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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, 1999
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.)
234 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 ((S)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.[X]
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 $287.7 million as of March 10, 2000.
As of March 10, 2000, the number of shares outstanding of the registrant's
common stock was 29,475,341.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's annual meeting of
stockholders to be held on May 22, 2000 are incorporated by reference into Part
III of this Annual 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,"
"opportunity," "decide," "goal," "objective," "quality," "growth," "leader,"
"expect," "intend," "plan," "expand," "focus," "build," "through," "strategy,"
"expiration," "provide," "hope," "offer," "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: (1) the continuation or worsening of declines in demand for
placement (permanent or temporary) or staffing services (whether commercial,
information technology or financial and accounting); (2) unanticipated problems
associated with integrating acquired companies and their operations; (3) failure
to obtain new customers or retain significant existing customers; (4) inability
to carry out marketing and sales plans; (5) inability to obtain capital or
refinance debt for future internal and external growth; (6) loss of key
executives; (7) 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; (8)
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; (9) adverse results in litigation matters; and
(10) 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
personnel, whether on a temporary or permanent placement basis. In evaluating
these statements, you should specifically consider various factors described
above as well as the risks outlined under "Business - Factors Affecting
Finances, Business Prospects and Stock Volatility." These factors may cause our
actual results to differ materially from those contemplated, projected,
anticipated, planned or budgeted in any such 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-K to conform such statements to actual
results.
PART I
ITEM 1. BUSINESS
General
We (StaffMark, Inc., incorporated in 1996, 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. We offer services through over 320
branches located in 32 states and 14 countries.
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Our operations are grouped into three segments: Professional/Information
Technology (we will refer to this segment as "Professional/IT"), Commercial and
E-solutions. Our 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. This
segment generated 49% and 53% of our revenues for the years ended December 31,
1999 and 1998. Our Commercial segment provides clerical, administrative, call
center outsourcing and light industrial services and generated approximately 50%
and 47% of our revenues for the years ended December 31, 1999 and 1998. Our E-
solutions segment consists of Edgewater Technology, Inc. ("Edgewater"), which
was acquired in 1999, and provides e-commerce software solutions, consulting and
web development as well as outsourcing to help companies convert to an internet
business model. Our E-solutions segment generated approximately 1% of our
revenue for the year ended December 31, 1999. See Note 18 to our Consolidated
Financial Statements for financial information about our business segments.
As a result of our IT restructuring in late 1999, we determined that our E-
solutions business was fundamentally different than the other components of our
Professional/IT segment and we began managing our E-solutions business as an
autonomous business segment at the beginning of 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. We believe that our E-solutions segment
provides us with growth opportunities in an industry that Forrester Research
expects will grow from an estimated annual revenue of approximately $10.6
billion as of November 1999 to annual revenue of approximately $64.8 billion in
2003.
For the year ended December 31, 1999, our revenues and operating income before
nonrecurring charges were $1,220.9 million and $66.0 million compared to
revenues and operating income of $1,014.9 million and $78.1 million for the year
ended December 31, 1998.
Business Strategy
Our overall business strategy is to be a valued-added provider 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, education programs and
retention. In order to increase revenue, grow profits and improve cash flows, we
implement this overall business strategy through a combination of the strategies
whose key elements are 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. 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, selling services and customer satisfaction. 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 Limited ("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 high 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 six service
platforms operating under six brand names in our three segments. 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
"ClinForce." 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 and
training services, "StaffMark Office Staffing," "StaffMark Medical Staffing,"
"StaffMark Industrial Staffing" and "StaffMark Training Center." Our E-solutions
segment operates under the name "Edgewater."
Expand Productivity and Continuity of Employees and Consultants Through
Education, Training and Career Management. We believe that our business will
shift to a bundled education, training and staffing model over time that focuses
on the career management of our professionals, consultants 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 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 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, consultants 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.
Continue to Deploy the Resource Solutions Business Model Domestically and
Expand 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, 1999, we had 101
Strategic Alliance partnering relationships (previously know as Vendor-On-
Premise or "VOP" relationships), compared to 75 at December 31, 1998 and 60 at
December 31, 1997. These Strategic Alliance relationships, which are usually in
our Commercial segment, represented $163.8 million and $102.0 million of our
revenues for the years ended December 31, 1999 and 1998. 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.
Focus on E-solutions Business. Consistent with the presentation of the E-
solutions business as a separate segment, we intend to focus a larger portion of
our capital and management services in this segment. In particular, we intend to
be middle market focused, speed time to market with a virtual company strategy,
provide innovative hosting, leverage the second tier markets, and increase
consultant headcount to service existing and new customers.
Increase Training and Niche Services in the Commercial Segment. We currently
operate StaffMark Training Centers in two Arkansas locations and in one Texas
location. We plan to open three or four Training Centers in new locations in the
United States during 2000. This training format provides career advancement and
job opportunities for all participants by enabling them to become certified in a
variety of computer and software related areas. We believe that this Training
Center model provides us with direct growth opportunities in our Commercial
segment in addition to indirect growth opportunities in our Commercial and
Professional/IT segments through access to a pool of qualified associates and
consultants. We also plan to target niche areas such as call center support, e-
fulfillment, managed vendor accounts and human resources process consulting
services in our Commercial segment during 2000.
Acquisition and Integration Strategy
Summary of Acquisitions. From our initial public offering in October 1996
through December 31, 1999, we implemented our growth and diversification
strategy by completing 43 acquisitions. We completed three purchase acquisitions
during 1999. 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. Two of the
1999 acquisitions were Professional/IT companies with revenues in the fiscal
year prior to acquisition approximating $19.7 million. The third acquisition in
1999 was Edgewater Technology, Inc., an e-solutions company located in a suburb
of Boston. A summary of the acquisitions we completed in 1999 is provided in the
following table.
<TABLE>
<CAPTION>
Fiscal Year
Revenues
Acquired Companies Segment(1) States (in millions)(2)
- --------------------------------------------------- ---------- ---------- ----------------
<S> <C> <C> <C>
ETEC Network Services, Inc. P/IT TX $ 5.5
Career Concepts Technologies, Inc & Career P/IT FL 14.2
Concepts, Inc.
Edgewater Technology, Inc. E MA, NC, NH 17.7
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Total $ 37.4
=======
</TABLE>
_____________
(1) P/IT = Professional/IT and E = E-solutions
(2) 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.
Acquisition. Through our internal growth and acquisition strategy, we have
contributed critical mass, geographic diversification and increased our
Professional/IT segment to approximately 50% of our revenue base. Although our
intent is to focus on internal growth and achieving integration efficiencies, we
may pursue select strategic acquisitions that: (1) expand the geographic scope
of our operations; (2) increase the scope of our operations into complementary
or new service offerings; and/or (3) include strong management, profitable
operating results and/or recognized local and regional presence.
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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.
Industry Information
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. In the last several years, competitive
pressures have forced businesses to focus on reducing costs, including
converting fixed, permanent labor costs to variable or flexible costs. This,
coupled with a shortage of available talent, has propelled the industry to where
it is today. 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 1999 revenues of
approximately $69.9 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.
The Business Solutions Industry. Many businesses today are facing intense
competition, accelerating technological changes, 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.
The E-solutions and Internet Industry. Increasing numbers of individuals and
companies now use the Internet to search for information, communicate with
others, conduct business and seek entertainment. According to International Data
Corporation, the estimated number of Internet users worldwide was 142 million at
the end of 1998, and is projected to grow to over 500 million users by the end
of 2003. The broad acceptance of the Internet has created numerous opportunities
for companies that are seeking growth and are challenged by highly competitive
and rapidly changing markets, geographically dispersed operations and demands
for increased efficiencies. E-solutions permits companies to acquire new
customers, conduct electronic commerce and consistently manage customer
relationships. These solutions can also dramatically improve a company's ability
to access, analyze and distribute important information to suppliers, business
partners, employees and customers. While there are numerous benefits that may be
gained by utilizing the Internet, the analysis, design and implementation of an
effective E-solution requires a range of skills and expertise which few
businesses possess. The successful design of E-solutions requires careful
analysis and definition of the strategic implications of the Internet for a
business, the creative possibilities for brand, content and user experience and
the technology required to support the solution. The rapid development and
launch of E-solutions further requires substantial expertise to develop and
integrate new business processes with existing capabilities, to design and
execute Internet marketing communications plans and to evaluate, select and
implement the appropriate technologies for the Internet solution. The current
supply of high quality, experienced Internet professionals is relatively
limited, making the market extremely competitive for these individuals. As a
result, an increasing number of businesses engage Internet professional services
firms to help them design and implement E-solutions. The market for Internet and
E-commerce services is projected to grow dramatically. Forrester Research
estimates that this market will grow from annual revenue of $10.6 billion as of
November 1999 to annual revenue of $64.8 billion in 2003.
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Human Resource Services and Business Solutions
We deliver human resource services and business solutions through three
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 49% and 53% of our
revenues for the years ended December 31, 1999, and 1998. IT services provided
through IntelliMark include systems planning and design, project management,
software applications development, systems and network implementation, ERP
system implementation, system maintenance, computer troubleshooting, outsourcing
of legacy systems, Internet development, "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) and paralegals 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
ClinForce.
Commercial Segment. Our Commercial segment provides clerical, administrative,
outsourcing, call center, computer training and light industrial staffing
services. This segment generated approximately 50% and 47% of our revenues for
the years ended December 31, 1999 and 1998. Our clerical services personnel
include call center support, secretarial, word processing personnel,
receptionist/switchboard operators, data entry operators, 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.
E-solutions Segment. Our E-solutions segment provides e-commerce strategy,
consulting and web development as well as outsourcing to help companies convert
to an internet business model. In particular, we focus on developing, building
and deploying custom e-commerce applications and integration opportunities for
our customers. We also provide internet hosting and outsourcing opportunities.
This segment generated approximately 1% of our revenue for the year ended
December 31, 1999. We currently provide E-solutions services via 155 billable
consultants located in Arkansas, Minnesota, Massachusetts, New Hampshire and
North Carolina.
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 own a
minority interest in Stepstone.com, a European internet job board. 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. In our E-solutions segment, we use
our own recruiters, engage outside professional recruitment companies, use the
strength of the IntelliMark recruitment system and advertise electronically and
via billboards, radio and television. In the E-solutions area, our challenge is
to attract and retain qualified consultants in a fast growing industry and
market. We are in the process of implementing equity and performance based
compensation plans that will induce new consultants to join our E-solutions
segment, as well as encourage retention of the existing consultants in this
segment. Additionally, we recently implemented a national database of IT
consultants and job postings available to all of our IT offices.
Full Time Employees/Professionals/Associates. Currently, we provide over
41,000 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, 401(k) and stock purchase programs, to certain of our
professionals and associates.
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Assessment, Training and Quality Control. In the Professional/IT segment and
in our E-solutions 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
working environment in which the individuals will be placed. Clerical and
office-support applicants receive tests in computer skills, word processing,
data entry, accounting and other business applications. Industrial 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 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 320 branch offices in
Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois,
Indiana, Kansas, Kentucky, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Virginia, Washington, Wisconsin, Australia, Belgium, Canada, France,
Germany, Hong Kong, Ireland, Japan, the Netherlands, New Zealand, Singapore,
South Africa, and the United Kingdom. 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 recruiting software
utilized by our Professional/IT segment is "i-base," our customized version of
EZ Access. The primary front office billing and payment software utilized by our
Professional/IT segment is the MAS 90 system. Robert Walters, part of our
Professional/IT segment, uses Merit as its billing and payroll software for
temporary staff and contractors and uses a BIS access database for its permanent
placement business. The primary front office software utilized by our Commercial
segment is the Caldwell-Spartin system. Our E-solutions segment uses a
customized Great Plains system as its front office billing and payment software
and uses an internally developed project-tracking software for job and
consultant utilization. We believe that the utilization of these quality front
office systems will provide opportunities for cost savings and efficiencies
through our existing branch network and for newly acquired companies.
8
<PAGE>
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, 1999, we operated
the general ledger and accounts payable modules in areas covering over 95% of
our United States operations. Robert Walters uses Sun Accounts as its general
ledger package and our E-solutions segment uses Great Plains Dynamics for its
general ledger package. Financial information is gathered from Robert Walters
and our E-solutions segment each month and uploaded into our PeopleSoft general
ledger module. Effective January 1, 2000, we began processing payroll for our
internal Commercial and corporate employees using our in-house PeopleSoft
payroll module. Payroll for our entire Professional/IT segment will be processed
internally later in 2000. 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 $10.7 million in 1999 on the various communication
networks, front office software implementations 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.,
Professional Group of America, Inc., Ciber, Inc., and Keane, 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., Interim Services,
Inc. and Adecco SA, all of which may have greater marketing, financial and other
resources than we do. There are many E-solutions competitors which include
public companies such as Scient Corp., Viant Corp., and Breakaway Solutions,
Inc., as well as a number of privately held e-solutions entities. 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 solutions 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; (2) registration, licensing, record keeping and
reporting requirements; and (3) substantive limitations on its operations.
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.
9
<PAGE>
In addition to regulations relating to the employer/employee relationship,
which is the primary type of regulation in the United States, in other
countries, particularly in continental Europe, entry into the personnel services
market is restricted by the requirement to register with or obtain national
and/or local licenses from a government agency. Certain foreign regulations,
particularly in continental European countries, also require that temporary
staffing companies pay certain minimum pay rates, pay specified minimum
benefits, limit the duration of assignments and/or limit temporary staffing
employment to certain industries. In some instances, industry-wide union
memberships may be necessary. 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. In the United Kingdom, regulations have been proposed that
would alter the current practice for temporary staffing contractors which is
that of vendor/independent contractor status to that of employer/employee status
similar to the temporary staffing regulatory model in the United States. It is
anticipated that these regulations would go into effect in the United Kingdom
during the second half of calendar 2000.
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", used in our Commercial segment,
"Strategic Legal Resources", used in our legal services platform, "ClinForce",
used in connection with our clinical trials support services platform,
"Edgewater" used in our E-solutions segment, "StaffView", used in connection
with a software product developed for client temporary workforce reporting, and
a United Kingdom registration for "Robert Walters", our finance and accounting
platform. We also own the pending service mark application for "IntelliMark" in
the United States, Australia, South Africa, New Zealand, Hong Kong, Singapore
and the European community. We have obtained the registration for the
"IntelliMark" service mark in the United Kingdom and Benelux. No assurance can
be given that any of the pending "IntelliMark" 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.
Factors Affecting 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. Although our intent is to focus on internal growth and achieving
integration efficiencies, we may pursue select strategic acquisitions that: (1)
expand the geographic scope of our operations; (2) increase the scope of our
operations into complementary or new service offerings; and/or (3) include
strong management, profitable operating results and/or recognized local and
regional presence.
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.
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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 the Professional/IT and E-
solutions segments, and other specialty areas 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 Competition in Each 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 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, 1999,
approximately $435.4 million, or 63.5%, of our total assets were intangible
assets. These intangible assets primarily represent amounts attributable to
goodwill recorded in connection with our acquisitions accounted for as purchase
business combinations. 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, Increasing Governing Regulation
and Existing Foreign Regulations. Due to the wide variety of national and state
proposals currently under consideration and changing foreign regulations, we
cannot predict the impact of such proposals or new regulations. Recent federal
and certain state legislative proposals have included provisions extending
health insurance benefits to employees not presently receiving such benefits. In
some of these countries, particularly in Europe, there is significant national
and local regulation of flexible staffing services. These laws generally require
that part-time, temporary and contract workers receive benefits similar to full-
time workers, such as vacation, welfare plan contributions and severance pay. In
some cases, hours of work and the duration of assignments are limited and
workers may not be assigned to certain industries. Industry-wide union
membership is also a requirement in some countries. Any material change in non-
U.S. regulation of flexible staffing services could have a material adverse
effect on us. Any material changes in federal, state, local or foreign statutes
and/or federal, state, local or foreign government regulations (e.g. the new
proposed employment regulations in the United Kingdom) 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.
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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.
Change in Technology. Our E-solutions business will be negatively affected if
we do not keep up with the internet's rapid technological change, evolving
industry standards and changing client requirements. Accordingly, the future
success of our E-solutions segment will depend, in part, on our ability to meet
these challenges. Among the most important challenges facing us are the need to:
(1) effectively use leading technologies; (2) continue to develop our strategic
and technical expertise; (3) influence and respond to emerging industry
standards and other technological changes; (4) enhance our current services; (5)
develop new services that meet changing customer needs; and (6) advertise and
market our services. All of these challenges must be met in a timely and cost-
effective manner. We cannot assure you that we will succeed in effectively
meeting these challenges and our failure to do so could harm our E-solutions
business results. In addition to changing technology in our E-solutions
segment, changes in technology relating to internet recruiting and human
resource outsourcing may adversely impact our other segments of business,
particularly our IT platform in our Professional/IT segment.
Risks Related to the Human Resource and Business 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.
Fluctuations in the Exchange Rate of the U.S. Dollar Could Have a Material
Adverse Effect on our Financial Performance, Condition and Results. The
functional currency for certain of our foreign subsidiaries is the local
currency. The translation from the foreign currency to U.S. dollar is performed
for our balance sheet accounts using the exchange rate in effect on the balance
sheet date and for income statement accounts using a weighted-average exchange
rate. As a result, the currency exchange rate effect of a strong U.S. dollar,
particularly in relation to the British pound, could negatively affect our
financial performance and results of operations.
The Current Acceptance of Outsourcing Business Services Could Decrease or
Cease. Our business and growth depend in part on the continued acceptance of
outsourced business services. Current and potential customers could elect to
perform such services with their own employees. A significant decline in the use
of outsourced services would have a material adverse effect on our business,
financial condition and operating results.
We Cannot Provide Assurance That Pending Litigation, Which is in a Very
Preliminary Stage, Will Not Have Any Material Adverse Impact on Our Operations,
Results or Financial Condition. A consolidated complaint was filed against us
in the United States District Court for the Eastern District of Arkansas on
January 11, 2000, purporting to act on behalf of a class of our stockholders,
alleging that the defendants (which, in addition to us, includes one of our
executive officer/directors) violated the federal securities laws, and seek
unspecified compensatory and other damages. This consolidated complaint relates
to five lawsuits filed against us between March 12, 1999 and April 22, 1999
regarding an announcement we made on March 2, 1999. We believe that the
consolidated complaint is without merit, deny all of the allegations of
wrongdoing and are vigorously
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<PAGE>
defending this suit. Nonetheless, because of the very preliminary stage at which
such action is presently situated, we cannot provide assurance that the pending
litigation will not have a material adverse impact on our operations, results or
financial condition.
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. 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 June 30, 2009. We have one ten year option to renew this lease
following the existing lease ten year term. Our headquarters are located at 234
East Millsap Road, Fayetteville, Arkansas 72703. Our telephone number is (501)
973-6000.
ITEM 3. 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
compliant 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. The defendants have until March
31, 2000 to either file an answer to the consolidated complaint or a motion to
dismiss the consolidated complaint. The defendants 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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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, 2000, there were
3,163 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 1998 and 1999 and the first quarter
of 2000 through March 10, 2000.
HIGH LOW
------- -------
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 $24.625 $ 5.750
Second Quarter 12.750 6.875
Third Quarter 12.875 6.938
Fourth Quarter 8.875 6.125
FISCAL 2000
-----------
First Quarter $12.063 $ 7.125
(through March 10, 2000)
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 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 8, 1998, we announced that our Board of Directors had authorized
the repurchase of up to $10 million of our common stock on the open market from
time to time to fund employee benefit programs like our employee stock purchase
program and private acquisitions. Consistent with this announcement, we
repurchased 263,310 shares of our common stock for an aggregate purchase price
of approximately $3.2 million during the fourth quarter of 1998 and during the
1999 year. In the fourth quarter of 1998, these stock repurchases were as
follows: (1) 18,310 shares on October 28, 1998 at $17.63; (2) 25,000 shares on
December 11, 1998 at $21.28; (3) 10,000 shares on December 14, 1998 at $20.81;
(4) 5,000 shares on December 15, 1998 at $21.00; and (5) 10,000 shares on
December 17, 1998 at $20.63. During 1999, our stock repurchases were as
follows: (1) 5,000 shares on February 8, 1999 at $17.50; (2) 5,000 shares on
February 8, 1999 at $17.44; (3) 10,000 shares on February 11, 1999 at $16.00;
(4) 20,000 shares on February 18, 1999 at $16.75; (5) 10,000 shares on March 3,
1999 at $8.31; (6) 40,000 shares on March 3, 1999 at $8.50; (7) 25,000 shares on
March 16, 1999 at $7.00; (8) 25,000 shares on March 16, 1999 at $6.82; (9) 7,500
shares on March 17, 1999 at $6.69; (10) 7,500 shares on March 17, 1999 at $6.75;
(11) 5,000 shares on March 17, 1999 at $6.94; (12) 10,000 shares on March 18,
1999 at $6.50; (13) 10,000 shares on March 18, 1999 at $6.44; (14) 10,000 shares
on May 3, 1999 at $10.00; and (15) 5,000 shares on May 6, 1999 at $10.63.
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ITEM 6. SELECTED FINANCIAL DATA
In October 1996, at the time of our initial public offering, we acquired
Brewer Personnel Services, Inc. and five other staffing companies (we sometimes
refer to these entities as the "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. The financial statements have
been restated for the significant pooling-of-interests business combinations. 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 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues $1,220,852 $1,014,913 $594,229 $176,194 $81,719
Cost of services 918,574 750,438 443,446 127,571 57,978
---------- ---------- -------- -------- -------
Gross profit 302,278 264,475 150,783 48,623 23,741
Operating expenses:
Selling, general and administrative 214,824 172,222 107,411 34,203 17,289
Nonrecurring charges 2,153 27,336 - - -
Depreciation and amortization 21,448 14,158 6,347 1,802 824
---------- ---------- -------- -------- -------
Operating income $ 63,853 $ 50,759 $ 37,025 $ 12,618 $ 5,628
========== ========== ======== ======== =======
Interest expense 17,419 6,768 1,413 1,390 729
Net income 30,213 18,639 20,400 7,493 3,692
Basic earnings per share $ 1.03 $ 0.65 $ 0.85 $ 0.65
Diluted earnings per share $ 1.02 $ 0.63 $ 0.82 $ 0.64
<CAPTION>
As of December 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 138,983 $ 94,457 $ 49,068 $ 30,412 $ 3,588
Total assets 685,146 580,945 301,170 92,676 31,535
Long-term debt, including current maturities 300,414 176,700 12,000 - 16,258
Stockholders' equity 290,476 260,092 219,673 67,021 5,826
</TABLE>
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," and our audited financial statements and the related notes
thereto appearing elsewhere in this 10-K.
Overview
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
15
<PAGE>
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.
Our operating results include acquisitions accounted for under the purchase
method since the effective date of acquisition and have been restated for the
significant pooling-of-interests business combinations. During 1998 and 1999,
we completed 18 and 3 business combinations, respectively. 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 $148.7
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.
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, pursuant to management's plan of integration, which was completed
September 30, 1999. Upon completion of our plan of integration, approximately
$828,000, representing an overaccrual of merger and integration expenses
relating to the merger with Robert Walters, was reversed into income during
September 1999.
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 would 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 coping with and trying to improve our
IT staffing growth rates as well as consolidating administrative functions and
building an IT solutions network that complements our business units and core
competencies. To focus our efforts in these areas, we slowed down our
acquisition program during the balance of 1999.
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, in January 2000 management
decided to operate its 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, management
is currently reevaluating its estimated useful life for the intangibles
associated with their acquisition of Edgewater Technology, Inc. ("Edgewater").
Prior to the restructure and segmentation, these intangibles were amortized over
30 years since Edgewater was operated as an integral component of the
Professional/IT segment. Management has engaged an independent valuation
consultant to assist them in determining the appropriate useful life for these
intangible assets. The change in useful life will be made effective January 1,
2000 and is expected to result in a material increase in the annual amortization
expense over that which would have been recorded based on the previous 30 year
life.
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.
16
<PAGE>
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 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 % 1998 % 1997 %
---------- ----- ---------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Professional/IT $ 591,430 48.4 $ 542,384 53.4 $252,577 42.5
Commercial 614,405 50.3 472,529 46.6 341,652 57.5
E-solutions(1) 15,017 1.3 - - - -
---------- ----- ---------- ----- -------- -----
Total 1,220,852 100.0 1,014,913 100.0 594,229 100.0
---------- ----- ---------- ----- -------- -----
Operating income:
Professional/IT 43,163 3.5 51,334 5.1 17,084 2.9
Commercial 35,721 2.9 34,936 3.4 25,137 4.2
E-solutions(1) 3,150 0.3 - - - -
Corporate (16,028) (1.3) (8,175) (0.8) (5,196) (0.9)
---------- ----- ---------- ----- -------- -----
Total before nonrecurring 66,006 5.4 78,095 7.7 37,025 6.2
charges
Nonrecurring charges 2,153 0.2 27,336 2.7 - -
---------- ----- ---------- ----- -------- -----
Total 63,853 5.2 50,759 5.0 37,025 6.2
Interest expense and other, net 17,646 1.4 6,996 0.7 681 0.1
---------- ----- ---------- ----- -------- -----
Income before income taxes 46,207 3.8 43,763 4.3 36,344 6.1
Income taxes 15,994 1.3 25,124 2.5 15,944 2.7
---------- ----- ---------- ----- -------- -----
Net income $ 30,213 2.5 $ 18,639 1.8 $ 20,400 3.4
---------- ----- ---------- ----- -------- -----
EBITDA $ 85,301 7.0 $ 64,917 6.4 $ 43,372 7.3
---------- ----- ---------- ----- -------- -----
Per share amounts:
Basic earnings $ 1.03 $ 0.65 $ 0.85
========== ========== ========
Diluted earnings $ 1.02 $ 0.63 $ 0.82
========== ========== ========
EBITDA $ 2.89 $ 2.19 $ 1.75
========== ========== ========
Excluding nonrecurring charges:
Net income $ 31,434 2.6 $ 43,406 4.3 $ 20,400 3.4
---------- ----- ---------- ----- -------- -----
EBITDA $ 87,454 7.1 $ 92,253 9.1 $ 43,372 7.3
---------- ----- ---------- ----- -------- ------
Per share amounts:
Basic earnings $ 1.07 $ 1.52 $ 0.85
========== ========== ========
Diluted earnings $ 1.06 $ 1.47 $ 0.82
========== ========== ========
EBITDA $ 2.96 $ 3.11 $ 1.75
========== ========== ========
</TABLE>
__________
(1) The revenues and operating income for the E-solutions segment represents
activity for the period following the effective date of our E-solutions
acquisition in 1999 which was for the period of April 1, 1999 through December
31, 1999.
Results for the Year Ended December 31, 1999 Compared to Results for the Year
Ended December 31, 1998
Revenues. Consolidated revenues increased $205.9 million, or 20.3%, to
$1,220.9 million for 1999 compared to $1,014.9 million for 1998. The
acquisitions completed during 1999 in the Professional/IT segment accounted for
approximately $32.6 million of the increase. Approximately $95.5 million of the
increase is the result of recording a full year's operations in 1999 for the
companies purchased in the Professional/IT and Commercial segments during 1998,
which consists of both internal and acquisition growth.
17
<PAGE>
Revenues for the Professional/IT segment increased $49.0 million, or 9.0%, to
$591.4 million for 1999 compared to $542.4 million for 1998. 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 $12.5 million of the increase results from
the full year's operations of the companies acquired during 1998, which consists
of both internal and acquisition growth. The Professional/IT companies purchased
in 1999 provided approximately $18.9 million of the increase.
Revenues for the Commercial segment increased $141.9 million, or 30.0%, to
$614.4 million for 1999 compared to $472.5 million for 1998. This revenue growth
is the result of acquisitions and internal growth. Approximately $83.0 million
of the increase results from the full year's operations of the companies
purchased during 1998, which consists of both internal and acquisition growth.
No Commercial acquisitions were completed during 1999.
Revenues for the E-solutions segment were $15.0 million in 1999. 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. Gross profit increased $37.8 million, or 14.3%, to $302.3
million for 1999 as compared to $264.5 million for 1998. Gross profit as a
percentage of revenue decreased from 26.1% for 1998 to 24.8% for 1999. The
decrease in gross margin is primarily the result of the faster growth of our
commercial staffing segment, which has grown to 50.3% of total revenues in 1999
up from 46.6% in 1998 and the decline in our permanent placement revenues as a
percentage of our total consolidated revenues. Our commercial staffing growth
was related primarily to the Strategic Resource Group, which targets large
accounts that typically bill at lower gross margins than our retail business in
exchange for higher volume, and the acquisition of the staffing services
division of WorldTec Group International, Inc. which also had lower margins.
SG&A and EBITDA. Selling, general and administrative expenses ("SG&A")
increased $17.4 million, or 8.7%, to $217.0 million for 1999 as compared to
$199.6 million for 1998. SG&A as a percentage of revenue decreased from 19.7% in
1998 to 17.8% in 1999. EBITDA increased $20.4 million, or 31.4%, to $85.3
million for 1999 as compared to $64.9 million for 1998. EBITDA as a percentage
of revenues was 7.0% for 1999 as compared to 6.4% for 1998. The revenue mix
shift and faster growth in the Commercial segment affected the SG&A as a
percentage of revenue since Commercial SG&A is significantly lower as a
percentage of revenue compared to the Professional/IT and E-solutions segments.
SG&A for 1998 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. Excluding this 1998
stock option income, SG&A as a percentage of revenue remained at 19.7%, but
EBITDA as a percentage of revenue changed to 6.3%.
Nonrecurring Charges. During 1998, we incurred $27.3 million in nonrecurring
merger costs and one-time charges 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. In 1999, the charge for restructuring our IT
platform in the Professional/IT segment of approximately $3.0 million was
comprised primarily of severance, office closing costs related to management
changes, and the redesign of key business processes in our domestic and
international IT operations. These restructuring expenses of approximately $3.0
million were offset by the reversal of the Robert Walters merger and integration
accrual of approximately $828,000.
SG&A and EBITDA Excluding Nonrecurring Charges. Exclusive of the 1999
restructuring expenses and the 1998 nonrecurring merger costs as discussed
above, SG&A was $214.8 million for 1999 and $172.2 million for 1998. SG&A as a
percentage of revenue increased from 17.0% in 1998 to 17.6% in 1999. EBITDA was
$87.5 million for 1999 and $92.3 million for 1998. EBITDA as a percentage of
revenues was 7.1% for 1999 and 9.1% for 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $7.3 million, or 51.5%, to $21.4 million for 1999 as compared
to $14.2 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, as well as assets
acquired in acquisitions. As previously mentioned, we are currently reevaluating
the estimated useful life for the intangibles associated with our acquisition of
Edgewater, our E-solutions unit. Prior to the restructure, these intangibles
were amortized over 30 years since Edgewater was operated as an integral
component of the Professional/IT segment. We have engaged an independent
valuation consultant to assist us in determining the appropriate useful life for
the intangible assets.
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<PAGE>
The change in useful life will be made effective January 1, 2000 and is expected
to result in a material increase in the annual amortization expense regarding
the intangibles in the E-solutions segment over that which would have been
recorded based on the previous 30 year life.
Operating Income. Operating income increased $13.1 million, or 25.8%, to
$63.9 million for 1999 compared to $50.8 million for the same period last year.
Operating margin was 5.2% for 1999 as compared to 5.0% for 1998. Exclusive of
the 1999 restructuring expenses and the 1998 nonrecurring merger costs,
operating income was $66.0 million for 1999 and $78.1 million for 1998.
Operating margin excluding these costs were 5.4% for 1999 and 7.7% for 1998.
Operating margin excluding nonrecurring merger costs declined due to lower gross
profit and higher depreciation and amortization expense as discussed above.
The following operating income discussion at the Professional/IT, Commercial
and E-solutions segment levels excludes unallocated corporate SG&A of $16.0
million for 1999 and $8.2 million for 1998. The increase in unallocated
corporate SG&A was primarily a result of increased staff health costs associated
with our self-insurance plan, increased salaries due to increased corporate
headcount, 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 and work
opportunity tax credit consultation.
Operating income for the Professional/IT segment decreased $8.2 million, or
15.9%, to $43.2 million in 1999 as compared to $51.3 million in 1998. The
operating margin for the Professional/IT segment decreased from 9.5% in 1998 to
7.3% in 1999. Excluding the portion of our IT restructuring recorded at the
Professional/IT division during 1999, operating income was $42.0 million with a
related operating margin of 7.1%. Negative growth in domestic IT staffing, which
we believe was primarily associated with Year 2000 spending patterns experienced
by the industry, deferral of non-Year 2000 related development projects, and
higher depreciation and amortization expenses were the primary reasons for the
decreases in operating income and operating margin.
Operating income for the Commercial segment increased $0.8 million, or 2.2%,
to $35.7 million in 1999 as compared to $34.9 million in the same period last
year. Continued growth from our Strategic Resource Group and growth from
purchase acquisitions completed during 1998 were the primary factors
contributing to the increase in operating income in 1999. The activity from our
Strategic Resource Group, which provides customers with dedicated on-site
account management, tend to have lower gross margins than traditional temporary
staffing services. However, the higher volumes and relatively long-term
contracts associated with these relationships have resulted in operating profit
growth. The operating margin of the Commercial segment decreased from 7.4% in
1998 to 5.8% in 1999. The decrease in operating margins resulted from lower
gross margins due to decreased permanent placement fees and higher revenues from
our Strategic Resource Group, as well as higher depreciation and amortization
expense. Also contributing to the decrease in operating margins was SG&A
incurred during the fourth quarter of 1999 to increase our internal headcount
for future growth purposes in this segment. Operating margins have also been
affected by the movement of certain support functions from corporate in 1998 to
the Commercial segment in 1999.
Operating income for the E-solutions segment was $3.2 million in 1999. As
previously mentioned, this segment was created at the end of 1999 as part of our
IT restructure. Results for this segment relate to Edgewater in Wakefield,
Massachusetts which was acquired effective April 1, 1999.
Net Interest Expense. We incurred net interest expense of $17.6 million in
1999 as compared to $7.0 million of interest expense in 1998. Interest expense
in all periods 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 increased $11.6 million, or 62.1%, to $30.2 million
for 1999 as compared to $18.6 million for the same period last year. Net margin
was 2.5% for 1999 as compared to 1.8% for 1998. Exclusive of the 1999
restructuring expenses and the 1998 nonrecurring merger costs, net income was
$31.4 million for 1999 and $43.4 million for 1998. Net margin excluding these
costs was 2.6% for 1999 and 4.3% for 1998.
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
$1,014.9 million 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.
19
<PAGE>
Revenues for the Professional/IT segment increased $289.9 million, or 114.8%,
to $542.4 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 $130.9 million, or 38.3%, to
$472.5 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.
Gross Profit. Gross profit increased $113.7 million, or 75.4%, to $264.5
million for 1998 as compared to $150.8 million for 1997. Gross profit as a
percentage of revenue increased from 25.4% in 1997 to 26.1% in 1998. 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.
SG&A and EBITDA. SG&A increased $92.1 million, or 85.8%, to $199.6 million in
1998 as compared to $107.4 million in 1997. SG&A as a percentage of revenue
increased from 18.1% in 1997 to 19.7% in 1998. EBITDA increased $21.5 million,
or 49.7%, to $64.9 million for 1998 as compared to $43.4 million for 1997.
EBITDA as a percentage of revenues was 6.4% for 1998 as compared to 7.3% for
1997. 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.
Nonrecurring Merger Costs. During 1998, we incurred $27.3 million in
nonrecurring merger costs and one-time charges 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.
SG&A and EBITDA Excluding Nonrecurring Charges. Exclusive of the 1998
nonrecurring merger costs discussed above, SG&A was $172.2 million and SG&A as a
percentage of revenue was 17.0%. EBITDA was $92.3 million for 1998 and EBITDA as
a percentage of revenues was 9.1% for 1998.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $7.8 million, or 123.1%, to $14.1 million for 1998 as compared to $6.3
million for 1997. 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 $8.2 million
for 1998 and $5.2 million for 1997.
Operating income for the Professional/IT segment increased $34.2 million, or
200.4%, to $51.3 million for 1998 as compared to $17.1 million for 1997. The
Professional/IT segment benefited from an increase in operating margin from 6.8%
in 1997 to 9.5% 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 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.
20
<PAGE>
Operating income for the Commercial segment increased $9.8 million, or 39.0%,
to $34.9 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 agreements as well as the strategic acquisitions completed during 1998
have provided the majority of this growth. Commercial acquisitions completed
during 1998 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 was 7.4% for both 1997 and 1998.
Net Interest Expense. We incurred net interest expense of $7.0 million in
1998 as compared to $0.7 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 decreased $1.8 million, or 8.6% to $18.6 million for
1998 as compared to $20.4 million for 1997. Net margin was 1.8% for 1998 and
3.4% for 1997. Exclusive of the nonrecurring merger costs, net income was $43.4
million for 1998 and net margin was 4.3% for 1998.
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 $10.0 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 is
scheduled to revert back to $300 million. 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 borrowings on the Credit
Facility of approximately $123.1 million in 1999 and $164.7 million in 1998. The
majority of these funds were used to pay the cash consideration for several of
our acquisitions and for general corporate purposes. As of March 10, 2000,
$293.9 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. At December
31, 1999, these swaps had a fair market value of approximately $1.5 million
which is not reflected in our year-end balance sheet.
Net cash provided by operating activities was $4.8 million in 1999, $6.5
million in 1998 and $16.7 million in 1997. The net cash provided by operating
activities for the periods presented was primarily attributable to net income
and changes in operating assets and liabilities. Excluding $16.3 million in
nonrecurring costs paid during 1999, net cash provided by operating activities
was $21.1 million.
Net cash used in investing activities was $135.4 million in 1999, $165.8
million in 1998 and $135.0 million in 1997. Cash used in investing activities in
1998 and 1999 was primarily attributable to cash paid for acquisitions completed
during these years and for additional contingent consideration paid for
acquisitions completed during 1997 and 1998. In 1997, cash used in investing
activities was primarily related to consideration paid for our acquisitions.
Net cash provided by financing activities was $122.9 million in 1999, $166.0
million in 1998 and $107.4 million in 1997. Cash provided by financing
activities in 1998 and 1999 was primarily related to borrowings under our Credit
Facility to finance several of the acquisitions and contingent consideration
payments completed during these years. 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.
21
<PAGE>
Our combined cash and cash equivalents decreased $7.8 million in 1999,
increased $6.7 million in 1998 and decreased $10.9 million in 1997 as a result
of the foregoing factors.
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. See
"Special Note Regarding Forward Looking Statements." 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 was 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. There were concerns that computer programs
with time sensitive software might recognize a date using "00" as the Year 1900
rather than the Year 2000. During 1999, we assembled a Year 2000 compliance team
to address these compliance matters company-wide. As part of this project and
consistent with our operating strategy, we implemented one primary front office
software package (Caldwell-Spartin) in a majority of our Commercial offices. In
a majority of our Professional/IT offices, we implemented one primary search and
retrieval software package (EZ Access) and one primary front office software
package (MAS 90). In addition, we selected and implemented the PeopleSoft system
for our back office, administrative and accounting systems. All of these
software systems had the ability to process transactions with dates for the Year
2000 and beyond at no incremental cost and, accordingly, Year 2000 costs with
respect to these software systems had no 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), 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 addressed their own Year 2000
compliance procedures and certified their compliance to us. Certain of our
utility vendors certified their Year 2000 compliance to us. Our contingency plan
ensured that we had 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, which did not
occur, could have had a material adverse effect on our revenue sources and could
have disrupted our customers' payment cycle. We also worked with our customers
to address the Year 2000 issues that could have affected our business. The costs
of our Year 2000 compliance project for each matter individually and all matters
in the aggregate were not material to our financial condition or results of
operations.
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.
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.
22
<PAGE>
Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133." SFAS No. 137 defers for one year the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and for Hedging Activities." As
a result, SFAS 133 is effective for all fiscal years beginning after June 15,
2000. SFAS 133 was issued to establish 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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We entered into interest rate swap agreements during 1998. Under the terms of
these agreements, we are obligated to pay interest on a notional amount to the
extent that the fixed rate under the interest rate swap agreements exceeds the
London interbank offered rate, as measured pursuant to the agreements.
Furthermore, we will receive interest to the extent that the London interbank
offered rate exceeds the aforementioned fixed rate. Interest received as a
result of these agreements has been netted against interest expense in our
financial statements. The amounts related to the interest rate swap agreements
as of and for the year ended December 31, 1999 were as follows:
Notional Fixed LIBOR Interest Estimated
Amount Rate Rate Revenue Fair Value Maturity
------- ----- ----- ------- ---------- --------
(In Thousands)
$20,000 4.865% 6.184% $84 $586 October 2001
20,000 4.823% 6.219% 63 671 October 2001
20,000 4.835% 6.125% 71 285 November 2000
Our involvement with derivative financial instruments is limited to the
interest rate swap agreements discussed above. We entered into these agreements
as hedges against increases in interest rates which would increase the cost of
its variable rate borrowings under our Credit Facility. Conversely, we are
exposed to the risk that the cost of those borrowings would be higher than the
amount computed under our Credit Facility should interest rates decline. In
addition, we are 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. At December 31, 1999, we had no
open foreign currency derivatives.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Consolidated Financial Statements: The following consolidated financial
---------------------------------
statements are included in this 10-K:
Page
----
Report of Independent Public Accountants 25
Covered by the Report of Independent Public Accountants:
Consolidated Balance Sheet at December 31, 1999 and 1998 26
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998, and 1997 27
Consolidated Statements of Stockholders' Equity at
December 31, 1999, 1998, and 1997 28
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997 29
Notes to Consolidated Financial Statements 30
(b) Not Covered by Report of Independent Public Accountants:
-------------------------------------------------------
Supplementary Quarterly Financial Information 44
24
<PAGE>
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,
1999 and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years ended December 31, 1999.
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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
January 28, 2000.
25
<PAGE>
STAFFMARK, INC.
---------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,718 $ 12,811
Accounts receivable, net 191,192 155,796
Deferred income taxes 5,987 2,569
Prepaid expenses and other 17,036 10,063
-------- --------
Total current assets 217,933 181,239
PROPERTY AND EQUIPMENT, net 29,043 22,449
INTANGIBLE ASSETS, net 435,387 375,682
OTHER ASSETS 2,783 1,575
-------- --------
$685,146 $580,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 40,982 $ 35,068
Payroll and related liabilities 26,139 40,309
Reserve for workers' compensation claims 9,627 8,087
Income taxes payable 2,202 3,318
-------- --------
Total current liabilities 78,950 86,782
LONG-TERM DEBT 300,414 176,700
OTHER LONG-TERM LIABILITIES 6,222 52,737
DEFERRED INCOME TAXES 9,084 4,634
COMMITMENTS AND CONTINGENCIES (Notes 15 through 17)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued or outstanding - -
Common stock, $.01 par value; 29,401,022 and 29,083,379 shares issued
and outstanding as of December 31, 1999 and 1998, respectively 294 291
Paid-in capital 216,279 214,271
Retained earnings 76,476 46,263
Accumulated other comprehensive income (2,573) (733)
-------- --------
Total stockholders' equity 290,476 260,092
-------- --------
$685,146 $580,945
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
26
<PAGE>
STAFFMARK, INC.
---------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------------------
1999 1998 1997
---------- ---------- -----------
<S> <C> <C> <C>
SERVICE REVENUES $1,220,852 $1,014,913 $ 594,229
COST OF SERVICES 918,574 750,438 443,446
---------- ---------- -----------
Gross profit 302,278 264,475 150,783
OPERATING EXPENSES:
Selling, general and administrative 214,824 172,222 107,411
Depreciation and amortization 21,448 14,158 6,347
Non-recurring charges 2,153 27,336 -
---------- ---------- -----------
Operating income 63,853 50,759 37,025
OTHER INCOME (EXPENSE):
Interest expense (17,419) (6,768) (1,413)
Other, net (227) (228) 732
---------- ---------- -----------
Income before provision for income taxes 46,207 43,763 36,344
PROVISION FOR INCOME TAXES 15,994 25,124 15,944
---------- ---------- -----------
Net income $ 30,213 $ 18,639 $ 20,400
========== ========== ===========
BASIC EARNINGS PER SHARE $ 1.03 $ 0.65 $ 0.85
========== ========== ===========
DILUTED EARNINGS PER SHARE $ 1.02 $ 0.63 $ 0.82
========== ========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
27
<PAGE>
STAFFMARK, INC.
---------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(In Thousands)
<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, 1996 19,598 $196 $ 60,067 $ 6,424 $ 334 $ 67,021
Dividends declared - - - (1,552) - (1,552)
Issuance of common stock, net of
offering costs 4,013 40 102,536 - - 102,576
Business combinations 3,354 34 25,687 (138) - 25,583
Issuances of common stock related to
employee stock plans 69 - 1,512 - - 1,512
Effect of compensatory stock options - - 4,630 - - 4,630
Comprehensive income:
Net income - - - 20,400 - 20,400
Foreign currency translation
adjustments - - - - (496) (496)
------ ---- -------- ------- ------- --------
Comprehensive income - - - 20,400 (496) 19,904
------ ---- -------- ------- ------- --------
BALANCE, December 31, 1997 27,034 270 194,432 25,134 (162) 219,674
Dividends declared - - - (693) - (693)
Business combinations 1,770 18 17,978 3,183 - 21,179
Issuances of common stock related to
employee stock plans 347 4 3,980 - - 3,984
Repurchase of stock (68) (1) (1,373) - - (1,374)
Effect of compensatory stock options - - (746) - - (746)
Comprehensive income:
Net income - - - 18,639 - 18,639
Foreign currency translation
adjustments - - - - (571) (571)
------ ---- -------- ------- ------- --------
Comprehensive income - - - 18,639 (571) 18,068
------ ---- -------- ------- ------- --------
BALANCE, December 31, 1998 29,083 291 214,271 46,263 (733) 260,092
Business combinations 171 2 2,284 - - 2,286
Issuances of common stock related to
employee stock plans 342 3 1,578 - - 1,581
Repurchase of stock (195) (2) (1,854) - - (1,856)
Comprehensive income:
Net income - - - 30,213 - 30,213
Foreign currency translation
adjustments - - - - (1,840) (1,840)
------ ---- -------- ------- ------- --------
Comprehensive income - - - 30,213 (1,840) 28,373
------ ---- -------- ------- ------- --------
BALANCE, December 31, 1999 29,401 $294 $216,279 $76,476 $(2,573) $290,476
====== ==== ======== ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
28
<PAGE>
STAFFMARK, INC.
---------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Years
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,213 $ 18,639 $ 20,400
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 21,448 14,158 6,347
Provision for bad debts 2,480 1,634 896
Deferred income taxes 1,668 4,889 (1,432)
Write-down of certain assets - 2,708 -
Effect of compensatory stock options - (746) 4,630
Other, net (426) (974) (339)
Change in operating accounts,
net of effects of acquisitions:
Accounts receivable (30,550) (40,726) (24,192)
Prepaid expenses and other (6,558) (2,554) (1,963)
Other assets (1,592) 2,327 (44)
Accounts payable and accrued liabilities 18,955 6,047 5,782
Payroll and related liabilities (14,495) 16,080 4,990
Payment of nonrecurring merger expenses (16,305) (9,261) -
Reserve for workers' compensation claims 1,251 1,504 226
Income taxes payable (1,699) (3,708) 1,392
Other long-term liabilities 381 (3,514) (16)
--------- --------- ---------
Net cash provided by operating activities 4,771 6,503 16,677
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (123,708) (155,552) (127,895)
Capital expenditures (11,709) (10,240) (7,061)
--------- --------- ---------
Net cash used in investing activities (135,417) (165,792) (134,956)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs - - 102,576
Proceeds from borrowings 416,844 290,890 63,350
Payments on borrowings (293,130) (126,190) (58,203)
Distributions to stockholders - (693) (1,552)
Proceeds from employee stock plans 1,581 3,984 1,512
Repurchases of stock (1,856) (1,374) -
Deferred financing costs (585) (601) (284)
--------- --------- ---------
Net cash provided by financing activities 122,854 166,016 107,399
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,792) 6,727 (10,880)
EFFECT OF FOREIGN CURRENCY TRANSLATION ON CASH AND
CASH EQUIVALENTS (1,301) (571) (496)
CASH AND CASH EQUIVALENTS, beginning of period 12,811 6,655 18,031
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 3,718 $ 12,811 $ 6,655
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 17,413 $ 5,647 $ 1,222
========= ========= =========
Income taxes paid $ 17,108 $ 28,269 $ 13,986
========= ========= =========
Non-cash transactions:
Notes payable issued in business combination $ - $ 16,117 $ -
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
29
<PAGE>
STAFFMARK, INC.
---------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. NATURE OF BUSINESS:
------------------
StaffMark, Inc. ("StaffMark" or the "Company") is a global provider of
diversified staffing, information technology ("IT"), professional, consulting
and solutions services to businesses, professional and service organizations and
governmental agencies. As of December 31, 1999, StaffMark operated over 320
offices in 32 states and 14 countries and provided staffing in the Commercial
and Professional/Information Technology ("Professional/IT") and E-solutions
service lines. The Company extends trade credit to customers representing a
variety of industries. There are no individual customers that accounted for more
than 5% of the Company's service revenues in any of the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Principles of Consolidation -
The consolidated financial statements include the accounts of StaffMark, Inc.
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.
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:
Furniture, fixtures and equipment 5-7 years
Computer equipment and software 5-7 years
Leasehold improvements 3-15 years
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.
In conjunction with management's restructuring plan described more fully in
Note 4, in January 2000, management decided to operate its 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, management is currently reevaluating its
estimated useful life for the intangibles associated with their acquisition of
Edgewater Technology, Inc. ("Edgewater"). Prior to the restructure and
segmentation, these intangibles were amortized over 30 years since Edgewater was
operated as an integral component of the Professional/IT segment. Management has
engaged an independent valuation consultant to assist them in determining the
appropriate useful life for these intangible assets. The change in useful life
will be made effective January 1, 2000 and is expected to result in a material
increase in the annual amortization expense over that which would have been
recorded based on the previous 30 year life.
30
<PAGE>
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.
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 currently enacted statutory tax rates to differences
between the financial reporting and the tax bases of existing assets and
liabilities.
Foreign Currency Translation -
The functional currency for certain of the Company's foreign subsidiaries is
their 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.
Derivative Financial Instruments -
The Company's policy is to use financial derivatives only to manage exposure
to fluctuations in interest and foreign currency exchange rates. Gains and
losses realized and premiums paid on interest rate hedges and foreign currency
options are deferred and amortized to expense over the life of the underlying
hedged instrument, or immediately if the underlying hedged instrument is
settled.
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 staffing unit as more fully
described in Note 4.
31
<PAGE>
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 13.
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.
Other Comprehensive Income -
The Company has adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income," in its financial statements for all periods presented.
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 -
The FASB recently issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of Effective Date of FASB Statement No. 133."
SFAS No. 137 defers for one year the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and for Hedging Activities." As a result, SFAS No.
133 is effective for all fiscal years beginning after June 15, 2000. SFAS No.
133 was issued to establish 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. 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:
---------------------
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.
32
<PAGE>
The Company has completed the following business combinations:
<TABLE>
<CAPTION>
Purchase Business Combinations Pooling-of-Interests
-------------------------------------- ---------------------------
Number of Consideration Paid Number of
------------------------
Year Transactions Cash Notes Shares Transactions Shares Issued
---- ------------ ------ ----- --------- ------------ -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
1999 3 $ 86.8 $ - 201,695 - -
1998 11 117.0 16.1 572,135 7 9,030,976
1997 18 132.5 - 1,691,911 2 347,083
</TABLE>
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 1999, the Company paid consideration
totaling $36.6 million in cash and 5,000 shares of common stock pursuant to
these arrangements. During 1998, the Company paid consideration totaling $36.9
million in cash and 169,434 shares of common stock pursuant to these
arrangements. In 1999, the Company also cancelled 35,986 shares that had been
put in escrow for certain companies acquired during 1998. As of December 31,
1998, the Company had accrued approximately $31.6 million related to these
arrangements. These amounts have been reported as other long-term liabilities in
the accompanying consolidated balance sheets. Any additional consideration to be
paid for acquisitions completed prior to December 31, 1999 will be immaterial to
the accompanying financial statements.
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.
Pro Forma Operating Results -
In addition to Robert Walters, the Company acquired 17 staffing and
professional service companies during 1998. The 1998 acquisitions of Strategic
Legal Resources, Inc., Progressive Personnel Resources, Inc. and WorldTec Group
International, Inc. were considered significant. These 1998 acquisitions are
referred to as the "Acquisitions." The unaudited consolidated results of
operations on a pro forma basis as though the Acquisitions had been acquired as
of the beginning of 1998 are presented below. The pro forma information
presented below does not reflect the reductions in salaries that certain owners
of the Acquisitions agreed to in connection with their acquisition. The
remaining 1998 and 1999 acquisitions were not significant, individually or in
the aggregate, and, therefore, have not been included in the following pro forma
presentation.
<TABLE>
<CAPTION>
Fiscal Years
------------------------
1999 1998
------------ ----------
(In Thousands)
<S> <C> <C>
Revenues $1,220,852 $1,083,979
========== ==========
Net income $ 29,780 $ 24,501
========== ==========
Basic earnings per share $ 1.02 $ 0.85
========== ==========
Diluted earnings per share $ 1.01 $ 0.82
========== ==========
</TABLE>
4. NON-RECURRING MERGER AND INTEGRATION EXPENSES AND PROVISIONS TO REDUCE THE
--------------------------------------------------------------------------
CARRYING VALUE OF CERTAIN ASSETS:
--------------------------------
During the fourth quarter of 1998, the Company recorded merger and
integration expenses totaling approximately $24.6 million related to the merger
with Robert Walters and other pooling-of-interests transactions completed during
1998. Included in these costs were 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 consisted primarily of costs related to office closings and
contract terminations pursuant to management's plan of integration, which was
completed by September 30, 1999. Substantially all costs associated with
severance had been incurred as of December 31, 1998.
33
<PAGE>
Upon completion of management's plan of integration, approximately $828,000,
representing an overaccrual of merger and integration expenses relating to the
merger with Robert Walters, was reversed into income during September 1999. The
following is a summary of the Company's merger and integration accrual:
(In Thousands)
Total merger and integration expenses $ 24,626
Cash outlays (9,261)
--------
Accrual at December 31, 1998 15,365
Cash outlays (14,537)
Reversal of excess accrual (828)
--------
Accrual at December 31, 1999 $ -
========
In 1998, the Company 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 staffing unit. In conjunction with renegotiating
its 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.
During the third quarter of 1999, the Company recorded restructuring expenses
totaling approximately $3.0 million relating to the restructure of the Company's
Professional/IT segment. This charge 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 their 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, the Company's 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. The Company 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 have been 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 restructuring expense also includes future
contractual obligations to certain severed employees which extend through
September 2001. The following is a summary of the Company's restructuring
accrual, which has been included in accounts payable and accrued liabilities in
the accompanying consolidated balance sheet:
(In Thousands)
Total restructuring expenses $ 2,981
Cash outlays (1,768)
-------
Accrual at December 31, 1999 $ 1,213
=======
5. ACCOUNTS RECEIVABLE:
-------------------
Included in accounts receivable are unbilled amounts totaling approximately
$29.6 million and $18.7 million at December 31, 1999 and 1998, 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.
34
<PAGE>
The following are the changes in the allowances for doubtful accounts:
<TABLE>
<CAPTION>
Fiscal Years
--------------------------------------------
1999 1998 1997
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year $3,648 $ 1,868 $ 625
Increases relating to acquisitions 125 1,188 862
Provision for bad debts 2,480 1,634 896
Charge-offs, net of recoveries (757) (1,042) (515)
------ ------- -------
Balance at end of year $5,496 $ 3,648 $ 1,868
====== ======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT:
----------------------
Components of property and equipment are as follows as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In Thousands)
<S> <C> <C>
Furniture, fixtures and equipment $19,415 $15,135
Computer equipment and software 22,450 18,299
Leasehold improvements 2,320 3,102
------- -------
44,185 36,536
Less accumulated depreciation and amortization 15,142 14,087
------- -------
$29,043 $22,449
======= =======
</TABLE>
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1999, 1998 and 1997, totaled approximately $6.8
million, $4.4 million and $2.9 million, respectively.
7. INTANGIBLE ASSETS:
------------------
Intangible assets consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In Thousands)
<S> <C> <C>
Goodwill $459,107 $387,187
Other 4,375 3,139
-------- --------
463,482 390,326
Less accumulated amortization 28,095 14,644
-------- --------
$435,387 $375,682
======== ========
</TABLE>
Amortization expense related to intangible assets for the years ended
December 31, 1999, 1998 and 1997, totaled approximately $14.7 million, $9.8
million and $3.4 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, 1999 and 1998, maximum borrowings
pursuant to the Credit Facility were limited to approximately $325.0 million and
$250.0 million, respectively. Additionally, during December 1999, the Company
obtained a commitment from two members of its Credit Facility to increase its
borrowing capacity for an additional $10.0 million through January 2000. These
increased borrowings were not utilized by the Company. On March 31, 2000, the
maximum amount of borrowings under the Credit Facility is scheduled to revert
back to $300 million. The remaining $300 million of the Credit Facility matures
on August 20, 2003. Interest on any borrowings is computed using the Company's
option of either the bank group's prime rate or the London interbank offered
rate, incrementally adjusted based on the Company's operating leverage ratios.
As of December 31, 1999, the Company is required to pay a quarterly facility fee
determined by multiplying the total amount of the Credit Facility by a
percentage which varies based on the Company's operating leverage ratios. As of
December 31, 1999, this fee was 0.25% of the total amount of the Credit
Facility. As of December 31, 1998, the Company was required to pay quarterly
commitment fees equal to 0.20%-0.25% of the unused portion
35
<PAGE>
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, 1999. The Credit Facility is secured by all of the issued and
outstanding capital stock of the Company's domestic subsidiaries and 65% of the
issued and outstanding capital stock of the Company's first tier foreign
subsidiaries. As of December 31, 1999 and 1998, debt outstanding under the
Credit Facility consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
(In Thousands)
<S> <C> <C>
Borrowings on Credit Facility. Interest payable monthly
at a variable rate which averaged 6.53% and 6.59%
during the years ended December 31, 1999 and 1998,
respectively. Matures on August 20, 2003. $300,414 $176,700
======== ========
</TABLE>
9. FINANCIAL INSTRUMENTS:
---------------------
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 exceeds 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, 1999 were as follows:
<TABLE>
<CAPTION>
Notional Fixed LIBOR Interest Estimated
Amount Rate Rate Revenue Fair Value Maturity
-------- ----- ----- -------- ----------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
$20,000 4.865% 6.184% $84 $586 October 2001
20,000 4.823% 6.219% 63 671 October 2001
20,000 4.835% 6.125% 71 285 November 2000
</TABLE>
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.
10. INCOME TAXES:
------------
The provision for income taxes consisted of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 9,935 $13,168 $11,081
State 934 1,839 1,963
Foreign 3,457 5,228 4,333
------- ------- -------
14,326 20,235 17,377
------- ------- -------
Deferred:
Federal 1,392 4,228 (1,225)
State 131 590 (208)
Foreign 145 71 -
------- ------- -------
1,668 4,889 (1,433)
------- ------- -------
$15,994 $25,124 $15,944
======= ======= =======
</TABLE>
36
<PAGE>
The components of deferred income tax assets and liabilities as of December
31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Deferred income tax assets:
Workers' compensation reserves $ 3,782 $2,499
Allowance for doubtful accounts 2,028 1,092
Accrued vacation 1,129 1,019
Non-compete and deferred compensation agreements 184 1,133
Other 475 147
------- ------
Total deferred income tax assets 7,598 5,890
Deferred income tax liabilities:
Change in income tax accounting method from cash
to accrual basis in conjunction with termination of
S Corporation status 1,427 3,139
Depreciation and amortization 9,268 4,745
Other - 71
------- ------
Total deferred income tax liabilities 10,695 7,955
------- ------
$ 3,097 $2,065
======= ======
</TABLE>
Components of the net deferred tax assets (liabilities) reported in the
accompanying consolidated balance sheets were as follows as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Current Long-term Current Long-term
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Assets $ 7,414 $ 184 $ 5,708 $ 182
Liabilities (1,427) (9,268) (3,139) (4,816)
------- ------- ------- -------
$ 5,987 $ (9,084) $ 2,569 $(4,634)
======= ======= ======= =======
</TABLE>
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 1999, 1998 and 1997, to income before income taxes and the
amounts recorded in the accompanying consolidated statements of income for the
years ended December 31, 1999, 1998 and 1997 result from the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ---------------
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate $16,172 35.0% $15,317 35.0% $12,720 35.0%
Add (deduct):
State income taxes, net of
federal tax benefit 707 1.5 1,597 3.7 1,106 3.0
Foreign taxes (2,626) (5.7) 142 0.3 1,549 4.3
Merger and integration expense - - 6,694 15.3 - -
Non-deductible amortization 1,021 2.2 888 2.0 478 1.3
Other, net 720 1.6 486 1.1 91 0.3
------- ------- ------- ------- ------- ----
$15,994 34.6% $25,124 57.4% $15,944 43.9%
======= ======= ======= ======= ======= ====
</TABLE>
37
<PAGE>
11. 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, 1999 and 1998, these letters
of credit totaled approximately $6.3 million and $5.2 million, respectively.
12. 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 $1.6 million, $1.2 million and $0.3 million for the
years ended December 31, 1999, 1998 and 1997, 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
shares of the Company's common 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.
13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS:
--------------------------------------
Common Stock -
The Company's stockholders had authorized 200 million shares of common stock
and 10 million shares of preferred stock for issuance as of December 31, 1999
and 1998, 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.
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 and 1997, Robert Walters made
distributions to its shareholders prior to the merger totaling $0.7 million and
$1.6 million, respectively. StaffMark has not historically paid any dividends on
its common stock and intends to continue this practice for the foreseeable
future.
Stock Options -
In October 1999, StaffMark's Board of Directors amended StaffMark's 1996
Stock Option Plan (the "Plan") to increase the maximum number of shares of
StaffMark's common stock that may be issued under the Plan from 12% to 15% 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 $(0.7) million and $4.6 million for the years ended December 31, 1998
and 1997, 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.
38
<PAGE>
Robert Walters options became fully vested on the effective date of the
merger and 245,903 equivalent StaffMark options had been exercised as of
December 31, 1999. A summary of StaffMark's stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Under Price Per
Option Share
------------- ---------
<S> <C> <C>
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
Granted 1,588,335 8.19
Exercised (53,486) 5.33
Forfeited (747,983) 16.84
--------- ------
Outstanding, December 31, 1999 3,664,349 $14.06
========= ======
</TABLE>
Options exercisable were 1,039,030 as of December 31, 1999; 797,082 as of
December 31, 1998; and 136,842 as of December 31, 1997. The following is a
summary of stock options outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------- ---------------------------
Weighted Weighted
Weighted Average Average Average
Options Range of Remaining Exercise Price Options Exercise Price
Outstanding Exercise Prices Life In Years Per Share Exercisable Per Share
----------- --------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
789,191 $2.13 - $8.00 9.0 $ 6.89 95,991 $ 4.47
1,344,997 8.01 - 12.00 7.7 10.21 408,141 11.98
887,907 12.01- 24.00 7.6 15.95 301,600 15.14
592,504 24.01- 36.00 7.2 27.43 226,538 26.83
49,750 36.01- 40.75 7.7 38.68 6,760 38.85
--------- --- ------ --------- ------
3,664,349 7.8 $14.06 1,039,030 $15.61
========= === ====== ========= ======
</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, 1999,
1998 and 1997, as if the fair value method of accounting prescribed by SFAS No.
123 had been used. In preparing the pro forma disclosures, 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
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted average risk-free interest rate 6.34% 4.55% 5.25%
Dividend yield 0% 0% 0%
Weighted average expected life 5 years 5 years 5 years
Expected volatility 80% 58% 51%
</TABLE>
Using these assumptions, the fair value of the noncompensatory stock options
granted during the years ended December 31, 1999, 1998 and 1997 was
approximately $8.7 million, $12.0 million and $9.5 million, respectively. The
weighted average fair value per share of noncompensatory options granted during
1999, 1998 and 1997 was $5.64, $14.60 and $10.97, 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:
39
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years
-------------------------------------
1999 1998 1997
----------- ----------- -----------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Net income:
As reported $30,213 $18,639 $20,400
======= ======= =======
Pro forma $28,616 $17,103 $18,950
======= ======= =======
Basic earnings per share:
As reported $ 1.03 $ 0.65 $ 0.85
======= ======= =======
Pro forma $ 0.98 $ 0.60 $ 0.79
======= ======= =======
Diluted earnings per share:
As reported $ 1.02 $ 0.63 $ 0.82
======= ======= =======
Pro forma $ 0.97 $ 0.58 $ 0.76
======= ======= =======
</TABLE>
14. 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 the exercise of all outstanding stock options
having exercise prices less than the average market price of the Company's
common shares. A reconciliation of net income and weighted average shares used
in computing basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- -----------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C>
Basic earnings per share:
Net income applicable to common shares $30,213 $18,639 $20,400
======= ======= =======
Weighted average common shares outstanding 29,280 28,593 24,009
======= ======= =======
Basic earnings per share of common stock $ 1.03 $ 0.65 $ 0.85
======= ======= =======
Diluted earnings per share:
Net income applicable to common shares $30,213 $18,639 $20,400
======= ======= =======
Weighted average common shares outstanding 29,280 28,593 24,009
Dilutive effect of stock options 246 1,034 773
------- ------- -------
Weighted average common shares, assuming
dilutive effect of stock options 29,526 29,627 24,782
======= ======= =======
Diluted earnings per share of common stock $ 1.02 $ 0.63 $ 0.82
======= ======= =======
</TABLE>
Options to purchase approximately 2.1 million shares of common stock at
prices ranging from $11.38 to $40.75 per share were outstanding during 1999 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 the
Company's common shares. These options, which expire ten years from the date of
issue, were still outstanding as of December 31, 1999. 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.
40
<PAGE>
15. RELATED PARTY TRANSACTIONS:
--------------------------
StaffMark has entered into agreements with certain stockholders, 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 $551,000, $609,000 and $644,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Annual future minimum payments required under
these leases are included in the table in Note 17 and are summarized as follows:
<TABLE>
<CAPTION>
Fiscal Years Amount
-------------- --------------
(In Thousands)
<S> <C>
2000 $ 709
2001 707
2002 707
2003 707
2004 744
Thereafter 3,514
------
$7,088
======
</TABLE>
Included in other current assets as of December 31, 1999 and 1998 are
advances to certain officers and employees totaling $457,000 and $460,000,
respectively. Also included in other current assets as of December 31, 1999 and
1998 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.
16. COMMITMENTS AND CONTINGENCIES:
-----------------------------
From March 12, 1999 through April 22, 1999, several stockholders filed
complaints against the Company seeking unspecified compensatory and other
damages by alleging that the Company violated the federal securities laws
relating to an announcement by the Company on March 2, 1999. All of the
complaints have been consolidated into an amended complaint that was filed in
the United States District Court for the Eastern District of Arkansas on January
11, 2000. Although the outcome is uncertain, the Company believes that these
complaints are without merit and denies all of the allegations of wrongdoing and
are vigorously defending the suits. Accordingly, no provisions have been made in
the accompanying financial statements related to this matter.
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.
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.
17. NONCANCELABLE OPERATING LEASES:
------------------------------
StaffMark leases office space and certain equipment under noncancelable
operating leases. As discussed in Note 15, 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
------------ -------------
(In Thousands)
<S> <C>
2000 $11,965
2001 9,134
2002 6,404
2003 4,571
2004 2,943
Thereafter 6,613
-------
$41,630
=======
</TABLE>
Rent expense, including amounts paid to related parties, was approximately
$13.6 million, $11.1 million and $4.9 million for
41
<PAGE>
the years ended December 31, 1999, 1998 and 1997, respectively.
18. 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. The Company
has adopted the provisions of SFAS No. 131 for the year ended December 31, 1999
and has also presented below the required segment information for the years
ended December 31, 1998 and 1997.
As a result of management's restructuring plan in late 1999, as discussed in
Note 4, management determined that its E-solutions business was fundamentally
different than the other components of its Professional/IT segment and began
managing the E-solutions segment as an autonomous business unit beginning in
2000. Accordingly, in January 2000, management began disaggregating the results
of the Company's E-solutions business unit and reviewing those results
separately. These operations had previously been included in the Company's
Professional/IT segment.
StaffMark segments its operations based upon differences in services
provided. The Company's Commercial segment provides clerical and light
industrial staffing services in the United States. The Company's 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. The Company's 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. The Company evaluates
performance of the segments based on segment operating income, excluding
corporate overhead, non-recurring 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 E-solutions Corporate Totals
------------- ---------- ----------- ---------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1999
Total service revenues $591,430 $614,405 $15,017 $ - $1,220,852
Earnings before interest, taxes
depreciation and amortization 53,864 42,719 4,044 (15,326) 85,301
Depreciation and amortization 11,890 6,998 894 1,666 21,448
Operating income 41,974 35,721 3,150 (16,992) 63,853
Capital expenditures 4,014 2,415 113 5,167 11,709
Total assets 382,153 224,672 44,934 33,387 685,146
1998
Total service revenues $542,384 $472,529 $ - $ - $1,014,913
Earnings before interest, taxes
depreciation and amortization 60,211 39,058 - (34,352) 64,917
Depreciation and amortization 8,877 4,122 - 1,159 14,158
Operating income 51,334 34,936 - (35,511) 50,759
Capital expenditures 3,176 1,290 - 5,774 10,240
Total assets 324,854 191,032 - 65,059 580,945
1997
Total service revenues $252,577 $341,652 $ - $ - $ 594,229
Earnings before interest, taxes
depreciation and amortization 19,951 27,889 - (4,468) 43,372
Depreciation and amortization 2,867 2,750 - 730 6,347
Operating income 17,084 25,139 - (5,198) 37,025
Capital expenditures 2,685 1,999 - 2,377 7,061
Total assets 193,990 97,690 - 9,490 301,170
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Revenues by Country 1999 1998 1997
---------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
United States $ 931,638 $ 755,891 $445,461
United Kingdom 221,978 202,769 135,778
Australia 51,609 45,503 5,408
Other 15,627 10,750 7,582
---------- ---------- --------
Total revenues $1,220,852 $1,014,913 $594,229
========== ========== ========
Property and Equipment
by Country 1999 1998 1997
(In Thousands) ---------- ---------- --------
<S> <C> <C> <C>
United States $ 25,056 $ 18,081 $ 9,597
United Kingdom 2,664 2,909 3,321
Australia 474 499 563
Other 849 960 834
---------- ---------- --------
Total property and equipment $ 29,043 $ 22,449 $ 14,315
========== ========== ========
</TABLE>
43
<PAGE>
Supplementary Quarterly Financial Information
- ---------------------------------------------
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------------------------
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter Total
---------------------- ---------------- ---------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Service Revenues $280,312,516 $304,271,877 $319,154,609 $317,112,649 $1,220,851,651
Gross Profit 68,945,484 78,254,761 80,090,112 74,987,773 302,278,130
Net Income 6,407,207 10,759,204 7,821,953 5,224,652 30,213,016
Basic Earnings Per Share $ 0.22 $ 0.37 $ 0.27 $ 0.18 $ 1.03
Diluted Earnings Per Share $ 0.22 $ 0.37 $ 0.27 $ 0.18 $ 1.02
<CAPTION>
1998
----------------------------------------------------------------------------------------------
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter Total
---------------------- --------------- ----------------- -------------------- ----------------
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
<CAPTION>
1997
----------------------------------------------------------------------------------------------
1/st/ Quarter 2/nd/ Quarter 3/rd/ Quarter 4/th/ Quarter Total
---------------------- ---------------- ---------------- -------------------- -----------------
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
-------------------------------------------------- --------------------------------------------------
Pooling Pooling
Per Form 10-Q Adjustment Restated Per Form 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
<CAPTION>
Second Quarter 1997 Second Quarter 1998
-------------------------------------------------- -------------------------------------------------
Pooling Pooling
Per Form 10-Q Adjustment Restated Per Form 10-Q Adjustment Restated
------------------- --------------- -------------- ---------------- --------------- ----------------
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>
44
<PAGE>
<TABLE>
<CAPTION>
Third Quarter 1997 Third Quarter 1998
------------------------------------------------------- -------------------------------------------------
Pooling Pooling
Per Form 10-Q Adjustment Restated Per Form 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>
<TABLE>
<CAPTION>
Fourth Quarter 1997 Fourth Quarter 1998
------------------------------------------------------- -------------------------------------------------
Pooling Pooling
Per Form 10-Q Adjustment Restated Per Form 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 disagreements or changes 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,
2000.
(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 and in our proxy statement for our Annual Meeting of
Stockholders to be held on May 22, 2000, under the caption "Election
of Directors - Nominees for Election -- Other Named Executive
Officers."
(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 22, 2000.
45
<PAGE>
Directors and Executive Officers
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---------- ---------------------------------------------------
<S> <C> <C>
Clete T. Brewer (1).................. 34 Chairman and Chief Executive Officer; Director
Stephen R. Bova...................... 53 President and Chief Operating Officer; Director
Terry C. Bellora (1)................. 53 Chief Financial Officer
W. David Bartholomew................. 43 President - Commercial Staffing Segment; Director
Gordon Y. Allison.................... 40 Executive Vice President - General Counsel
Steven E. Schulte(1)................. 37 Executive Vice President - Administration; Director
Janice Blethen....................... 56 President - ClinForce, Inc.; Director
William J. Lynch(2)(3)............... 57 Director
R. Clayton McWhorter(2)(3)(4)........ 66 Director
Charles A. Sanders, M.D.(2)(4)....... 68 Director
Bob L. Martin(3)(4).................. 51 Director
</TABLE>
_________
(1) Member of the Acquisition Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Nominating Committee.
Clete T. Brewer was one of our co-founders in March 1996 and served until
September 1999 as our President and Chief Executive Officer and since September
1999 as our Chairman and Chief Executive Officer. Mr. Brewer has been a
Director since the inception of our Company. 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.
Stephen R. Bova became our President, Chief Operating Officer and a
Director in September 1999. Prior to joing us, Mr. Bova served as the Managing
Director of International Operations for Intelligroup, Inc., an information
technology company, from 1998 to 1999. From 1996 to 1998, Mr. Bova served as
President of the Global Banking Division for Electronic Data Systems. From 1986
to 1996, Mr. Bova was with ALLTEL Information Systems, the information systems
division of ALLTEL Corp., where he founded their International Division, later
becoming President of the Wireless Telecommunications Division, then President
of the Global Financial Division.
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.
W. David Bartholomew is our President - Commercial staffing 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.
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 SEC in
Washington, D.C. and from 1988 to 1990 he was a staff attorney in the Division
of Corporate Finance of the SEC. 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.
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.
46
<PAGE>
Janice Blethen is our President - ClinForce, Inc., which is our 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 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 as Chairman
of 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 Executive Officer of Healthtrust, Inc. from 1987
to April 1995 and served as President and Chief Operating 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., Kendle International, Inc., Genentech, Inc. and Biopure
Corp. which are all publicly traded companies.
Bob L. Martin has been one of our Directors since September 1999. From 1993
to 1999, Mr. Martin was President and Chief Executive Officer of Wal-Mart
International, the international division of Wal-Mart Stores, Inc. Prior to his
position as President and Chief Executive Officer of Wal-Mart International, Mr.
Martin served nine years as the Chief Information Officer of Wal-Mart Stores,
Inc. Mr. Martin is also a director for Students in Free Enterprise, SABRE Group
Holdings, Inc., and Santa Clara University. Mr. Martin is a member of the
Council of the Americas and serves on the Executive Advisory Board of the
University of Arkansas.
Other Corporate Officers
Donald A. Marr, Jr. is the Chief Operating Officer - Commercial staffing
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 36 years old.
Benjamin Anderson is the President 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 37 years old.
John Willett is the Executive Vice President - IT Solutions 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 43 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 31 years old.
47
<PAGE>
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 44 years old.
J. Kevin Brown became our Vice President -- 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 33 years
old.
Alex Stallings became Chief Accounting Officer in November 1999 and has
served as Vice President of Corporate Accounting and Finance since October 1998.
Mr. Stallings joined us as our 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.P., in Tulsa, Oklahoma. Mr.
Stallings received his degree in Business Administration from Baylor University
and is a certified public accountant. Mr. Stallings is 33 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 for our Annual Meeting of Stockholders to be held on May 22,
2000.
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-Beneficial
Ownership of Certain Stockholders, Directors and Executive Officers" in our
proxy statement for our Annual Meeting of Stockholders to be held on May 22,
2000.
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 pages
(b) Reports on Form 8-K during the fourth quarter of 1999.
1. None.
48
<PAGE>
(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).
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
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
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)).
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).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
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/
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,
</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>
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
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 1997 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 Lenders1. (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).
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 Lenders1. (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 Plan1. (Incorporated by reference
</TABLE>
- ------------------------------
/2/ 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).
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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 1997 Employee Stock Purchase Plan, as amended.
(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)1.
10.26 The Company's Stock Election Plan for Non-Employee Directors1.
(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) Plan1. (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).
10.29 Third Amended and Restated Credit Agreement dated January 20, 1999 by
and among StaffMark, Inc., Robert Walters plc, Robert Walters Tristar
pty ltd., the lenders named therein (the "Lenders"), The First
National Bank of Chicago, as syndication agent on behalf of Lenders,
Mercantile Bank National Association, as administrative agent on
behalf of Lenders, Bank of America National Trust and Saving
Association, Credit Lyonnais New York Branch, Fleet National Bank and
First Union National Bank, as co-agents on behalf of the Lenders
(Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999, filed with the SEC on May
13, 1999).
10.30 First Amendment to Third Amended and Restated Credit Agreement dated
May 6, 1999, by and among StaffMark, Inc., Robert Walters plc, Robert
Walters Tristar pty ltd., the lenders named therein (the "Lenders"),
The First National Bank of Chicago, as syndication agent on behalf of
the Lenders, Mercantile Bank National Association, as administrative
agent on behalf of the Lenders, and Bank of America National Trust and
Savings Association, Credit Lyonnais New York Branch, Fleet National
Bank and First Union National Bank, as co-agents on behalf of the
Lenders (Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999, filed with the SEC
on August 13, 1999).
10.31 Lease Agreement by and between StaffMark, Inc. and Brewer Investments
II LC dated June 2, 1999 and effective as of July 1, 1999, for
StaffMark, Inc.'s corporate headquarters located at 302 East Millsap
and 234 East Millsap in Fayetteville, Arkansas (Incorporated by
reference from the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, filed with the SEC on August 13, 1999).
10.32 Employment Agreement between the Company and Stephen R. Bova dated as
of August 18, 1999 (Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, filed with the SEC on November 12, 1999)/1/
10.33 First Amendment to Employment Agreement dated as of September 17,
1999, between the Company and Clete T. Brewer, amending that certain
Employment Agreement dated as of October 1, 1996, by and among the
Company, Brewer Personnel Services, Inc. and Clete T. Brewer, which
original agreement is incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (File No. 333-15059)
(Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended
</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>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
September 30, 1999, filed with the SEC on November 12, 1999)/1/.
10.34 First Amendment to Employment Agreement dated as of September 17,
1999, between the Company and Terry C. Bellora, amending that certain
Employment Agreement dated as of August 20, 1996, by and among the
Company and Terry C. Bellora, which original agreement is incorporated
by reference from Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-15059) (Incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, filed with the SEC on November 12, 1999)1.
10.35 First Amendment to Employment Agreement dated as of September 17,
1999, between the Company and David Bartholomew, amending that certain
Employment Agreement dated as of October 1, 1996, by and among the
Company, HRA, Inc. n/k/a StaffMark, Inc. - Nashville and David
Bartholomew, which original agreement is incorporated by reference
from Exhibit 10.8 to the Company's Registration Statement on Form S-1
(File No. 333-15059) (Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, filed with the SEC on November 12, 1999)/1/.
10.36 First Amendment to Employment Agreement dated as of September 17,
1999, between the Company and Gordon Y. Allison, amending that certain
Employment Agreement dated as of June 23, 1997, by and between the
Company and Gordon Y. Allison, which original agreement is
incorporated by reference from Exhibit 10.1 to the Company's Form 10-Q
for the quarter ended June 30, 1997, filed with the Commission on July
28, 1997 (Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999, filed
with the SEC on November 12, 1999)/1/.
10.37 The Company's 1999 Employee Stock Purchase Plan filed with the SEC on
October 1, 1999 (Incorporated by reference from the Company's Form S-8
(File No. 333-88313))1.
10.38 The Company's Amended and Restated 1996 Stock Option Plan filed with
the SEC on October 1, 1999 (Incorporated by reference from the
Company's Form S-8 (File No. 333-88313))/1/.
10.39 The Company's 1999 U.K. Sharesave Plan filed with the SEC on December
22, 1999 (Incorporated by reference from the Company's Form S-8 (File
No. 333-93325))/1/.
21.1 Subsidiaries of StaffMark as of December 31, 1999.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants.
24.1 Power of Attorney (See page 56).
27.1 Financial Data Schedule for the year ended December 31, 1999,
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).
54
<PAGE>
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 17, 2000.
StaffMark, Inc.
By: /s/ Clete T. Brewer
-----------------------
Clete T. Brewer
Chairman 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 Chairman, Chief Executive Officer and March 17, 2000
- ------------------- Director
Clete T. Brewer
/s/ Terry C. Bellora Chief Financial Officer (Principal March 17, 2000
- -------------------- Financial Officer)
Terry C. Bellora
/s/ Alex Stallings Chief Accounting Officer and Vice March 17, 2000
- ------------------ President of Finance and Accounting
Alex Stallings (Principal Accounting Officer)
/s/ Stephen R. Bova President & Chief Operating Officer and March 17, 2000
- ------------------- Director (Principal Operating Officer)
Stephen R. Bova
/s/ W. David Bartholomew President - Commercial Staffing Division March 17, 2000
- ------------------------ and Director
W. David Bartholomew
/s/ Steven E. Schulte Executive Vice President- Administration March 17, 2000
- --------------------- and Director
Steven E. Schulte
/s/ Janice Blethen President- ClinForce, Inc. and Director March 17, 2000
- ------------------
Janice Blethen
/s/ Bob L. Martin Director March 17, 2000
- -----------------
Bob L. Martin
/s/ William J. Lynch Director March 17, 2000
- --------------------
William J. Lynch
/s/ R. Clayton McWhorter Director March 17, 2000
- ------------------------
R. Clayton McWhorter
/s/ Charles A. Sanders Director March 17, 2000
- ----------------------
Charles A. Sanders, M.D.
</TABLE>
55
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF STAFFMARK, INC/1/
STATE OR COUNTRY
SUBSIDIARY OF ORGANIZATION
Brewer Personnel Services, Inc. Arkansas
CFRC, Inc. - Nevada Nevada
ClinForce, Inc. Delaware
Commercial Staffing - Indiana L.P. Indiana
Commercial Staffing - Texas L.P. Texas
Edgewater Technology, Inc. Delaware
Essex Computer Service Inc. Florida
ETEC Network Services, Inc. Texas
FAIT CV Netherlands
FAIT LLC Delaware
IMRC, Inc. Nevada
IntelliMark, Inc. Delaware
IT Staffing - Texas L.P. Texas
PFS&C Services International Company, Inc. Nevada
PFS&C Services International Holding Company, Inc. Nevada
Resource Solutions, Inc. Delaware
Robert Walters Associates, Inc. Delaware
Robert Walters Associates, Ltd. Hong Kong
Robert Walters Associates, Ltd. Ireland
Robert Walters Associates Pte Ltd Singapore
Robert Walters BV Netherlands
Robert Walters KK Japan
Robert Walters Limited United Kingdom
Robert Walters SARL France
Robert Walters Tristar Pty Ltd Australia
RSRC, Inc. Nevada
RWA Payroll Services Limited United Kingdom
RWARC, Inc. Nevada
RW Holding, CV Netherlands
SAI Holdings BV Netherlands
SISC, LLC Delaware
SLRRC, Inc. Nevada
SMRC, Inc. Nevada
StaffMark Acquisition Corporation Twenty-Nine Delaware
StaffMark Acquisition Corporation Thirty Delaware
StaffMark East, L.P. Delaware
StaffMark Factoring, Inc. Nevada
StaffMark Funding Company, Inc. Nevada
StaffMark, Inc. - Indiana Delaware
StaffMark, Inc. - Midwest Arkansas
StaffMark, Inc. - Nashville Tennessee
StaffMark, Inc. - Northeast Delaware
StaffMark, Inc. - Pacific Delaware
StaffMark, Inc. - West Nevada
StaffMark Training Center, L.P. Delaware
__________________
/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, 1999.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF STAFFMARK, INC./1/
(Continued)
STATE OR COUNTRY
SUBSIDIARY OF ORGANIZATION
Strategic Global Resourcing Ltd United Kingdom
Strategic Global Resourcing Pty Ltd Australia
Strategic Legal Resources, Inc. Delaware
Maxwell/Healthcare, Inc. Oklahoma
MRIC - Medical Recruiters International, LTD. British Columbia
Technical Resource Solutions Ltd United Kingdom
__________________
/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, 1999.
<PAGE>
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 28, 2000 included in this Form 10-K into
the following registration statements of StaffMark, Inc.: (1) Registration
Statement (Form S-8 No. 333-93325) filed with the SEC on December 22, 1999; (2)
Registration Statement (Form S-8 No. 333-88313) filed with the SEC on October 1,
1999; (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, 1999, or performed any audit procedures subsequent to the date of
our report.
ARTHUR ANDERSEN LLP
Little Rock, Arkansas,
March 17, 2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,715
<SECURITIES> 0
<RECEIVABLES> 196,688
<ALLOWANCES> 5,496
<INVENTORY> 0
<CURRENT-ASSETS> 217,933
<PP&E> 44,185
<DEPRECIATION> 15,142
<TOTAL-ASSETS> 685,146
<CURRENT-LIABILITIES> 78,950
<BONDS> 0
0
0
<COMMON> 294
<OTHER-SE> 290,182
<TOTAL-LIABILITY-AND-EQUITY> 685,146
<SALES> 1,220,852
<TOTAL-REVENUES> 1,220,852
<CGS> 918,574
<TOTAL-COSTS> 238,425
<OTHER-EXPENSES> 227
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,419
<INCOME-PRETAX> 46,207
<INCOME-TAX> 15,994
<INCOME-CONTINUING> 30,213
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,213
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.02
</TABLE>
