21
<PAGE> 22
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
The Company at times does have routine litigation incidental to its business.
In the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a material adverse effect on the
Company's results of operations or financial condition. The Company maintains
insurance in such amounts and with such coverage and deductibles as management
believes are reasonable.
ITEM 2. CHANGES IN SECURITIES
In connection with the July 1997 acquisition of Baker Street, the
Company issued 286,162 shares of common stock to the stockholders of Baker
Street. In connection with the August 1997 acquisition of EBS, the Company
issued 123,500 shares of common stock to the stockholders of EBS. In connection
with the September 1997 acquisition of Able Temps, the Company issued 24,068
shares of common stock to the stockholder of Able Temps. In connection with the
September 1997 acquisition of H. Allen, the Company issued 71,982 shares of
common stock to the stockholder of H. Allen. Each of these transactions was
effected without registration of the respective securities under the Securities
Act in reliance upon the exemption provided by Section 4(2) of the Securities
Act for transactions not involving a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.4 Asset Purchase Agreement by and among StaffMark, Inc.,
StaffMark Acquisition Corporation Ten and Expert Business
Systems, Incorporated (Incorporated by reference from Exhibit
2.1 to the Company's Form 8-K filed with the Commission on
August 15, 1997)./1/
2.5 Asset Purchase Agreement by and among StaffMark, Inc.,
StaffMark Acquisition Corporation Twelve, and H. Allen &
Company (Incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K filed with the Commission on September 26,
1997)./1/
3.1 Certificate of Incorporation of the Company (Incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
3.2 Certificate of amendment of Certificate of Incorporation
(Incorporated by reference from Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-07513)).
3.3 Amended and Restated By-Laws of the Company, as amended to
date (Incorporated by reference from Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (File No.
333-07513)).
4.1 Form of certificate evidencing ownership of Common Stock of
the Company (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No.
333-07513)).
4.2 Article Four of the Certificate of Incorporation of the
Company (included in Exhibit 3.1).
11.0 Statement re: Computation of per share earnings.
27.1 Financial Data Schedule.
/1/ The Company will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
(b) Reports on Form 8-K
1. A report on Form 8-K was filed with the SEC on August
15, 1997 in connection with the acquisition by the
Company of EBS on August 4, 1997.
2. A report on Form 8-K/A was filed with the SEC on
September 19, 1997 in connection with the acquisition
by the Company of EBS on August 4, 1997.
3. A report on Form 8-K was filed with the SEC on
September 26, 1997 in connection with the acquisition
by the Company of H. Allen on September 15, 1997.
22
<PAGE> 23
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 14, 1997 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: November 14, 1997 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
23
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
11.0 -- Statement re: computation of per share earnings.
27.1 -- Financial Data Schedule.
</TABLE>
24
<PAGE> 1
EXHIBIT 11.0
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
-------------------------- --------------------------
Primary Fully Diluted Primary Fully Diluted
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,886,812 $ 4,886,812 $10,695,866 $10,695,866
----------- ----------- ----------- -----------
Weighted-average shares:
Shares outstanding at beginning of period 14,509,634 14,509,634 13,417,012 13,417,012
Shares issued in conjunction with acquisitions:
183,823 shares issued for Flexible in March 1997 -- -- 144,096 144,096
690,855 shares issued for Global in April 1997 -- -- 463,101 463,101
23,263 shares issued for Kleven in June 1997 -- -- 7,840 7,840
193,860 shares issued for Sterling in June 1997 -- -- 65,330 65,330
286,612 shares issued for Baker Street in August 1997 286,162 286,162 286,162 286,162
123,500 shares issued for EBS in August 1997 123,500 123,500 41,619 41,619
3,665,000 shares issued in conjunction with 1,593,478 1,593,478 536,996 536,996
Secondary Offering in August 1997
24,068 shares issued for Able in September 1997 4,971 4,971 1,675 1,675
71,982 shares issued for H. Allen in September 1997 12,519 12,519 4,219 4,219
Outstanding options considered common stock
equivalents 764,397 900,099 476,420 783,647
Other 42,788 42,788 43,118 43,118
----------- ----------- ----------- -----------
Total weighted-average shares 17,337,449 17,473,151 15,487,588 15,794,815
----------- ----------- ----------- -----------
Earnings per share $ 0.28 $ 0.28 $ 0.69 $ 0.68
----------- ----------- ----------- -----------
</TABLE>
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,204
<SECURITIES> 0
<RECEIVABLES> 49,927
<ALLOWANCES> 2,295
<INVENTORY> 0
<CURRENT-ASSETS> 82,159
<PP&E> 12,020
<DEPRECIATION> 4,341
<TOTAL-ASSETS> 206,583
<CURRENT-LIABILITIES> 26,328
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 179,628
<TOTAL-LIABILITY-AND-EQUITY> 206,583
<SALES> 121,557
<TOTAL-REVENUES> 121,557
<CGS> 94,637
<TOTAL-COSTS> 18,355
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 435
<INCOME-PRETAX> 8,283
<INCOME-TAX> 3,396
<INCOME-CONTINUING> 4,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,887
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
