SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
Quarterly report pursuant to Section 13 or 15 (d) of the
X Securities Exchange Act of 1934 for the quarterly period ended
March 31, 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 May 5, 1997 was 14,291,205.
1
<PAGE>
STAFFMARK INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Index
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Introduction 3
StaffMark, Inc. Pro Forma Statements of Income
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 13
Pro Forma Results for the Three Months Ended March 31, 1997 13
Compared to Pro Forma Results for the Three Months
Ended March 31, 1996
Results for the Three Months Ended March 31, 1997 14
Compared to the Three Months Ended March 31, 1996
Results for the Three Months Ended March 31, 1997 15
Compared to the Combined Results for the Three
Months Ended March 31, 1996
Liquidity and Capital Resources 16
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings 18
Item 2 -- Changes in Securities 18
Item 6 -- Exhibits and Reports on Form 8-K 18
(a) Exhibits
(b) Reports on Form 8-K
Signatures 19
2
<PAGE>
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 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 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"), 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 (collectively, the "Other Founding Companies"). Based upon
the provisions of SAB 97, these acquisitions were accounted for as combinations
at historical cost.
The following unaudited pro forma statements of income give effect to the
following pro forma adjustments: (i) the effect of Brewer's February 1996
acquisition of On Call Employment Services, Inc. ("On Call") and StaffMark's
March 1997 acquisition of Flexible Personnel, Inc., Great Lakes Search
Associates, Inc., and HR America, Inc. (collectively, "Flexible"); (ii) the
adjustment to reflect reductions in salaries to certain owners of the Founding
Companies which were agreed to in connection with the Merger; (iii) the
adjustment to reflect reductions in salaries to the owners of Flexible which
were agreed to in connection with its acquisition; and (iv) the adjustment to
provide federal and state income taxes at an effective combined tax rate of 39%,
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.
3
<PAGE>
STAFFMARK, INC.
PRO FORMA STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1996 1997
------------------ -----------------
SERVICE REVENUES $ 51,933,692 $ 72,239,751
COST OF SERVICES 41,393,411 56,591,832
------------------ -----------------
Gross profit 10,540,281 15,647,919
------------------ -----------------
OPERATING EXPENSES:
Selling, general and administrative 8,738,123 11,257,758
Depreciation and amortization 585,133 740,679
------------------ -----------------
Operating income 1,217,025 3,649,482
------------------ -----------------
OTHER INCOME (EXPENSE):
Interest expense (560,519) (49,222)
Other, net 79,594 238,906
------------------ -----------------
INCOME BEFORE INCOME TAXES 736,100 3,839,166
PROVISION FOR INCOME TAXES 346,879 1,569,520
------------------ -----------------
NET INCOME $ 389,221 $ 2,269,646
================== =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 8,483,531 13,600,835
================== =================
PRO FORMA EARNINGS PER SHARE $ 0.05 $ 0.17
================== =================
The accompanying notes are an integral part of these statements.
4
<PAGE>
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 services to businesses, healthcare providers, professional
and service organizations and governmental agencies, primarily in growth markets
in the southeastern and southwestern United States. 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. 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 its 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
compensates its temporary employees only for hours actually worked, therefore
wages of the temporary employees are a variable cost that increase or decrease
in proportion to revenues. Cost of services primarily consists of wages paid to
temporary employees, 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 and
Flexible as if these acquisitions had occurred at the beginning of the periods
presented. Other acquisitions made by the Company since its 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 months ended
March 31, 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.
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 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 require
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>
5. EARNINGS PER COMMON SHARE:
The computation of earnings per common share for the three months ended
March 31, 1996 is based upon 8,483,531 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; and (iv) 183,823 shares issued in conjunction with the February 1997
acquisition of Flexible.
The computation of earnings per common share for the three months ended
March 31, 1997 is based upon 13,600,835 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) 6,325,000 shares issued in connection with the
Offering; (iv) 118,763 shares issued in conjunction with the November 1996
acquisition of The Technology Source L.L.C. ("Technology Source"); and (v)
183,823 shares issued in conjunction with the February 1997 acquisition of
Flexible.
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 on
the face of the income statement. Based on the provisions of SFAS 128, both
basic and diluted earnings per share for the periods presented would be the same
as the pro forma earnings per share included in the accompanying financial
statements.
6
<PAGE>
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1996 1997
------------------ -----------------
SERVICE REVENUES $ 13,866,251 $ 63,863,741
COST OF SERVICES 10,953,381 49,839,053
------------------ -----------------
Gross profit 2,912,870 14,024,688
------------------ -----------------
OPERATING EXPENSES:
Selling, general and administrative 2,035,310 9,931,641
Depreciation and amortization 264,584 687,834
------------------ -----------------
Operating income 612,976 3,405,213
------------------ -----------------
OTHER INCOME (EXPENSE):
Interest expense (424,893) (31,633)
Other, net 11,389 238,706
------------------ -----------------
INCOME BEFORE INCOME TAXES 199,472 3,612,286
PROVISION FOR INCOME TAXES - 1,481,037
------------------ -----------------
NET INCOME $ 199,472 $ 2,131,249
================== =================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 13,478,286
=================
EARNINGS PER SHARE $ 0.16
=================
The accompanying notes are an integral part of these statements
7
<PAGE>
<TABLE>
STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1996 1997
---------------- ---------------
(Unaudited)
<CAPTION>
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,856,422 $ 3,637,154
Accounts receivable, net of allowance
for doubtful accounts 21,064,875 28,949,113
Prepaid expenses and other 1,577,508 1,856,530
Deferred income taxes - 388,498
---------------- ---------------
Total current assets 36,498,805 34,831,295
PROPERTY AND EQUIPMENT, net 4,003,638 5,045,791
INTANGIBLE ASSETS, net 30,512,571 39,328,746
OTHER ASSETS 483,217 744,479
---------------- ---------------
$ 71,498,231 $ 79,950,311
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 1,907,331 $ 2,158,757
Outstanding checks 176,156 -
Payroll and related liabilities 3,515,743 7,574,067
Reserve for workers' compensation claims 3,771,398 5,942,624
Income taxes payable 2,415,203 1,684,529
Deferred income taxes 662,505 -
---------------- ---------------
Total current liabilities 12,448,336 17,359,977
OTHER LONG TERM LIABILITIES 518,669 345,114
DEFERRED INCOME TAXES 421,147 384,049
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 13,600,835 in 1997 134,170 136,008
Paid-in capital 55,379,391 57,002,553
Foreign currency translation adjustment - (5,157)
Retained earnings 2,596,518 4,727,767
---------------- ---------------
Total stockholders' equity 58,110,079 61,861,171
---------------- ---------------
$ 71,498,231 $ 79,950,311
================ ===============
The accompanying notes are an integral part of these balance sheets.
</TABLE>
8
<PAGE>
<TABLE>
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1996 1997
------------- --------------
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 199,472 $ 2,131,249
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 264,584 687,834
Provision for bad debts 111 39,847
Change in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable (1,014,175) (4,480,298)
Prepaid expenses and other (96,381) (264,320)
Deferred income taxes - (1,088,101)
Other assets (2,099) 114,705
Accounts payable and other accrued liabilities (24,368) (544,440)
Outstanding checks 182,039 (176,156)
Payroll and related liabilities 83,862 3,144,366
Reserve for workers' compensation claims (53,519) 562,515
Income taxes payable - (730,674)
Accrued interest and other (231,471) (115,921)
------------- --------------
Net cash used in operating activities (691,945) (719,394)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (3,000,000) (9,129,994)
Capital expenditures (188,466) (369,880)
------------- --------------
Net cash used in investing activities (3,188,466) (9,499,874)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 4,251,706 -
Payments on borrowings (288,646) -
Cash dividends (17,000) -
Deferred financing costs (56,250) -
------------- --------------
Net cash provided by financing activities 3,889,810 -
------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 9,399 (10,219,268)
CASH AND CASH EQUIVALENTS,
beginning of period 319,159 13,856,422
------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 328,558 $ 3,637,154
============= ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid, including commitment fees $ 608,594 $ 36,229
============= ==============
The accompanying notes are an integral part of these statements.
</TABLE>
9
<PAGE>
STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION:
In March 1996, StaffMark was founded to create a national company to
provide temporary staffing services. Effective October 2, 1996, the Company
acquired the Founding Companies and completed its Offering. Based on the
provisions of SAB 97, Brewer was designated as the acquirer, for financial
reporting purposes, of the Other Founding Companies. As Brewer was designated as
the acquirer for financial reporting purposes, the accompanying financial
statements reflect the results of its operations for the three months ended
March 31, 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 temporary staffing, outsourcing and direct placement
services to businesses, professional organizations, medical niches, service
organizations and governmental agencies. The Company recognizes revenues upon
performance of services. The Company compensates its temporary employees only
for hours actually worked, therefore wages of the temporary employees are a
variable cost that increase or decrease in proportion to revenues. Cost of
services primarily consists of wages paid to temporary employees, 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 March 31, 1997, StaffMark operated offices in Arkansas, Colorado,
Georgia, Indiana, Michigan, Missouri, North Carolina, Ohio, Oklahoma, South
Carolina, Tennessee, Virginia and British Columbia and provides temporary
staffing in the commercial, professional and specialty medical staffing service
lines. 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 of StaffMark in any of the periods presented.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER:
On October 2, 1996, the Company completed the Offering, which involved the
public sale of 6,325,000 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 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, 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 for
working capital and general corporate purposes, including acquisitions.
Concurrent with the completion of the Offering discussed above, 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.
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. 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.
10
<PAGE>
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 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 effective February
1, 1997. Advance, located in Memphis, Tennessee, provides clerical, light
industrial, assembly and packing services for several Fortune 500 companies.
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 effective February 1, 1997. MRIC, located in Vancouver, British
Columbia, 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 was acquired effective March 1, 1997. Flexible, located in Fort
Wayne, Indiana, operates a total of 40 offices located in Indiana, Michigan and
Ohio. Providing clerical, light industrial, professional/information technology
and accounting services, Flexible also operates a staff leasing company.
Flexible had 1996 revenues of approximately $45.0 million and operates in the
Commercial and Professional/Information Technology divisions. The total
consideration paid for Flexible's assets was $10.0 million, including $7.5
million in cash and 183,823 shares of StaffMark 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.
In February 1996, Brewer acquired the stock of On Call. On Call is engaged
in providing temporary personnel services through four staffing offices in
Colorado. On Call had 1995 revenues of approximately $12.5 million and operates
in the Commercial and Professional/Information Technology divisions. The total
consideration paid for On Call was approximately $3.8 million.
The accompanying balance sheet as of March 31, 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.
6. SUBSEQUENT EVENTS:
Effective April 1, 1997, StaffMark acquired Global Dynamics, Inc.
("Global"). Global, located in Walnut Creek, California, provides information
technology staffing services to several Fortune 500 companies. Global had 1996
revenues of approximately $17.2 million and operates in the
Professional/Information Technology division.
Effective April 1, 1997, StaffMark acquired Lindenberg & Associates, Inc.
("Lindenberg"). Lindenberg, headquartered in St. Louis, Missouri, provides
information technology staffing services through offices in St. Louis, Kansas
City, Omaha and Minneapolis/St. Paul. Lindenberg had 1996 revenues of
approximately $18.0 million and operates in the Professional/Information
Technology division.
11
<PAGE>
6. SUBSEQUENT EVENTS (Continued):
Subsequent to quarter-end, StaffMark received a commitment for the
expansion of its line of credit with Mercantile Bank of St. Louis National
Association ("Mercantile") 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 Company also borrowed $29.3 million on the line of credit which
was used to pay the cash portion of the Global and Lindenberg acquisition costs.
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The information below is intended to discuss the pro forma results of
operations for the three months ended March 31, 1997 as compared to the pro
forma results for the three months ended March 31, 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 and StaffMark's
February 1997 acquisition of Flexible. Also presented are the results of
operations for the three months ended March 31, 1997 as compared to Brewer's
results of operations for the three months ended March 31, 1996 and the results
of operations for the three months ended March 31, 1997 as compared to the
combined results of operations for the three months ended March 31, 1996.
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 first
quarter 1996 results 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 MONTHS ENDED MARCH 31, 1997 COMPARED TO PRO
FORMA RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996
Pro Forma Revenues. Pro forma revenues increased $20.3 million, or 39.1%,
to $72.2 million for the three months ended March 31, 1997 as compared $51.9
million for the three months ended March 31, 1996. This increase was largely
attributable to an overall increase in the demand for staffing services and the
Company's strong internal growth over the prior year. Also accounting for the
increase is revenue from the acquisitions of Technology Source, Chandler
Enterprises, Inc. d/b/a Advantage Staffing ("Advantage"), and Tom Bain
Personnel, Inc. ("Tom Bain") in the fourth quarter of 1996 which totaled $4.0
million of the increase.
Pro Forma Cost of Services. Pro forma cost of services increased $15.2
million, or 36.7%, to $56.6 million for the three months ended March 31, 1997
compared to $41.4 million for the three months ended March 31, 1996. This
increase was also due to an overall increase in the demand for staffing
services, acquisitions, and the Company's strong internal growth over the prior
year which resulted in additional staffing payroll and benefit costs.
Pro Forma Gross Profit. Pro forma gross profit increased $5.1 million, or
48.5%, to $15.6 million for the three months ended March 31, 1997 as compared to
$10.5 million for the three months ended March 31, 1996. Pro forma gross margin
increased to 21.7% for the three months ended March 31, 1997 from 20.3% for the
three months ended March 31, 1996. The increases in pro forma gross profit and
gross margin are primarily attributable to the Company's increased revenues,
acquisitions, and focus on the Professional/Information Technology division,
which provides higher profit margins than the Commercial division due to the
specialized expertise of the temporary personnel. Efficiencies realized from the
consolidation of workers' compensation policies have also increased the
Company's gross margin.
13
<PAGE>
Pro Forma Operating Expenses. Pro forma selling, general and administrative
expenses ("SG&A") increased $2.5 million, or 28.8%, to $11.3 million for the
three months ended March 31, 1997 as compared to $8.7 million for the three
months ended March 31, 1996. This increase was primarily attributable to the
Company's continued internal growth as well as its acquisition based growth. As
the Company has begun to realize efficiencies from the Merger, pro forma SG&A as
a percentage of revenues decreased to 15.6% for the three months ended March 31,
1997 compared to 16.8% for the three months ended March 31, 1996. Pro forma
depreciation and amortization expense increased $156,000, or 26.7%, to $741,000
for the three months ended March 31, 1997 as compared to $585,000 for the three
months ended March 31, 1996. This increase is primarily related to the
amortization of goodwill resulting from the Company's acquisitions.
Pro Forma Operating Income. Pro forma operating income increased $2.4
million, or 199.9%, to $3.6 million for the three months ended March 31, 1997 as
compared to $1.2 million for the three months ended March 31, 1996. Pro forma
operating margin increased to 5.1% for the three months ended March 31, 1997 as
compared to 2.3% for the three months ended March 31, 1996. These increases are
primarily attributable to the increased gross profit, increased gross margin and
a decrease in SG&A as a percentage of revenue as previously discussed.
Pro Forma Interest Expense. Pro forma interest expense was $49,000 for the
three months ended March 31, 1997 as compared to $560,000 for the three months
ended March 31, 1996. The decrease in interest cost was a result of all debt
being repaid with proceeds from the Offering. Interest expense for the three
months ended March 31, 1997 is primarily related to a quarterly commitment fee
on the Company's credit facility.
Pro Forma Net Income. Pro forma net income increased $1.9 million, or
483.1%, to $2.3 million for three months ended March 31, 1997 compared to
$389,000 for the three months ended March 31, 1996. Pro forma net income as a
percentage of revenues increased to 3.1% for the three months ended March 31,
1997 compared to 0.8% for the three months ended March 31, 1996.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 1996
The following information compares the results of operations in accordance
with the provisions of SAB 97.
Revenues. Revenues increased $50.0 million, or 360.6%, to $63.9 million for
the three months ended March 31, 1997 compared to $13.9 million for the three
months ended March 31, 1996. This increase was attributable to the fourth
quarter 1996 acquisition of the Other Founding Companies and the subsequent
acquisitions of Technology Source, Advantage, Tom Bain, Advance, MRIC and
Flexible. These acquisitions accounted for approximately $45.5 million of the
increase. Also accounting for this increase is an overall increase in the demand
for staffing services and the Company's strong internal growth.
Cost of Services. Cost of services increased $38.9 million, or 355.0%, to
$49.8 million for the three months ended March 31, 1997 compared to $11.0
million for the three months ended March 31, 1996. This increase was primarily
attributable to an increase in staffing payroll and related benefit costs
associated with increased revenues. Also accounting for the increase was the
acquisition of the Other Founding Companies and the subsequent acquisitions of
Technology Source, Advantage, Tom Bain, Advance, MRIC and Flexible which
accounted for approximately $35.5 million of this increase.
Gross Profit. Gross profit increased $11.1 million, or 381.5%, to $14.0
million for the three months ended March 31, 1997 compared to $2.9 million for
the three months ended March 31, 1996. This increase is primarily attributable
to the acquisitions of the Other Founding Companies, Technology Source,
Advantage, Tom Bain, Advance, MRIC and Flexible. Gross margin increased to 22.0%
for the three months ended March 31, 1997 compared to 21.0% for the three months
ended March 31, 1996. The increases in gross profit and gross margin are
primarily attributable to the Company's increased revenues, acquisitions, and
focus on the Professional/Information Technology division, which provides higher
profit margins than the Commercial division due to the specialized expertise of
the temporary personnel.
14
<PAGE>
Operating Expenses. SG&A increased $7.9 million, or 388.0%, to $9.9 million
for the three months ended March 31, 1997 compared to $2.0 million for the three
months ended March 31, 1996. This increase was primarily attributable to the
acquisitions of the Other Founding Companies, Technology Source, Advantage, Tom
Bain, Advance, MRIC and Flexible which accounted for approximately $7.1 million
of the increase. SG&A as a percentage of revenues increased to 15.6% for the
three months ended March 31, 1997 compared to 14.7% for the three months ended
March 31, 1996. Depreciation and amortization expense increased $423,000, or
160.0%, to $688,000 for the three months ended March 31, 1997 compared to
$265,000 for the three months ended March 31, 1996. This increase is primarily
attributable to amortization of the goodwill associated with several of the
Company's subsequent acquisitions and depreciation from the addition of property
and equipment acquired in the Merger.
Operating Income. Operating income increased $2.8 million, or 455.5%, to
$3.4 million for the three months ended March 31, 1997 compared to $613,000 for
the three months ended March 31, 1996. The Company's operating margin increased
to 5.3% for the first quarter of 1997 compared to 4.4% for the first quarter of
1996.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THE COMBINED
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1996
The following information compares actual results for the three months
ended March 31, 1997 to the combined results of the Founding Companies for the
three months ended March 31, 1996 as if they had been members of the same
operating group. These combined amounts for the three months ended March 31,
1996 have not been adjusted for significant acquisitions or reductions in
salaries to certain owners of the Founding Companies.
<TABLE>
Three Months Ended March 31,
(Dollars in Thousands)
==================================================
1996 1997
========================= ========================
$ % $ %
------------ ------------ ----------- -----------
<CAPTION>
<S> <C> <C> <C> <C>
SERVICE REVENUES $40,925 100.0 $63,864 100.0
COST OF SERVICES 32,449 79.3 49,839 78.0
------------ ------------ ----------- -----------
Gross profit 8,476 20.7 14,025 22.0
OPERATING EXPENSES:
Selling, general and administrative 6,939 17.0 9,932 15.6
Depreciation and amortization 428 1.0 688 1.0
------------ ------------ ----------- -----------
Operating income $ 1,109 2.7 $ 3,405 5.4
============ ============ =========== ===========
</TABLE>
Combined Revenues. Revenues increased $22.9 million, or 56.1%, to $63.9
million for the three months ended March 31, 1997 compared to combined revenues
of $40.9 million for the three months ended March 31, 1996. This increase was
attributable to strong internal growth, an overall increase in the demand for
staffing services, and the acquisitions of On Call, Technology Source,
Advantage, Tom Bain, Advance, MRIC and Flexible, which accounted for
approximately $10.6 million of the increase.
Combined Cost of Services. Cost of services increased $17.4 million, or
53.6%, to $49.8 million for the three months ended March 31, 1997 compared to
combined cost of services of $32.4 million for the three months ended March 31,
1996. This increase is primarily due to increased staffing and benefit costs
associated with the increase in revenue, strong internal growth, an overall
increase in the demand for staffing services, and the acquisitions of On Call,
Technology Source, Advantage, Tom Bain, Advance, MRIC and Flexible.
15
<PAGE>
Combined Gross Profit. Gross profit increased $5.5 million, or 65.5%, to
$14.0 million for the three months ended March 31, 1997 as compared to combined
gross profit of $8.5 million for the three months ended March 31, 1996. This
increase is attributable to higher revenues due to internal growth and the
acquisitions of On Call, Technology Source, Advantage, Tom Bain, Advance, MRIC
and Flexible. Gross margin increased to 22.0% for the three months ended March
31, 1997 from a combined gross profit of 20.7% for the three months ended March
31, 1996. The increases in gross profit and gross margin are primarily
attributable to the Company's increased revenues, acquisitions, and focus on the
Professional/Information Technology division, which provides higher profit
margins than the Commercial division due to the specialized expertise of the
temporary personnel. Gross margin also increased as a result of lower workers'
compensation expenses and state unemployment taxes.
Combined Operating Expenses. SG&A increased $3.0 million, or 43.1%, to $9.9
million for the three months ended March 31, 1997 compared to combined SG&A of
$6.9 million for the three months ended March 31, 1996. This increase was due to
the Company's costs to support the internal and acquisition growth. SG&A as a
percentage of revenues decreased to 15.6% for the three months ended March 31,
1997 compared to combined SG&A of 17.0% for the three months ended March 31,
1996 as the Company has begun to realize efficiencies from the Merger.
Depreciation and amortization expense increased $260,000, or 60.9%, to $688,000
for the three months ended March 31, 1997 compared to combined depreciation and
amortization expense of $428,000 for the three months ended March 31, 1996. This
increase is primarily related to the amortization of goodwill resulting from the
Company's acquisitions.
Combined Operating Income. Operating income increased $2.3 million, or
207.2%, to $3.4 million for the three months ended March 31, 1997 as compared to
combined operating income of $1.1 million for the three months ended March 31,
1996. Operating margin increased to 5.4% for the three months ended March 31,
1997 as compared to combined operating margin of 2.7% for the three months ended
March 31, 1996. These increases are primarily attributable to the increased
gross profit, increased gross margin and decreased SG&A as a percentage of
revenue previously discussed.
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. Subsequent to quarter-end, the Company
received a commitment to expand its line of credit 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 October 4, 2001 and
interest on any borrowings will be 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. The Company is obligated to pay a
commitment fee equal to 0.25% per annum multiplied by the total line of credit
commitment through March 31, 1997. Subsequent to March 31, 1997, the 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 March
31, 1997, no funds were borrowed on either credit facility. Subsequent to
quarter-end, the Company borrowed $29.3 million on the line of credit which was
used to pay the cash portion of the Global and Lindenberg acquisition costs.
In October 1996, the Company registered an additional 4.0 million shares of
its Common Stock for use by the Company as consideration to be paid in
conjunction with future acquisitions. As of March 31, 1997, none of these shares
had been issued.
Net cash used in operating activities was $692,000 and $719,000 for the
three months ended March 31, 1996 and 1997, respectively. The net cash provided
by operating activities for the periods presented was primarily attributable to
net income and changes in operating assets and liabilities.
Net cash used in investing activities was $3.2 million and $9.5 million for
the three months ended March 31, 1996 and 1997, respectively. Cash used in
investing activities in the first quarter of 1996 was largely for the
acquisition of On Call by Brewer for cash totaling $3.0 million. Cash used in
investing activities in the first quarter of 1997 was primarily related to the
acquisition of Advance, MRIC and Flexible for cash totaling $9.8 million.
16
<PAGE>
Net cash provided by financing activities was $3.9 million, and $0 for the
three months ended March 31, 1996 and 1997, respectively. Cash provided by
financing activities in the first quarter of 1996 was primarily attributable to
the proceeds from debt issued by Brewer in conjunction with the acquisition of
On Call.
As a result of the foregoing, combined cash and cash equivalents increased
by $9,000 for the first quarter of 1996 and decreased by $10.2 million for the
first quarter of 1997, respectively.
Management believes that the Company's revolving credit facility, its cash
flows from operations, and the shares of Common Stock available under its shelf
registration statement 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 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.
17
<PAGE>
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 materially 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 acquisition of Technology Source, the Company issued
118,763 shares of Common Stock to the members of Technology Source in January
1997. In connection with the acquisition of Flexible, the Company issued 183,823
shares of Common Stock to the stockholders of Flexible in March 1997. Each of
these transactions was effected without registration of the relevant security
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
2.1 Asset Purchase Agreement, dated March 17, 1997, among StaffMark,
Inc., StaffMark Acquisition Corporation Two, StaffMark Acquisition
Corporation Three, and Flexible Personnel, Inc., Great Lakes Search
Associates, Inc., H.R. America, Inc., Douglas H. Curtis, Jean A.
Curtis and Robert P. Curtis. /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 of 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 Statement re: computation of per share earnings; reference is made
to Note 5 of the StaffMark, Inc. Notes to Pro Forma Statements of
Income and Note 5 of the StaffMark, Inc. Notes to Consolidated
Financial Statements contained in this Form 10-Q.
21 Subsidiaries of the Company.
27.1 Financial Data Schedule.
/1/ The Company will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
18
<PAGE>
(b) Reports on Form 8-K
1. A report on Form 8-K was filed with the SEC on February 21,
1997 in connection with the acquisition by the Company of
Advance on February 7, 1997.
2. A report on Form 8-K was filed with the SEC on February 21,
1997 in connection with the acquisition by the Company of
MRIC on February 7, 1997.
3. A report on Form 8-K was filed with the SEC on April 2, 1997
in connection with the acquisition by the Company of
Flexible on March 18, 1997.
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: May 5, 1997 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: May 5, 1997 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
21.1 -- Subsidiaries of StaffMark, Inc.
27.1 -- Financial Data Schedule
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF STAFFMARK, INC.
SUBSIDIARY STATE OR COUNTRY
OF ORGANIZATION
Brewer Personnel Services, Inc. Arkansas
The Blethen Group, Inc. d/b/a Clinical North Carolina
Trial Support Services
First Choice Staffing, Inc. South Carolina
HRA, Inc. Tennessee
Tom Bain Personnel, Inc., a subsidiary of Tennessee
HRA, Inc.
Maxwell Staffing, Inc. Oklahoma
Maxwell/Healthcare, Inc. Oklahoma
Maxwell Staffing of Bristow, Inc. Oklahoma
Square One Rehab, Inc. Oklahoma
Technical Staffing, Inc. Oklahoma
Prostaff Personnel, Inc. Arkansas
Excel Temporary Staffing, Inc. Arkansas
Professional Resources, Inc. Arkansas
The Technology Source Acquisition Corporation Delaware
d/b/a Technology Source, Inc.
Advance Personnel Service Acquisition Corporation Delaware
d/b/a Advance Personnel Service, Inc.
StaffMark Acquisition Corporation Two Delaware
StaffMark Acquisition Corporation Three Delaware
StaffMark Acquisition Corporation Four Delaware
StaffMark Acquisition Corporation Five Delaware
StaffMark Acquisition Corporation Six Delaware
533993 B.C., LTD. British Columbia
MRIC - Medical Recruiters International LTD., British Columbia
a subsidiary of 533993 B.C., LTD.
<PAGE>
<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> MAR-31-1997
<CASH> 3,637
<SECURITIES> 0
<RECEIVABLES> 29,553
<ALLOWANCES> 604
<INVENTORY> 0
<CURRENT-ASSETS> 34,831
<PP&E> 8,640
<DEPRECIATION> 3,594
<TOTAL-ASSETS> 79,950
<CURRENT-LIABILITIES> 17,360
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 61,725
<TOTAL-LIABILITY-AND-EQUITY> 79,950
<SALES> 63,864
<TOTAL-REVENUES> 63,864
<CGS> 49,839
<TOTAL-COSTS> 10,619
<OTHER-EXPENSES> 239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 3,612
<INCOME-TAX> 1,481
<INCOME-CONTINUING> 2,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,131
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
