<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1998
[ ] 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 August 12, 1998 was 22,079,913.
<PAGE> 2
STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
Index
-----
<S> <C> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
StaffMark, Inc. Consolidated Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction 10
Results for the Three and Six Months Ended June 30, 1998
Compared to Results for the Three and Six Months Ended
June 30, 1997 10
Liquidity and Capital Resources 11
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 13
ITEM 2 -- CHANGES IN SECURITIES 13
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5 -- OTHER INFORMATION 14
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 15
</TABLE>
2
<PAGE> 3
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERVICE REVENUES $174,913,328 $ 99,296,583 $325,859,523 $165,705,753
COST OF SERVICES 130,327,995 76,969,432 244,115,779 128,746,203
------------ ------------ ------------ ------------
Gross profit 44,585,333 22,327,151 81,743,744 36,959,550
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 27,694,915 14,658,446 51,630,474 25,046,438
Depreciation and amortization 2,656,882 1,071,867 5,032,091 1,777,443
Nonrecurring merger costs 1,120,496 - 1,120,496 -
------------ ------------ ------------ ------------
Operating income 13,113,040 6,596,838 23,960,683 10,135,669
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (1,147,651) (492,865) (1,777,034) (543,353)
Other, net (50,249) 14,833 (49,276) 253,539
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,915,140 6,118,806 22,134,373 9,845,855
PROVISION FOR INCOME TAXES 4,885,207 2,508,711 9,075,093 4,036,801
------------ ------------ ------------ ------------
NET INCOME $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.34 $ 0.25 $ 0.64 $ 0.41
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.33 $ 0.24 $ 0.62 $ 0.40
============ ============ ============ ============
BASIC EARNINGS PER SHARE
EXCLUDING MERGER COSTS $ 0.37 $ 0.25 $ 0.68 $ 0.41
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
EXCLUDING MERGER COSTS $ 0.36 $ 0.24 $ 0.65 $ 0.40
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,409,997 $ 304,995
Accounts receivable, net of allowance
for doubtful accounts 81,086,180 56,707,089
Prepaid expenses and other 4,701,497 4,706,313
Deferred income taxes 1,609,881 851,284
------------- ---------------
Total current assets 91,807,555 62,569,681
PROPERTY AND EQUIPMENT, net 14,357,314 9,536,164
INTANGIBLE ASSETS, net 304,573,919 172,807,775
OTHER ASSETS 1,451,738 3,735,628
------------- ---------------
$ 412,190,526 $ 248,649,248
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 5,990,345 $ 10,024,096
Payroll and related liabilities 19,245,239 11,580,706
Reserve for workers' compensation claims 6,526,418 6,108,748
Income taxes payable 2,322,166 2,677,191
------------- ---------------
Total current liabilities 34,084,168 30,390,741
LONG TERM DEBT 112,560,000 12,000,000
OTHER LONG TERM LIABILITIES 36,313,782 9,658,774
DEFERRED INCOME TAXES 1,968,883 1,314,629
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized shares of
10,000,000; no shares issued or outstanding - -
Common stock, $.01 par value; authorized shares of
200,000,000; shares issued and outstanding of
20,764,308 in 1998 and 19,138,636 in 1997 207,643 191,386
Paid-in capital 191,914,652 176,195,026
Retained earnings 35,141,398 18,898,692
------------- ---------------
Total stockholders' equity 227,263,693 195,285,104
------------- ---------------
$ 412,190,526 $ 248,649,248
============= ===============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE> 5
STAFFMARK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 19,138,636 $191,386 $176,195,026 $18,898,692 $195,285,104
Effect of business combinations 1,596,862 15,968 15,191,869 3,183,426 18,391,263
Exercise of stock options 13,344 134 104,608 - 104,742
Employee stock purchase plan 15,466 155 423,149 - 423,304
Net income - - - 13,059,280 13,059,280
---------- -------- ------------ ----------- ------------
BALANCE, June 30, 1998 20,764,308 $207,643 $191,914,652 $35,141,398 $227,263,693
========== ======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
5
<PAGE> 6
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $7,029,933 $3,610,095 $13,059,280 $5,809,054
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,656,882 1,071,867 5,032,091 1,777,443
Provision for bad debts 489,338 - 729,186 148,528
Deferred income taxes (787,941) (1,190,040) (1,347,470) (2,278,141)
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (3,149,542) (4,077,792) (9,048,659) (9,960,499)
Prepaid expenses and other 799,452 214,707 2,290,074 (50,807)
Other assets 902,748 549,968 677,203 657,973
Accounts payable and other accrued liabilities (4,173,456) 180,283 (8,994,599) 438,626
Payroll and related liabilities (449,084) 2,533,598 5,870,111 5,818,216
Reserve for workers' compensation claims 422,932 497,840 462,927 1,066,629
Income taxes payable (2,846,162) (1,183,093) (918,614) (1,925,409)
Accrued interest 59,653 460,552 185,615 438,421
Other long-term liabilities 460,969 (1,457,184) 126,641 (1,561,833)
Other 149,253 (141,939) (407,484) (203,463)
---------- ---------- ------------ ----------
Net cash provided by operating activities 1,564,975 1,068,862 7,716,302 174,738
---------- ---------- ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (62,770,650) (41,800,708) (99,620,650) (50,930,702)
Capital expenditures (2,604,721) (1,553,794) (4,746,432) (1,923,674)
---------- ---------- ------------ ----------
Net cash used in investing activities (65,375,371) (43,354,502) (104,367,082) (52,854,376)
---------- ---------- ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 96,900,000 43,110,750 142,200,000 43,430,000
Payments on borrowings (34,290,000) (1,935,244) (41,640,000) (1,935,244)
Proceeds from stock purchase plan and stock option exercises 385,856 - 528,046 -
Deferred financing costs (56,333) - (332,264) -
---------- ---------- ------------ ----------
Net cash provided by financing activities 62,939,523 41,175,506 100,755,782 41,494,756
---------- ---------- ------------ ----------
Net increase (decrease) in cash and cash equivalents (870,873) (1,110,134) 4,105,002 (11,184,882)
CASH AND CASH EQUIVALENTS, beginning of period 5,280,870 3,781,674 304,995 13,856,422
---------- ---------- ------------ ----------
CASH AND CASH EQUIVALENTS, end of period $4,409,997 $2,671,540 $ 4,409,997 $2,671,540
========== ========== ============ ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $1,048,347 $ 290,014 $ 1,428,516 $ 326,243
========== ========== ============ ==========
Income taxes paid $8,206,060 $2,510,550 $ 11,000,145 $4,533,450
========== ========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS:
StaffMark, Inc. ("StaffMark" or 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 the 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 June 30, 1998, StaffMark operated offices in 29 states, Canada,
South Africa, the United Kingdom and Thailand and provides staffing in the
Commercial and Professional/Information Technology ("Professional/IT") 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. BASIS OF PRESENTATION:
The accompanying interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("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.
The accompanying interim financial statements reflect all adjustments
(which were of a normal, recurring nature) that, in the opinion of management,
are necessary to present fairly the Company's financial position, results of
operations and cash flows as of and for the interim periods presented. The
accompanying statements of income and cash flows for the three and six months
ended June 30, 1997 have been restated to reflect the July 1997 acquisition of
Baker Street Group, Inc., which was accounted for as a pooling-of-interests. All
significant intercompany transactions have been eliminated in the accompanying
consolidated financial statements. 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 notes thereto included in
StaffMark's Annual Report on Form 10-K as filed with the SEC on March 13, 1998.
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. Accordingly, the
results of operations for an interim period are not necessarily indicative of
the results of operations for a full fiscal year.
7
<PAGE> 8
4. BUSINESS COMBINATIONS:
During the second quarter of 1998, the Company acquired seven
businesses. These acquired companies along with the four acquisitions made in
the first quarter of 1998 are collectively referred to as the "1998
Acquisitions." DPSC Technology Consultants, Inc. ("DPSC") is located in
Baltimore Maryland and provides information technology and consulting services.
Tempway Services, Inc. ("Tempway") provides clerical and administrative staffing
services in the Atlanta, Georgia metropolitan area. Tribase Systems, Inc.
("Tribase") is located in Florham Park, New Jersey and provides information
technology and consulting services primarily to customers in New York City.
Progressive Resources, Inc. ("Progressive") is headquartered in New York City
and provides traditional office staffing as well as clerical, office automation,
and desktop publishing services in New York and New Jersey. KnowledgeSoft, Inc.
("KSI") is located in Mechanicsburg, Pennsylvania and provides information
technology solutions. The Matrix Group ("Matrix") is located in Las Vegas,
Nevada and provides clerical, technical and administrative staffing and
placement services. Essex Computer Service, Inc. ("Essex") is located in Ft.
Lauderdale, Florida and provides information technology services. The Company's
1998 Acquisitions had cumulative fiscal 1997 revenues of approximately $101.1
million.
The Company's mergers with DPSC, Tempway and Tribase have been
accounted for as pooling-of-interest transactions. Nonrecurring merger costs
incurred for these transactions totaled approximately $1.1 million and, in
accordance with Accounting Principles Board Opinion No. 16, have been reflected
in expense in the current period.
The accompanying balance sheet as of June 30, 1998 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 Company acquired 19 staffing and professional service companies
during 1997. The 1997 acquisitions of Flexible Personnel, Inc. and related
entities ("Flexible"), Global Dynamics, Inc., Lindenberg & Associates, Inc.,
Expert Business Systems, Incorporated, H. Allen & Company, Inc., RHS Associates,
Inc., EMJAY Careers, Inc. and EMJAY Contracts, Inc., and Structured Logic
Company, Inc. ("Structured Logic") were considered significant. These
significant 1997 acquisitions along with Strategic Legal and Progressive during
1998 are collectively referred to as the "Significant Acquisitions." The
unaudited consolidated results of operations on a pro forma basis as though the
Significant Acquisitions had been acquired as of the beginning of 1997 are
presented below. Note that the pro forma information presented below does not
reflect the reductions in salaries that certain owners of the Significant
Acquisitions agreed to in conjunction with the acquisitions discussed above or
nonrecurring merger costs incurred in connection with several of the Company's
pooling-of-interest transactions. The remaining 1998 acquisitions have not been
significant and, therefore, have not been included in the following pro forma
presentation. Management believes this information reflects all adjustments
necessary for a fair presentation of results for the interim periods. The pro
forma results of operations for the three and six months ended June 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $178,104,578 $126,199,582 $337,063,944 $233,900,424
============ ============ ============ ============
Net income $ 7,911,196 $ 4,825,817 $ 14,190,642 $ 7,745,610
============ ============ ============ ============
Basic earnings per share $ 0.38 $ 0.31 $ 0.70 $ 0.50
============ ============ ============ ============
Diluted earnings per share $ 0.36 $ 0.30 $ 0.66 $ 0.49
============ ============ ============ ============
</TABLE>
8
<PAGE> 9
In addition to the purchase prices disclosed below, certain of the
acquisition agreements include provisions for the payment of additional
consideration which is contingent upon the achievement of certain performance
measures of the acquired company, typically during the twelve months immediately
following the transaction. Although the contingent consideration could be
significant to the accompanying financial statements, the amounts are not
currently determinable and, accordingly, have no been reflected in the Company's
financial statements. The obligations for this contingent consideration, which
will be payable in a combination of cash and the Company's common stock ("Common
Stock"), will be recorded in the Company's financial statements when they become
fixed and determinable.
The aggregate consideration of acquisitions during the six months ended
June 30, 1998, which includes consideration paid for companies acquired in the
current period, as well as contingent consideration paid to the former owners of
companies acquired in previous periods consisted of $99.6 million in cash and
1.6 million shares of Common Stock.
5. EARNINGS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
established new standards for computing and presenting earnings per share
information. Basic earnings per share is determined by dividing net income by
the weighted average common shares outstanding during each period. Diluted
earnings per share reflects the potential dilution that could occur assuming
exercise of all outstanding stock options. A reconciliation of net income and
weighted average shares used in computing basic and diluted earnings per share
is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
-------------- --------------- ------------ -------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income applicable to common shares $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054
============== =============== ============ =============
Weighted average common shares outstanding 20,585,628 14,585,684 20,275,185 14,178,351
============== =============== ============ =============
Basic earnings per share of common stock $ 0.34 $ 0.25 $ 0.64 $ 0.41
============== =============== ============ =============
Basic earnings per share of common stock excluding merger costs $ 0.37 $ 0.25 $ 0.68 $ 0.41
============== =============== ============ =============
DILUTED EARNINGS PER SHARE:
Net income applicable to common shares $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054
============== =============== ============ =============
Weighted average common shares outstanding 20,585,628 14,585,684 20,275,185 14,178,351
Dilutive effect of stock options 1,043,611 339,543 949,189 218,168
-------------- --------------- ------------ -------------
Weighted average common shares including
dilutive effect of stock options 21,629,239 14,925,227 21,224,374 14,396,519
============== =============== ============ =============
Diluted earnings per share of common stock $ 0.33 $ 0.24 $ 0.62 $ 0.40
============== =============== ============ =============
Diluted earnings per share of common stock excluding merger costs $ 0.36 $ 0.24 $ 0.65 $ 0.40
============== =============== ============ =============
</TABLE>
9
<PAGE> 10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The information below discusses the results of operations for the three
and six months ended June 30, 1998 as compared to the results of operations for
the three and six months ended June 30, 1997. 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.
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.
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO RESULTS FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
Revenues. Revenues increased $75.6 million, or 76.2%, to $174.9 million
for the three months ended June 30, 1998 compared to $99.3 million for the three
months ended June 30, 1997. Revenues increased $160.2 million, or 96.6%, to
$325.9 million for the six months ended June 30, 1998 compared to $165.7 million
for the six months ended June 30, 1997. These increases are attributable to the
continued growth of the Company's existing operations and results from the 1998
Acquisitions which accounted for approximately $32.1 million of the increase for
the three months ended June 30, 1998 and $44.1 million of the increase for the
six months ended June 30, 1998.
Cost of Services. Cost of services increased $53.4 million, or 69.3%,
to $130.3 million for the three months ended June 30, 1998 compared to $77.0
million for the three months ended June 30, 1997. Cost of services increased
$115.4 million, or 89.6%, to $244.1 million for the six months ended June 30,
1998 compared to $128.7 million for the six months ended June 30, 1997. These
increases were primarily attributable to an increase in staffing payroll and
related benefit costs associated with increased revenues and a change in the
Company's business mix toward the Professional/IT division which has higher
payroll rates. Also accounting for the increase were the results from the 1998
Acquisitions, which accounted for approximately $22.1 million of the increase
for the three months ended June 30, 1998 and $30.3 million of the increase for
the six months ended June 30, 1998.
Gross Profit. Gross profit increased $22.3 million, or 99.7%, to $44.6
million for the three months ended June 30, 1998 compared to $22.3 million for
the three months ended June 30, 1997. Gross profit increased $44.8 million, or
121.2%, to $81.7 million for the six months ended June 30, 1998 compared to
$37.0 million for the six months ended June 30, 1997. The increase in gross
profit is primarily attributable to the Company's increased revenues from
internal growth and the Company's acquisitions. Gross margin increased to 25.5%
for the three months ended June 30, 1998 compared to 22.5% for the three months
ended June 30, 1997 and to 25.1% for the six months ended June 30, 1998 compared
to 22.3% for the six months ended June 30, 1997. The increases in gross margin
are primarily a result of a larger portion of the Company's revenue base being
directly related to the Professional/IT division, which provides higher profit
margins than the Commercial division.
Operating Expenses. SG&A increased $14.2 million, or 96.6%, to $28.8
million for the three months ended June 30, 1998 compared to $14.7 million for
the three months ended June 30, 1997. SG&A increased $27.7 million, or 110.6%,
to $52.8 million for the six months ended June 30, 1998 compared to $25.0
million for the six months ended June 30, 1997. These increases in part were
attributable to the results from the 1998 Acquisitions, which accounted for
approximately $4.5 million of the increase for the three months ended June 30,
1998 and $6.2 million of the increase for the six months ended June 30, 1998.
Also accounting for the increase were nonrecurring merger costs associated with
several of the
10
<PAGE> 11
Company's 1998 Acquisitions, increased costs associated with a larger revenue
base, and costs associated with the development of corporate infrastructure.
SG&A as a percentage of revenues increased to 16.5% for the three months ended
June 30, 1998 compared to 14.8% for the three months ended June 30, 1997. SG&A
as a percentage of revenues increased to 16.2% for the six months ended June 30,
1998 compared to 15.1% for the six months ended June 30, 1997. The increases in
SG&A as a percentage of revenue are related to costs associated with the
Company's efforts to increase the Professional/IT division to become a larger
percentage of the overall business, nonrecurring merger costs and the
development of the corporate infrastructure. Depreciation and amortization
expense increased $1.6 million, or 147.9%, to $2.7 million for the three months
ended June 30, 1998 compared to $1.1 million for the three months ended June 30,
1997. Depreciation and amortization expense increased $3.3 million, or 183.1%,
to $5.0 million for the six months ended June 30, 1998 compared to $1.8 million
for the six months ended June 30, 1997. These increases are primarily
attributable to amortization of goodwill associated with the Company's
acquisitions.
Operating Income. Operating income increased $6.5 million, or 98.8%, to
$13.1 million for the three months ended June 30, 1998 compared to $6.6 million
for the three months ended June 30, 1997. Operating income increased $13.8
million, or 136.4%, to $24.0 million for the six months ended June 30, 1998
compared to $10.1 million for the six months ended June 30, 1997. The Company's
operating margin increased to 7.5% for the three months ended June 30, 1998
compared to 6.6% for the three months ended June 30, 1997. The Company's
operating margin increased to 7.4% for the six months ended June 30, 1998
compared to 6.1% for the six months ended June 30, 1997. Excluding the
nonrecurring merger costs associated with several of the 1998 Acquisitions, the
Company's operating income increased $7.6 million, or 115.8%, to $14.2 million
for the three months ended June 30, 1998 and increased $14.9 million, or 147.5%,
to $25.1 million for the six months ended June 30, 1998. Operating margin,
exclusive of these merger costs, was 8.1% for the three months ended June 30,
1998 and 7.7% for the six months ended June 30, 1998.
Interest Expense. Interest expense was $1.1 million and $1.8 million
for the three and six months ended June 30, 1998, respectively, as compared to
$493,000 and $543,000 for the three and six months ended June 30, 1997,
respectively. These increases in interest expense are primarily related to
borrowings on the Credit Facility (as defined below) used to fund the cash
portion of acquisition consideration.
Earnings before interest, taxes, depreciation and amortization.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $15.8 million and $29.0 million for the three and six months ended
June 30, 1998, respectively, as compared to $7.7 million and $11.9 million for
the three and six months ended June 30, 1997, respectively. EBITDA as a
percentage of revenue increased to 9.0% and 8.9% for the three and six months
ended June 30, 1998, respectively, as compared to 7.7% and 7.2% for the three
and six months ended June 30, 1997. Exclusive of nonrecurring merger costs,
EBITDA was $16.9 million and $30.1 million for the three and six months ended
June 30, 1998, respectively. EBITDA margin excluding nonrecurring merger costs
was 9.7% and 9.2% for the three and six months ended June 30, 1998,
respectively.
Net Income. Net income increased $3.4 million, or 94.7%, to $7.0
million for the three months ended June 30, 1998 compared to $3.6 million for
the three months ended June 30, 1997. Net income increased $7.3 million, or
124.8%, to $13.1 million for the six months ended June 30, 1998 compared to $5.8
million for the six months ended June 30, 1997. Excluding the nonrecurring
merger costs associated with several of the 1998 Acquisitions, the Company's net
income increased $4.1 million, or 113.0%, to $7.7 million for the three months
ended June 30, 1998 and increased $7.9 million, or 136.2%, to $13.7 million for
the six months ended June 30, 1998 as a result of the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is from operations, proceeds of
Common Stock offerings and borrowings under the Credit Facility (as defined
below). The Company's principal uses of cash are to fund acquisitions, working
capital and capital expenditures. The Company generally pays its temporary
associates and consultants weekly for their services, while receiving payments
from customers 30 to 60 days from the date of the invoice. As new offices are
established or acquired, or as existing offices are expanded, the Company has
increasing requirements for cash resources to fund growing operations.
11
<PAGE> 12
In March 1998, the Company amended and restated its credit facility
with the members of its bank group to increase the borrowing availability from
$100.0 million to $175.0 million (the "Credit Facility"). The Credit Facility
matures on April 1, 2003. Interest on any borrowings is computed at the
Company's option of either LIBOR or the bank group's prime rate and
incrementally adjusted based on the Company's operating leverage ratios. As a
result of the recent amendment to the Credit Facility, there is no distinction
between a revolving credit line for operations and an acquisition facility, such
that borrowings, whether for operations or for acquisitions, may be made up to
$175.0 million. For the three month period ended March 31, 1997, the Company
paid a quarterly commitment fee equal to 0.25% per annum of the total Credit
Facility ($50.0 million at that time). From March 31, 1997 to June 30, 1998, the
quarterly commitment fee was determined by multiplying the unused portion of the
Credit Facility by a percentage which varied from 0.25% to 0.375% per annum
based on the Company's operating leverage ratio. Subsequent to March 31, 1998,
the quarterly commitment fee is determined by multiplying the unused portion of
the Credit Facility by a percentage which varies from 0.1875% to 0.25% per annum
based on the Company's operating leverage ratios. The Credit Facility is secured
by all of the assets of the Company and a pledge of 100% of the stock of all of
the Company's subsidiaries. During the three and six months ended June 30, 1998,
the Company had net borrowings of approximately $62.6 million and $100.6
million, respectively, on the Credit Facility which were used: (i) to pay the
cash consideration for several of the Company's acquisitions; (ii) to fund the
additional cash consideration for several of the Company's 1997 acquisitions;
and (iii) for general corporate purposes. The Company has received a commitment
letter from the bank group to increase the Credit Facility up to $250.0 million,
along with reduced coverage ratios, more favorable interest rates and removal of
certain of the Company's assets as collateral. The Company believes that this
amendment will be finalized before September 30, 1998. As of August 11, 1998,
$105.2 million was outstanding on the Credit Facility.
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 acquired companies. Management believes
that neither the total amount of these contingent payments nor the specific
combination of cash and Common Stock consideration can be currently determined.
Management believes that its cash flows from operations, the Credit Facility and
its ability to issue equity or debt securities will provide sufficient liquidity
and capital resources to satisfy these obligations.
Net cash provided by operating activities was $1.6 million and $1.1
million for the three months ended June 30, 1998 and 1997, respectively, and
$7.7 million and $175,000 for the six months ended June 30, 1998 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 $65.4 million and $43.4
million for the three months ended June 30, 1998 and 1997, respectively, and
$104.4 million and $52.9 million for the six months ended June 30, 1998 and
1997, respectively. Net cash used in investing activities for all periods
presented was primarily related to the Company's acquisitions.
Net cash provided by financing activities was $62.9 million, and $41.2
million for the three months ended June 30, 1998 and 1997, respectively, and
$100.8 million and $41.5 million for the six months ended June 30, 1998 and
1997, respectively. Cash provided by financing activities for all periods
presented was primarily attributable to the proceeds from the debt issued in
conjunction with the Company's acquisitions.
As a result of the foregoing, combined cash and cash equivalents
decreased $871,000 for the three months ended June 30, 1998, increased $4.1
million for the six months ended June 30, 1998, decreased $1.1 million for the
three months ended June 30, 1997, and decreased $11.2 million for the six months
ended June 30, 1997, respectively.
12
<PAGE> 13
Management believes that its cash flows from operations, borrowings
available under the Credit Facility, offerings of debt or equity securities and
the use of Common Stock as partial consideration for 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. 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, acquisition plans and offerings of
debt or equity securities, in order to ensure the Credit Facility is adequate to
meet the Company's needs on a short-term and long-term basis.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. As part
of its operating strategy, the Company is implementing one primary front office
software package (Caldwell-Spartin) in a majority of its Commercial offices and
one primary search and retrieval software package (EZ Access) in a majority of
its Professional/IT offices. In addition, the Company has selected and
implemented the PeopleSoft system for its back office, administrative and
accounting systems. All of these software systems have the ability to process
transactions with dates for the Year 2000 and beyond at no incremental cost and,
accordingly, the Company believes that Year 2000 costs with respect to these
software systems are not expected to have a material impact on the Company's
financial condition or results of operations.
As to software systems and applications utilized by entities acquired
or to be acquired by the Company, the Company anticipates that upgrades and/or
conversions may be required to ensure that these systems and applications are
Year 2000 compliant. As to these software systems and applications, the Company
believes that any such upgrades and/or conversions will be timely made and are
not expected to have a material impact on the Company's financial condition or
results of operations.
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 acquisition of DPSC, the Company issued 176,366
shares of Common Stock to the stockholders of DPSC in April 1998. In connection
with the acquisition of Tempway, the Company issued 169,342 shares of Common
Stock to the stockholders of Tempway in April 1998. In connection with the
acquisition of Tribase, the Company issued 575,132 shares of Common Stock to the
stockholders of Tribase in May 1998. In connection with the acquisition of the
assets of Progressive, the Company issued 211,496 shares of Common Stock to
Progressive in June 1998. In connection with the acquisition of KSI, the Company
issued 28,312 shares of Common Stock to KnowledgeSoft, Inc., of which KSI was an
operating division, in June 1998. In connection with the acquisition of the
assets of Matrix, the Company issued 21,814 shares of Common Stock to Matrix in
June 1998. In connection with contingent consideration payments regarding the
Flexible and Structured Logic acquisitions which were consummated in 1997, the
Company issued 5,733 and 154,064 shares of Common Stock, respectively, to the
entities that sold assets to the Company in each of these acquisitions. Each of
these issuances described above was effected without registration of the
relevant 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 8, 1998 (the
"Meeting"). For purposes of voting for the election of Directors, the amendment
to the Company's Certificate of Incorporation and the approval and ratification
of the Amended and Restated 1996 Stock Option Plan, as well as such other
business as may have properly come before the Meeting, there were 19,273,632
shares of outstanding Common Stock entitled to vote at the Meeting. Of those
outstanding shares, 16,942,919 were represented either in person or by proxy at
the Meeting. The stockholders voted on and approved the matters described below,
with the voting results therein noted at the Meeting:
13
<PAGE> 14
<TABLE>
<CAPTION>
Election Matter 1. - Election of Directors
---------------------------------------------------------------------
Authority
Name For Withheld
---------------- ---------- ---------
<S> <C> <C>
Jerry T. Brewer 16,509,716 433,203
Clete T. Brewer 16,509,716 433,203
W. David Bartholomew 16,509,716 433,203
Steven E. Schulte 16,509,716 433,203
John H. Maxwell, Jr. 16,509,566 433,353
Janice Blethen 16,507,781 435,138
William T. Gregory 16,509,716 433,203
William J. Lynch 16,509,716 433,203
R. Clayton McWhorter 16,509,516 433,403
Charles A. Sanders, M.D. 16,509,516 433,403
Election Matter 2. - Adoption of Amendment to the
Company's Certificate of Incorporation, as
amended, to Increase the Company's Authorized
Common Stock and Preferred Stock
--------------------------------------------------
Shares Voted For 10,501,564
Shares Voted Against 4,729,484
Abstentions 17,547
Broker Non-Votes 1,694,324
--------------------------------------------------
Election Matter 3. - Approval and Ratification of
the Amended and Restated 1996 Stock Option Plan
--------------------------------------------------
Shares Voted For 16,559,998
Shares Voted Against 353,801
Abstentions 29,120
</TABLE>
No other matters to be voted upon were brought before the Meeting.
ITEM 5. OTHER INFORMATION
The SEC requires a registrant to provide stockholders notice of
deadlines for timely submission of certain types of stockholder proposals that
stockholders wish to present for a vote at a registrant's annual meeting. These
deadlines are set based on certain SEC rules as they relate to the registrant's
annual meeting date and relevant provisions of its charter and by-laws. Set
forth below are the deadlines applicable to Company's stockholders. The
Company's Board of Directors has not yet acted to set a 1999 Annual Meeting
date, thus the following dates are based on an assumed Annual Meeting date of
May 8, 1999 and assumed proxy statement mailing date of March 25, 1999 for the
Company's 1999 Annual Meeting.
Stockholder proposals submitted outside the process of Rule 14a-8 under
the Securities Exchange Act of 1934, as amended, must be received by February
8, 1999, or they will be considered untimely. In the event a stockholder does
not timely notify the Company concerning stockholder proposals, the Company will
have the right to exercise its discretionary authority (through the right
conferred upon its proxies) to vote against such stockholder proposal.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings, reference is
made to Note 5 of the StaffMark, Inc. Consolidated Financial
Statements contained in this Form 10-Q.
27.1 Financial Data Schedule for the three months ended June 30,
1998, submitted to the SEC in electronic format.
(b) Reports on Form 8-K
1. Report on Form 8-K filed with the SEC on June 19, 1998 to
report the acquisition of Progressive Resources, Inc. on June
5, 1998.
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: August 12, 1998 /s/ CLETE T. BREWER
-------------------
Clete T. Brewer
Chief Executive Officer and President
Date: August 12, 1998
/s/ TERRY C. BELLORA
--------------------
Terry C. Bellora
Chief Financial Officer
15
<PAGE> 16
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 -- Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,410
<SECURITIES> 0
<RECEIVABLES> 83,385
<ALLOWANCES> 2,299
<INVENTORY> 0
<CURRENT-ASSETS> 91,808
<PP&E> 21,466
<DEPRECIATION> 7,109
<TOTAL-ASSETS> 412,191
<CURRENT-LIABILITIES> 34,084
<BONDS> 0
0
0
<COMMON> 208
<OTHER-SE> 227,056
<TOTAL-LIABILITY-AND-EQUITY> 412,191
<SALES> 174,913
<TOTAL-REVENUES> 174,913
<CGS> 130,328
<TOTAL-COSTS> 31,472
<OTHER-EXPENSES> 50
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148
<INCOME-PRETAX> 11,915
<INCOME-TAX> 4,885
<INCOME-CONTINUING> 7,030
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,030
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.33
</TABLE>
