<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2000
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from _________ to
__________
Commission file number: 0-20971
StaffMark, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 71-0788538
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
234 East Millsap Road
Fayetteville, AR 72703
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (501) 973-6000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at May 5, 2000 was 29,525,535.
<PAGE>
STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
Index
-----
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
StaffMark, Inc. Consolidated Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction 11
Results for the Three Months Ended March 31, 2000 Compared to
Results for the Three Months Ended March 31, 1999 12
Liquidity and Capital Resources 14
Possible Robert Walters Flotation 15
Foreign Currency Translation 15
Special Note Regarding Forward Looking Statements 15
Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk 16
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 16
Item 2 -- Changes in Securities and Use of Proceeds 16
Item 4 -- Submission of Matters to a Vote of Security Holders 16
Item 6 -- Exhibits and Reports on Form 8-K 17
(a) Exhibits
(b) Reports on Form 8-K
Signatures 17
2
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STAFFMARK, INC.
---------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(Dollars in Thousands)
Three Months Ended
March 31,
------------------
2000 1999
-------- --------
SERVICE REVENUES $294,285 $280,312
COST OF SERVICES 221,268 211,367
-------- --------
Gross profit 73,017 68,945
-------- --------
OPERATING EXPENSES:
Selling, general and administrative 58,655 50,514
Depreciation and amortization 6,586 4,816
-------- --------
Operating income 7,776 13,615
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (5,444) (3,305)
Other, net 503 (46)
-------- --------
INCOME BEFORE INCOME TAXES 2,835 10,264
PROVISION FOR INCOME TAXES 904 3,857
-------- --------
NET INCOME $ 1,931 $ 6,407
======== ========
BASIC EARNINGS PER SHARE $ 0.07 $ 0.22
======== ========
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.22
======== ========
The accompanying notes are an integral part of these statements.
3
<PAGE>
STAFFMARK, INC.
---------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 228 $ 3,718
Accounts receivable, net 186,837 191,192
Prepaid expenses and other 18,471 17,036
Deferred income taxes 5,992 5,987
---------- ----------
Total current assets 211,528 217,933
PROPERTY AND EQUIPMENT, net 30,055 29,043
INTANGIBLE ASSETS, net 433,222 435,387
OTHER ASSETS 2,700 2,783
---------- ----------
$ 677,505 $ 685,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 35,390 $ 40,982
Payroll and related liabilities 34,807 26,139
Reserve for workers' compensation claims 9,915 9,627
Income taxes payable 9,675 2,202
---------- ----------
Total current liabilities 89,787 78,950
LONG TERM DEBT 288,268 300,414
OTHER LONG TERM LIABILITIES 101 6,222
DEFERRED INCOME TAXES 9,049 9,084
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued or outstanding - -
Common stock, $.01 par value; 29,475,442 and 29,401,022 shares issued
and outstanding as of March 31, 2000 and December 31, 1999 294 294
Paid-in capital 216,759 216,279
Retained earnings 78,406 76,476
Accumulated other comprehensive income (5,159) (2,573)
---------- ----------
Total stockholders' equity 290,300 290,476
---------- ----------
$ 677,505 $ 685,146
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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STAFFMARK, INC.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,931 $ 6,407
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of assets (651) -
Depreciation and amortization 6,586 4,816
Provision for bad debts 1,299 166
Deferred income taxes (31) 1,648
Change in operating assets and liabilities, net of effects of acquisitions
and dispositions:
Accounts receivable 2,287 (10,903)
Prepaid expenses and other (1,590) (780)
Other assets 82 (126)
Accounts payable and other accrued liabilities (6,162) (3,352)
Payroll and related liabilities 9,158 7,221
Payment of nonrecurring merger expenses (406) (9,058)
Reserve for workers' compensation claims 288 441
Income taxes payable 1,330 39
Other, net 82 (977)
--------- --------
Net cash provided by (used in) operating activities 14,203 (4,458)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Specialty Medical division 931 -
Purchase of businesses, net of cash acquired (1,341) (71,640)
Capital expenditures (3,143) (2,995)
--------- --------
Net cash used in investing activities (3,553) (74,635)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 40,585 168,180
Payments on borrowings (52,766) (91,580)
Proceeds from employee stock plans 71 948
Deferred financing costs - (519)
--------- --------
Net cash (used in) provided by financing activities (12,110) 77,029
--------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (1,460) (2,064)
Effect of Foreign Currency Translation on Cash and Cash Equivalents (2,030) (1,392)
CASH AND CASH EQUIVALENTS, beginning of period 3,718 12,812
--------- --------
CASH AND CASH EQUIVALENTS, end of period $ 228 $ 9,356
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 358 $ 1,356
========= ========
Interest paid, including commitment fees $ 5,725 $ 3,097
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
STAFFMARK, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. ORGANIZATION:
------------
We (StaffMark, Inc. and our subsidiaries) are a global provider of diversified
staffing, information technology ("IT"), professional, consulting and solutions
services to businesses, professional and service organizations and governmental
agencies. Revenues are recognized upon the performance of services. We generally
compensate our associates and consultants only for hours actually worked and,
therefore, wages of associates and consultants are a variable cost that increase
or decrease as revenues increase or decrease. However, we do have associates and
consultants 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 associates and consultants, 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.
As of March 31, 2000, we operated over 320 offices in 32 states and 14
countries and provide staffing in the Commercial, Professional/Information
Technology ("Professional/IT") and E-solutions service lines. We extend trade
credit to customers representing a variety of industries. There are no
individual customers that account for more than 5% of our service revenues in
any of the periods presented.
2. BASIS OF PRESENTATION:
---------------------
The accompanying interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). Certain information and note disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to those rules and regulations,
although we believe that the disclosures made are adequate to ensure the
information presented is not misleading.
The accompanying interim financial statements reflect all adjustments (which
were of a normal, recurring nature) that, in the opinion of management, are
necessary to present fairly our financial position, results of operations and
cash flows as of and for the interim periods presented. All significant
intercompany transactions have been eliminated in the accompanying consolidated
financial statements. Additionally, certain reclassifications have been made to
prior period balances in order to conform with the current period presentation.
These financial statements should be read in conjunction with our audited
financial statements and notes thereto included in our 1999 Annual Report on
Form 10-K as filed with the Commission on March 20, 2000.
3. SEASONALITY:
-----------
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause our 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. Accordingly, the results of
operations for an interim period are not necessarily indicative of the results
of operations for a full fiscal year.
6
<PAGE>
4. BUSINESS TRANSACTIONS:
---------------------
We acquired three staffing and professional service companies during 1999
including Edgewater Technology, Inc. ("Edgewater"). None of these acquisitions
were considered significant. Consideration paid during the three months ended
March 31, 2000 consisted of $1.3 million in contingent consideration paid to the
former owners of companies acquired in previous periods. For the three months
ended March 31, 1999, consideration paid with respect to acquisitions included
cash consideration paid for companies acquired in that period, as well as
contingent consideration paid to the former owners of companies acquired in
previous periods. The aggregate consideration paid consisted of $71.6 million in
cash for the three months ended March 31, 1999.
During the first quarter of 2000, the Company completed the sale of its
Specialty Medical division. Considered part of the Commercial Services segment,
the Specialty Medical division had revenues of approximately $0.7 million and
$1.7 million for the three months ended March 31, 2000 and 1999, respectively,
and provided physical and occupational therapy, nurse staffing and outsourced
rehabilitation management services. Consideration was approximately $1.0 million
and a gain on disposition of approximately $0.6 million is reflected in Other
Income in the accompanying consolidated statements of income.
5. NONRECURRING COSTS:
------------------
During the third quarter of 1999, we recorded restructuring expenses totaling
approximately $3.0 million relating to the restructure of our Professional/IT
segment. This charge arose from our decision, during the third quarter of 1999,
to redesign the sales strategy and resulting management organization. Our plan,
which was completed during the first quarter of 2000, was to separate the sales
and management functions between the IT staffing and end-user solutions
services. As a result of this plan, approximately 80 employees were severed or
reassigned in the restructuring process, which also involved the hiring of about
25 new IT salespeople, service specialists and managers. Additionally, our IT
platform in the Professional/IT segment closed 12 offices and implemented a
satellite branch structure to serve certain markets where a full branch office
was not required. We also implemented a new front-end system throughout the
domestic IT offices which altered branch staff requirements and reduced the need
for certain positions. As a result of the above, expenses of approximately $2.2
million for severance costs, approximately $280,000 for office closing costs,
and approximately $457,000 for other costs including legal and travel expenses
were recorded in the third quarter of 1999. In addition to costs that have been
incurred, the restructuring expense also includes future contractual obligations
to certain severed employees which extend through September 2001. The following
is a summary of our restructuring accrual, which has been included in accounts
payable and other accrued liabilities in the accompanying consolidated balance
sheet:
(In Thousands)
Total restructuring expenses $ 2,981
Cash outlays (2,174)
--------
Accrual at March 31, 2000 $ 807
========
7
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6. EARNINGS PER COMMON SHARE:
-------------------------
A reconciliation of net income and weighted average shares used in computing
basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
2000 1999
----------- -----------
(In thousands, except per share data)
<S> <C> <C>
Basic earnings per share:
Net income applicable to common shares $ 1,931 $ 6,407
=========== ===========
Weighted average common shares outstanding 29,461 29,289
=========== ===========
Basic earnings per share of common stock $ 0.07 $ 0.22
=========== ===========
Diluted earnings per share:
Net income applicable to common shares $ 1,931 $ 6,407
=========== ===========
Weighted average common shares outstanding 29,461 29,289
Dilutive effect of stock options 215 337
----------- -----------
Weighted average common shares, assuming
dilutive effect of stock options 29,676 29,626
=========== ===========
Diluted earnings per share of common stock $ 0.07 $ 0.22
=========== ===========
</TABLE>
Excluding amortization expense, net of tax of approximately $3.1 million and
$2.1 million for the three months ended March 31, 2000 and 1999, respectively,
diluted earnings per share was $0.17 and $0.29 for the three months ended March
31, 2000 and 1999, respectively.
Options to purchase approximately 2.3 million shares of common stock at prices
ranging from $8.94 to $40.75 per share were outstanding during the three months
ended March 31, 2000, but were not included in the computation of diluted
earnings per share because the options' exercise prices were greater than the
average market price of our common shares. These options, which expire ten years
from the date of grant, were still outstanding as of March 31, 2000.
7. SEGMENT INFORMATION:
-------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, we have adopted the provisions of SFAS No. 131 and have presented
below the required segment information for the three months ended March 31, 2000
and 1999.
As a result of our restructuring plan in late 1999, as discussed in Note 5, we
determined that our E-solutions business was fundamentally different than the
other components of our Professional/IT segment and we began managing the E-
solutions segment as an autonomous business unit beginning in 2000. Accordingly,
in January 2000, we began disaggregating the results of our E-solutions business
unit and reviewing those results separately. These operations had previously
been included in our Professional/IT segment. As a result of this change in
operating strategy, we reevaluated the estimated useful life for the intangibles
associated with our acquisition of Edgewater. Based on an independent valuation,
we have reduced the amortization period from 30 years to 10 years for these
intangibles. This change was effective January 1, 2000 and resulted in increased
quarterly amortization expense of approximately $0.6 million.
8
<PAGE>
We segment our operations based upon differences in services provided. Our
Commercial segment provides clerical and light industrial staffing services in
the United States. Our Professional/IT 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 ten other foreign countries. Our E-solutions segment
provides e-commerce software solutions, consulting and development services. 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 to our audited financial statements
and notes thereto included in our 1999 Annual Report on Form 10-K as filed with
the Commission on March 20, 2000. We evaluate performance of the segments based
on segment operating income, excluding corporate overhead. We do not have any
significant intersegment sales or transfers.
The results of the business segments as of and for the three months ended
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Professional/
Information Consolidated
Technology Commercial E-solutions Corporate Totals
------------- ---------- ----------- ------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Three Months Ended March 2000
Total service revenues $132,338 $154,860 $ 7,087 $ - $294,285
Earnings before interest, taxes
depreciation and amortization 9,630 8,278 1,421 (4,967) 14,362
Depreciation and amortization 3,150 1,787 1,067 582 6,586
Operating income 6,480 6,491 354 (5,549) 7,776
Capital expenditures 991 539 156 1,381 3,067
Total assets 377,216 221,074 46,290 32,925 677,505
Three Months Ended March 1999
Total service revenues $145,733 $134,579 $ - $ - $280,312
Earnings before interest, taxes
depreciation and amortization 11,935 8,902 - (2,406) 18,431
Depreciation and amortization 2,863 1,613 - 340 4,816
Operating income 9,072 7,289 - (2,746) 13,615
Capital expenditures 535 901 - 1,559 2,995
Total assets 378,005 201,918 - 35,301 615,224
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Revenues by Country 2000 1999
---------- ----------
<S> <C> <C>
United States $ 225,852 $ 211,714
United Kingdom 51,402 53,896
Australia 12,424 11,595
Other 4,607 3,107
---------- ----------
Total revenues $ 294,285 $ 280,312
========== ==========
</TABLE>
9
<PAGE>
Three Months Ended March 31,
----------------------------
Property and Equipment by Country 2000 1999
---------- ----------
United States $ 25,825 $ 19,930
United Kingdom 2,866 2,679
Australia 474 519
Other 890 937
---------- ----------
Total property and equipment $ 30,055 $ 24,065
========== ==========
8. COMPREHENSIVE INCOME:
--------------------
Comprehensive income was as follows:
Three Months Ended March 31,
----------------------------
(In thousands) 2000 1999
---------- ----------
Net income $ 1,931 $ 6,407
Other comprehensive income:
Change in cumulative foreign currency
translation adjustments (2,030) (1,392)
---------- ----------
Total comprehensive income $ (99) $ 5,015
========== ==========
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Our services are provided through three segments: Professional/IT,
Commercial and E-solutions. The Professional/IT segment provides staffing,
recruitment (placement), consulting, technical support and solutions services
primarily in the areas of IT, finance, accounting, pharmaceutical, and legal
services. The Commercial segment provides clerical, administrative, call center
outsourcing and light industrial staffing services. Our E-solutions segment
provides e-commerce software solutions, consulting and web development, as well
as outsourcing to help companies convert to an internet business model. Our
services are provided through our network of over 320 branch offices located in
32 states and 14 countries including, but not limited to, the United States, the
United Kingdom, Australia, Germany, New Zealand, Belgium, Holland, Singapore,
and South Africa.
Revenues are recognized upon the performance of services. In the Commercial
and Professional/IT segments, we generally compensate our associates and
consultants only for hours actually worked and, therefore, wages of associates
and consultants are a variable cost that increase or decrease as revenues
increase or decrease. However, we do have associates and consultants in our
Professional/IT segment and our E-solutions segment 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 associates and consultants, 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 the third quarter of 1999, we recorded restructuring expenses
totaling approximately $3.0 million relating to the restructure of our
Professional/IT segment. This change arose from management's decision during the
third quarter of 1999 to redesign their sales strategy and resulting management
organization. Management's plan, which is expected to be completed during the
first quarter of 2000, is to separate the sales and management functions between
the IT staffing and end-user solutions services. As a result of this plan,
approximately 80 employees were severed or reassigned in the restructuring
process, which also involved the hiring of about 25 new IT salespeople, service
specialists and managers. Additionally, our IT platform in the Professional/IT
segment closed 12 offices and implemented a satellite branch structure to serve
certain markets where a full branch office was not required. We also implemented
a new front-end system throughout the domestic IT offices which altered branch
staff requirements and reduced the need for certain positions. As a result of
the above, non-recurring expenses of approximately $2.2 million for severance
costs, approximately $280,000 for office closing costs, and approximately
$457,000 for other costs including legal and travel expenses were recorded. The
total expenses of approximately $3.0 million were partially offset by the
reversal of the Robert Walters merger and integration accrual of approximately
$828,000 discussed above. In addition to costs that have been incurred, the
restructure expense also includes future contractual obligations to certain
severed employees which extend through September 2001.
In conjunction with this restructuring plan, we decided to operate our E-
solutions business unit as a distinct operating unit as opposed to an integrated
component of the Professional/IT segment, as had been originally planned. As a
result of this change in operating strategy, we reevaluated the estimated useful
life for the intangibles associated with our acquisition of Edgewater. Based on
an independent valuation, we have reduced the amortization period from 30 years
to 10 years for these intangibles. This change was effective January 1, 2000 and
resulted in increased quarterly amortization expense of approximately $0.6
million.
11
<PAGE>
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.
The financial information provided below has been rounded in order to
simplify its presentation. The amounts and 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
Quarterly Report on Form 10-Q.
Results For The Three Months Ended March 31, 2000 Compared To Results For The
Three Months Ended March 31, 1999
Revenues. Consolidated revenues increased $14.0 million, or 5.0%, to $294.3
million for the three months ended March 31, 2000 compared to $280.3 million for
the three months ended March 31, 1999. The April 1999 purchase acquisition of
Edgewater in the E-solutions segment accounted for approximately $7.1 million of
the increase for the three months ended March 31, 2000.
Revenues for the Professional/IT segment decreased $13.4 million, or 9.2%,
to $132.3 million for the three months ended March 31, 2000 compared to $145.7
million for three months ended March 31, 1999. This decrease is primarily the
result of lower demand for IT staffing. Domestic IntelliMark revenues decreased
20.7% on an internal basis compared with the first quarter of 1999, while the
rest of the Professional/IT segment recorded an internal growth rate of
approximately 2.7%.
Revenues for the Commercial segment increased $20.3 million, or 15.1%, to
$154.9 million for the three months ended March 31, 2000 compared to $134.6
million for three months ended March 31, 1999. This increase is primarily the
result of growth in the segment's Strategic Resource Group, which provides
customers with dedicated on-site account management. No Commercial acquisitions
were made during 1999.
Revenue for the E-solutions segment was $7.1 million for the three months
ended March 31, 2000. Our E-solutions segment consists of Edgewater, which was
acquired effective April 1, 1999, and as previously mentioned, beginning January
1, 2000 has been managed as a separate unit as a result of the Professional/IT
restructuring initiated in the third quarter of 1999. Accordingly, this business
unit has been reported as a separate segment.
Gross Profit, SG&A and EBITDA. For the three months ended March 31, 2000,
gross profit as a percentage of revenue increased from 24.6% to 24.8%, while
selling, general and administrative expenses ("SG&A") as a percentage of revenue
increased from 18.0% to 19.9%. EBITDA decreased $4.1 million, or 22.1%, to $14.4
million for the three months ended March 31, 2000 as compared to $18.4 million
for the three months ended March 31, 1999. EBITDA as a percentage of revenues
was 4.9% and 6.6% for the three months ended March 31, 2000 and 1999,
respectively. The increase in gross margin is primarily the result of an
increase in permanent placement revenues, which carry a 100% margin, and the
addition of Edgewater, which has gross margins of approximately 50%. The
decrease in EBITDA is primarily the result of increased SG&A relating to the
expansion of our training center business and our Strategic Resource Group as
well as increased employee expenses such as staff health costs. EBITDA has also
been adversely affected by the faster growth of our commercial staffing segment,
which has grown to 53% of total revenues up from 48% in this quarter last year.
As previously mentioned, our commercial staffing growth was primarily related to
the Strategic Resource Group, which targets large accounts that typically bill
at lower margins than our retail business in exchange for higher volume. The
decline in our higher margin Professional/IT revenues as a percentage of our
total consolidated revenues further contributes to the decline in consolidated
margins.
12
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $1.8 million, or 36.7%, to $6.6 million for the three months
ended March 31, 2000 as compared to $4.8 million for the three months ended
March 31, 1999. This increase is primarily attributable to amortization of
goodwill associated with our purchase business combinations. Effective January
1, 2000, the goodwill associated with the Edgewater acquisition began being
amortized over a 10 year period as opposed to the 30 year life that was
established in April 1999 when Edgewater was part of the Professional/IT
segment. Depreciation expense also increased as a result of continuing
development of our corporate infrastructure and information systems network.
Operating Income. Operating income decreased $5.8 million, or 42.9%, to
$7.8 million for the three months ended March 31, 2000 compared to $13.6 million
for the same period last year. Operating margin was 2.6% and 4.9% for the three
months ended March 31, 2000 and 1999, respectively. Operating income and
operating margin declined due to higher SG&A and higher depreciation and
amortization expense as discussed above.
The following operating income discussion at the Professional/IT and
Commercial segment levels excludes unallocated corporate SG&A of $4.7 million
and $2.7 million for the three months ended March 31, 2000 and 1999,
respectively. The increase in unallocated corporate SG&A was primarily a result
of increased staff health costs associated with our self-insurance plan,
increased rent, utilities and telephone and equipment lease costs associated
with our new corporate headquarters and increased professional fees primarily
associated with international and domestic tax restructuring, state unemployment
tax planning and work opportunity tax credit consultation. We believe that many
of professional fees are one-time in nature and should yield benefits by
reducing go-forward costs.
Operating income for the Professional/IT segment decreased $2.6 million, or
28.6%, to $6.5 million for the three months ended March 31, 2000 as compared to
$9.1 million for the three months ended March 31, 1999. The operating margin for
the Professional/IT segment decreased from 6.2% for the three months ended March
31, 1999 to 4.9% for the three months ended March 31, 2000. The primary reasons
for the decreases in operating income and operating margin were the negative
growth in our domestic IT staffing division and higher depreciation and
amortization expenses.
Operating income for the Commercial segment decreased $0.8 million, or
10.9%, to $6.5 million for the three months ended March 31, 2000 as compared to
$7.3 million in the same period last year. The operating margin of the
Commercial segment decreased from 5.4% for the three months ended March 31, 1999
to 4.2% for the three months ended March 31, 2000. The decrease in operating
margins resulted from increased SG&A as the segment put infrastructure in place
for future growth in our training center business and our Strategic Resource
Group. We also incurred higher professional fees, primarily in the area of
recruitment, as well as higher depreciation and amortization expense.
Operating income for the E-solutions segment was $0.4 million for the three
months ended March 31, 2000. Results for this segment related to Edgewater,
which was acquired effective April 1, 1999.
Interest Expense. We incurred interest expense of $5.4 million for the
three months ended March 31, 2000 as compared to $3.3 million of interest
expense for the three months ended March 31, 1999. Interest expense in the
periods presented is primarily related to borrowings on our Credit Facility (as
defined below) to fund working capital requirements, the cash portion of our
acquisitions and additions to property and equipment.
Net Income. Net income decreased $4.5 million, or 69.9%, to $1.9 million
for the three months ended March 31, 2000 as compared to $6.4 million for the
same period last year. Net margin was 0.7% for the three months ended March 31,
2000 as compared to 2.3% for the three months ended March 31, 1999.
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Liquidity and Capital Resources
Our primary historical sources of funds are from operations, the proceeds
from securities offerings, if any, and borrowings under our credit facility with
a consortium of banks (the "Credit Facility"). Our principal historical uses of
cash have been to fund acquisitions, working capital requirements 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.
In May 1999, we expanded the Credit Facility from $300 million to $325
million. Additionally, during December 1999, we obtained a commitment from two
members of our Credit Facility to increase our borrowing capacity for an
additional $10 million through January 2000 as a buffer for unexpected Year
2000 issues. This $10 million borrowing increase was not utilized by us. On
March 31, 2000, the maximum amount of borrowings under the Credit Facility
reverted back to $300 million. In April 2000, we obtained a commitment from one
member of our Credit Facility to increase our borrowing capacity for an
additional $7.5 million through May 2000 as a buffer for unexpected costs. This
$7.5 million borrowing increase has not been utilized by us. The $300 million
portion of the Credit Facility matures in August 2003. The Credit Facility 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 first
tier foreign subsidiaries. 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. We
had net payments and net borrowings on the Credit Facility of approximately
($12.2) million and $76.6 million for the three months ended March 31, 2000 and
1999, respectively. The majority of our borrowings were used to pay the cash
consideration for several of our acquisitions and for general corporate
purposes. As of May 5, 2000, $290.0 million was outstanding on the Credit
Facility.
In 1998, we entered into fixed interest rate swap agreements with a
notional amount of $60.0 million related to 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. These swaps did not have a
material impact on recorded interest expense during the periods presented.
Net cash provided by (used in) operating activities was $14.2 million and
($4.5) million for the three months ended March 31, 2000 and 1999, respectively.
The net cash provided by (used in) operating activities for the periods
presented was primarily attributable to net income and changes in operating
assets and liabilities. Excluding $0.4 million and $9.1 million in nonrecurring
costs paid during 2000 and 1999, respectively, net cash provided by operating
activities was $14.6 million and $4.6 million for the three months ended March
31, 2000 and 1999, respectively.
Net cash used in investing activities was $3.6 million and $74.6 million
for the three months ended March 31, 2000 and 1999, respectively. Cash used in
investing activities was primarily attributable to cash paid for acquisitions
and for additional contingent consideration paid for acquisitions completed
during prior periods.
Net cash (used in) provided by financing activities was ($12.1) million and
$77.0 million for the three months ended March 31, 2000 and 1999, respectively.
Cash used in financing activities was primarily related to the repayment of
borrowings under our Credit Facility. Cash provided by financing activities was
primarily related to borrowings under our Credit Facility to finance several of
the acquisitions and contingent consideration payments completed during these
periods.
As a result of the above and the related foreign currency translations, our
combined cash and cash equivalents decreased $3.5 million for both the three
months ended March 31, 2000 and 1999, respectively.
14
<PAGE>
We believe that our cash flows from operations and borrowings available
under the Credit Facility will provide sufficient liquidity for our existing
operations. However, if we make any acquisitions or there is a slowdown in the
economy or our business is adversely influenced by other factors, we may need to
seek additional financing through the public or private sale of equity or debt
securities or 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.
Possible Robert Walters Flotation
On April 27, 2000, we announced our current plan to sell, through an
indirect wholly-owned subsidiary, all or substantially all of our equity
interest in Robert Walters through a flotation on the London Stock Exchange. The
flotation, also known as an initial public offering, would not be made in the
United States. The proceeds from this offering would be used to repay borrowings
on the Credit Facility and increase dedication of operating resources to our
E-solutions segment. It is anticipated that this offering would occur in the
third quarter of 2000, subject to market conditions.
Foreign Currency Translation
Operations outside of the United States expose us to foreign currency
exchange rate changes and could impact translations of foreign denominated
assets and liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. We operate outside the United
States primarily through wholly owned subsidiaries in the United Kingdom and
Australia. These foreign subsidiaries use the local currency as their functional
currency as sales are generated and expenses are incurred in such currencies.
The translation from the applicable foreign currencies to United States dollars
is performed for balance sheet accounts using current exchange rates in effect
at the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. Gains or losses resulting from such
translations are included in stockholders' equity. We continuously monitor our
exposure to changes in foreign currency exchange rates. From time to time, we
may enter into foreign currency forward and option contracts to manage this
exposure.
Special Note Regarding Forward Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q (this "10-Q")
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 our future liquidity, our IT
business model and organization, Year 2000 compliance matters, 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 below, as
well as those listed under "Business - Factors Affecting Finances, Business
Prospects and Stock Volatility" and elsewhere in our 1999 Annual Report on Form
10-K as filed with the Commission on March 20, 2000 and under the headings
"Potential Risks, Detriments and Other Considerations Associated with the
Transaction," and "Forward Looking Statements" in our proxy statement filed with
the Commission on September 25, 1998.
The forward-looking statements included in this 10-Q relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "believe," "will,"
"provide," "anticipate," "future," "could," "growth," "increase," "modifying,"
"reacting," 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-Q. 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: (1) the continuation or worsening of declines in demand for
placement (permanent or temporary), staffing services (whether commercial,
information technology or financial and accounting) or solutions services;
(2) the nature, timing and extent of the possible Robert Walters flotation;
(3) adverse developments involving debt, equity or currency markets that affect
our plans or operations (4) failure to obtain new customers or retain
significant existing customers; (5) inability to carry out marketing and sales
plans; (6) inability to obtain capital or refinance debt for future internal and
external growth; (7) loss of key executives; (8) general economic and business
conditions (whether foreign, national, state or local) which are less favorable
than expected, including but not limited to, adverse fluctuations in foreign
currency exchange rates; (9) adverse changes in interest rates, including but
not limited to, counter party risks on our interest rate swap agreements as well
as adverse movement in foreign currency exchange rates; (10) adverse results in
litigation matters; and (11) changes in industry trends and technologies such as
changes in the conduct of the business through the internet and other similar
mediums of exchange and changes in demand for commercial or professional
information technology staffing
15
<PAGE>
personnel, whether on a temporary or permanent placement basis. Actual events or
results may differ materially. These factors may cause our actual results to
differ materially from any forward-looking statements.
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-Q to conform such statements to actual
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended March 31, 2000, we did not enter into new
arrangements, or modify existing arrangements, concerning market risk. For a
description of such existing arrangements, see Notes 8 and 9 to our audited
financial statements filed as part of our 1999 Annual Report on Form 10-K as
filed with the Commission on March 20, 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Foreign Currency Translation."
PART II
Item 1. LEGAL PROCEEDINGS
From March 12, 1999 through April 22, 1999, John A. Jennen, Richard A.
Watson, Rick W. Johnson, Edward D. LaFrance and Trust Equity Advisors Plus, LLC,
each purporting to act on behalf of a class of our stockholders, filed
complaints against us in the United States District Court for the Eastern
District (in the case of each plaintiff except Mr. LaFrance) and Western
District (in the case of Mr. LaFrance) of Arkansas, alleging that StaffMark, one
of its officer/directors and one of its officers, violated the federal
securities laws, and seeks unspecified compensatory and other damages. By order
entered May 6, 1999, the four cases pending in the Eastern District of Arkansas
were consolidated into one action, and on July 15, 1999, the LaFrance action in
the Western District of Arkansas was transferred to the Eastern District to be
consolidated with the other four cases. On November 10, 1999, the Court
appointed lead plaintiff and approved lead counsel, and the lead plaintiffs
filed their consolidated complaint on January 11, 2000 which supercedes all
other complaints. The consolidated complaint names us and one of our
officer/directors as defendants. It purports to be filed on behalf of all
purchasers of our securities between February 3, 1998 and March 2, 1999, and
alleges violations of the federal securities law and seeks unspecified damages.
We filed a motion to dismiss the consolidated complaint on March 31, 2000. The
lead plantiffs have until May 31, 2000 to file a response to our motion to
dismiss. We will then have until June 30, 2000 to file a reply to the lead
plantiff's response to our motion to dismiss. We believe that this complaint is
without merit and deny all of the allegations of wrongdoing and are vigorously
defending the suit.
We also are a party to litigation incidental to our business. We believe
that these routine legal proceedings will not have a material adverse effect on
the results of operations or financial condition. We maintain insurance in
amounts, with coverages and deductibles, that we believe are reasonable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings, reference is
made to Note 6 of the StaffMark, Inc. Consolidated Financial
Statements contained in this Form 10-Q.
27.1 Financial Data Schedule for the three months ended March 31,
2000, submitted to the Commission in electronic format.
(b) Reports on Form 8-K
1. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAFFMARK, INC.
Date: May 8, 2000 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chief Executive Officer and Chairman
Date: May 8, 2000 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
17
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule for the three months ended March
31, 2000, submitted to the Commission in electronic
format.
18
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 228
<SECURITIES> 0
<RECEIVABLES> 193,386
<ALLOWANCES> 6,549
<INVENTORY> 0
<CURRENT-ASSETS> 211,528
<PP&E> 46,455
<DEPRECIATION> 16,400
<TOTAL-ASSETS> 677,505
<CURRENT-LIABILITIES> 89,787
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 290,006
<TOTAL-LIABILITY-AND-EQUITY> 677,505
<SALES> 294,285
<TOTAL-REVENUES> 294,285
<CGS> 221,268
<TOTAL-COSTS> 65,241
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,444
<INCOME-PRETAX> 2,835
<INCOME-TAX> 904
<INCOME-CONTINUING> 1,532
<DISCONTINUED> 399
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,931
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
