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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
incorporation or organization) Identification No.)
302 East Millsap Road
Fayetteville, AR 72703
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (501) 973-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
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 as required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting common stock of the registrant held by
non-affiliates of the registrant (assuming for these purposes, but not
conceding, that all executive officers and directors are "affiliates" of the
registrant) was approximately $177.1 million as of March 10, 1999.
As of March 10, 1999, the number of shares outstanding of the registrant's
common stock was 29,361,211.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's annual meeting of
stockholders to be held on May 7, 1999 are incorporated by reference into Part
III of this Report on Form 10-K.
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements under "Business," "Properties," "Legal Proceedings,"
"Market for Registrant's Common Stock and Related Stockholder Matters" and
"Management Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Annual Report on Form 10-K (this "10-K")
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including statements made with respect to future earnings per share,
plans to accelerate IT staffing revenue growth, a slow down in our acquisition
program, operations and/or future growth opportunities. These statements involve
known and unknown risks, uncertainties and other factors that may cause results,
levels of activity, growth, performance, earnings per share or achievements to
be materially different from any future results, levels of activity, growth,
performance, earnings per share or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, those
listed under "Business - Factors Affecting Finances, Business Prospects and
Stock Volatility" and elsewhere in this 10-K.
The forward-looking statements included in this 10-K relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "should," "believe,"
"anticipate," "future," "forward," "potential," "estimate," "encourage,"
"offer," "opportunity," "decide," "goal," "objective," "quality," "growth,"
"leader," "expect," "intend," "plan," "expand," "focus," "build," "through,"
"strategy," "expiration," "provide," "hope," "encourage," "maximize," "meet,"
"allow," "strengthen," "allowed," "represent," "commitment," "lend," "create,"
"implement," "result," "seek," "increase," "add," "find," "establish," "pursue,"
"feel," "work," "perform," "make," "continue," "strike," "can," "will," "going,"
"include," or the negative of such terms or comparable terminology. These
forward-looking statements inherently involve certain risks and uncertainties,
although they are based on our current plans or assessments which are believed
to be reasonable as of the date of this 10-K. Factors that may cause actual
results, goals, targets or objectives to differ materially from those
contemplated, projected, forecast, estimated, anticipated, planned or budgeted
in such forward-looking statements include, among others, the following
possibilities: (i) an inability to successfully implement the organizational
changes at IntelliMark set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Information"; (ii) the
continuation or worsening, of declines in demand for placement (permanent or
temporary) or staffing services; (iii) unanticipated problems associated with
integrating acquired companies and their operations; (iv) failure to obtain new
customers or retain significant existing customers; (v) inability to carry out
marketing and sales plans; (vi) inability to obtain capital or refinance debt
for future internal and external growth; (vii) loss of key executives; (viii)
general economic and business conditions (whether foreign, national, state or
local) which are less favorable than expected; and (ix) changes in industry
trends such as changes in demand for commercial or professional information
technology staffing personnel, whether on a temporary or permanent placement
basis. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Business - Factors Affecting Finances, Business Prospects
and Stock Volatility." These factors may cause our actual results to differ
materially from any forward-looking statement.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. However, neither we
nor any other person assumes responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking
statements after the date of this 10-K to conform such statements to actual
results.
PART I
ITEM 1. BUSINESS
GENERAL
We (StaffMark, Inc., incorporated in 1996, and our subsidiaries) are an
international provider of diversified staffing, information technology ("IT"),
professional, consulting and solutions services to businesses, professional and
service organizations and governmental agencies. We offer services through over
300 branches located in 31 states and 12 countries.
Our operations are grouped in two segments: Professional/Information
Technology (we will refer to this segment as "Professional/IT") and Commercial.
Our Professional /IT segment provides staffing, consulting, technical support
and solutions primarily in the areas of IT, finance, accounting and legal
services. Our business solutions include IT staffing, help desk and distributed
services, network services development systems, integration, training,
enterprise resource planning, clinical research and solutions, finance and
accounting staffing and legal staffing. This segment generated 52% and 43% of
our revenues for the years ended December 31, 1998 and 1997. Our Commercial
segment provides clerical, administrative, outsourcing and light industrial
services and generated approximately 48% and 57% of our revenues for the years
ended December 31, 1998 and 1997. See Note 17 to our Consolidated Financial
Statements for financial information about our business segments.
On October 2, 1996, at the time of our initial public offering, we acquired
six staffing companies (we sometimes refer to these entities as the "Founding
Companies"). Securities and Exchange Commission Staff Accounting Bulletin No.
97 was applicable to our transaction and required us to designate Brewer
Personnel Services, Inc., one of the Founding Companies, as the acquirer of the
other Founding Companies. This means that the results of operations for 1996
only include the operations of the other five Founding Companies for the period
following their acquisition on October 2, 1996. Under the applicable provisions
of this accounting rule, the acquisition of assets and the assumption of
liabilities of the Founding Companies are reflected at their historical cost.
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In 1998, we grew both internally and through the acquisition of 18
additional staffing, consulting, professional service and solutions companies.
For the year ended December 31, 1998, our revenues and operating income before
nonrecurring charges were $1,014.9 million and $78.1 million compared to
revenues and operating income of $594.2 million and $37.0 million for the year
ended December 31, 1997.
ROBERT WALTERS PLC ACQUISITION
On November 25, 1998, we completed the acquisition of Robert Walters plc
(we will refer to this entity as "Robert Walters"), a London-based
international recruitment consultancy operating in 14 cities in ten countries.
Our largest acquisition to date, Robert Walters specializes in placing
accounting, finance and IT professionals on a contract, temporary and permanent
basis with customers in the finance, commercial and industrial sectors. We
believe that the Robert Walters business complements our existing business
lines by providing a value-added, high margin international professional
services component with a significant presence in the United Kingdom. The
transaction was accounted for as a pooling-of-interests with the Robert Walters
stockholders receiving 6,687,704 shares of our common stock.
BUSINESS STRATEGY
Our overall business strategy is to increase revenue, grow profits and
improve cash flow by the timely delivery of human resource and business
solutions to our customers through the creation of opportunities for our
professionals, consultants and associates, with these opportunities being
enhanced over time by training and education programs. We implement this
overall business strategy through a combination of the strategies and their key
elements described below.
OPERATING STRATEGY
Our operating strategy is to:
Develop Long-Term Relationships with Customers. We strive to satisfy the
needs of our customers by delivering customized human resource and business
solutions. A decentralized organization allows us to tailor our operations to
meet local customer requirements. For example, customers may be provided with
customized billings, utilization reports, safety awareness and training
programs. We believe that the establishment and maintenance of long-term
relationships with customers depends on the quality of our services, which
entails an understanding of the customer's needs, responding promptly to the
requests of customers, proactively assessing the human resource needs of
customers and monitoring job performance and customer satisfaction.
Increase Operating Efficiencies and Provide Corporate Support. We work to
achieve economies of scale through the combination of a number of general and
administrative functions at the corporate level, as well as through the
reduction or elimination of redundant functions and facilities of existing
branches and newly acquired companies. Centralization and infrastructure
development allows us the opportunity to deliver corporate support and
management information to our branches, with the goal of enabling the branches
to focus on marketing and selling services. We also seek to achieve economies
of scale through common regional management and the allocation of recruiting,
training, advertising, administrative and branch office costs over a larger
number of professionals, associates and customers.
Maintain a Decentralized, Entrepreneurial Environment. We believe an
entrepreneurial business environment that rewards performance tends to attract
and retain self-motivated, achievement-oriented individuals. Our branch offices
operate as separate profit centers with local management having primary profit
and loss responsibility. Generally, this encourages branch managers to be
flexible and responsive to the specific needs of local customers. We have also
established a profit-based compensation plan at the branch level and utilize
various performance-based bonuses at the regional level.
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Further Develop and Utilize the Global Pipeline. The Global Pipeline was
developed by Robert Walters to handle the shortage in IT professionals and
consultants in Europe and the United States. The Global Pipeline sources
candidates from Australia, New Zealand, Hong Kong, Singapore and South Africa
and places them on behalf of customers in Europe and the United States. We
believe that the Global Pipeline is a solid resource for helping professionals
and consultants in areas like Australia, New Zealand and South Africa maximize
their career objectives in the United States, Europe and around the world. We
believe that the Global Pipeline will help meet the excess demand for
professionals globally, particularly in the IT area in the United States.
Establish Service Platforms and Brand Name Identification. We believe that
building and developing platforms of related staffing, professional, consulting
and/or solutions services within each of our segments is an essential
operational management tool that encourages entrepreneurial focus and
innovation. In addition, once platform foundations are established and are in
development, we select and market brand names, logos and other attributes to
customers, professionals, consultants and associates. We have five service
platforms operating under five brand names. Four of the service platforms
operate in the Professional/IT segment. Our IT platform operates under the name
"IntelliMark." The finance and accounting platform is "Robert Walters." The
Clinical Trials Support Services platform operates as "Clinical Trials Support
Services." Our legal platform operates under the brand name "Strategic Legal
Resources." Our Commercial segment utilizes the "StaffMark" brand name and
several derivative names reflecting different types of commercial staffing
services, "StaffMark Office Staffing," "StaffMark Medical Staffing," "StaffMark
Industrial Staffing" and "StaffMark Clerical Staffing."
Education, Training and Career Management. We believe that our business
will shift to an education and training model over time that focuses on the
career management of our professionals and associates. Currently, we offer
IntelliMark Virtual University to our IT professionals. This educational
opportunity is a "virtual" learning center which offers more than 500
web-enabled courses and can track of individual participant's progress, as well
as providing an opportunity for an "uplift" in skills for our IT professionals.
In our Commercial segment, we have StaffMark University, which offers over 20
classroom courses for internal employees and associates. These educational
programs are the first step in the training/education model, which we hope over
time will provide life-long careers for our professionals and associates.
INTERNAL GROWTH STRATEGY
Our internal growth strategy is to:
Penetrate Existing Geographic Markets. We currently provide human resource
and business solutions to businesses, professional and service organizations
and governmental agencies. We plan to continue providing high-quality services
to our existing customers, to strengthen our customer relationships and
establish additional customer relationships in existing geographic markets. To
further penetrate existing geographic markets, we sometimes spin-off, or
"seed," new branch offices from existing branches, which we believe allows
greater coverage in existing geographic markets at lower marginal cost. These
office clusters provide economies of scale by spreading common costs, such as
recruiting, advertising and management over a larger revenue base, with closer
proximity to customers and new groups of professionals and associates in new
market areas.
Expand and Cross-Develop Professional/IT Services. The Professional/IT
segment generally enjoys higher profit margins than the Commercial segment due
to the specialized expertise of the professionals and consultants. One of our
internal growth strategies is to increase the percentage of revenue and gross
profit from the Professional/IT segment by emphasizing the expansion of IT
services and solutions, by cross-developing into new and existing geographic
markets, by adding new professional lines of business like Robert Walters and
leveraging wherever possible, existing customer relationships.
Introduce the Resource Solutions Business Model Domestically and Grow this
Business Model Internationally. Resource Solutions is a human resources
consultancy business that interacts at a high level of a customer's management
team. Through Resource Solutions, we provide business outsourcing to a
diversified array of customer needs, including project management, vendor
management, relocation services, human resources consultancy services,
recruitment and training. As part of this business model, we seek to develop
and implement a business process improvement plan, supported by proprietary
software to manage the information on a continual basis. This business model
was developed by Robert Walters and we are introducing it into the United
States, in addition to expanding it internationally. Under this model, Resource
Solutions effectively becomes the "Managing Vendor" for a customer's human
resource needs.
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Increase Strategic Alliance Relationships. At December 31, 1998, we had 75
Strategic Alliance partnering relationships (previously know as
Vendor-On-Premise or "VOP" relationships), compared to 60 at December 31, 1997.
These Strategic Alliance relationships, which are usually in our Commercial
segment, represented $102.0 million and $67.4 million of our revenues for the
years ended December 31, 1998 and 1997. Under these programs, we usually become
the "Master Vendor" by assuming administrative responsibility for coordinating
staffing and/or professional services throughout a customer's location or
organization, including skills testing and training. Strategic Alliance
relationships provide customers with dedicated on-site account management which
can more effectively meet the client's changing staffing needs with high quality
and consistent service. These partnering relationships generally tend to have
lower gross margins than traditional temporary staffing services, although the
higher volumes, comparatively lower operating expenses and relatively long-term
contracts associated with these relationships generally result in attractive
operating profits and a more stable source of revenue.
ACQUISITION AND INTEGRATION STRATEGY
Summary of Acquisitions in 1998. From our initial public offering in
October 1996 through December 31, 1998, we implemented our acquisition strategy
by completing 40 acquisitions. Of the Company's 18 business combinations that
were completed during 1998, seven were accounted for as a pooling-of-interests
and 11 were accounted for as purchase business combinations. Under the
pooling-of-interests method of accounting, the historical basis of the assets
and liabilities of the combining companies, as well as their stockholders'
equity accounts are combined on the acquirer's balance sheet, without any
goodwill being recorded by the acquirer. Under the purchase method of
accounting, the purchase price paid by the acquirer is allocated to the assets
acquired and liabilities assumed based on their estimated fair market
values, with any excess purchase price being allocated to goodwill. Generally
accepted accounting principles require goodwill to be amortized by the acquirer
over a period not to exceed 40 years. The major difference between these two
accounting methods is that an acquisition accounted for as a
pooling-of-interests does not result in the subsequent reduction in the
acquirer's earnings from goodwill amortization. Eleven of these 1998
acquisitions were Professional/IT companies with revenues in the fiscal year
prior to acquisition approximating $225.0 million. Seven of these acquisitions
were Commercial companies with revenues in the fiscal year prior to acquisition
approximating $126.4 million. A summary of the acquisitions we completed in
1998 is provided in the table below.
<TABLE>
<CAPTION>
Fiscal Year
Revenues
Acquired Companies Segment(1) States/Countries (in millions)(3)
- --------------------------------------- ---------- ------------------------ ---------------
<S> <C> <C> <C>
Strategic Legal Resources LLC P/IT NY,NJ $ 11.8
Independent Software Solutions, Inc. P/IT FL 7.0
Temporary Tech Corporation P/IT NC 2.2
FirstChoice Staffing Services, Inc. C TX 3.6
DPSC Technology Consultants, Inc. P/IT MD 5.4
Tempway Services, Inc. C GA 10.6
TRIBASE Systems, Inc. P/IT NJ 12.0
Progressive Resources, Inc. C NY, NJ 26.5
KnowledgeSoft inc. Services Division P/IT PA 9.0
The Matrix Group C NV 3.1
Essex Computer Service, Inc. P/IT FL 9.9
Brady & Company, Inc. P/IT MN, WS 7.2
Enterprise Systems Associates, Inc. P/IT KS 9.0
International Team Consultants, Inc. C TX 17.6
Sable Technology P/IT AR 2.8
Carrollton Employment Service, Inc. C TX 6.3
Robert Walters plc P/IT United Kingdom based(2) 148.7
WorldTec Group International Staffing Division C CA, WA, NV, NC, AZ 58.7
--------
Total $ 351.4
========
</TABLE>
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- ----------
(1) C = Commercial and P/IT = Professional/IT.
(2) In addition to its United Kingdom operations, Robert Walters, at the time
of acquisition, had offices in Australia, Belgium, Germany, Holland, Hong
Kong, New Zealand, Singapore, South Africa and the United States (New York
office).
(3) The revenue amounts presented in the table are for the most recent fiscal
year for each of the referenced entities prior to their acquisition by us.
In some instances, the fiscal period ended on a date other than December
31.
Acquisition. Through our acquisition strategy, we have contributed
critical mass, geographic diversification and increased our Professional/IT
segment to over 50% of our revenue base. While focusing on internal growth and
building infrastructure in certain of our platforms, we have decided to slow
down our acquisition program during the balance of 1999. In certain situations
however, we may pursue strategic acquisitions that: (1) expand the geographic
scope of our operations; (2) increase our penetration in existing markets; (3)
increase the scope of our operations into complementary or new service
offerings; (4) include strong management, profitable operating results and/or
recognized local and regional presence; and/or (5) expand the percentage of
revenues generated by the Professional/IT segment.
Integration. Following completion of an acquisition, we begin the
integration process. This process involves standardizing each acquired
company's accounting and financial procedures with ours, as well as bringing
these companies under our uniform risk management program. Marketing, sales,
field operations and personnel programs are reviewed with the objective of
conforming these functional areas to the best practices of our existing
operations. Key personnel of acquired companies often become a part of our
management.
INDUSTRY INFORMATION
The Business Solutions Industry. Many businesses today are facing intense
competition, accelerating technological change, downsizing and widespread
business process reengineering. Increasingly, these companies are turning to IT
and/or professional services and solutions to address these issues and to
compete more effectively. As a result, the ability of an organization to
integrate and deploy new information technologies and/or introduce new
professional human capital has become critical. IT services is one of the
fastest growing sectors of the economy. Over the last decade, the increased use
of technology has led to a dramatic rise in demand for technical project
support, software development and other computer-related services and solutions.
Businesses have outsourced many of these departments and/or have used the
employees of IT services firms in an attempt to meet the increased demand for
computer-skilled personnel and solutions services. According to International
Data Corporation ("IDC"), the worldwide market for IT services and solutions was
estimated at $282 billion in 1997, with a projected market of $370 billion in
2000. IDC also projects that the North American IT services market will grow
from $132 billion in 1997 to $173 billion in 2000.
The Human Resources Industry. Historically, the demand for temporary
staffing services has been used predominantly as a short-term solution for peak
production periods and to temporarily replace full-time employees due to
illness, vacation or abrupt termination. Recently, competitive pressures have
forced businesses to focus on reducing costs, including converting fixed,
permanent labor costs to variable or flexible costs. The use of temporary
employees typically shifts employment costs and risks, such as workers'
compensation, unemployment insurance and the possible adverse effects of
changing employment regulations, to temporary staffing companies. This type of
shift spreads the costs and risks over a larger pool of employees and
customers. In addition, companies are increasingly using temporary staffing as
a means of evaluating the qualification of personnel before hiring them on a
full-time basis. The National Association of Temporary Staffing Services
estimates that more than 90% of all United States businesses use staffing
services. According to the Staffing Industry Report, the United States
temporary staffing industry was forecasted to have 1997 revenues of
approximately $54 billion. We believe that the demand for staffing services
will continue to increase due to changes in workforce lifestyles, advances in
technology and the increasing desire of many companies to shift employee costs
from a fixed to a variable expense and to outsource the support functions.
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HUMAN RESOURCE SERVICES AND BUSINESS SOLUTIONS
We deliver human resource services and business solutions through two segments:
Professional/IT Segment. The Professional/IT segment provides information
technology staffing, consulting support services, solutions and professional and
technical services. This segment generated approximately 52% and 43% of our
revenues for the years ended December 31, 1998, and 1997. IT services provided
through IntelliMark include systems planning and design, project management,
software applications development, systems and network implementation,
distributed services, systems integration and higher-level contract programming
services, facilities management, SAP development and implementation, ERP system
implementation, system maintenance, computer troubleshooting, outsourcing of
legacy systems, Internet development, mainframe programming, "help-desk"
assistance and education and training. Finance and accounting professionals, at
varied levels, are provided through Robert Walters in the finance, commercial
and industrial sectors. Attorneys (at senior and junior levels), paralegals and
legal assistants are provided through Strategic Legal Resources. Our clinical
consultants support the staffing and solutions demands of the pharmaceutical,
biotechnology, and medical device companies, as well as clinical research
organizations which are provided through Clinical Trials Support Services.
Commercial Segment. Our Commercial segment provides clerical,
administrative, outsourcing and light industrial staffing services. This segment
generated approximately 48% and 57% of our revenues for the years ended December
31, 1998 and 1997. Our clerical services personnel include secretarial, word
processing personnel, receptionist/switchboard operators, typists, data entry
operators, cashiers, client service representatives, medical/legal
transcriptionists, file clerks and other miscellaneous office personnel. Light
industrial services personnel include warehouse workers, maintenance workers,
electronics assemblers, quality control clerks, order pullers, food service
workers, production workers, shipping/receiving clerks, janitors, packagers,
inventory clerks, textile manufacturers and machinists.
PROFESSIONALS, CONSULTANTS AND ASSOCIATES
Recruiting. One of our most successful recruiting tools is referrals by our
professionals and associates. We find that referrals from our existing
professionals and consultants provide a high quality and a large number of new
professionals. In our Professional/IT segment, we use the Global Pipeline to
deliver professionals worldwide. We also use various internet sites and in
Europe own a minority interest in Taps.com, a European recruitment site. In
addition to the Global Pipeline and our internet sites, our Professional/IT
offices have recruiters assigned to that office's designated territory. In the
Commercial segment, we employ full-time regional recruiters to monitor the
skills and availability of their region's temporary associates to ensure a base
of qualified employees is available to meet customer demands. These recruiters
visit schools, clubs and professional associations and present career
development programs to various organizations. In both segments, we obtain
applicants through our various internet sites, advertising in major newspapers,
on radio, on television, in the Yellow Pages and through other print media. In
the IT area, we pay our external consultants a referral fee for the recruitment
and retention of qualified IT professionals. Additionally, we plan to have a
national database of IT consultants and job postings available to all IT
offices in the near future.
Full Time Employees/Professionals/Associates. Currently, we provide over
35,000 professionals and associates to our customers during a typical week and
we employ approximately 2,000 internal staff. None of our employees, including
our professionals and associates, are represented by a collective bargaining
agreement. We believe that our employee relations are satisfactory. Hourly wages
for our associates and salaries for our professionals are determined according
to market conditions. We pay mandated costs of employment, including the
employer's share of social security taxes, federal, state unemployment taxes,
workers' compensation insurance, foreign statutory taxes and national insurance.
We also offer access to various insurance programs and other benefits, such as
vacations, holidays and 401(k) programs to certain of our professionals and
associates.
Assessment, Training and Quality Control. In the Professional/IT segment,
review of work history and experience, degrees obtained and specific programming
tests are used to measure proficiency in programming languages,
electromechanical skills, autocad, schematics, other technical applications
and/or professional expertise. In our Commercial segment, we use various methods
to assess, select and train our temporary associates in order to provide quality
assurance for our staffing and service operations. Applicants are given a range
of tests, applicable to the position(s) they seek. We feel it is imperative to
customize testing and training to match the specific office environment in which
the individuals will be placed. Clerical and office-support applicants receive
tests in computer skills, word processing, typing, data entry, accounting and
other business applications. Industrial
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electronic assembly applicants are tested to determine basic competency,
industry aptitude, hand and finger dexterity, soldering, mathematics, ability
to read a blue print, ability to assemble electronic components and measurement
calculations. We recognize that certain customers have specialized professional
and staffing service needs that can only be fulfilled with customized skills.
We provide training programs for specific requirements, such as electronic or
mechanical assembly or the use of specialized software applications.
Computerized tutorials are generally available for professionals and associates
seeking to upgrade their typing, data entry, office automation or word
processing skills, and classes on topics such as spreadsheets, software
applications and network management are conducted periodically in branch
offices. We also educate and train personnel through IntelliMark Virtual
University and StaffMark University.
Workers' Compensation Program. We maintain workers' compensation insurance
for most claims in excess of a retention level of $250,000 per occurrence. Our
risk management team works alongside a third party administrator and a broker
in order to take a proactive approach to safety and risk control. The risk
management team works to train our full-time staff to better screen, test and
orient our professionals and temporary associates to a more safety-conscious
environment. The risk management team also performs periodic safety inspections
of new and existing customers in order to evaluate the safety environment. We
sometimes decline staffing opportunities if the work environment is perceived
to be unsafe or potentially hazardous. Our policies prohibit staffing of
high-risk activities such as working on unprotected elevated platforms or the
handling of hazardous materials. Our goal is to work alongside the customer and
achieve a safe work environment through effective training and commitment to
safety. An independent actuary provides advice on overall workers' compensation
costs and periodically performs an actuarial valuation regarding the adequacy
of our reserve for workers' compensation claims. Newly acquired operations are
integrated into our program at such time as, in management's judgment, the
integration is most cost effective.
OPERATIONS
Branch Offices. We offer our services through over 300 branch offices in
Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois,
Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota,
Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia,
Washington, Wisconsin, Canada, the United Kingdom, Australia, Holland, Germany,
Belgium, New Zealand, Hong Kong, Singapore, Thailand and South Africa. Branch
managers operate their offices with a degree of autonomy and accountability and
receive bonuses based on the profitability and growth of the branch. The
compensation system is designed to motivate the managers and staff to maximize
the growth and profitability of their offices, while securing long-term
customer relationships. Branch managers report directly to regional managers
who report to either general managers, vice presidents or executive vice
presidents that receive bonuses based upon the profitability of their region or
branch. Within operating guidelines, the branch managers are responsible for
pursuing new business opportunities and focusing on sales and marketing,
account development and retention, as well as employee recruitment,
development and retention.
Sales and Marketing. Our services are marketed through our network of
offices whose branch managers, supported by our marketing staff, make regular
personal sales visits to clients and prospective clients. We emphasize personal
relationships with customers through regular assessment of customer
requirements and monitoring of professional, consultant and associate
performance. New clients are obtained through sales calls, consultation
meetings, customer referrals, telemarketing and advertising in a variety of
local and regional media (including television, radio, direct mail, Yellow
Pages, newspapers, magazines and trade publications and through our various
internet sites). We sponsor job fairs and other community events and our
officers and senior management participate in national and regional trade
associations, local chambers of commerce and other civic associations.
Management Information Systems. The primary front office billing and
payment software utilized by our Professional/IT segment is the MAS 90 system.
The primary front office recruiting software utilized by our Professional/IT
segment is "EZ Access." The primary front office software utilized by our
Commercial segment is the Caldwell-Spartin system. We believe that the
utilization of these three quality front office systems will provide
opportunities for cost savings and efficiencies through our existing branch
network and for newly acquired companies. We licensed our back office
accounting and administrative systems software from PeopleSoft, Inc.
("PeopleSoft"). We believe that PeopleSoft applications provide effective
management reports, the ability to eliminate redundant functions and provide a
high degree of internal control. We also believe that the use of PeopleSoft
applications may result in lower costs through the centralization of systems by
providing economy and control in the areas of accounts payable, cash control,
budgeting, management reporting and human resources. Our PeopleSoft
implementation plan began in April 1997 and as of December 31, 1998, we
operated the general ledger and accounts payable modules in areas covering
approximately 90% of our United States operations. Implementation in our
remaining United States areas of operations
8
<PAGE> 9
is scheduled to be completed by the end of 1999. Digital Equipment Corporation
is the hardware provider for the database server for PeopleSoft and currently
supplies the hardware supporting the Caldwell-Spartin application in all
locations as well. We invested approximately $3.8 million in 1998 on the
PeopleSoft network, front office software implementation and other information
systems support.
COMPETITION
Our industry is highly competitive and fragmented, with limited barriers to
entry. We compete with other companies in the recruitment of qualified
personnel, the development of customer relationships and the acquisition of
other staffing, solutions and professional service companies. A large
percentage of staffing, solutions and professional services companies are local
operators with fewer than five offices. Within local markets, these operators
actively compete with us for business and, in most of these markets, no single
company has a dominant share of the market. We also compete with larger,
full-service and specialized competitors in national, regional and local
markets. The primary Professional/IT competitors include Modis Professional
Services, Inc., Metamor Worldwide, Inc., Professional Group of America, Inc.,
Ciber, Inc., Keane, Inc. and The Registry, Inc. The limited supply of qualified
Professional/IT candidates, compensation, job locations and project complexity
are the primary competitive factors for Professional/IT candidates. The
principal national competitors of our Commercial segment include Manpower,
Inc., Volt Management Corp., Kelly Services, Inc., The Olsten Corporation,
Interim Services, Inc. and Norrell Corporation, all of which may have greater
marketing, financial and other resources than we do. We believe that the
primary competitive factors in obtaining and retaining customers are the number
and location of offices, an understanding of customers' specific job
requirements, the ability to provide temporary personnel in a timely manner,
the monitoring of quality of job performance and the price of services. We
believe the primary competitive factors in obtaining qualified candidates for
temporary employment assignments are wages, benefits, 401(k) plans, vacation,
holiday, training, etc., responsiveness to work schedules and number of hours
of work available. We also compete for acquisition candidates. We believe that
further industry consolidation will continue during the next several years and
that significant competition will still exist for good acquisition candidates.
REGULATION
Our Professional/IT segment currently recruits information technology
consultants and professionals internationally for placement inside and outside
the United States. The entry of these employees into the United States is
regulated by the United States Department of Labor and United States Department
of Justice -- Immigration and Naturalization Services. The regulations
governing the hiring of foreign nationals are complex and change often. If
either of these authorities or any other regulatory or judicial body should
determine that we are not in compliance with these regulations, then we could
be subject to fines and/or suspension of this part of our business. Immigration
between countries outside the United States is also subject to many different
laws, rules and regulations that could hinder our ability to place
professional/IT candidates in foreign countries. Further, these regulations
could change in a manner which would limit our ability to employ foreign
nationals. Any of the foregoing laws, rules and regulations or their
modification could have a material adverse effect on our business, financial
condition, and results of operation.
Temporary employment staffing, consulting and solutions services firms are
generally subject to one or more of the following types of government
regulation: (1) regulation of the employer/employee relationship between a firm
and its temporary employees; and (2) registration, licensing, record keeping
and reporting requirements. Staffing services firms are the legal employers of
their temporary workers. Therefore, these firms are governed by laws regulating
the employer/employee relationship, such as tax withholding and reporting,
social security or retirement, anti-discrimination and workers' compensation.
State mandated workers' compensation and unemployment insurance premiums have
increased in recent years and have directly increased our cost of services. In
addition, the extent and type of health insurance benefits that employers are
required to provide employees have been the subject of intense scrutiny and
debate in recent years at both the national and state level. Proposals have
been made to mandate that employers provide health insurance benefits to
staffing employees, and some states could impose sales taxes, or raise sales
tax rates, on staffing services. Further increases in such premiums or rates,
or the introduction of new regulatory provisions, could substantially raise the
costs associated with hiring and employing staffing employees.
INTELLECTUAL PROPERTY
We have secured certain service marks and continue to seek registration of
other service marks, because we consider our intellectual property to be a
principal asset in a highly competitive industry, as well as being an important
factor in building brand recognition as a source indicator of quality services
and performance. We own and license United States, state and foreign service
marks used by our subsidiaries. These marks include, but are not limited to,
United States registrations for "StaffMark(R)", used in our Commercial segment,
"Strategic Legal Resources(R)", used in our legal services platform,
"ClinForce(R)", used in connection with our Clinical Trails Support Services
platform, "StaffView(R)", used in connection with a software product developed
for client temporary workforce reporting and a United Kingdom registration for
"Robert Walters(R)", our finance and accounting platform. We also own the
pending service mark applications for "IntelliMark(SM)" in the United States,
the United Kingdom, Australia, South Africa, New Zealand and Singapore. No
assurance can be given that any of the pending "IntelliMark(SM)" applications
will be granted registration or that, if granted, the registration will
effectively prevent third-party concurrent use of the mark or challenge of the
registration. We believe that we have all rights to trademarks and trade names
necessary for the conduct of our business.
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<PAGE> 10
FACTORS AFFECTING OUR FINANCES, BUSINESS PROSPECTS AND STOCK VOLATILITY
We May be Unable to Properly Manage Growth. We have experienced significant
growth, through acquisitions, internal growth and opening new offices. There
can be no assurance that we will be able to expand our market presence in our
current locations or successfully enter other markets through acquisitions or
the opening of new offices. Our ability to continue growth and profitability
will depend on a number of factors, including those described later in this
section of this 10-K. Acquisitions also involve special risks, including
unanticipated problems, liabilities and contingencies, diversion of management
attention and possible adverse effects on earnings resulting from increased
goodwill amortization, increased interest costs, the issuance of additional
securities and difficulties related to the integration of acquired businesses.
While an acquired company is being integrated or when integrated, the acquired
company may not achieve the same levels of revenue, profitability, or
productivity as before the acquisition or otherwise perform as we expect.
Furthermore, we are unable to predict whether or when a prospective acquisition
candidate will be available or the likelihood that any acquisition will be
completed.
We Expect that Fluctuations in the General Economy Will Impact Us. The
general level of economic activity and unemployment in the United States and
internationally significantly affects demand for our staffing and solutions
services, particularly in the permanent placement markets. When economic
activity increases, professionals, consultants and temporary employees are
often added before full-time employees are hired. However, as economic activity
slows, many companies reduce their utilization of professionals, consultants
and temporary employees before undertaking layoffs of full-time employees. In
addition, we may experience more competitive pricing pressure during periods of
economic downturn. Therefore, any significant domestic and/or international
economic downturn could have a material adverse effect on our business,
financial condition and results of operations.
We Expect Our Quarterly Revenues and Operating Results to Fluctuate. Our
operating results have fluctuated in the past and will fluctuate in the future
based on many factors. Due to such factors, our operating results could be less
than the expectations of public market analysts and investors in any particular
quarter. This would likely result in a material adverse affect on the price of
our common stock. We believe that period-to-period comparisons of our financial
results are not necessarily meaningful, and you should not rely upon such
comparisons as an indication of our future performance. Because we only derive
revenue when our professionals, consultants and temporary associates are
actually working, our operating results are adversely affected when customer
facilities close due to holidays or inclement weather. We generally experience
lower revenues, operating income, and net income during the first and fourth
quarters due to certain holidays, weather conditions and seasonal vacation
patterns.
We May Be Adversely Affected if Qualified Professionals and/or Associates
are Unavailable. We depend on our ability to attract, train, and retain
personnel who possess the skills and experience necessary to meet the staffing
and/or solution service requirements of our customers. Competition for
individuals with proven skills in certain areas, particularly in professional,
IT and other specialty fields is intense. We operate in several areas in which
unemployment is relatively low thereby increasing competition for employees. We
must continually evaluate, train, and upgrade our base of available personnel
to keep pace with customers' needs. We cannot assure you that qualified
professionals and/or associates will continue to be available in sufficient
numbers and on acceptable terms of employment. The inability to attract and
retain qualified personnel could have a material adverse effect on our
business, financial condition, and results of operations.
We Face Intense Competition in Both of Our Segments. The staffing and
solutions services industry is highly competitive with limited barriers to
entry. We compete for professionals, associates and customers in national,
regional and local markets with full-service and specialized staffing and
service businesses. A significant number of competitors have greater marketing,
financial, and other resources and more established operations than us. Price
competition in the staffing industry is intense, particularly for the provision
of commercial personnel, and pricing pressures from competitors and customers
are increasing. We expect that the level of
10
<PAGE> 11
competition will remain high in the future, which could limit our ability to
maintain or increase our market share or maintain or increase gross margins in
this segment, either of which could have a material adverse effect on our
business, financial condition, and results of operations.
We Will Incur Increased Employee Costs. We pay unemployment insurance
premiums and workers' compensation for our professionals and associates.
Unemployment insurance premiums may increase as a result of, among other
things, increased levels of unemployment and the lengthening periods for which
unemployment benefits are available. Workers' compensation costs may increase
as a result of changes in our experience rating or in applicable laws. We
cannot assure you that actual future workers' compensation claims will not
exceed the coverage amounts. Our workers' compensation insurance premiums are
subject to retroactive increases based upon audits of our employee
classification practices and other data provided to the insurance carrier. We
have retained the services of an independent third-party administrator and an
independent actuary to assist in establishing appropriate reserves for the
uninsured portion of claims (up to the deductible amount), but such reserves
are only estimates and are based upon limited prior experience. Actual future
workers' compensation obligations may exceed the amount of our workers'
compensation reserve. Higher than anticipated losses from known claims or an
increase in the number and severity of new claims are two factors that could
cause greater workers' compensation costs.
The Majority of Our Assets are Intangible. On December 31, 1998,
approximately $375.7 million, or 64.7%, of our total assets were intangible
assets. These intangible assets primarily represent amounts attributable to
goodwill recorded in connection with our acquisitions. Any impairment in the
value of such assets could have a material adverse effect on our financial
condition and/or results of operations.
Our Business May Be Threatened By New Laws and Increasing Governing
Regulation. Recent federal and certain state legislative proposals have
included provisions extending health insurance benefits to employees not
presently receiving such benefits. Due to the wide variety of national and
state proposals currently under consideration, we cannot predict the impact of
such proposals. Any material changes in federal, state, local or foreign
statutes and/or government regulations could result in increased costs for us.
We cannot assure you that we will be able to increase the fees charged to our
clients in a timely manner and sufficient amount to cover such increased costs.
We cannot predict whether other legislation or regulations affecting our
operations will be proposed or enacted at the federal, state, local or foreign
level.
Our United States IT Business Will Be Affected By Government Regulation of
Immigration. Certain Professional/IT consultants are foreign nationals working
in the United States under H-1B permits. Accordingly, IntelliMark and our other
Professional/IT platforms and these foreign nationals relating to domestic
business matters must comply with United States immigration laws. Our inability
to obtain H-1B permits for certain employees in sufficient quantities or at a
sufficient rate could materially and adversely effect our business, financial
condition and results of operations. Furthermore, Congress and administrative
agencies with jurisdiction over immigration matters have periodically expressed
concerns over the levels of legal and illegal immigration into the United
States. These concerns have often resulted in proposed legislation, rules and
regulations aimed at reducing the number of work permits that may be issued.
Any changes in such laws making it more difficult to hire foreign nationals or
limiting our ability to retain foreign employees could require us to incur
additional unexpected labor costs and expenses. Any such restrictions or
limitations on our hiring practices could have a material adverse effect on our
business, operating results, and financial condition.
Risks Related to the Human Resource and Solutions Industry. As a provider
of staffing, consulting and solutions services, we place our employees in the
workplace of other businesses. Like all employers, our employees can commit
acts that would subject us to negative publicity, injunctive orders, or the
imposition of fines or damages. Such acts include discrimination, harassment,
personal injury and other similar claims. In addition, by providing
professional services, such as IT services and solutions, clinical trials and
legal services, we are subject to claims for professional malpractice. If an
employee fails to follow these policies or if our insurance is inadequate, such
actions could materially and adversely affect our business, financial condition
and/or results of operations.
Risks Related to Acquisition Financing. In the past, we have financed all
or a portion of the consideration in acquisitions with shares of our common
stock. If our common stock does not maintain a sufficient market value, or if
potential acquisition candidates are unwilling to accept our common stock as
all or a part of the consideration for their businesses, we may be required to
use cash to maintain our acquisition program. If we do not have sufficient cash
resources and we are unable to obtain additional financing, our growth could be
limited. Our inability to acquire additional financing, if needed, could have a
material adverse effect on our business, financial condition and/or results of
operations.
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<PAGE> 12
We May be Adversely Affected If We Lose Key Personnel. We believe that our
success depends significantly upon the efforts and abilities of key executives.
Furthermore, we will likely depend on the senior management of companies that
we acquire in the future. If any of these individuals cannot continue in their
position with us, or if we cannot attract and retain other skilled employees,
our business, financial condition, and results of operation could be adversely
affected.
Anti-Takeover Provisions in Our Charter Documents and Delaware Law Could
Prevent or Delay a Change in Control of Our Company. Our Board of Directors can
issue preferred stock in one or more series without stockholder action. The
existence of this "blank-check" preferred stock provision could render more
difficult or discourage an attempt to obtain control by means of a tender
offer, merger, proxy contest or otherwise. Certain provisions of the Delaware
General Corporation Law may also discourage someone from acquiring or merging
with us.
We Do Not Expect to Pay Any Dividends. For the foreseeable future, we
anticipate retaining our earnings for the operation and expansion of our
business and we do not anticipate paying cash dividends. In addition, our
credit facility limits the payment of cash dividends, without the lenders'
consent.
ITEM 2. PROPERTIES
We own no real property. We lease our corporate headquarters, as well as
space for all of our branch offices. These facilities are principally used for
operations, general and administrative functions and training. In addition,
several facilities are maintained for storage purposes. Other than the
additional space that will be leased with respect to the expansion of our
corporate headquarters, we believe that our facilities are adequate for our
needs and do not anticipate any difficulty in replacing these facilities or
opening additional facilities, if necessary. Our corporate headquarters are
leased from a related party with the lease term expiring on January 1, 2001. We
have three consecutive five year options under the lease to renew the existing
lease term. Within the next few months, we will lease additional space from the
same related party for the expansion of our corporate headquarters on property
adjacent to the existing location. We anticipate combining the lease for our
existing facility and the new facility into one lease that will extend for ten
years. We also anticipate that the new lease will include an option (replacing
the three existing consecutive five year options) to renew for ten years
following expiration of the initial term. Our headquarters are located at 302
East Millsap Road, Fayetteville, Arkansas 72703. Our telephone number is (501)
973-6000.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 1999, a stockholder, purporting to act on behalf of a class of
our stockholders, filed a complaint against us in the United States District
Court for the Eastern District of Arkansas, Western Division. The complaint
alleges that the defendants (which in addition to us includes one of our
officer/directors and one of our officers), violated the federal securities
laws, and seeks unspecified compensatory and other damages. The defendants
believe that the complaint is without merit and deny all of the allegations of
wrongdoing and are vigorously defending the suit. We also are a party to routine
litigation incidental to our business. We believe that these routine legal
proceedings will not have a material adverse effect on the results of operations
of financial condition. We maintain insurance in amounts, with coverages and
deductibles, that we believe are reasonable.
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<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
One matter was submitted to a vote of our stockholders during the fourth
quarter of 1998. On October 27, 1998, we held a Special Stockholders' Meeting
to vote on the Robert Walters merger transaction. Because the number of common
shares that we expected to issue in the transaction would have exceeded 20% of
our outstanding common shares on the date of issuance, the Nasdaq corporate
governance rules required us to obtain the approval of our stockholders prior
to the issuance of the shares. The record date for the Special Stockholders'
Meeting was September 15, 1998, with 22,153,596 of our common shares being
entitled to vote at this meeting. Of the 22,153,596 shares entitled to vote at
the Special Stockholders' Meeting, 16,665,320 shares were represented either in
person or by proxy. The issuance of our shares of common stock in the Robert
Walters merger transaction was approved by our stockholders at the Special
Stockholders' Meeting. The specific voting results from the meeting are
provided below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
16,385,410 264,367 15,543
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK PRICE INFORMATION
Our common stock, which has a par value of $.01 per share, trades on the
Nasdaq National Market under the symbol "STAF." On March 10, 1999, there were
2,534 holders of record of our common stock. The following table sets forth the
range of high and low trading prices for our common stock as reported by the
Nasdaq National Market for each quarter in 1997 and 1998 and the first quarter
of 1999 through March 10, 1999.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL 1997 ---- ---
-----------
<S> <C> <C>
First Quarter 15.250 12.000
Second Quarter 23.000 11.500
Third Quarter 39.375 21.375
Fourth Quarter 40.500 25.875
FISCAL 1998
First Quarter 41.875 23.000
Second Quarter 44.875 32.375
Third Quarter 37.000 17.000
Fourth Quarter 24.000 12.750
FISCAL 1999
First Quarter
(through March 10, 1999) 24.625 6.875
</TABLE>
OTHER STOCKHOLDER MATTERS
We have not paid dividends in the past and intend to retain earnings to
finance the expansion and operations of our business. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future. In
addition, our credit facility (as further described in Management's Discussion
and Analysis of Financial Condition and Results of Operations) includes
restrictions on our ability to pay dividends, without obtaining the prior
written consent of our bank group.
The trading price of our common stock is subject to wide fluctuations in
response to quarterly variations in operating results, announcements of
acquisitions, performance by our competitors, as well as other events or
factors. In addition, the stock market
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<PAGE> 14
has from time to time experienced extreme price and volume fluctuations which
have particularly effected the market price of many staffing and professional
service companies and which often have been unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
effect the market price of our common stock.
On October 7, 1998, we purchased the stock of Carrollton Employment
Service, Inc. In this transaction, we issued 28,036 shares of common stock in
addition to cash consideration. We relied upon the exemption from registration
in Section 4(2) of the Securities Act of 1933, as amended, in issuing the shares
of common stock in the Carrollton acquisition. On November 25, 1998, we issued
6,687,704 shares of our common stock when we acquired Robert Walters through a
merger transaction. Based upon a no action interpretive letter from the
Securities and Exchange Commission, we relied upon the exemption from
registration in Section 3(a)(10) of the Securities Act of 1933, as amended, in
issuing the shares of our common stock to the stockholders of Robert Walters in
this merger transaction.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
In October 1996, at the time of our initial public offering, we acquired
Brewer Personnel Services, Inc. and the other five Founding Companies. Staff
Accounting Bulletin No. 97 issued by the Securities and Exchange Commission
required us to designate Brewer Personnel Services, Inc. as the acquirer of the
other five Founding Companies for financial reporting purposes. The results of
operations for 1996 only include the operations of the other five Founding
Companies for the period following their acquisition on October 2, 1996. We
believe that the Selected Financial Data should be read in conjunction with our
audited financial statements, notes to the financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Revenues $1,014,913 $ 594,229 $ 176,194 $ 81,719 $ 57,203
Cost of services 750,438 443,446 127,571 57,978 38,783
---------- ---------- ---------- ---------- ----------
Gross profit 264,475 150,783 48,623 23,741 18,420
Operating expenses:
Selling, general and administrative 172,222 107,411 34,203 17,289 14,123
Nonrecurring charges 27,336 -- -- -- --
Depreciation and amortization 14,158 6,347 1,802 824 561
---------- ---------- ---------- ---------- ----------
Operating income $ 50,759 $ 37,025 $ 12,618 $ 5,628 $ 3,736
========== ========== ========== ========== ==========
Interest expense 6,768 1,413 1,390 729 86
Net income 18,640 20,400 7,493 3,692 2,727
Basic earnings per share $ 0.65 $ 0.85 $ 0.65
Diluted earnings per share $ 0.63 $ 0.82 $ 0.64
Basic earnings per share excluding
nonrecurring charges $ 1.52 $ 0.85 $ 0.65
Diluted earnings per share excluding
nonrecurring charges $ 1.47 $ 0.82 $ 0.64
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 94,458 $ 49,068 $ 30,412 $ 3,588 $ 2,659
Total assets 580,945 301,170 92,676 31,535 11,954
Long-term debt, including current
maturities 176,700 12,000 -- 16,258 654
Stockholders' equity 260,092 219,673 67,021 5,826 4,076
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data," the related notes thereto and our audited financial statements
and the related notes thereto appearing elsewhere in this Annual Report on Form
10-K.
OVERVIEW
On October 2, 1996, we acquired, at the time of our initial public
offering, Brewer Personnel Services, Inc. and the other five Founding
Companies. Based on the provisions of Staff Accounting Bulletin No. 97, Brewer
was designated as the acquirer of the other Founding Companies for financial
reporting purposes. Therefore, our results of operations for 1996 only include
the operations of the other Founding Companies for the period following their
acquisition on October 2, 1996. The acquisition of assets and the assumption of
liabilities of the Founding Companies are reflected at their historical cost
based on the applicable provisions of Staff Accounting Bulletin No. 97.
Our services are provided through two segments: Professional/IT and
Commercial. The Professional/IT segment provides staffing, consulting,
technical support and solutions services primarily in the areas of finance,
accounting, information technology, and legal services. The Commercial segment
provides clerical and light industrial staffing services. Our services are
provided through our network of over 300 branch offices located in 31 states
and 12 countries including the United States, the United Kingdom, Australia,
Germany, New Zealand, Belgium, Holland, Singapore, and South Africa.
Revenues are recognized upon the performance of services. We generally
compensate our professionals and associates only for hours actually worked and,
therefore, wages of professionals and associates are a variable cost that
increase or decrease as revenues increase or decrease. However, we do have
professionals that are full-time, salaried employees who are paid even when not
engaged in staffing or consulting. Cost of services primarily consists of wages
paid to professionals, temporary associates, payroll taxes, workers'
compensation, foreign statutory taxes, national insurance and other related
employee benefits. Selling, general and administrative expenses are comprised
primarily of administrative salaries and benefits, marketing, rent,
recruitment, training, IT systems and communications expenses.
During 1998, we completed 18 business combinations. On November 25, 1998,
we completed the acquisition of Robert Walters. Our largest acquisition to
date, Robert Walters specializes in placing accounting, finance and IT
professionals on a contract, temporary and permanent basis with customers in
the finance, commercial and industrial sectors. This acquisition complemented
our existing business lines by providing a value-added, high margin
international professional services component with a significant presence in
the United Kingdom. For the year ended December 31, 1997, Robert Walters had
approximately $149.0 million of revenue. The transaction was accounted for as a
pooling-of-interests, with 6,687,704 shares of our common stock being issued to
the Robert Walters stockholders.
The financial statements have been restated for the significant
pooling-of-interests business combinations. Our operating results include
acquisitions accounted for under the purchase method since the effective date
of acquisition. We incurred $27.3 million in nonrecurring merger costs and
one-time charges during 1998 primarily related to our pooling-of-interests
business combinations and the reassessment of recoverability of certain assets.
Approximately $22.4 million of these nonrecurring merger expenses related to
the Robert Walters transaction. These nonrecurring costs consist primarily of
professional fees, printing fees, fees of financial advisors, integration
expenses including the elimination of redundant offices, severance plans and
other contract terminations.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
is included in the following discussion because we believe the year-to-year
change in EBITDA is a meaningful measure since we have been an acquisitive
company and the non-cash expenses of depreciation and amortization have a
significant impact on operating income and operating margins. EBITDA should not
be construed as an alternative measure of the amount of our income or cash
flows from operating activities as EBITDA excludes certain significant costs of
doing business. The EBITDA per share information that follows has been
calculated using diluted shares outstanding for the relevant period.
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<PAGE> 17
RECENT INFORMATION
On March 2, 1999, based on a detailed review of January results and an
accelerated review of preliminary February results, we announced that a decline
in demand from our finance, banking and legal clients and lower growth from
IntelliMark's domestic IT staffing business could cause our earnings per share
for the first quarter of 1999 and the 1999 year to be lower than the
pre-announcement I/B/E/S consensus analyst estimate for each of these periods.
In response to this circumstance, we implemented executive and organizational
changes at IntelliMark for the purpose of improving IT staffing growth rates,
consolidating administrative functions and building an IT solutions network that
compliments our business units and core competencies. To focus our efforts in
these areas, we plan to slow down our acquisition program during the balance of
the 1999 year.
FINANCIAL INFORMATION
The financial information provided below has been rounded in order to
simplify its presentation. The percentages below have been calculated using the
detailed financial information contained in the financial statements, the notes
thereto and the other financial data included in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 % 1997 % 1996 %
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional/IT $ 530,175 52.2 $252,577 42.5 $ 72,777 41.3
Commercial 484,738 47.8 341,652 57.5 103,417 58.7
--------- ----- -------- ----- -------- --------
Total 1,014,913 100.0 594,229 100.0 176,194 100.0
---------- ----- -------- ----- -------- --------
Operating income:
Professional/IT 47,510 4.7 17,084 2.9 6,239 3.6
Commercial 36,842 3.6 25,137 4.2 6,718 3.8
Corporate (6,257) (0.6) (5,196) (0.9) (339) (0.2)
---------- ----- -------- ----- -------- --------
Total before nonrecurring
charges 78,095 7.7 37,025 6.2 12,618 7.2
Nonrecurring charges 27,336 2.7 -- -- -- --
---------- ----- -------- ----- -------- --------
Total 50,759 5.0 37,025 6.2 12,618 7.2
Interest expense and other, net 6,995 0.7 681 0.1 1,009 0.6
---------- ----- -------- ----- -------- --------
Income before income taxes 43,764 4.3 36,344 6.1 11,609 6.6
Income taxes 25,124 2.5 15,944 2.7 4,116 2.3
---------- ----- -------- ----- -------- --------
Net income $ 18,640 1.8 $ 20,400 3.4 $ 7,493 4.3
---------- ----- -------- ----- -------- --------
EBITDA $ 64,917 6.4 $ 43,372 7.3 $ 14,420 8.2
---------- ----- -------- ----- -------- --------
Per share amounts:
Basic Earnings $ 0.65 $ 0.85 $ 0.65
========== ======== ========
Diluted Earnings $ 0.63 $ 0.82 $ 0.64
========== ======== ========
EBITDA $ 2.19 $ 1.75 $ 1.23
========== ======== ========
Excluding nonrecurring charges:
Net income $ 43,406 4.3 $ 20,400 3.4 $ 7,493 4.3
---------- ----- -------- ----- -------- --------
EBITDA $ 92,253 9.1 $ 43,372 7.3 $ 14,420 8.2
---------- ----- -------- ----- -------- --------
Per share amounts:
Basic Earnings $ 1.52 $ 0.85 $ 0.65
========== ======== ========
Diluted Earnings $ 1.47 $ 0.82 $ 0.64
========== ======== ========
EBITDA $ 3.11 $ 1.75 $ 1.23
========== ======== ========
</TABLE>
17
<PAGE> 18
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO RESULTS FOR THE YEAR
ENDED DECEMBER 31, 1997
Revenues. Consolidated revenues increased $420.7 million, or 70.8%, to $1.0
billion for 1998 compared to $594.2 million for 1997. The acquisitions
completed during 1998 in both the Professional/IT and Commercial segments
accounted for approximately $265.8 million of the increase. Approximately
$115.4 million of the increase is the result of recording a full year's
operations in 1998 for the companies purchased during 1997 which consists of
both internal and acquisition growth.
Revenues for the Professional/IT segment increased $277.6 million, or
109.9%, to $530.2 million for 1998 compared to $252.6 million for 1997. This
increase is primarily the result of acquisitions and internal growth
particularly in the expansion of contracting professional and information
technology consultants in the United Kingdom and other European locations, as
well as in Australia and certain Asian markets. Approximately $79.7 million of
the increase results from the full year's operations of the companies acquired
during 1997 which consists of both internal and acquisition growth. The
Professional/IT companies purchased in 1998 provided approximately $45.9
million of the increase.
Revenues for the Commercial segment increased $143.1 million, or 41.9%, to
$484.7 million for 1998 compared to $341.7 million for 1997. This revenue
growth is the result of acquisitions and internal growth. Commercial
acquisitions completed during 1998 accounted for $76.1 million in revenue
during 1998. Approximately $35.7 million of the increase results from the full
year's operations of the companies purchased during 1997 which consists of both
internal and acquisition growth.
EBITDA and Gross Profit. EBITDA, excluding nonrecurring charges, increased
$48.9 million, or 112.7%, to $92.3 million for 1998 as compared to $43.4 million
for 1997. EBITDA, excluding nonrecurring charges, as a percentage of revenues
was 9.1% for 1998 and 7.3% for 1997. This margin improvement was the result of
our efforts to increase our concentration in the higher-margin Professional/IT
business, somewhat offset by higher stock option compensation expense in 1997
compared to 1998, as discussed below. Including nonrecurring charges, 1998
EBITDA was $64.9 million and EBITDA margin was 6.4%. For 1998, gross profit as a
percentage of revenue increased from 25.4% to 26.1% while selling, general and
administrative expenses ("SG&A"), excluding nonrecurring charges, as a
percentage of revenue decreased from 18.1% to 17.0%. The increase in gross
profit and gross profit margin primarily resulted from higher revenues and an
increased percentage of revenues being derived from the Professional/IT segment
which generally has higher profit margins than the Commercial segment, in
conjunction with an increase in Robert Walters permanent placement revenues in
1998. We will continue to invest in the infrastructure of our Company in the
areas of technology, training, communications and marketing as we believe these
investments will provide valuable benefits in the future. SG&A for 1998 and 1997
includes amounts related to the Robert Walters stock option plan which were
compensatory prior to the acquisition but which became subject to fixed plan
accounting as of the acquisition date. These compensatory stock option plans
resulted in income of $0.7 million in 1998 and expense of $4.6 million in 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $7.8 million to $14.1 million for 1998. This increase is
primarily attributable to amortization of goodwill associated with our purchase
business combinations. Depreciation also increased as a result of continuing
development of our corporate infrastructure and information systems network.
Operating Income. Operating income increased $13.7 million, or 37.1%, to
$50.8 million for 1998 compared to $37.0 million for the same period last year.
Due to nonrecurring charges of $27.3 million, our operating margin decreased to
5.0% for 1998 as compared to 6.2% for 1997. Excluding these nonrecurring
charges, 1998 consolidated operating income was $78.1 million, or 7.7% of
consolidated revenues.
The following operating income discussion at the Professional/IT and
Commercial segment levels excludes unallocated corporate SG&A of $6.3 million
for 1998 and $5.2 million for 1997.
Operating income for the Professional/IT segment increased $30.4 million,
or 178.1%, to $47.5 million in 1998 as compared to $17.1 million in 1997. The
Professional/IT segment benefited from an increase in operating margin from
6.8% in 1997 to 9.0% in 1998 partially as a result of lower compensation
expenses related to the Robert Walters compensatory stock options in 1998. The
higher margin business involving consulting and solutions services, along with
an increase in Robert Walters
18
<PAGE> 19
permanent placement business were the primary reasons for the margin increase.
The domestic acquisitions completed during 1998 provided approximately $13.0
million in operating income.
Operating income for the Commercial segment increased $11.7 million, or
46.6%, to $36.8 million in 1998 as compared to $25.1 million in the same period
last year. Continued growth in our existing markets, increases in our strategic
alliance (vendor-on-premise) agreements as well as the strategic acquisitions
completed during the year have provided the majority of this growth. Commercial
acquisitions completed during the year added operating income of approximately
$8.1 million. The growth from our strategic alliances, which provide clients
with dedicated on-site account management, tend to have lower gross margins
than traditional temporary staffing services. However, the higher volumes,
comparatively lower operating expenses and relatively long-term contracts
associated with these relationships have resulted in operating profit growth
and a stable source of revenue. The operating margin of the Commercial segment
increased from 7.4% in 1997 to 7.6% in 1998.
Interest Expense. We incurred interest expense of $6.8 million in 1998 as
compared to $1.4 million of interest expense in 1997. Interest expense in both
periods is primarily related to borrowings on our Credit Facility (as defined
below) to fund the cash portion of several of our acquisitions.
Net Income. Net income, excluding nonrecurring charges, increased 112.8% to
$43.4 million for 1998 as compared to $20.4 million for the same period last
year. This increase of $23.0 million is a result of the factors described
above. Net margin, excluding nonrecurring charges, was 4.3% for 1998 up from
3.4% for 1997. Including nonrecurring charges, net income for 1998 was $18.6
million and net income as a percentage of revenue was 1.8%.
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO RESULTS FOR THE YEAR
ENDED DECEMBER 31, 1996
Revenues. Consolidated revenues increased $418.0 million, or 237.3%, to
$594.2 million for 1997 compared to $176.2 million for 1996. This increase was
primarily attributable to the full year's operations of the other five Founding
Companies, the acquisitions completed during 1997 of approximately $161.0
million, and internal growth, particularly in the finance, accounting and IT
areas of Robert Walters.
Revenues for the Professional/IT segment increased $179.8 million, or
247.1%, to $252.6 million for 1997 compared to $72.8 million for 1996. This
increase is primarily the result of our focus on acquiring and developing our
Professional/IT segment which tends to have higher margins and growth rates
than the traditional commercial business. At the end of 1997, the
Professional/IT segment constituted 42.5% of our revenue base. The
Professional/IT companies purchased in 1997 provided approximately $66.0
million of the increase.
Revenues for the Commercial segment increased $238.2 million, or 230.4%, to
$341.7 million for 1997 compared to $103.4 million for 1996. The largest driver
of this change relates to the inclusion of the other five Founding Companies
for a full year since these operations were primarily Commercial in nature.
Additionally, the Commercial acquisitions completed during 1997 provided $95.0
million of revenue during 1997.
EBITDA and Gross Profit. EBITDA increased $29.0 million, or 200.8%, to
$43.4 million for 1997 as compared to $14.4 million for 1996. These changes were
primarily the result of including the other five Founding Companies for a full
year and from our 1997 acquisitions. EBITDA as a percentage of revenues was 7.3%
for 1997 and 8.2% for 1996. This decrease resulted primarily from an increase in
gross profit offset by costs associated with our acquisitions, the integration
of the other five Founding Companies, the development of an operational and
functional infrastructure and the higher compensation expense resulting from
stock option expense in 1997. SG&A for 1997 and 1996 includes amounts related to
the Robert Walters stock option plan which were compensatory prior to the
acquisition but which became subject to fixed plan accounting as of the
acquisition date. These compensatory stock option plans resulted in expense of
$4.6 million in 1997 and $0.3 million in 1996.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $4.5 million to $6.3 million for 1997. This increase is
primarily attributable to amortization of goodwill associated with our purchase
business combinations.
Operating Income. Operating income increased $24.4 million, or 193.4%, to
$37.0 million for 1997 compared to $12.6 million for 1996. Our operating margin
decreased to 6.2% for 1997 compared to 7.2% for 1996 for the reasons described
above.
19
<PAGE> 20
The following operating income discussion at the Professional/IT and
Commercial segment levels excludes unallocated corporate SG&A of $5.2 million
and $0.3 million for 1997 and 1996, respectively.
Operating income for the Professional/IT segment increased $10.8 million,
or 173.8%, to $17.1 million in 1997 as compared to $6.2 million in 1996. The
majority of this increase relates to the internal expansion throughout the
United Kingdom and other European locations in permanent placement and
contracting revenues, and also benefited from the acquisitions completed during
1997 as well as domestic internal growth. Operating margin decreased from 8.6%
in 1996 to 6.8% in 1997 primarily as a result of costs related to the Robert
Walters stock option plan as described above.
Operating income for the Commercial segment increased $18.4 million, or
274.2%, to $25.1 million in 1998 as compared to $6.7 million in the same period
last year. Inclusion of the other five Founding Companies for the full year was
the main driver of this change. Growth in existing markets, new office
openings, strategic alliance programs and the Commercial acquisitions completed
during 1997 also accounted for increased growth. The operating margin of the
Commercial segment increased from 6.4% in 1996 to 7.4% in 1997 as we realized
the synergies of operating the combined companies and realized savings in
controllable costs such as workers' compensation.
Interest Expense. Interest expense was approximately $1.4 million for both
1997 and 1996. Interest expense for 1997 was primarily related to borrowings on
our Credit Facility to fund the cash portion of several of the 1997
acquisitions, while interest expense in 1996 related to various borrowings of
Brewer that were paid-off with proceeds from our initial public offering.
Net Income. Net income increased $12.9 million, or 172.2%, to $20.4 million
for 1997 compared to $7.5 million for 1996 as a result of the factors described
above. Net income as a percentage of revenues was 3.4% for 1997 and 4.3% for
1996.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is from operations, the proceeds of common
stock offerings and borrowings under our Credit Facility. Our principal uses of
cash are to fund acquisitions, working capital and capital expenditures. We
generally pay our temporary associates and professionals weekly for their
services, while receiving payments from customers 30 to 60 days from the date
of the invoice. We have increasing requirements for cash resources to fund
working capital increases, new office openings and the expansion of existing
offices.
We currently have a $300 million credit facility with a consortium of banks
(the "Credit Facility") which is secured by all of the issued and outstanding
capital stock of our domestic subsidiaries and 65% of the issued and
outstanding capital stock of our foreign subsidiaries. The Credit Facility
matures in August 2003. Interest on any borrowings is computed at our option of
either the bank group's prime rate or the London interbank offered rate
incrementally adjusted based on our operating leverage ratios. We pay a
quarterly facility fee determined by multiplying the total amount of the Credit
Facility by a percentage which varies based on our operating leverage ratios.
During 1997, we borrowed approximately $65.8 million on our Credit Facility,
the majority of which was used to pay the cash consideration for several of our
1997 acquisitions. During 1998, we had net borrowings of approximately $164.7
million on the Credit Facility, which were used to pay the cash consideration
for several of our acquisitions and for general corporate purposes. In 1998, we
entered into fixed interest rate swap agreements with respect to a portion of
the borrowings under the Credit Facility to hedge against increases in interest
rates which would increase the cost of variable rate borrowings under the
Credit Facility. As of March 10, 1999, $222.6 million was outstanding on the
Credit Facility.
Net cash provided by operating activities was $6.5 million in 1998, $16.7
million in 1997 and $4.3 million in 1996. The net cash provided by operating
activities for the periods presented was primarily attributable to net income
adjusted for non-cash expenses such as depreciation and amortization and
changes in operating assets and liabilities.
Net cash used in investing activities was $165.8 million in 1998, $135.0
million in 1997 and $29.5 million in 1996. Cash used in investing activities in
1998 was primarily attributable to cash paid for acquisitions completed during
the year and for additional contingent consideration paid during 1998 for
acquisitions completed in 1997. In 1997, cash used in investing activities was
primarily related to consideration paid for our acquisitions. Cash used in
investing activities in 1996 was primarily related to the acquisitions of the
other five Founding Companies.
Net cash provided by financing activities was $166.0 million in 1998,
$107.4 million in 1997 and $40.6 million in 1996. Cash provided by financing
activities in 1998 was primarily related to borrowings under our Credit
Facility to finance several of
20
<PAGE> 21
the acquisitions and contingent consideration payments completed during the
year. Cash provided by financing activities in 1997 was primarily attributable
to the proceeds from a secondary offering of our common stock and borrowings
under our Credit Facility to finance several of our acquisitions. These 1997
proceeds were partially offset by the repayment of borrowings under our Credit
Facility with proceeds from the secondary offering. Cash provided by financing
activities in 1996 was primarily attributable to the issuance of common stock
in conjunction with our initial public offering partially offset by the
repayment of the debt obligations of the Founding Companies with proceeds from
our initial public offering as well as dividends to stockholders.
Our combined cash and cash equivalents increased $6.7 million in 1998,
decreased $10.9 million in 1997 and increased $15.4 million in 1996 as a result
of the foregoing factors.
We believe that our cash flows from operations and borrowings available
under our Credit Facility will provide sufficient liquidity for our existing
operations during 1999. However, if we continue to make acquisitions or there
is a slowdown in the economy or our business, we would need to seek additional
financing through the public or private sale of equity or debt securities, or
we will request our bank group to increase the Credit Facility. There can be no
assurance that we could secure such financing, if and when it is needed, or on
terms we deem acceptable. We periodically reassess the adequacy of our
liquidity position, taking into consideration current and anticipated operating
cash flow, anticipated capital expenditures, acquisition plans, public or
private offerings of debt or equity securities and borrowing availability under
the Credit Facility.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs (whether related to
IT systems or non-IT systems) being written using two digits rather than four
digits to define the applicable year. Computer programs that have time
sensitive software may recognize a date using "00" as the Year 1900 rather than
the Year 2000. We have assembled a Year 2000 compliance team that is working on
these compliance matters company-wide. As part of this project and consistent
with our operating strategy, we are implementing one primary front office
software package (Caldwell-Spartin) in a majority of our Commercial offices. In
a majority of our Professional/IT offices, we are implementing one primary
search and retrieval software package (EZ Access) and one primary front office
software package (MAS 90). In addition, we have selected and implemented the
PeopleSoft system for our 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, we
believe that Year 2000 costs with respect to these software systems are not
expected to have a material impact on our financial condition or results of
operations.
As to non-IT systems and vendor services, other than banking relationships
and utilities (which includes electrical power, water and related items), we
believe there is no single system or vendor service that is material to our
operations. As to banking needs, our banking relationships are primarily with
large national and international financial institutions which are undertaking
their own Year 2000 compliance procedures and certifying their compliance to
us. Certain of our utility vendors are certifying their Year 2000 compliance to
us. To the extent that a utility vendor fails to certify its Year 2000
compliance capability, our contingency plan is to ensure that we have back-up
utility sources necessary to maintain the critical information systems at our
corporate headquarters. Utility failures at our branch offices or the inability
of our customers to operate could have a material adverse effect on our revenue
sources and could disrupt our customers' payment cycle. We are working with our
customers to address the Year 2000 issues that will affect our business and our
plan is to ensure that our Year 2000 compliance project is materially complete
by June 30, 1999. We believe that the costs of our Year 2000 compliance project
for each matter individually and all matters in the aggregate will not be
material to our financial condition or results of operations.
As to software systems and applications utilized by entities acquired or to
be acquired by us, we anticipate that upgrades and/or conversions may be
required to ensure that these systems and applications are Year 2000 compliant.
We believe that any such upgrades and/or conversions will be timely made and
are not expected to have a material impact on our financial condition or
results of operations.
21
<PAGE> 22
SEASONALITY
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause the Company's results of operations to fluctuate. We
generally expect to realize higher revenues, operating income and net income
during the second and third quarters and relatively lower revenues, operating
income and net income during the first and fourth quarters.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at fair value. SFAS
No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999, and cannot be applied retroactively. We
have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements; however, SFAS No. 133 could increase the volatility of reported
earnings and other comprehensive income once adopted.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding certain of our long-term debt obligations relating to
quantitative and qualitative disclosure about market risk is described in Note 8
to the Consolidated Financial Statements.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
statements are included in this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants 24
Covered by the Report of Independent Public Accountants:
Consolidated Balance Sheet at December 31, 1998 and 1997 25
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996 26
Consolidated Statements of Stockholders' Equity at
December 31, 1998, 1997, and 1996 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 28
Notes to Consolidated Financial Statements 29
(b) Not Covered by Report of Independent Public Accountants:
Supplementary Quarterly Financial Information 43
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of StaffMark, Inc.:
We have audited the accompanying consolidated balance sheets of StaffMark,
Inc. and subsidiaries (the "Company", a Delaware corporation) as of December
31, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of StaffMark, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 29, 1999.
24
<PAGE> 25
STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 12,811,415 $ 6,654,599
Accounts receivable, net 155,795,909 89,126,584
Deferred income taxes 2,569,331 851,284
Prepaid expenses and other 10,063,288 5,793,669
------------- -------------
Total current assets 181,239,943 102,426,136
PROPERTY AND EQUIPMENT, net 22,449,478 14,315,353
INTANGIBLE ASSETS, net 375,681,961 181,970,550
OTHER ASSETS 1,573,393 2,458,104
------------- -------------
$ 580,944,775 $ 301,170,143
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 35,067,726 $ 23,600,459
Payroll and related liabilities 40,309,069 17,085,991
Reserve for workers' compensation claims 8,087,030 6,208,748
Income taxes payable 3,317,984 6,462,905
------------- -------------
Total current liabilities 86,781,809 53,358,103
LONG-TERM DEBT 176,700,000 12,000,000
OTHER LONG-TERM LIABILITIES 47,736,824 14,354,783
DEFERRED INCOME TAXES 9,634,299 1,783,947
COMMITMENTS AND CONTINGENCIES (Notes 14 through 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued or outstanding -- --
Common stock, $.01 par value; 29,083,379 and 27,034,335 shares issued
and outstanding as of December 31, 1998 and 1997, respectively 290,834 270,343
Paid-in capital 214,271,146 194,431,766
Retained earnings 46,262,641 25,133,665
Accumulated other comprehensive income (732,778) (162,464)
------------- -------------
Total stockholders' equity 260,091,843 219,673,310
------------- -------------
$ 580,944,775 $ 301,170,143
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated balance sheets.
25
<PAGE> 26
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
SERVICE REVENUES $ 1,014,912,925 $ 594,228,973 $ 176,194,109
COST OF SERVICES 750,438,266 443,445,780 127,570,986
--------------- --------------- ---------------
Gross profit 264,474,659 150,783,193 48,623,123
OPERATING EXPENSES:
Selling, general and administrative 172,221,993 107,411,228 34,203,615
Depreciation and amortization 14,158,252 6,346,502 1,801,954
Non-recurring charges 27,335,436 -- --
--------------- --------------- ---------------
Operating income 50,758,978 37,025,463 12,617,554
OTHER INCOME (EXPENSE):
Interest expense (6,767,662) (1,413,172) (1,389,879)
Other, net (227,813) 731,561 380,954
--------------- --------------- ---------------
Income before provision for income taxes 43,763,503 36,343,852 11,608,629
PROVISION FOR INCOME TAXES 25,124,074 15,944,054 4,115,833
--------------- --------------- ---------------
Net income $ 18,639,429 $ 20,399,798 $ 7,492,796
=============== =============== ===============
BASIC EARNINGS PER SHARE $ 0.65 $ 0.85 $ 0.65
=============== =============== ===============
DILUTED EARNINGS PER SHARE $ 0.63 $ 0.82 $ 0.64
=============== =============== ===============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
26
<PAGE> 27
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
----------- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 261 $ 3 $ 1,267,917 $ 4,608,703 $ (51,091) $ 5,825,532
Dividends declared:
Cash -- -- -- (2,578,172) -- (2,578,172)
Property -- -- -- (73,700) -- (73,700)
Shares issued in conjunction with
Brewer business combination 10 -- 319,149 -- -- 319,149
Exercise of stock options 7 -- 160,000 -- -- 160,000
Issuance of common stock
upon formation of StaffMark, Inc. 1,000 10 -- -- -- 10
Split of StaffMark, Inc. common stock 1,354,000 13,540 (13,540) -- -- --
Issuance of common stock,
net of offering costs 10,192,840 101,928 69,733,423 -- -- 69,835,351
Conversion of Brewer common stock
into common stock of StaffMark, Inc. 1,934,865 19,349 (2,969,349) -- -- (2,950,000)
Conversion of Robert Walters common
stock into common stock of
StaffMark, Inc. 2,313,801 23,138 (4,730) -- -- 18,408
Acquisition of Other Founding Companies 3,683,249 36,832 (10,940,326) -- -- (10,903,494)
Reclassification of retained earnings in
conjunction with the conversion from
S Corporation to C Corporation status
for tax reporting purposes -- -- 3,025,212 (3,025,212) -- --
Establishment of deferred income tax
liabilities in conjunction with the
conversion from S Corporation to
C Corporation status for tax
reporting purposes -- -- (1,839,706) -- -- (1,839,706)
Shares issued in conjunction with
StaffMark business combination 118,763 1,188 1,021,658 -- -- 1,022,846
Effect of compensatory stock options -- -- 307,623 -- -- 307,623
Comprehensive income:
Net income -- -- -- 7,492,796 -- 7,492,796
Foreign currency translation
adjustments -- -- -- -- 384,691 384,691
----------- ----------- ------------ ----------- ----------- ------------
Comprehensive income -- -- -- 7,492,796 384,691 7,877,487
----------- ----------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1996 19,598,796 195,988 60,067,331 6,424,415 333,600 67,021,334
Dividends declared -- -- -- (1,552,274) -- (1,552,274)
Issuance of common stock, net of
offering costs 4,013,160 40,132 102,536,027 -- -- 102,576,159
Business combinations 3,353,657 33,536 25,686,806 (138,274) -- 25,582,068
Issuances of common stock related to
employee stock plans 68,722 687 1,511,738 -- -- 1,512,425
Effect of compensatory stock options -- -- 4,629,864 -- -- 4,629,864
Comprehensive income:
Net income -- -- -- 20,399,798 -- 20,399,798
Foreign currency translation
adjustments -- -- -- -- (496,064) (496,064)
----------- ----------- ------------ ----------- ----------- ------------
Comprehensive income -- -- -- 20,399,798 (496,064) 19,903,734
----------- ----------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1997 27,034,335 270,343 194,431,766 25,133,665 (162,464) 219,673,310
Dividends declared -- -- -- (693,880) -- (693,880)
Business combinations 1,770,177 17,702 17,977,970 3,183,427 -- 21,179,099
Issuances of common stock related to
employee stock plans 278,867 2,789 2,607,105 -- -- 2,609,894
Effect of compensatory stock options -- -- (745,695) -- -- (745,695)
Comprehensive income:
Net income -- -- -- 18,639,429 -- 18,639,429
Foreign currency translation
adjustments -- -- -- -- (570,314) (570,314)
----------- ----------- ------------ ----------- ----------- ------------
Comprehensive income -- -- -- 18,639,429 (570,314) 18,069,115
----------- ----------- ------------ ----------- ----------- ------------
BALANCE, December 31, 1998 29,083,379 $ 290,834 $214,271,146 $46,262,641 $ (732,778) $260,091,843
=========== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes to consolidated
financial statements are an integral
part of these consolidated statements.
27
<PAGE> 28
STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,639,429 $ 20,399,798 $ 7,492,796
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 14,158,252 6,346,502 1,801,954
Provision for bad debts 1,633,823 896,455 290,555
Deferred income taxes 4,889,167 (1,432,415) (641,370)
Write-down of certain assets 2,708,829 -- --
Effect of compensatory stock options (745,695) 4,629,864 307,623
Other, net (973,490) (340,113) 93,106
Change in operating accounts, net of effects of acquisitions:
Accounts receivable (40,726,073) (24,191,764) (8,993,490)
Prepaid expenses and other (2,554,428) (1,962,904) (530,051)
Other assets 2,326,535 (43,658) (421,792)
Accounts payable and accrued liabilities (3,213,679) 5,782,383 2,870,615
Payroll and related liabilities 16,080,184 4,989,995 (1,388,688)
Reserve for workers' compensation claims 1,503,539 225,624 94,496
Income taxes payable (3,708,499) 1,391,693 3,122,535
Other long term liabilities (3,513,597) (16,228) 198,173
------------- ------------- ------------
Net cash provided by operating activities 6,504,297 16,675,232 4,296,462
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (155,552,201) (127,894,577) (12,322,832)
Acquisition of Founding Companies, net of cash acquired -- -- (14,989,436)
Capital expenditures (10,240,080) (7,060,595) (2,237,467)
------------- ------------- ------------
Net cash used in investing activities (165,792,281) (134,955,172) (29,549,735)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs -- 102,576,159 69,835,351
Proceeds from borrowings 290,890,000 63,349,818 5,875,106
Payments on borrowings (126,190,000) (58,202,711) (32,286,566)
Distributions to stockholders (693,880) (1,552,274) (2,578,172)
Proceeds from employee stock plans 2,609,894 1,512,425 160,000
Deferred financing costs (600,900) (283,679) (398,708)
------------- ------------- ------------
Net cash provided by financing activities 166,015,114 107,399,738 40,607,011
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,727,130 (10,880,202) 15,353,738
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND
CASH EQUIVALENTS (570,314) (496,064) 384,691
CASH AND CASH EQUIVALENTS, beginning of period 6,654,599 18,030,865 2,292,436
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 12,811,415 $ 6,654,599 $ 18,030,865
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 5,647,446 $ 1,221,786 $ 1,633,081
============= ============= ============
Income taxes paid $ 28,268,995 $ 13,986,122 $ 559,521
============= ============= ============
Non-cash transactions:
Notes payable issued in business combination $ 16,117,188 $ -- $ --
============= ============= ============
Distribution of property to stockholders $ -- $ -- $ 73,700
============= ============= ============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
28
<PAGE> 29
STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
StaffMark, Inc. ("StaffMark" or the "Company") is a global provider of
diversified staffing, solutions, professional and consulting services to
businesses, professional and service organizations and governmental agencies.
As of December 31, 1998, StaffMark operated offices in 31 states and 12
countries. StaffMark provides services to numerous customers, none of which
individually represent a significant portion of revenues within a geographic
region or for the Company as a whole.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents--
The Company considers cash on deposit with financial institutions and all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
Property and Equipment--
Property and equipment are recorded at cost and are depreciated or
amortized on a straight-line basis over the estimated useful lives of the
assets, which are as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 5-7 years
Computer equipment and software 5-7 years
Leasehold improvements 3-15 years
</TABLE>
Additions that extend the lives of the assets are capitalized while repairs
and maintenance costs are expensed as incurred. When property and equipment are
retired, the related cost and accumulated depreciation or amortization are
removed from the balance sheet and any resultant gain or loss is recorded.
Intangible Assets--
Intangible assets consist primarily of goodwill, which is generally
amortized over 30 years using the straight-line method. Deferred financing
costs are amortized over the life of the respective debt obligation using a
method which approximates the effective interest method. Intangibles associated
with non-compete agreements are amortized using the straight-line method over
the life of the respective agreements.
Workers' Compensation--
StaffMark self-insures certain risks related to workers' compensation
claims. The estimated costs of existing and future claims are accrued as
incidents occur based upon historical loss development trends and may be
subsequently revised based on developments relating to such claims. StaffMark
has engaged the services of a third-party actuary to assist with the
development of these cost estimates.
Revenue Recognition--
Service revenues are recognized as income at the time staffing services are
provided.
29
<PAGE> 30
Income Taxes--
Income taxes have been provided based upon the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred income taxes using the liability method.
Deferred income taxes result from the effect of transactions which are
recognized in different periods for financial and tax reporting purposes.
Deferred income taxes are recognized for the tax consequences of such temporary
differences by applying enacted statutory tax rates to differences between the
financial reporting and the tax bases of existing assets and liabilities.
Prior to the acquisitions in October 1996, as discussed in Note 3, Brewer
Personnel Services, Inc. ("Brewer") was an S Corporation for income tax
reporting purposes. Accordingly, no provision for federal or state income taxes
related to the income for those periods is reflected in the accompanying
consolidated financial statements since such taxes are liabilities of the
individual stockholders. The S Corporation status of Brewer terminated upon the
effective date of these acquisitions.
Foreign Currency Translation--
The functional currency for certain of the Company's foreign subsidiaries
is the local currency. The translation from the foreign currency to U.S.
dollars is performed for balance sheet accounts using the exchange rate in
effect at the balance sheet date and for income statement accounts using a
weighted-average exchange rate during the period. The gains or losses resulting
from such translations are included in the accompanying consolidated statements
of stockholders' equity.
Fair Value of Financial Instruments--
StaffMark's financial instruments include cash and cash equivalents and its
debt obligations. Management believes that these financial instruments bear
interest at rates which approximate prevailing market rates for instruments
with similar characteristics and, accordingly, that the carrying values for
these instruments are reasonable estimates of fair value.
Impairment of Long-Lived Assets--
StaffMark regularly evaluates whether events and circumstances have
occurred which may indicate that the carrying amount of intangible or other
long-lived assets warrant revision or may not be recoverable. When factors
indicate that an asset or assets should be evaluated for possible impairment,
an evaluation is performed pursuant to the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value is required. During 1998 the Company recognized an impairment in the
goodwill associated with its physical/occupational therapy business unit as
more fully described in Note 4.
Stock Options--
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which encourages all
companies to recognize compensation expense based on the fair value, at grant
date, of instruments issued pursuant to stock-based compensation plans. SFAS
No. 123 requires the fair value of the instruments granted, which is measured
pursuant to the provisions of the statement, to be recognized as compensation
expense over the vesting period of the instrument. However, the statement also
allows companies to continue to measure compensation costs for these
instruments using the method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees." Companies electing to account for stock-based compensation plans
pursuant to the provisions of APB No. 25 must make pro forma disclosures of net
income as if the fair value method defined in SFAS No. 123 had been applied.
StaffMark has elected to account for stock options under the provisions of APB
No. 25 and has included the disclosures required by SFAS No. 123 in Note 12.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and disclosures of contingent assets and liabilities. The
estimates and assumptions used in preparing the accompanying consolidated
financial statements are based upon management's evaluation of the relevant
facts and circumstances as of the date of the financial statements. However,
actual results may differ from the estimates and assumptions used in preparing
these consolidated financial statements.
30
<PAGE> 31
Other Comprehensive Income--
As required, the Company has adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," in its financial statements for the year
ended December 31, 1998, and has conformed its prior year financial statements
accordingly. Other comprehensive income consists of foreign currency
translation gains and losses and has been included in the accompanying
consolidated statements of stockholders' equity.
Recent Accounting Pronouncements--
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and for Hedging Activities." This Statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
on the balance sheet as either an asset or liability measured at fair value.
SFAS No. 133 requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, and cannot be applied
retroactively. StaffMark has not yet quantified the impacts of adopting SFAS
No. 133 on its financial statements; however, SFAS No. 133 could increase the
volatility of reported earnings and other comprehensive income once adopted.
Classification of Prior Year Balances--
Certain reclassifications have been made to prior year balances in order to
conform with the current year presentation.
3. BUSINESS COMBINATIONS:
StaffMark was founded in March 1996, and in October 1996 the Company
acquired six local and regional temporary staffing companies (the "Founding
Companies") and completed an initial public offering of its common stock (the
"Offering"). Based on the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 97, Brewer was designated as
the acquirer, for financial reporting purposes, of the other five staffing
companies (the "Other Founding Companies"). Cash of approximately $13.0 million
and 3,683,249 shares of common stock were issued in conjunction with the
mergers of the Founding Companies. Based on the applicable provisions of SAB
No. 97, the acquisition of assets and assumption of liabilities of the Other
Founding Companies have been reflected at their historical cost and their
results of operations and cash flows have been included only from the date of
acquisition.
The operating results of all acquisitions accounted for under the purchase
method have been included since the effective date of acquisition. The costs of
these acquisitions have been allocated based on estimated fair market values of
the assets acquired and liabilities assumed with any excess costs over fair
values of net assets acquired recorded as goodwill. The accompanying
consolidated financial statements have been restated for significant
pooling-of-interests business combinations. All significant intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.
Since the date of the initial public offering, the Company has completed
the following business combinations:
<TABLE>
<CAPTION>
Purchase Business Combinations Pooling-of-Interests
----------------------------------------------- ------------------------------
Consideration Paid
Number of ------------------------------- Number of
Year Transactions Cash Notes Shares Transactions Shares Issued
---- ------------ ------ ----- ------ ------------ -------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
1998 11 $ 80.6 $16.1 572,135 7 9,030,976
1997 18 132.5 -- 1,691,911 2 347,083
1996 3 9.6 -- 118,763 -- --
</TABLE>
31
<PAGE> 32
In addition to the purchase prices disclosed above, certain of these
acquisition agreements include provisions for the payment of additional
consideration, which is contingent upon the achievement of certain performance
measures of the businesses acquired. During 1998, the Company paid
consideration totaling $36.9 million in cash and 169,434 shares of common stock
pursuant to these arrangements. Additionally, as of December 31, 1998 and 1997,
the Company had accrued approximately $31.6 million and $9.6 million,
respectively, related to certain contingent consideration arrangements. These
amounts have been reported as other long-term liabilities in the accompanying
consolidated balance sheets. Management believes that any additional
consideration to be paid related to acquisitions completed prior to December
31, 1998 will not be significant.
On November 25, 1998, StaffMark completed its merger with Robert Walters
plc ("Robert Walters"). In connection with the merger, each outstanding share
of Robert Walters common stock was converted into the right to receive 0.272
shares of the Company's common stock, totaling 6,687,704 common shares in the
aggregate. The merger has been accounted for as a pooling-of-interests.
Accordingly, the accompanying consolidated financial statements have been
restated to include the accounts of Robert Walters for all periods presented.
Separate and combined results of operations are as follows:
<TABLE>
<CAPTION>
For the Period
January 1, 19 For the Years Ended
Through December 31,
November 24, ---------------------
1998 1997 1996
---------------- -------- --------
<S> <C> <C> <C>
(in thousands)
Service Revenues:
StaffMark $667,662 $445,268 $104,476
Robert Walters 231,436 148,961 71,718
-------- -------- --------
Combined $899,098 $594,229 $176,194
======== ======== ========
Net Income:
StaffMark $ 30,174 $ 16,761 $ 4,023
Robert Walters 8,613 3,639 3,470
-------- -------- --------
Combined $ 38,787 $ 20,400 $ 7,493
======== ======== ========
</TABLE>
Pro Forma Operating Results--
The unaudited consolidated results of operations on a pro forma basis as
though all significant acquisitions had been acquired as of the beginning of
1997 are shown below. For purposes of this presentation, significant
acquisitions represent those which have purchase prices greater than 10% of the
Company's total assets at the end of the year preceding the acquisition. Note
that the pro forma information presented below reflects reductions in salaries
that certain owners agreed to in conjunction with these significant acquisitions
totaling approximately $0.3 million and $3.3 million in 1998 and 1997,
respectively, and excludes $27.3 million in nonrecurring charges primarily
related to the Robert Walters merger and other pooling-of-interests
transactions.
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues $ 1,026,196,659 $ 707,105,228
=============== ===============
Net income $ 43,839,522 $ 21,536,803
=============== ===============
Basic earnings per share $ 1.53 $ 0.86
=============== ===============
Diluted earnings per share $ 1.48 $ 0.84
=============== ===============
</TABLE>
32
<PAGE> 33
4. NON-RECURRING MERGER AND INTEGRATION EXPENSES AND PROVISIONS TO REDUCE
THE CARRYING VALUE OF CERTAIN ASSETS:
During 1998, the Company recorded merger and integration expenses and
provisions to reduce the carrying value of certain assets totaling $27.3
million. The merger and integration expenses recorded totaled approximately
$24.6 million and relate to the merger with Robert Walters and other
pooling-of-interests transactions completed during 1998. Included in these
costs are approximately $13.3 million for professional and financial advisors'
fees, approximately $10.8 million related to integration expenses and
approximately $500,000 for severance and employee-related expenses. Integration
expenses consist primarily of costs related to office closings and contract
terminations pursuant to management's plan of integration, which is expected to
be completed by September 1999. Substantially all costs associated with
severance had been incurred as of December 31, 1998.
The following is a summary of the Company's merger and integration accrual:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Total merger and integration expenses $24,626
Cash outlays (9,261)
-------
Accrual at December 31, 1998 $15,365
=======
</TABLE>
The Company also recorded a non-cash, charge of $1.4 million to write down
the carrying value of goodwill due to its plan to discontinue or dispose of its
physical/occupational therapy business. In conjunction with negotiating a new
credit facility, the Company also recorded a non-cash charge of $1.3 million to
write-off deferred financing costs related to its previously outstanding debt.
5. ACCOUNTS RECEIVABLE:
Included in accounts receivable are unbilled amounts totaling approximately
$18.7 million and $9.2 million at December 31, 1998 and 1997, respectively.
StaffMark maintains allowances for potential losses which management believes
are adequate to absorb losses to be incurred in realizing the amounts recorded
in the accompanying consolidated financial statements.
The following are the changes in the allowances for doubtful accounts:
<TABLE>
<CAPTION>
Fiscal Years
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,868,263 $ 624,601 $ 319,602
Increases relating to acquisitions 1,187,753 862,344 252,216
Provision for bad debts 1,633,823 896,455 290,555
Charge offs, net of recoveries (1,042,241) (515,137) (237,772)
----------- ----------- -----------
Balance at end of year $ 3,647,598 $ 1,868,263 $ 624,601
=========== =========== ===========
</TABLE>
6. PROPERTY AND EQUIPMENT:
Components of property and equipment are as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment $15,135,117 $ 8,808,288
Computer equipment and software 18,299,005 10,847,781
Leasehold improvements 3,102,509 1,800,434
----------- -----------
36,536,631 21,456,503
Less accumulated depreciation and amortization 14,087,153 7,141,150
----------- -----------
$22,449,478 $14,315,353
=========== ===========
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1998, 1997 and 1996, totaled approximately $4.4
million, $2.9 million and $0.9 million, respectively.
33
<PAGE> 34
7. INTANGIBLE ASSETS:
Intangible assets consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Goodwill $387,187,358 $184,748,739
Other 3,138,555 1,989,316
------------ ------------
390,325,913 186,738,055
Less accumulated amortization 14,643,952 4,767,505
------------ ------------
$375,681,961 $181,970,550
============ ============
</TABLE>
Amortization expense related to intangible assets for the years ended
December 31, 1998, 1997 and 1996, totaled approximately $9.8 million, $3.4
million and $0.9 million, respectively.
8. DEBT:
The Company has a credit facility (the "Credit Facility") with a consortium
of banks used for working capital and other general corporate purposes,
including acquisitions. As of December 31, 1998 and 1997, maximum borrowings
pursuant to the Credit Facility were limited to approximately $250 million and
$100 million, respectively. As of December 31, 1997, the Credit Facility was
comprised of a $30 million revolving credit facility and a $70 million
acquisition facility. As of December 31, 1998 no distinction is made between
the revolving credit facility and the acquisition facility. The Credit Facility
matures on August 20, 2003 and interest on any borrowings is computed using the
Company's option of either LIBOR or Mercantile Bank, N.A. prime rate which is
incrementally adjusted based on the Company's operating leverage ratios. As of
December 31, 1998, the Company is required to pay quarterly commitment fees
equal to 0.20%-0.25% of the unused portion of the total revolving credit
commitment.
The Credit Facility requires compliance with certain financial ratios and
other operational covenants. The Company was in compliance with all covenants
at December 31, 1998. The Credit Facility is secured by a pledge of 100% of the
stock of all of the Company's domestic subsidiaries and 65% of the stock of all
of the Company's foreign subsidiaries. As of December 31, 1998 and 1997, debt
outstanding under the Credit Facility consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Borrowings on revolving credit facility. Interest payable monthly at a
variable rate which averaged 6.59% and 8.50% during the years ended
December 31, 1998 and 1997,
respectively. Matures on August 20, 2003. $176,700,000 $ 3,000,000
Borrowings on acquisition facility. Interest payable quarterly
at a variable rate which averaged 6.99% during the year
ended December 31, 1997. -- 9,000,000
------------ ------------
$176,700,000 $ 12,000,000
============ ============
</TABLE>
The Company entered into interest rate swap agreements during 1998. Under
the terms of these agreements, the Company is obligated to pay interest on a
notional amount to the extent that the fixed rate under the interest rate swap
agreements exceed the LIBOR rate, as measured pursuant to the agreements.
Furthermore, the Company will receive interest to the extent that the LIBOR
rate exceeds the aforementioned fixed rate. Interest received as a result of
these agreements has been netted against interest expense in the accompanying
consolidated statements of income. The amounts related to the interest rate
swap agreements as of and for the year ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Notional Fixed LIBOR Interest Estimated
Amount Rate Rate Revenue Fair Value Maturity
----------- ------ ------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
$20,000,000 4.865% 5.281% -- $112,709 October 2001
$20,000,000 4.823% 5.209% $14,180 $145,141 October 2001
$20,000,000 4.835% 5.377% $15,654 $ 86,776 November 2000
</TABLE>
34
<PAGE> 35
The Company's involvement with derivative financial instruments is limited
to the interest rate swap agreements discussed above. The Company entered into
these agreements as hedges against increases in interest rates which would
increase the cost of its variable rate borrowings under the Credit Facility.
Conversely, the Company is exposed to the risk that the cost of those
borrowings would be higher than the amount computed under the Credit Facility
should interest rates decline. In addition, the Company is exposed to credit
risk in the event of non-performance by the bank facilitating these agreements
but has no off-balance-sheet risk of accounting loss related to these
agreements.
9. INCOME TAXES:
The provision for income taxes consisted of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal $ 13,168,323 $ 11,080,701 $ 2,022,827
State 1,838,964 1,962,768 392,376
Foreign 5,227,620 4,333,000 2,342,000
------------ ------------ ------------
20,234,907 17,376,469 4,757,203
------------ ------------ ------------
Deferred:
Federal 4,227,425 (1,224,586) (532,521)
State 590,362 (207,829) (108,849)
Foreign 71,380 -- --
------------ ------------ ------------
4,889,167 (1,432,415) (641,370)
------------ ------------ ------------
$ 25,124,074 $ 15,944,054 $ 4,115,833
============ ============ ============
</TABLE>
The components of deferred income tax assets and liabilities as of December
31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Workers' compensation reserves $ 2,498,959 $ 1,801,820
Allowance for doubtful accounts 1,092,237 503,096
Accrued vacation 1,018,655 494,673
Non-compete and deferred compensation agreements 1,132,579 179,278
Other 147,883 190,567
----------- -----------
Total deferred income tax assets 5,890,313 3,169,434
Deferred income tax liabilities:
Change in income tax accounting method from cash
to accrual basis in conjunction with termination of
S Corporation status 3,138,762 2,634,589
Depreciation and amortization 4,745,139 1,050,909
Other 5,071,380 416,599
----------- -----------
Total deferred income tax liabilities 12,955,281 4,102,097
----------- -----------
$ 7,064,968 $ 932,663
=========== ===========
</TABLE>
Components of the net deferred tax assets (liabilities) reported in the
accompanying consolidated balance sheets were as follows as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------------
Current Long-term Current Long-term
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets $ 5,708,093 $ 182,220 $ 2,915,958 $ 253,476
Liabilities (3,138,762) (9,816,519) (2,064,674) (2,037,423)
----------- ----------- ----------- -----------
$ 2,569,331 $(9,634,299) $ 851,284 $(1,783,947)
=========== =========== =========== ===========
</TABLE>
35
<PAGE> 36
A valuation allowance for the deferred tax assets has not been recorded in
the accompanying consolidated balance sheets because management believes that
all deferred tax assets are more likely than not to be recovered. In assessing
the realizability of deferred income tax assets, management has considered
scheduled reversals of the deferred income tax liabilities and projected future
taxable income.
The differences in income taxes determined by applying the statutory
federal tax rate of 35% for 1998, 1997 and 1996, to income before income taxes
and the amounts recorded in the accompanying consolidated statements of income
for the years ended December 31, 1998, 1997 and 1996 result from the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- --------------------- ----------------------
Amount Rate Amount Rate Amount Rate
----------- ---- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $15,317,226 35.0% $12,720,348 35.0% $ 4,063,020 35.0%
Add (deduct):
State income taxes, net of
federal tax benefit 1,597,503 3.7 1,106,415 3.0 185,542 1.6
Foreign taxes 142,362 0.3 1,548,872 4.3 365,920 3.2
Merger and integration expense 6,693,900 15.3 -- -- -- --
Non-deductible amortization 887,637 2.0 478,471 1.3 52,204 0.5
Effect of S Corporation income -- -- -- -- (484,934) (4.2)
Other, net 485,446 1.1 89,948 0.3 (65,919) (0.6)
----------- ---- ----------- ---- ----------- ----
$25,124,074 57.4% 15,944,054 43.9% $ 4,115,833 35.5%
=========== ==== =========== ==== =========== ====
</TABLE>
10. WORKERS' COMPENSATION:
StaffMark is self-insured for certain workers' compensation claims and is
regulated by various state-administered workers' compensation insurance
commissions. StaffMark has purchased insurance for claims which exceed certain
thresholds and is required in certain states to maintain letters of credit to
cover any potential unpaid claims. At December 31, 1998 and 1997, these letters
of credit totaled approximately $5.2 million and $2.7 million, respectively.
11. EMPLOYEE BENEFIT PLANS:
The Company maintains several defined contribution employee benefit plans,
some of which allow eligible employees to defer a portion of their income
through contributions to the plans. Contributions by StaffMark to the various
plans were approximately $1.2 million, $0.3 million and $0.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
In May 1997, the Company's shareholders approved an employee stock purchase
plan (the "Stock Purchase Plan") which grants employees the right to purchase
common shares of the Company's stock at a price equal to the lower of 85% of
the market value on the date of purchase or the beginning of the calendar
quarter of the purchase. Purchases under the Stock Purchase Plan are limited to
10% of the respective employees' compensation and do not impact the Company's
reported net income.
12. STOCKHOLDERS' EQUITY AND STOCK OPTIONS:
Common Stock--
The Company's shareholders had authorized 200,000,000 and 26,000,000 shares
of common stock for issuance as of December 31, 1998 and 1997, respectively.
Common shares outstanding as of December 31, 1997 include 7,895,699 shares
which represent the equivalent common shares issued for pooling-of-interests
business combinations that were completed during 1998. Additionally, the
Company's shareholders had authorized 10,000,000 and 1,000,000 shares of
preferred stock for issuance as of December 31, 1998 and 1997, respectively.
In conjunction with the organization and initial capitalization, StaffMark
issued 1,000 shares of common stock at a par value of $.01 per share. In June
1996, StaffMark's Board of Directors declared a 1,355-for-one stock split. The
effect of this stock split has been reflected as a reduction of paid-in-capital
and an increase in common stock in the accompanying consolidated statements of
stockholders' equity.
StaffMark issued 5,618,249 shares of common stock to the stockholders of
the Founding Companies and issued 6,325,000 shares of common stock to the
public in conjunction with the Offering. Additionally, the accompanying
consolidated statements
36
<PAGE> 37
of stockholders' equity have been restated to present the issuance of 3,867,840
equivalent shares of StaffMark common stock to reflect Robert Walters' initial
public offering during 1996 and 2,313,944 shares to reflect the conversion of
Robert Walters' equivalent Brewer shares into shares of StaffMark common stock.
On August 26, 1997, the Company completed a common stock offering which
involved the public sale of 3,950,000 shares (including underwriters'
over-allotment) of common stock. Approximately 285,000 of these shares were
sold by certain stockholders of the Company (the "Selling Stockholders"). The
Company did not receive any of the proceeds from the sale of these shares by
the Selling Stockholders. Additionally, Robert Walters issued 348,160
equivalent StaffMark shares in conjunction with a public sale of common stock
during 1997.
Dividends--
During the years ended December 31, 1998, 1997 and 1996, Robert Walters
made distributions to its shareholders prior to the merger totaling $693,880,
$1,552,274 and $1,563,080, respectively. Prior to its merger with StaffMark,
Brewer made 1996 cash and property distributions to its shareholders totaling
$1,015,092 and $73,700, respectively. StaffMark has not historically paid any
dividends on its common stock and intends to continue this practice for the
foreseeable future.
Stock Options--
Prior to the Offering, Brewer granted stock options to certain key
employees. These options were granted at fair value as determined by
management, were exercisable in installments and expired from June 30, 1999 to
February 26, 2001. A summary of Brewer's stock option activity, as restated for
the merger with Robert Walters, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Under Price Per
Option Option
------------ ---------
<S> <C> <C>
Outstanding, December 31, 1995 12.5 $24,800
Granted 26.0 18,575
Exercised (7.5) 21,333
Forfeited (5.0) 30,000
---- -------
Outstanding prior to conversion to StaffMark options 26.0 $18,575
==== =======
</TABLE>
In June 1996, StaffMark's Board of Directors and stockholders approved
StaffMark's 1996 Stock Option Plan (the "Plan"). The maximum number of shares
of StaffMark's common stock that may be issued under the Plan is the greater of
1,500,000 shares or 12% of the total number of shares of common stock
outstanding. Options granted under the Plan generally become 40% vested after
two years and then vest 20% in each of the next three years. Under the Plan,
the exercise price of the option equals the market value of StaffMark's common
stock on the date of the grant, and the maximum term for each option is 10
years.
Robert Walters maintained three stock option plans for its employees, all
of which required compensatory accounting treatment under APB No. 25. Total
compensation (income)/expense recognized related to Robert Walters stock option
plans was $(745,695), $4,629,864 and $307,623 for the years ended December 31,
1998, 1997 and 1996, respectively. These amounts have been included in selling,
general and administrative expenses in the accompanying consolidated statements
of income and reflected as adjustments to paid-in capital in the accompanying
consolidated statements of stockholders' equity.
37
<PAGE> 38
Robert Walters options became fully vested on the effective date of the
merger and 116,180 equivalent StaffMark options had been exercised as of
December 31, 1998. A summary of StaffMark's stock option activity is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Under Price Per
Option Option
---------- ----------
<S> <C> <C>
Outstanding options prior to conversion to
StaffMark options 26 $ 18,575
Conversion to StaffMark options 425,426 1.13
Granted 867,928 12.01
Exercised (6,365) 0.71
Forfeited (39,642) 4.86
--------- ----------
Outstanding, December 31, 1996 1,247,373 8.97
Granted 1,081,371 19.82
Exercised (37,539) 0.74
Forfeited (184,982) 8.85
--------- ----------
Outstanding, December 31, 1997 2,106,223 14.70
Granted 1,107,786 21.23
Exercised (155,963) 2.85
Forfeited (180,563) 14.58
--------- ----------
Outstanding, December 31, 1998 2,877,483 $ 17.86
========= ==========
</TABLE>
Options exercisable as of December 31, 1998, 1997 and 1996 were 797,082,
136,842 and 35,000, respectively.
The following is a summary of stock options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ----------------------------
Weighted Weighted
Weighted Average Average Average
Options Range of Remaining Exercise Price Options Exercise Price
Outstanding Exercise Prices Contractual Life Per Share Exercisable Per Share
----------- --------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
1,002,159 $ 1.10-$12.00 6.1 $ 9.43 638,681 $ 7.97
1,042,890 12.01-24.00 9.2 16.36 68,899 13.16
749,884 24.01-36.00 8.9 27.87 89,502 27.00
82,550 36.01-40.75 9.2 38.04 -- --
--------- --- ------- ------- -------
2,877,483 8.0 $ 17.86 797,082 $ 10.56
========= === ======= ======= =======
</TABLE>
As discussed in Note 2, StaffMark has elected to account for its stock
options under the provisions of APB No. 25. Accordingly, no compensation expense
has been recognized in the accompanying consolidated statements of income other
than the compensation (income)/expense recognized related to Robert Walters
stock option plans for the periods prior to the merger discussed above. Pursuant
to the requirements of SFAS No. 123, the following disclosures are presented to
reflect StaffMark's pro forma net income for the years ended December 31, 1998,
1997 and 1996, as if the fair value method of accounting prescribed by SFAS No.
123 had been used. In preparing the pro forma disclosures, StaffMark determined
the value of all options granted prior to the Offering date using the minimum
value method, as discussed in SFAS No. 123. For stock options granted from the
Offering date to December 31, 1998, the fair value was estimated on the grant
date using the Black-Scholes option-pricing model. These fair value calculations
were based on the following assumptions:
<TABLE>
<CAPTION>
Fiscal Years
-----------------------------------
1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
Weighted average risk-free interest rate 4.55% 5.25% 6.30%
Dividend yield 0% 0% 0%
Weighted average expected life 5 years 5 years 4.6 years
Expected volatility 58% 51% 65%
</TABLE>
38
<PAGE> 39
Using these assumptions, the fair value of the noncompensatory stock options
granted during the years ended December 31, 1998, 1997 and 1996 was
approximately $12.0 million, $9.5 million and $6.0 million, respectively. The
weighted average fair value of noncompensatory options granted during 1998, 1997
and 1996 was $14.60, $10.97 and $7.04, respectively. Had compensation expense
been determined consistent with SFAS No. 123, utilizing the assumptions above
and the straight-line amortization method over the vesting period, net income
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net income:
As reported $18,639,429 $20,399,798 $7,492,796
=========== =========== ==========
Pro forma $17,102,712 $18,950,208 $7,181,738
=========== =========== ==========
Basic earnings per share:
As reported $ 0.65 $ 0.85 $ 0.65
=========== =========== ==========
Pro forma $ 0.60 $ 0.79 $ 0.62
=========== =========== ==========
Diluted earnings per share:
As reported $ 0.63 $ 0.82 $ 0.64
=========== =========== ==========
Pro forma $ 0.58 $ 0.76 $ 0.61
=========== =========== ==========
</TABLE>
13. EARNINGS PER SHARE:
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per
share is determined by dividing net income by the weighted average common
shares outstanding during each year. Diluted earnings per share reflects the
potential dilution that could occur assuming exercise of all outstanding stock
options. In calculating basic and diluted earnings per share for 1996, the
Brewer shares and options outstanding prior to the Offering have been restated
to reflect an equivalent number of StaffMark shares and options, determined
using the total consideration paid for Brewer by StaffMark. A reconciliation of
net income and weighted average shares used in computing basic and diluted
earnings per share is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shares $ 18,639,429 $ 20,399,798 $ 7,492,796
============ ============ ============
Weighted average common shares outstanding 28,592,694 24,009,220 11,588,375
============ ============ ============
Basic earnings per share of common stock $ 0.65 $ 0.85 $ 0.65
============ ============ ============
Diluted earnings per share:
Net income applicable to common shares $ 18,639,429 $ 20,399,798 $ 7,492,796
============ ============ ============
Weighted average common shares outstanding 28,592,694 24,009,220 11,588,375
Dilutive effect of stock options 1,034,289 772,505 98,176
------------ ------------ ------------
Weighted average common shares, assuming
dilutive effect of stock options 29,626,983 24,781,725 11,686,551
============ ============ ============
Diluted earnings per share of common stock $ 0.63 $ 0.82 $ 0.64
============ ============ ============
</TABLE>
Options to purchase 316,850 shares of common stock at prices ranging from
$29.125 to $40.750 per share were outstanding during 1998 but were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the Company's common shares. These
options, which expire ten years from the date of issue, were still outstanding
as of December 31, 1998.
39
<PAGE> 40
14. RELATED PARTY TRANSACTIONS:
StaffMark has entered into agreements with certain officers and employees of
the Company to lease certain parcels of land and buildings used in the
Company's operations. Rent expense related to these facilities totaled
approximately $608,536, $644,000 and $304,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Annual future minimum payments required
under these leases are included in the table in Note 16 and are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Years Amount
------------ ------------
<S> <C>
1999 $ 309,774
2000 249,492
2001 22,000
2002 --
2003 --
------------
$ 581,266
============
</TABLE>
Included in other current assets as of December 31, 1998 and 1997 are
advances to certain officers and employees totaling $460,000 and $160,000,
respectively. Also included in other current assets as of December 31, 1998 and
1997 is a note receivable from a stockholder totaling $1,000,000 which bears
interest at 6.5% and is payable in annual installments through maturity on
February 28, 2002.
15. COMMITMENTS AND CONTINGENCIES:
StaffMark is subject to certain claims and lawsuits arising in the normal
course of business, primarily relating to workers' compensation and other
employee related matters. StaffMark maintains various insurance coverages in
order to minimize the financial risk associated with certain of these claims.
In the opinion of management, any uninsured losses resulting from the ultimate
resolution of these matters will not be material to StaffMark's financial
position or results of operations.
StaffMark has employment agreements with certain executive officers and
management personnel that provide for annual salaries, cost-of-living
adjustments and additional compensation in the form of "performance-based"
bonuses. Certain agreements include covenants against competition with
StaffMark, which extend for a period of time after termination. These
agreements generally continue until terminated by the employee or StaffMark.
16. NONCANCELABLE OPERATING LEASES:
StaffMark leases office space and certain equipment under noncancelable
operating leases. As discussed in Note 14, certain of these facilities are
leased from related parties. Annual future minimum payments required under
operating leases that have an initial or remaining noncancelable lease term in
excess of one year are as follows:
<TABLE>
<CAPTION>
Fiscal Years Amount
------------ ------------
<S> <C>
1999 $ 9,572,973
2000 7,408,270
2001 4,824,819
2002 3,116,083
2003 1,793,817
-----------
$26,715,962
===========
</TABLE>
Rent expense, including amounts paid to related parties, was approximately
$11.1 million, $4.9 million and $1.7 million for the years ended December 31,
1998, 1997 and 1996, respectively.
40
<PAGE> 41
17. SEGMENT INFORMATION:
In 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires reporting segment
information consistent with the way management internally disaggregates an
entity's operations to assess performance and to allocate resources. As
required, the Company has adopted the provisions of SFAS No. 131 for the year
ended December 31, 1998 and has also presented below the required segment
information for the years ended December 31, 1997 and 1996.
StaffMark segments its operations based upon differences in services
provided and has established separate management teams responsible for each
operating segment. The Company's Commercial Segment provides clerical and light
industrial staffing services in the United States. The Company's
Professional/Information Technology Segment provides staffing, consulting,
technical and support services primarily in the areas of finance, accounting,
information technology and legal services in the United States, the United
Kingdom, Australia and eight other foreign countries. The "corporate" column
includes general corporate expenses, headquarters facilities and equipment,
internal-use software, and other non-recurring expenses not allocated to the
segments.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 2. The Company evaluates
performance of the segments based on segment operating income, excluding
corporate overhead, nonrecurring and unusual items. The Company does not have
any significant intersegment sales or transfers.
The results of the Company's business segments as of and for the years
ending December 31 are as follows:
<TABLE>
<CAPTION>
Professional/
Information Consolidated
Technology Commercial Corporate Totals
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
1998
Total Service Revenues $ 530,174,870 $ 484,738,055 $ -- $1,014,912,925
Operating Income 47,509,863 36,841,909 (6,257,358) 78,094,414
Capital Expenditures 2,275,716 2,389,567 5,574,797 10,240,080
Total Assets 333,786,483 223,283,274 23,875,018 580,944,775
Depreciation and Amortization 8,801,488 4,012,512 1,344,252 14,158,252
1997
Total Service Revenues $ 252,577,117 $ 341,651,856 $ -- $ 594,228,973
Operating Income 17,084,429 25,137,420 (5,196,386) 37,025,463
Capital Expenditures 2,684,983 1,999,208 2,376,404 7,060,595
Total Assets 193,990,162 97,690,288 9,489,693 301,170,143
Depreciation and Amortization 2,867,375 2,750,916 728,211 6,346,502
1996
Total Service Revenues $ 72,776,747 $ 103,417,362 $ -- $ 176,194,109
Operating Income 6,238,756 6,718,086 (339,288) 12,617,554
Capital Expenditures 1,428,809 453,488 355,170 2,237,467
Total Assets 28,680,637 50,162,110 13,833,414 92,676,161
Depreciation and Amortization 469,846 1,324,515 7,593 1,801,954
</TABLE>
<TABLE>
<CAPTION>
Revenues by Country 1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
United States $ 754,475,139 $ 445,460,595 $ 104,476,109
United Kingdom 207,955,260 135,778,218 65,595,884
Australia 41,473,423 5,408,061 1,415,437
Other 11,009,103 7,582,099 4,706,679
-------------- -------------- --------------
Total Revenues $1,014,912,925 $ 594,228,973 $ 176,194,109
============== ============== ==============
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
Property and equipment
by Country 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
United States $ 18,079,390 $ 9,596,728 $ 3,257,966
United Kingdom 2,982,157 3,321,060 1,987,357
Australia 475,290 563,095 142,761
Other 912,641 834,470 386,406
------------- ------------- -------------
Total Property and Equipment $ 22,449,478 $ 14,315,353 $ 5,774,490
============= ============= =============
</TABLE>
A reconciliation of operating income shown above to reported operating
income is as follows:
<TABLE>
<CAPTION>
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Operating Income shown above $ 78,094,414 $ 37,025,463 $ 12,617,554
Nonrecurring Expenses 27,335,436 -- --
------------- ------------- -------------
Reported Operating Income $ 50,758,978 $ 37,025,463 $ 12,617,554
============= ============= =============
</TABLE>
42
<PAGE> 43
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Service Revenues $214,550,199 $243,155,342 $264,268,227 $292,939,157 $1,014,912,925
Gross Profit 54,913,559 65,280,094 70,083,391 74,197,615 264,474,659
Net Income 7,207,266 11,020,563 12,105,798 (11,694,198) 18,639,429
Basic Earnings Per Share $ 0.26 $ 0.39 $ 0.42 $ (0.41) $ 0.65
Diluted Earnings Per Share $ 0.25 $ 0.37 $ 0.41 $ (0.40) $ 0.63
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Service Revenues $ 96,014,910 $137,974,503 $166,036,351 $194,203,209 $594,228,973
Gross Profit 24,497,291 35,387,127 41,209,179 49,689,596 150,783,193
Net Income 3,191,585 5,541,511 4,933,291 6,733,411 20,399,798
Basic Earnings Per Share $ 0.15 $ 0.25 $ 0.20 $ 0.25 $ 0.85
Diluted Earnings Per Share $ 0.14 $ 0.24 $ 0.19 $ 0.24 $ 0.82
</TABLE>
<TABLE>
<CAPTION>
First Quarter 1997 First Quarter 1998
----------------------------------------------- -----------------------------------------------
Per Form Pooling Per Form Pooling
10-Q Adjustment Restated 10-Q Adjustment Restated
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $ 63,863,741 $ 32,151,169 $ 96,014,910 $146,812,968 $ 67,737,231 $214,550,199
Gross Profit 14,024,688 10,472,603 24,497,291 35,991,309 18,922,250 54,913,559
Net Income 2,131,249 1,060,336 3,191,585 5,666,646 1,540,620 7,207,266
Basic Earnings Per Share $ 0.16 $ (0.01) $ 0.15 $ 0.29 $ (0.03) $ 0.26
Diluted Earnings Per Share $ 0.16 $ (0.02) $ 0.14 $ 0.28 $ (0.03) $ 0.25
</TABLE>
<TABLE>
<CAPTION>
Second Quarter 1997 Second Quarter 1998
----------------------------------------------- -----------------------------------------------
Per Form Pooling Per Form Pooling
10-Q Adjustment Restated 10-Q Adjustment Restated
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $96,123,410 $41,851,093 $137,974,503 $174,913,328 $ 68,242,014 $243,155,342
Gross Profit 21,447,448 13,939,679 35,387,127 44,585,333 20,694,761 65,280,094
Net Income 3,451,944 2,089,567 5,541,511 7,029,933 3,990,630 11,020,563
Basic Earnings Per Share $ 0.24 $ 0.01 $ 0.25 $ 0.34 $ 0.05 $ 0.39
Diluted Earnings Per Share $ 0.23 $ 0.01 $ 0.24 $ 0.33 $ 0.04 $ 0.37
</TABLE>
<TABLE>
<CAPTION>
Third Quarter 1997 Third Quarter 1998
----------------------------------------------- -----------------------------------------------
Per Form Pooling Per Form Pooling
10-Q Adjustment Restated 10-Q Adjustment Restated
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $121,557,009 $44,479,342 $166,036,351 $195,960,227 $ 68,308,000 $264,268,227
Gross Profit 26,919,590 14,289,589 41,209,179 50,602,391 19,481,000 70,083,391
Net Income 4,886,812 46,479 4,933,291 9,143,070 2,962,728 12,105,798
Basic Earnings Per Share $ 0.28 $ (0.08) $ 0.20 $ 0.41 $ 0.01 $ 0.42
Diluted Earnings Per Share $ 0.28 $ (0.09) $ 0.19 $ 0.40 $ 0.01 $ 0.41
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
Fourth Quarter 1997 Fourth Quarter 1998
----------------------------------------------- -----------------------------------------------
Per Form Pooling Per Form Pooling
10-Q Adjustment Restated 10-Q Adjustment Restated
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Service Revenues $139,233,032 $ 54,970,177 $194,203,209 $292,939,157 $ -- $292,939,157
Gross Profit 32,889,316 16,800,280 49,689,596 74,197,615 -- 74,197,615
Net Income 5,773,324 960,087 6,733,411 (11,694,198) -- (11,694,198)
Basic Earnings Per Share $ 0.30 $ (0.05) $ 0.25 $ (0.41) $ -- $ (0.41)
Diluted Earnings Per Share $ 0.29 $ (0.05) $ 0.24 $ (0.40) $ -- $ (0.40)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreement or change in our independent accountants
since our inception.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
Some information required by Part III of Form 10-K is omitted from this
report because we will file a definitive proxy statement in accordance with
Regulation 14A of the Securities and Exchange Commission rules before April 30,
1999.
(a) The information called for by Item 10 of Form 10-K for the
identification of directors and executive officers of the Company is
included below.
(b) The information called for by Item 10 of Form 10-K involving Item 405
of Regulation S-K is incorporated by reference to the material under
the caption "Stock Ownership - Section 16 (a) Beneficial Ownership
Reporting Compliance" in our proxy statement for our Annual Meeting of
Stockholders to be held on May 7, 1999.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Jerry T. Brewer(1)(2)(4)...... 58 Chairman of the Board
Clete T. Brewer(1)(4)......... 33 President and Chief Executive Officer; Director
Terry C. Bellora(4)........... 52 Chief Financial Officer
Ted Feldman(4)................ 45 Chief Operating Officer
Robert C. Walters............. 44 President and Chief Executive Officer - Robert Walters plc
Gordon Y. Allison............. 39 Executive Vice President - General Counsel
W. David Bartholomew.......... 42 President - Commercial Staffing Segment; Director
Steven E. Schulte(4).......... 36 Executive Vice President - Administration; Director
Janice Blethen................ 55 President - Clinical Trials Support Services, Inc.; Director
William T. Gregory............ 56 Vice President and General Manager - Commercial Staffing
Segment - Carolina Region; Director
John H. Maxwell, Jr........... 55 Executive Vice President - Medical Services; Director
William J. Lynch(2)(3)........ 56 Director
R. Clayton McWhorter(3)....... 65 Director
Charles A. Sanders, M.D.(2)... 66 Director
</TABLE>
- ----------
(1) Jerry T. Brewer is the father of Clete T. Brewer.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Acquisition Committee.
44
<PAGE> 45
Jerry T. Brewer was one of our co-founders in March 1996 and has served
since then as our Chairman of the Board. Mr. Brewer also co-founded Brewer
Personnel Services, Inc. in July 1988, and served as its Chairman of the Board.
From July 1988 to April 1994, Mr. Brewer served as President and Chief
Executive Officer of Brewer Personnel Services, Inc.
Clete T. Brewer was one of our co-founders in March 1996 and has served
since then as our President and Chief Executive Officer and as a Director. Mr.
Brewer also co-founded Brewer Personnel Services, Inc. in July 1988 and served
since April 1994 as its President, Chief Executive Officer. From July 1988 to
April 1994, Mr. Brewer served as Vice President and a Director of Brewer
Personnel Services, Inc.
Terry C. Bellora became our Chief Financial Officer in August 1996. Prior to
joining us, Mr. Bellora served as the Chief Financial Officer of Pace
Industries, Inc. from 1988 to August 1996. Mr. Bellora served as a Director of
Pace Industries, Inc. from 1988 to 1993 and as an advisory Director of Pace
Industries, Inc. from 1993 to 1996. Mr. Bellora is a certified public accountant
and was previously an audit partner for a regional accounting firm.
Ted Feldman became our Chief Operating Officer at the time of our initial
public offering. Mr. Feldman founded HRA, Inc. in 1991 and since its inception
served as its President and Chief Executive Officer. From 1979 until 1992, Mr.
Feldman served as President of Nashville Trunk & Bag Co. Mr. Feldman is also a
director of Prison Realty Corporation, a publicly traded real estate investment
trust.
Robert C. Walters founded Robert Walters plc in 1985 and has since served as
its President and Chief Executive Officer. Prior to founding Robert Walters plc,
Mr. Walters worked for The Michael Page Group plc, an international recruitment
and consultancy firm since 1978.
Gordon Y. Allison became our Executive Vice President -- General Counsel in
June 1997. Prior to joining us, Mr. Allison served as the Vice President --
General Counsel of Pace Industries, Inc. from February 1995 to May 1997.
Beginning in May 1992, Mr. Allison practiced law at the firm of Giroir,
Gregory, Holmes & Hoover LLC in Little Rock, Arkansas and was a partner from
January 1994 until his employment with Pace Industries, Inc. From 1990 to 1992,
Mr. Allison was a special counsel in the Division of Corporation Finance at the
Securities and Exchange Commission in Washington, D.C. and from 1988 to 1990 he
was a staff attorney in the Division of Corporate Finance. Mr. Allison is a
certified public accountant and worked at Arthur Andersen LLP prior to
attending law and graduate business school. Mr. Allison received his Masters of
Laws in Securities Regulation and Taxation from the Georgetown University Law
School. Prior to attending the Georgetown University Law School, Mr. Allison
received his Juris Doctor from the University of Arkansas School of Law and his
Masters of Business Administration from the University of Arkansas School of
Business.
W. David Bartholomew is our President -- Commercial segment and has been one
of our Directors since October 1996. From October 1996 to June 1998, Mr.
Bartholomew served as Executive Vice President -- Eastern Operations for the
Commercial Segment. Prior to joining us, Mr. Bartholomew had served as
Secretary/Treasurer and Principal of HRA, Inc. since August 1993. From 1991
through August 1993, Mr. Bartholomew was President of Cobble Personnel of
Nashville.
Steven E. Schulte is our Executive Vice President -- Administration and has
been one of our Directors since October 1996. Prior to joining us, Mr. Schulte
had been employed by Prostaff Personnel Services, Inc. since August 1987 and
served as its President and Chief Executive Officer since June 1992.
Janice Blethen is our President -- Clinical Trial Support Services Platform
and has been one of our Directors since October 1996. Prior to joining us, Ms.
Blethen had served as the Chief Executive Officer of The Blethen Group since
its inception in 1975. Ms. Blethen is a Certified Personnel Consultant.
William T. Gregory is the Vice President and General Manager -- Carolina
Region of the Commercial segment. Prior to joining us, Mr. Gregory served as
President of First Choice Staffing, Inc. since 1985. Mr. Gregory is a Certified
Personnel Consultant.
John H. Maxwell, Jr. became our Executive Vice President -- Medical Services
and a Director at the time of our initial public offering. Mr. Maxwell served as
the Chief Executive Officer of Maxwell Healthcare, Inc. since 1973. Mr. Maxwell
is a Certified Personnel Consultant and a Certified International Personnel
Consultant.
William J. Lynch has been one of our Directors since the completion of our
initial public offering. Mr. Lynch is a Managing Director of Capstone Partners,
LLC, a venture capital firm. From October 1989 to March 1996, Mr. Lynch was a
partner of the law firm of Morgan, Lewis & Bockius LLP. Mr. Lynch also serves
as a director of Coach USA, Inc., a publicly traded motorcoach services
company.
R. Clayton McWhorter has been one of our Directors since the completion of
our initial public offering. In 1996, Mr. McWhorter founded and serves as
Chairman and Chief Executive Officer of Clayton Associates, LLC and Life Trust
America, LLC. Mr. McWhorter is a member of the Board of Directors of
Columbia/HCA Healthcare Corporation, a public company, and served as its
Chairman of the Board from April 1995 to May 1996. Mr. McWhorter served as
Chairman, President and Chief
45
<PAGE> 46
Executive Officer of Healthtrust, Inc. from 1987 to April 1995 and served as
President and Chief Executive Officer of Hospital Corporation of America from
1985 to 1987. In addition, Mr. McWhorter is a director of Suntrust Bank -
Nashville, a subsidiary of a publicly traded company, and is a director of
Corrections Corporation of America, a publicly traded company.
Charles A. Sanders, M.D. has been one of our Directors since the completion
of our initial public offering. Dr. Sanders is retired from Glaxo, Inc. where
he served as Chief Executive Officer from 1989 through 1994 and Chairman from
1992 through 1995. Dr. Sanders currently serves as Chairman of The Commonwealth
Fund and Project HOPE and serves on the Board of Trustees of the University of
North Carolina at Chapel Hill. Dr. Sanders is also a director of Pharmacopia,
Inc., Scios, Inc., Vertex Pharmaceuticals, Incorporated, Magainin
Pharmaceuticals, Inc., Trimeris, Inc. and Kendle International, Inc., which are
all publicly traded companies.
OTHER CORPORATE OFFICERS
Benjamin Anderson is the Chief Operating Officer of IntelliMark. Prior to
becoming IntelliMark's Chief Operating Officer, Mr. Anderson had served as an
Executive Director of Robert Walters plc since 1994. Mr. Anderson joined Robert
Walters in 1989 and since that time has been primarily responsible for the
Robert Walters IT recruitment business in the United Kingdom and Australia.
Prior to joining Robert Walters, Mr. Anderson had worked for Accountancy
Placements Pty, a specialist accountancy recruitment consultancy in Australia
since 1987. Mr. Anderson is 36 years old.
Donald A. Marr, Jr. is the Chief Operating Officer -- Commercial segment.
Prior to joining us, Mr. Marr had been employed by Brewer Personnel Services,
Inc. since 1990 and had served as Brewer Personnel Services, Inc.'s Vice
President of Operations since October 1993. Mr. Marr is 35 years old.
John Willett is the Executive Vice President -- IT Services for
IntelliMark. Prior to becoming Executive Vice President - IT Services for
IntelliMark, Mr. Willett had been employed as the General Manager for
IntelliMark's business unit in Dallas, Texas since August 1997. Prior to joining
IntelliMark, Mr. Willett was employed by IBM from 1979 to 1997 and served as a
Global Solutions Executive from 1996 to 1997. Mr. Willett is 42 years old.
Randall E. Grigg became Vice President -- Corporate Development in November
1998. Prior to becoming Vice President - Corporate Development, Mr. Grigg served
as our Director of Mergers and Acquisitions since his initial employment with us
in August 1997. Prior to joining us, Mr. Grigg was a Director of Business
Development at Koch Industries in Wichita, Kansas. Prior to joining Koch
Industries, Mr. Grigg was an Assistant Vice President with the Leveraged Finance
Unit of Boatmen's Bank in St. Louis, Missouri. Mr. Grigg received his Masters in
Business Administration from Northwestern University and his degree in Business
Administration from the University of Missouri. Mr. Grigg is 30 years old.
Kathleen McComber became our Vice President -- Human Resources in March
1997. Prior to joining us, Ms. McComber was Vice President - Client Services of
Express Human Resources from October 1996 to February 1997. From April 1989 to
October 1996, Ms. McComber was Corporate Services Executive of Acxiom
Corporation. Prior to joining Acxiom Corporation, Ms. McComber was employed
sixteen years for M.M. Cohn with five years of sales experience and eleven
years in human resource management. Ms. McComber obtained her degree in
Education from the University of Arkansas at Little Rock and obtained a Masters
in Management from Webster University in St. Louis, Missouri. Ms. McComber is
43 years old.
J. Kevin Brown became our Vice President of Corporate Information Technology
Systems in October 1998 and joined us as our Director of Information Systems in
November 1996. Before joining us, Mr. Brown was a Principal Architect with
Sybase Professional Services from March 1993 to November 1996. Prior to joining
Sybase, Mr. Brown was a Systems Engineer with Electronic Data Systems in Plano,
Texas in the Commercial Insurance, Banking, Corporate Systems and Retail
business units. Mr. Brown received his degree in Information Systems and
Quantitative Business Analysis from Baylor University. Mr. Brown is 32 years
old.
Alex Stallings became our Vice President of Corporate Accounting and Finance
in October 1998 and joined us as Controller in August 1996. Prior to joining us,
Mr. Stallings was the Chief Financial Officer of Maxwell Staffing, Inc. from
June 1995 to August 1996. Prior to joining Maxwell Staffing, Inc., Mr. Stallings
was an audit manager with Coopers & Lybrand L.L.C., in Tulsa, Oklahoma. Mr.
Stallings received his degree in Business Administration from Baylor University
and is a certified public accountant. Mr. Stallings is 32 years old.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 of Form 10-K for management
remuneration is incorporated herein by reference to the material under the
caption "Compensation of Outside Directors and the Named Executive Officers" in
our proxy statement.
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<PAGE> 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 of Form 10-K for the security
ownership of certain beneficial owners and management is incorporated herein by
reference to the material under the caption "Stock Ownership" in our proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 of Form 10-K is incorporated herein
by reference to the material under the caption "Certain Transactions" in our
proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements required by Item 14 are included and indexed
in Part II, Item 8.
(a) 2. Financial Statement Schedule included in Part IV of this report.
Schedule II is omitted because the information is included in the
Notes to Consolidated Financial Statements. All other schedules under
the accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable
and, thus have been omitted.
(a) 3. See "Exhibit Index" on the following page.
(b) See "Reports on Form 8-K" on page 52.
47
<PAGE> 48
(a) 3. Exhibits
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among StaffMark, Inc. (the
"Company"), Brewer Personnel Services Acquisition
Corp., Brewer Personnel Services, Inc. and the
Stockholders named therein (Incorporated by
reference from Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (File No.
333-07513).
2.2 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, Prostaff
Personnel Acquisition Corp., Excel Temporary
Staffing Acquisition Corp., Professional Resources
Acquisition Corp., Prostaff Personnel, Inc., Excel
Temporary Staffing, Inc., Professional Resources,
Inc., and the Stockholders named therein
(Incorporated by reference from Exhibit 2.2 to the
Company's Registration Statement on Form S-1 (File
No. 333-07513)).
2.3 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company,
Maxwell/Healthcare Acquisition Corp., Square One
Rehab Acquisition Corp., Maxwell Staffing of
Bristow Acquisition Corp., Maxwell Staffing
Acquisition Corp., Technical Staffing Acquisition
Corp., Maxwell/Healthcare, Inc., Square One Rehab,
Inc., Maxwell Staffing of Bristow, Inc., Maxwell
Staffing, Inc., Technical Staffing, Inc. and the
Stockholders named therein (Incorporated by
reference from Exhibit 2.3 to the Company's
Registration Statement on Form S-1 (File No.
333-07513)).
2.4 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, HRA
Acquisition Corp., HRA, Inc., and the Stockholders
named therein (Incorporated by reference from
Exhibit 2.4 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
2.5 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, First
Choice Staffing Acquisition Corp., First Choice
Staffing, Inc., and the Stockholders named therein
(Incorporated by reference from Exhibit 2.5 to the
Company's Registration Statement on Form S-1 (File
No. 333-07513)).
2.6 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, DP Pros
of Burlington Acquisition Corp., Blethen
Temporaries Acquisition Corp., Personnel Placement
Acquisition Corp., Jaeger Personnel Services
Acquisition Corp., Dixon Enterprises of Burlington
Acquisition Corp., Trasec Acquisition Corp., DP
Pros of Burlington, Inc., Blethen Temporaries,
Inc., Personnel Placement, Inc., Jaeger Personnel
Services, Ltd., Dixon Enterprises of Burlington,
Inc., Trasec Corp., and the Stockholders named
therein (Incorporated by reference from Exhibit
2.6 to the Company's Registration Statement on
Form S-1 (File No. 333-07513)).
2.7 Asset Purchase Agreement, dated as of November
29, 1996, among the Company, The Technology Source
Acquisition Corporation, and The Technology
Source, L.L.C. (Incorporated by reference from
Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on December 16, 1996).
2.8 Asset Purchase Agreement, dated as of March 17,
1997, by and among the Company, StaffMark
Acquisition Two, StaffMark Acquisition Three,
Flexible Personnel, Great Lakes Search Associates,
Inc., H.R. America, Inc. Douglas H. Curtis, Jean
A. Curtis and Robert P. Curtis (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
April 2, 1997 and as amended by Form 8-K/A as
filed with the SEC on May 30, 1997).
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
2.9 Agreement and Plan of Reorganization, dated April
4, 1997, by and among the Company, StaffMark
Acquisition Four, Global Dynamics, Inc., the Perry
Butler Charitable Remainder Trust, the Carolyn J.
Butler Charitable Remainder Trust, Perry Butler,
Carolyn J. Butler and Paul Sharps (Incorporated by
reference form Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
April 24, 1997 and as amended by Form 8-K/A as
filed with the SEC on June 6, 1997).
2.10 Asset Purchase Agreement, dated as of April 24,
1997, by and among the Company, StaffMark
Acquisition Five, Lindenberg & Associates, Inc.,
Earl Lindenberg and Mark Tiemann. (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
May 9, 1997).
2.11 Asset Purchase Agreement, dated as of August 4,
1997, by and among the Company, StaffMark
Acquisition Corporation Ten and Expert Business
Systems, Incorporated (Incorporated by reference
from Exhibit 2.1 to the Company's Form 8-K filed
with the Commission on August 15, 1997 and as
amended by Form 8-K/A as filed with the SEC on
September 19, 1997).
2.12 Asset Purchase Agreement, dated as of September
15, 1997, by and among the Company, StaffMark
Acquisition Corporation Twelve, and H. Allen &
Company, Inc. (Incorporated by reference from
Exhibit 2.1 to the Company's Form 8-K filed with
the SEC on September 26, 1997).
2.13 Stock Purchase Agreement dated as of October 28,
1997 by and among the Company, the Estate of
Russell H. Stanley and Allan J. Lebow. (
Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with
the SEC on November 11, 1997).
2.14 Asset Purchase Agreement dated as of November 4,
1997, by and among StaffMark, Inc., StaffMark
Acquisition Corporation Thirteen, StaffMark
Acquisition Corporation Fourteen, EMJAY Careers,
L.P. and EMJAY Contracts, L.P. (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
November 17, 1997).
2.15 Asset Purchase Agreement dated as of November 10,
1997 by and among the Company, StaffMark
Acquisition Corporation Sixteen, Structured Logic
Company, Inc. and Structured Logic Systems, Inc.
(Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with
the SEC on November 21, 1997 and as amended by
Form 8-K/A as filed with the SEC on January 16,
1998).
2.16 Membership Interest Purchase Agreement dated as
of January 9, 1998, by and among the Company,
Elihu Gordis, Jay Horowitz, Eugene Greene and
Kristin Vickery (Incorporated by reference from
Exhibit 2.1 to the Company's Report on Form 8-K
filed with the SEC on January 23, 1998 and as
amended by Form 8-K/A as filed with the SEC on
March 16, 1998).
2.17 Asset Purchase Agreement dated as of June 5,
1998, by and among the Company, StaffMark
Acquisition Corporation Twenty-Four, StaffMark
Acquisition Corporation Twenty-Five, Progressive
Resources, Inc., Progressive Personnel Resources,
Inc. Strategic Computer Resources, LLC and
Progressive Personnel Resources of New Jersey,
Inc. (Incorporated by reference to the Company's
Form 8-K filed with the SEC on June 19, 1998).
2.18 Merger Agreement dated as of August 18, 1998, by
and among the Company, PFS&C Services
International Holding Company, Inc. and Robert
Walters plc (Incorporated by reference to the
Company's Definitive Proxy Statement filed with
the SEC on September 25, 1998).
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)).
</TABLE>
49
<PAGE> 50
<TABLE>
<S> <C>
3.2 Certificate of Amendment of the Certificate of
Incorporation (Incorporated by reference from
Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
3.3 Certificate of Amendment of the Certificate of
Incorporation dated May 8, 1998 (Filed herewith).
3.4 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).
10.1 StaffMark, Inc. 1996 Stock Option Plan
(Incorporated by reference from Exhibit 10.1 to
the Company's Registration Statement on Form S-1
(File No. 333-07513)).(1)
10.2 Form of Director Indemnification Agreement
between the Company and each of its directors and
executive officers (Incorporated by reference
from Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
10.3 Employment Agreement between the Company and
Terry C. Bellora (Incorporated by reference from
Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).(1)
10.4 Employment Agreement among the Company, Brewer
Personnel Services, Inc. and Clete T. Brewer.
(Incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.5 Employment Agreement among the Company, Brewer
Personnel Services, Inc. and Jerry T. Brewer.
(Incorporated by reference from Exhibit 10.5 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.6 Employment Agreement among the Company, Prostaff
and Steven E. Schulte. (Incorporated by reference
from Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File No. 333-15059)).(1)
10.7 Employment Agreement among the Company, Maxwell
Staffing, Inc. and John H. Maxwell, Jr.
(Incorporated by reference from Exhibit 10.7 to
the Company's Registration Statement on Form S-1
(File No. 333- 15059)).(1)
10.8 Employment Agreement among the Company, Maxwell
Staffing, Inc. and Mary Sue Maxwell.
(Incorporated by reference from Exhibit 10.8 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.9 Employment Agreement among the Company, HRA, Inc.
and W. David Bartholomew. (Incorporated by
reference from Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No.
333-15059)).(1)
10.10 Employment Agreement among the Company, HRA, Inc.
and Ted Feldman. (Incorporated by reference from
Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-15059)).(1)
10.11 Employment Agreement among the Company, First
Choice Temporary Staffing, Inc. and William T.
Gregory. (Incorporated by reference from Exhibit
10.11 to the Company's Registration Statement on
Form S-1 (File No. 333-15059)).(1)
</TABLE>
- ---------
(1) This Agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
50
<PAGE> 51
<TABLE>
<S> <C>
10.12 Employment Agreement among the Company, The
Blethen Group, Inc. and Janice Blethen.
(Incorporated by reference from Exhibit 10.12 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.13 Employment Agreement by and between the Company
and Gordon Y. Allison dated June 23, 1997
(Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, filed with the SEC on July
28, 1997).(1)
10.14 Credit Agreement dated October 4, 1996, in the
amount of $50,000,000 by and between the
Registrant, the lenders named therein (the
"Lenders") and Mercantile Bank of St. Louis
National Association ("Mercantile"), as Agent on
behalf of the Lenders (the "Credit Agreement").
(Incorporated by reference from Exhibit 10.13 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).
10.15 First Amendment to the Credit Agreement dated
December 18, 1996 among the Registrant and the
Lenders named therein (Incorporated by reference
from the Company's Annual Report on Form 10-K
filed with the SEC on March 17, 1997, as amended
by Form 10-K/A filed with the SEC on March 24,
1997).
10.16 Second Amendment to the Credit Agreement dated
May 30, 1997 by and among the Company and the
Lenders named therein and Mercantile, as agent on
behalf of the Lenders. (Incorporated by reference
from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, filed with
the SEC on July 28, 1997).
10.17 The Company's Employee Stock Purchase Plan
adopted May 2, 1997 (Incorporated by reference
from the Company's Registration Statement on Form
S-8 (File No. 333-29689)).(1)
10.18 Lock-Up and Registration Rights Agreement dated
September 20, 1996 by and among the Company,
Jerry T. Brewer, Clete T. Brewer, Chad J. Brewer,
Donald A. Marr, Jr., Robert H. Janes III, John C.
Becker, Betty Becker, Donna F. Vassil, Janice
Blethen and Capstone Partners, L.L.C.
(Incorporated by reference from the Company's
Annual Report on Form 10-K filed with the SEC on
March 17, 1997, as amended by Form 10-K/A filed
with the SEC on March 24, 1997).
10.19 Lease Agreement among Brewer Personnel Services,
Inc. and Brewer Investments L.P. for the
StaffMark Corporate offices located at 302 East
Millsap Road, City of Fayetteville, County of
Washington, State of Arkansas. (Incorporated by
reference from the Company's Annual Report on
Form 10-K filed with the SEC on March 17, 1997,
as amended by Form 10-K/A filed with the SEC on
March 24, 1997).
10.20 Lease Agreement among Maxwell Staffing, Inc. and
Maxwell Properties, L.L.C. for the Company's
offices located at 8221 East 63rd Place, Tulsa,
Oklahoma. (Incorporated by reference from the
Company's Annual Report on Form 10-K filed with
the SEC on March 17, 1997, as amended by Form
10-K/A filed with the SEC on March 24, 1997).
10.21 Lease Agreement among Maxwell/Healthcare, Inc.
and Maxwell Properties L.L.C. for the Company's
offices located at 8211-8213 East 65th Street,
Tulsa, Oklahoma. (Incorporated by reference from
the Company's Annual Report on Form 10-K filed
with the SEC on March 17, 1997, as amended by
Form 10-K/A filed with the SEC on March 24,
1997).
10.22 Amended and Restated Credit Agreement dated March
9, 1998, by and among the Company, the lenders
named therein (the "Lenders") and Mercantile Bank
National Association ("Mercantile"), as agent on
behalf of the Lenders.(1) (Incorporated by
reference from Exhibit
</TABLE>
- ---------
(1) This Agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
51
<PAGE> 52
<TABLE>
<S> <C>
10.22 from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, as
filed with the SEC on May 7, 1998).
10.23 First Amendment to the Amended and Restated
Credit Agreement dated March 16, 1998, by and
among the Company, the Lenders and Mercantile, as
agent on behalf of the Lenders(1). (Incorporated
by reference from Exhibit 10.23 from the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, as filed with the SEC on May
7, 1998).
10.24 The Company's Amended and Restated 1996 Stock
Option Plan.(1) (Incorporated by reference from
Exhibit 10.24 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31,
1998, as filed with the SEC on May 7, 1998).
10.25 The Company's Employee Stock Purchase Plan, as
amended.(1) (Incorporated by reference from
Exhibit 10.25 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998,
as filed with the SEC on May 7, 1998).
10.26 The Company's Stock Election Plan for Non-Employee
Directors.(1) (Incorporated by reference from
Exhibit 10.26 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998,
as filed with the SEC on May 7, 1998.)
10.27 The Company's Non-Qualified 401(K) Plan.(1)
Incorporated by reference from Exhibit 10.27 from
the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, as filed with
the SEC on May 7, 1998.)
10.28 Second Amended and Restated Credit Agreement
dated August 20, 1998 by and among the Company,
the lenders named therein (the "Lenders"),
Mercantile, as administrative agent on behalf of
the Lenders and the First National Bank of
Chicago, as syndication agent on behalf of the
Lenders (Incorporated by reference from Exhibit
10.28 of the Company's Quarterly Report on Form
10-Q filed for the quarter ended September 30,
1998, filed with the SEC on November 13, 1998).
11.1 Statement re: computation of per share earnings,
reference is made to Note 12 of the StaffMark,
Inc. Consolidated Financial Statements contained
in this Form 10-K.
21.1 Subsidiaries of StaffMark as of December 31,
1998.
23.1 Consent of Arthur Andersen LLP, Independent
Public Accountants.
24.1 Power of Attorney (See page 52).
27.1 Financial Data Schedule for the year ended
December 31, 1998, submitted to the SEC in
electronic format.
</TABLE>
- ------------------------------------------------------------------------------
(1) This agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
(b) 3. Reports on Form 8-K.
1. Report on Form 8-K filed with the SEC on October 15, 1998
relating to the July 31, 1998 acquisition of Enterprise
Systems Associates, Inc.
2. Report on Form 8-K filed with the SEC on December 9, 1998
relating to the November 25, 1998 acquisition Robert
Walters plc, as amended by Form 8-K/A filed with the SEC
February 5, 1999.
52
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Fayetteville, State of Arkansas, on March 12, 1999.
StaffMark, Inc.
By: /s/ Clete T. Brewer
----------------------------------------------
Clete T. Brewer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints jointly and severally, Clete T. Brewer and Terry C.
Bellora, and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Annual Report (Form 10-K) and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- -----
<S> <C> <C>
/s/ Clete T. Brewer President, Chief Executive Officer March 12, 1999
- ------------------------- and Director (Principal Executive
Clete T. Brewer Officer)
/s/ Terry C. Bellora Chief Financial Officer (Principal March 12, 1999
- ------------------------- Financial and Accounting Officer)
Terry C. Bellora
/s/ Jerry T. Brewer Chairman of the Board March 12, 1999
- -------------------------
Jerry T. Brewer
/s/ W. David Bartholomew President - Commercial Staffing March 12, 1999
- ------------------------- Division and Director
W. David Bartholomew
/s/ Steven E. Schulte Executive Vice President- March 12, 1999
- ------------------------- Administration and Director
Steven E. Schulte
/s/ Janice Blethen President- Clinical Trials Support March 12, 1999
- ------------------------- Services Division and Director
Janice Blethen
/s/ William T. Gregory Vice President - Commercial March 12, 1999
- ------------------------- Staffing Division - Carolina Region
William T. Gregory and Director
/s/ John H. Maxwell, Jr. Executive Vice President- March 12, 1999
- ------------------------ Medical Services and Director
John H. Maxwell, Jr.
/s/ William J. Lynch Director March 12, 1999
- -------------------------
William J. Lynch
/s/ R. Clayton McWhorter Director March 12, 1999
- -------------------------
R. Clayton McWhorter
/s/ Charles A. Sanders Director March 12, 1999
- -------------------------
Charles A. Sanders, M.D.
</TABLE>
53
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among StaffMark, Inc. (the
"Company"), Brewer Personnel Services Acquisition
Corp., Brewer Personnel Services, Inc. and the
Stockholders named therein (Incorporated by
reference from Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (File No.
333-07513).
2.2 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, Prostaff
Personnel Acquisition Corp., Excel Temporary
Staffing Acquisition Corp., Professional Resources
Acquisition Corp., Prostaff Personnel, Inc., Excel
Temporary Staffing, Inc., Professional Resources,
Inc., and the Stockholders named therein
(Incorporated by reference from Exhibit 2.2 to the
Company's Registration Statement on Form S-1 (File
No. 333-07513)).
2.3 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company,
Maxwell/Healthcare Acquisition Corp., Square One
Rehab Acquisition Corp., Maxwell Staffing of
Bristow Acquisition Corp., Maxwell Staffing
Acquisition Corp., Technical Staffing Acquisition
Corp., Maxwell/Healthcare, Inc., Square One Rehab,
Inc., Maxwell Staffing of Bristow, Inc., Maxwell
Staffing, Inc., Technical Staffing, Inc. and the
Stockholders named therein (Incorporated by
reference from Exhibit 2.3 to the Company's
Registration Statement on Form S-1 (File No.
333-07513)).
2.4 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, HRA
Acquisition Corp., HRA, Inc., and the Stockholders
named therein (Incorporated by reference from
Exhibit 2.4 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
2.5 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, First
Choice Staffing Acquisition Corp., First Choice
Staffing, Inc., and the Stockholders named therein
(Incorporated by reference from Exhibit 2.5 to the
Company's Registration Statement on Form S-1 (File
No. 333-07513)).
2.6 Agreement and Plan of Reorganization, dated as of
June 17, 1996, by and among the Company, DP Pros
of Burlington Acquisition Corp., Blethen
Temporaries Acquisition Corp., Personnel Placement
Acquisition Corp., Jaeger Personnel Services
Acquisition Corp., Dixon Enterprises of Burlington
Acquisition Corp., Trasec Acquisition Corp., DP
Pros of Burlington, Inc., Blethen Temporaries,
Inc., Personnel Placement, Inc., Jaeger Personnel
Services, Ltd., Dixon Enterprises of Burlington,
Inc., Trasec Corp., and the Stockholders named
therein (Incorporated by reference from Exhibit
2.6 to the Company's Registration Statement on
Form S-1 (File No. 333-07513)).
2.7 Asset Purchase Agreement, dated as of November
29, 1996, among the Company, The Technology Source
Acquisition Corporation, and The Technology
Source, L.L.C. (Incorporated by reference from
Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on December 16, 1996).
2.8 Asset Purchase Agreement, dated as of March 17,
1997, by and among the Company, StaffMark
Acquisition Two, StaffMark Acquisition Three,
Flexible Personnel, Great Lakes Search Associates,
Inc., H.R. America, Inc. Douglas H. Curtis, Jean
A. Curtis and Robert P. Curtis (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
April 2, 1997 and as amended by Form 8-K/A as
filed with the SEC on May 30, 1997).
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
2.9 Agreement and Plan of Reorganization, dated April
4, 1997, by and among the Company, StaffMark
Acquisition Four, Global Dynamics, Inc., the Perry
Butler Charitable Remainder Trust, the Carolyn J.
Butler Charitable Remainder Trust, Perry Butler,
Carolyn J. Butler and Paul Sharps (Incorporated by
reference form Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
April 24, 1997 and as amended by Form 8-K/A as
filed with the SEC on June 6, 1997).
2.10 Asset Purchase Agreement, dated as of April 24,
1997, by and among the Company, StaffMark
Acquisition Five, Lindenberg & Associates, Inc.,
Earl Lindenberg and Mark Tiemann. (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
May 9, 1997).
2.11 Asset Purchase Agreement, dated as of August 4,
1997, by and among the Company, StaffMark
Acquisition Corporation Ten and Expert Business
Systems, Incorporated (Incorporated by reference
from Exhibit 2.1 to the Company's Form 8-K filed
with the Commission on August 15, 1997 and as
amended by Form 8-K/A as filed with the SEC on
September 19, 1997).
2.12 Asset Purchase Agreement, dated as of September
15, 1997, by and among the Company, StaffMark
Acquisition Corporation Twelve, and H. Allen &
Company, Inc. (Incorporated by reference from
Exhibit 2.1 to the Company's Form 8-K filed with
the SEC on September 26, 1997).
2.13 Stock Purchase Agreement dated as of October 28,
1997 by and among the Company, the Estate of
Russell H. Stanley and Allan J. Lebow. (
Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with
the SEC on November 11, 1997).
2.14 Asset Purchase Agreement dated as of November 4,
1997, by and among StaffMark, Inc., StaffMark
Acquisition Corporation Thirteen, StaffMark
Acquisition Corporation Fourteen, EMJAY Careers,
L.P. and EMJAY Contracts, L.P. (Incorporated by
reference from Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the SEC on
November 17, 1997).
2.15 Asset Purchase Agreement dated as of November 10,
1997 by and among the Company, StaffMark
Acquisition Corporation Sixteen, Structured Logic
Company, Inc. and Structured Logic Systems, Inc.
(Incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with
the SEC on November 21, 1997 and as amended by
Form 8-K/A as filed with the SEC on January 16,
1998).
2.16 Membership Interest Purchase Agreement dated as
of January 9, 1998, by and among the Company,
Elihu Gordis, Jay Horowitz, Eugene Greene and
Kristin Vickery (Incorporated by reference from
Exhibit 2.1 to the Company's Report on Form 8-K
filed with the SEC on January 23, 1998 and as
amended by Form 8-K/A as filed with the SEC on
March 16, 1998).
2.17 Asset Purchase Agreement dated as of June 5,
1998, by and among the Company, StaffMark
Acquisition Corporation Twenty-Four, StaffMark
Acquisition Corporation Twenty-Five, Progressive
Resources, Inc., Progressive Personnel Resources,
Inc. Strategic Computer Resources, LLC and
Progressive Personnel Resources of New Jersey,
Inc. (Incorporated by reference to the Company's
Form 8-K filed with the SEC on June 19, 1998).
2.18 Merger Agreement dated as of August 18, 1998, by
and among the Company, PFS&C Services
International Holding Company, Inc. and Robert
Walters plc (Incorporated by reference to the
Company's Definitive Proxy Statement filed with
the SEC on September 25, 1998).
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)).
</TABLE>
<PAGE> 56
<TABLE>
<S> <C>
3.2 Certificate of Amendment of the Certificate of
Incorporation (Incorporated by reference from
Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
3.3 Certificate of Amendment of the Certificate of
Incorporation dated May 8, 1998 (Filed herewith).
3.4 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).
10.1 StaffMark, Inc. 1996 Stock Option Plan
(Incorporated by reference from Exhibit 10.1 to
the Company's Registration Statement on Form S-1
(File No. 333-07513)).(1)
10.2 Form of Director Indemnification Agreement
between the Company and each of its directors and
executive officers (Incorporated by reference
from Exhibit 10.3 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
10.3 Employment Agreement between the Company and
Terry C. Bellora (Incorporated by reference from
Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).(1)
10.4 Employment Agreement among the Company, Brewer
Personnel Services, Inc. and Clete T. Brewer.
(Incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.5 Employment Agreement among the Company, Brewer
Personnel Services, Inc. and Jerry T. Brewer.
(Incorporated by reference from Exhibit 10.5 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.6 Employment Agreement among the Company, Prostaff
and Steven E. Schulte. (Incorporated by reference
from Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File No. 333-15059)).(1)
10.7 Employment Agreement among the Company, Maxwell
Staffing, Inc. and John H. Maxwell, Jr.
(Incorporated by reference from Exhibit 10.7 to
the Company's Registration Statement on Form S-1
(File No. 333- 15059)).(1)
10.8 Employment Agreement among the Company, Maxwell
Staffing, Inc. and Mary Sue Maxwell.
(Incorporated by reference from Exhibit 10.8 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.9 Employment Agreement among the Company, HRA, Inc.
and W. David Bartholomew. (Incorporated by
reference from Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (File No.
333-15059)).(1)
10.10 Employment Agreement among the Company, HRA, Inc.
and Ted Feldman. (Incorporated by reference from
Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-15059)).(1)
10.11 Employment Agreement among the Company, First
Choice Temporary Staffing, Inc. and William T.
Gregory. (Incorporated by reference from Exhibit
10.11 to the Company's Registration Statement on
Form S-1 (File No. 333-15059)).(1)
</TABLE>
- ----------------
(1) This Agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
<PAGE> 57
<TABLE>
<S> <C>
10.12 Employment Agreement among the Company, The
Blethen Group, Inc. and Janice Blethen.
(Incorporated by reference from Exhibit 10.12 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).(1)
10.13 Employment Agreement by and between the Company
and Gordon Y. Allison dated June 23, 1997
(Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, filed with the SEC on July
28, 1997).(1)
10.14 Credit Agreement dated October 4, 1996, in the
amount of $50,000,000 by and between the
Registrant, the lenders named therein (the
"Lenders") and Mercantile Bank of St. Louis
National Association ("Mercantile"), as Agent on
behalf of the Lenders (the "Credit Agreement").
(Incorporated by reference from Exhibit 10.13 to
the Company's Registration Statement on Form S-1
(File No. 333-15059)).
10.15 First Amendment to the Credit Agreement dated
December 18, 1996 among the Registrant and the
Lenders named therein (Incorporated by reference
from the Company's Annual Report on Form 10-K
filed with the SEC on March 17, 1997, as amended
by Form 10-K/A filed with the SEC on March 24,
1997).
10.16 Second Amendment to the Credit Agreement dated
May 30, 1997 by and among the Company and the
Lenders named therein and Mercantile, as agent on
behalf of the Lenders. (Incorporated by reference
from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, filed with
the SEC on July 28, 1997).
10.17 The Company's Employee Stock Purchase Plan
adopted May 2, 1997 (Incorporated by reference
from the Company's Registration Statement on Form
S-8 (File No. 333-29689)).(1)
10.18 Lock-Up and Registration Rights Agreement dated
September 20, 1996 by and among the Company,
Jerry T. Brewer, Clete T. Brewer, Chad J. Brewer,
Donald A. Marr, Jr., Robert H. Janes III, John C.
Becker, Betty Becker, Donna F. Vassil, Janice
Blethen and Capstone Partners, L.L.C.
(Incorporated by reference from the Company's
Annual Report on Form 10-K filed with the SEC on
March 17, 1997, as amended by Form 10-K/A filed
with the SEC on March 24, 1997).
10.19 Lease Agreement among Brewer Personnel Services,
Inc. and Brewer Investments L.P. for the
StaffMark Corporate offices located at 302 East
Millsap Road, City of Fayetteville, County of
Washington, State of Arkansas. (Incorporated by
reference from the Company's Annual Report on
Form 10-K filed with the SEC on March 17, 1997,
as amended by Form 10-K/A filed with the SEC on
March 24, 1997).
10.20 Lease Agreement among Maxwell Staffing, Inc. and
Maxwell Properties, L.L.C. for the Company's
offices located at 8221 East 63rd Place, Tulsa,
Oklahoma. (Incorporated by reference from the
Company's Annual Report on Form 10-K filed with
the SEC on March 17, 1997, as amended by Form
10-K/A filed with the SEC on March 24, 1997).
10.21 Lease Agreement among Maxwell/Healthcare, Inc.
and Maxwell Properties L.L.C. for the Company's
offices located at 8211-8213 East 65th Street,
Tulsa, Oklahoma. (Incorporated by reference from
the Company's Annual Report on Form 10-K filed
with the SEC on March 17, 1997, as amended by
Form 10-K/A filed with the SEC on March 24,
1997).
10.22 Amended and Restated Credit Agreement dated March
9, 1998, by and among the Company, the lenders
named therein (the "Lenders") and Mercantile Bank
National Association ("Mercantile"), as agent on
behalf of the Lenders.(1) (Incorporated by
reference from Exhibit 10.22 from the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, as filed with the SEC on May
7, 1998).
</TABLE>
- --------------------
(1) This Agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
<PAGE> 58
<TABLE>
<S> <C>
10.23 First Amendment to the Amended and Restated
Credit Agreement dated March 16, 1998, by and
among the Company, the Lenders and Mercantile, as
agent on behalf of the Lenders(1). (Incorporated
by reference from Exhibit 10.23 from the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, as filed with the SEC on May
7, 1998).
10.24 The Company's Amended and Restated 1996 Stock
Option Plan.(1) (Incorporated by reference from
Exhibit 10.24 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31,
1998, as filed with the SEC on May 7, 1998).
10.25 The Company's Employee Stock Purchase Plan, as
amended.(1) (Incorporated by reference from
Exhibit 10.25 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998,
as filed with the SEC on May 7, 1998).
10.26 The Company's Stock Election Plan for Non-Employee
Directors.(1) (Incorporated by reference from
Exhibit 10.26 from the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998,
as filed with the SEC on May 7, 1998.)
10.27 The Company's Non-Qualified 401(K) Plan.(1)
Incorporated by reference from Exhibit 10.27 from
the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, as filed with
the SEC on May 7, 1998.)
10.28 Second Amended and Restated Credit Agreement
dated August 20, 1998 by and among the Company,
the lenders named therein (the "Lenders"),
Mercantile, as administrative agent on behalf of
the Lenders and the First National Bank of
Chicago, as syndication agent on behalf of the
Lenders (Incorporated by reference from Exhibit
10.28 of the Company's Quarterly Report on Form
10-Q filed for the quarter ended September 30,
1998, filed with the SEC on November 13, 1998).
11.1 Statement re: computation of per share earnings,
reference is made to Note 12 of the StaffMark,
Inc. Consolidated Financial Statements contained
in this Form 10-K.
21.1 Subsidiaries of StaffMark as of December 31,
1998.
23.1 Consent of Arthur Andersen LLP, Independent
Public Accountants.
24.1 Power of Attorney (See page 52).
27.1 Financial Data Schedule for the year ended
December 31, 1998, submitted to the SEC in
electronic format.
</TABLE>
- --------------------------------------------------------------------------------
(1) This agreement is a compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14(c).
<PAGE> 1
EXHIBIT 3.3
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "STAFFMARK, INC.", FILED IN THIS OFFICE ON THE TWELFTH DAY OF MAY, A.D.
1998, AT 12 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
[SEAL] /s/ EDWARD J. FREEL
---------------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION:
2601903 8100 9077792
DATE:
981181764 05-13-98
<PAGE> 2
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
STAFFMARK, INC.
Pursuant to Section 242 of the
Delaware General Corporation Law
StaffMark, Inc., a Delaware corporation (the "Corporation"),
hereby certifies as follows:
1. The Certificate of Incorporation of the Corporation (the
"Certificate") was filed in the Office of the Secretary of State of the State of
Delaware (the "Secretary") on [March 12, 1996].
2. The Certificate was previously amended by a Certificate of
Amendment filing with the Secretary on [June 14, 1996].
3. The first paragraph of Article Four of the Certificate is
hereby amended and restated in its entirety as follows:
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is two hundred and
ten million (210,000,000), divided into two classes of which
ten million (10,000,0000) shares, par value $.01 per share,
shall be designated Preferred Stock (the "Preferred Stock"),
and two hundred million (200,000,000) shares, par value $.01
per share, shall be designated Common Stock (the "Common
Stock").
4. This Certificate of Amendment to the Certificate was duly
adopted by the unanimous vote of the Board of Directors and the
Board of Directors duly called an annual meeting of
stockholders to, among other things, vote on such Certificate
of Amendment, and resolutions to such effect were duly
recorded. Upon notice, and in accordance with Section 222 of
the Delaware General Corporation Law, the Corporation convened
an annual stockholder's meeting on May 8, 1998, at which, among
other things, this Certificate of Amendment to the Certificate
was adopted by the holders of at least a majority of the
outstanding Common Stock of the Corporation entitled to vote
thereon. As a result of the foregoing, this Certificate of
Amendment to the Certificate was duly adopted in accordance
with Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to its Certificate of Incorporation to be executed as of the 8th day
of May, 1998.
STAFFMARK, INC.
By: /s/ GORDON Y. ALLISON
-----------------------------------
Gordon Y. Allison
Executive Vice President - General Counsel
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF STAFFMARK, INC.(1)
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY OF ORGANIZATION
<S> <C>
Brewer Personnel Services, Inc. Arkansas
533993 B.C., LTD. British Columbia
Clinical Trials Support Services, Inc. Nevada
ClinForce, Inc. Delaware
ClinForce, Inc. - Nevada Nevada
Essex Computer Service Inc. Florida
IntelliMark, Inc. Delaware
PFS&C Services International Company, Inc. Nevada
PFS&C Services International Holding Company, Inc. Nevada
Robert Walters plc United Kingdom
Robert Walters Associates Ltd. Hong Kong
Robert Walters Associates, Inc. New York
Robert Walters Associates Pte Ltd Singapore
Robert Walters BV Holland
Robert Walters Tristar Pty Ltd Australia
RWA Payroll Services Limited United Kingdom
StaffMark Acquisition Corporation Twenty-Three Delaware
StaffMark Acquisition Corporation Twenty-Six Delaware
StaffMark Acquisition Corporation Twenty-Nine Delaware
StaffMark Acquisition Corporation Thirty Delaware
StaffMark Factoring, Inc. Nevada
StaffMark Funding Company, Inc. Nevada
StaffMark, Inc. - Nevada Nevada
StaffMark, Inc. - Indiana Delaware
StaffMark, Inc. - West Nevada
StaffMark, Inc. - Nashville Tennessee
Strategic Global Resourcing Ltd United Kingdom
Strategic Global Resourcing Pty Ltd Australia
Strategic Legal Resources, Inc. Delaware
Strategic Legal Resources, Inc. - Nevada Nevada
Maxwell/Healthcare, Inc. Oklahoma
MRIC - Medical Recruiters International, LTD. British Columbia
Technical Resource Solutions Ltd United Kingdom
Commercial Staffing - Texas L.P. Texas
Commercial Staffing - Indiana L.P. Indiana
IT Staffing - Texas L.P. Texas
</TABLE>
- ---------------------
(1) StaffMark, Inc. or one of its subsidiaries owned one hundred percent (100%)
of the outstanding shares of capital stock or the general partnership and
limited partnership interests of the subsidiaries, as applicable, listed
above as of December 31, 1998.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our report dated January 29, 1999 included in this Form 10-K
into the following registration statements of StaffMark, Inc.: (1) Registration
Statement (Form S-8 No. 333-29689) filed with the SEC on June 20, 1997; (2)
Registration Statement (Form S-8 No. 333-30209) filed with the SEC on June 27,
1997; (3) Registration Statement (Form S-3 No. 333-51263) filed with the SEC on
April 29, 1998; (4) Registration Statement (Form S-8 No. 333-56789) filed with
the SEC on June 12, 1998; (5) Registration Statement (Form S-3 No. 333-56791)
filed with the SEC on June 12, 1998; and (6) Registration Statement (Form S-3
No. 333-65283) filed with the SEC on October 2, 1998. It should be noted that we
have not audited any financial statements of StaffMark, Inc. subsequent to
December 31, 1998, or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
March 10, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,811
<SECURITIES> 0
<RECEIVABLES> 159,444
<ALLOWANCES> 3,648
<INVENTORY> 0
<CURRENT-ASSETS> 181,240
<PP&E> 36,537
<DEPRECIATION> 14,087
<TOTAL-ASSETS> 580,945
<CURRENT-LIABILITIES> 86,792
<BONDS> 0
0
0
<COMMON> 291
<OTHER-SE> 259,801
<TOTAL-LIABILITY-AND-EQUITY> 580,945
<SALES> 1,014,913
<TOTAL-REVENUES> 1,014,913
<CGS> 750,438
<TOTAL-COSTS> 213,716
<OTHER-EXPENSES> 228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,768
<INCOME-PRETAX> 43,763
<INCOME-TAX> 25,124
<INCOME-CONTINUING> 18,639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,639
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
</TABLE>
