1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JANUARY 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___ TO ___.
Commission file number 0-23144
PERSONNEL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1671569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1499 Windhorst Way, Suite 100
Greenwood, Indiana 46143
(Address of principal executive offices) (Zip Code)
(317) 888-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1994 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Class Outstanding at March 14, 1997
Common Stock, without par value 2,020,156 shares
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PERSONNEL MANAGEMENT, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets
at January 31, 1997 and October 31, 1996 3
Condensed Consolidated Statements of
Income for the three months ended
January 31, 1997 and 1996 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
January 31, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 7-8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 9-10
Item 4 - Submission of Matters to a Vote of
Security Holders 10
Item 6 - Exhibits and Reports on Form 8-K 10
SIGNATURE 11
EXHIBIT INDEX 12
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, October 31,
1997 1996
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 376,083$ 180,462
Accounts receivable, net 6,458,214 7,548,919
Current portion of notes receivable 77,918 99,039
Income taxes receivable 25,099 25,099
Prepaid expenses 144,276 109,751
Other current assets 122,567 70,252
Deferred tax asset 464,900 433,900
Total current assets 7,669,057 8,467,422
Property and equipment, net 1,235,327 1,209,050
Notes receivable, shareholder 518,985 508,148
Goodwill, net 6,557,743 6,636,191
Other 109,348 113,728
Total assets $16,090,460$16,934,539
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 588,299$ 106,269
Accounts payable 187,767 284,669
Accrued compensation and benefits 1,613,620 2,822,341
Accrued workers' compensation claims 829,977 752,000
Income taxes payable 187,550 159,500
Other current liabilities 327,787 247,208
Current portion of long-term debt 627,499 500,201
Total current liabilities 4,362,499 4,872,188
Notes payable 2,000,000 2,507,732
Deferred tax liability 159,600 154,600
SHAREHOLDERS' EQUITY
Common stock 7,846,105 7,846,105
Retained earnings 1,722,256 1,553,914
Total shareholders' equity 9,568,361 9,400,019
Total liabilities and shareholders' equity $16,090,460 $16,934,539
See accompanying notes.
/TABLE
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PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
January 31,
1997 1996
Revenues $16,626,425 $14,030,116
Cost of services 13,387,427 11,228,594
Gross margin 3,238,998 2,801,522
Operating expenses:
General and administrative 2,695,114 2,405,954
Selling 82,186 97,685
Amortization of goodwill 91,473 81,956
2,868,773 2,585,595
Income from operations 370,225 215,927
Interest expense, net (46,583) (70,221)
Income before income taxes 323,642 145,706
Income taxes 155,300 64,106
Net income $ 168,342 $ 81,600
Net income per share $ 0.08 $ 0.04
See accompanying notes.
/TABLE
5
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
January 31,
1997 1996
OPERATING ACTIVITIES:
Net income $ 168,342 $ 81,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 186,486 156,955
Deferred income taxes (26,000) -
Interest on shareholder loan (10,837) (9,648)
Changes in operating assets and
liabilities:
Accounts & notes receivable 1,111,826 659,528
Prepaid expenses and other assets (82,460) (40,479)
Accounts payable (96,902) 309,650
Accrued liabilities & other payables (1,022,115) 46,543
Net cash provided by operations 228,340 1,204,149
INVESTING ACTIVITIES:
Purchases of businesses and
additions to goodwill (13,025) (772,123)
Purchases of property and equipment (121,290) (45,204)
Net cash used by investing activities (134,315) (817,327)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 224,625
Payments on long-term debt (30,434) -
Net payments on line of credit (350,000) (339,000)
Net cash used by financing activities (380,434) (114,375)
Increase (decrease) in cash (286,409) 272,447
Cash (overdraft) at beginning of period 74,193 50,817
Cash (overdraft) at end of period $ (212,216) $ 323,264
See accompanying notes.
/TABLE
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PERSONNEL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997
(unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared
by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). This Report on Form
10-Q should be read in conjunction with the Company's
financial statements and notes thereto for the year ended
October 31, 1996 included in the Company's 1996 Annual Report
to Shareholders. Certain information and footnote disclosures
which are normally included in financial statements prepared
in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and
regulations. The information reflects all normal and
recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of
the Company and its results of operations for the interim
periods set forth herein. Especially because of the
seasonality of the Company's business, the results for the
three months ended January 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
The financial statements include the combined financial
position, operations and cash flows for Personnel Management,
Inc. and its wholly-owned subsidiaries, hereafter referred to
as "the Company".
2. Per Share Disclosures
Per share amounts are based on the weighted average
number of shares of common stock outstanding during the
period, including the dilutive effect of warrants and stock
options. For the aforementioned items, the effect on the
weighted average number of shares outstanding was computed
using the treasury stock method using the actual date of grant
or exercise for shares and options issued.
3. Commitments and Contingencies
The Company may, from time to time, be charged for
allegations of discrimination, other employment related claims
by temporary employees, or other claims made in the ordinary
course of business. There are no cases pending or threatened,
individually or in the aggregate, that management believes
will result in a material loss.
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Item 2. Management's Discussion and Analysis of Financial
Condition
and Results of Operations
The following should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's 1996 Annual Report to
Shareholders.
SELECTED INCOME STATEMENT COMPARISONS
REVENUES. For the three months ended January 31, 1997,
revenues increased 18.5% or $2,596,000 compared to the 1996
period, to $16,626,000. The increase was a result of internal
revenue growth of $823,000 or 5.9% and the acquisition of a
staffing company in Jacksonville, Florida in February 1996.
GROSS MARGINS. Gross margin is defined by the Company as
revenues less the cost of providing services, which includes
hourly wages of temporary employees, employer payroll taxes,
benefits for temporary employees and workers' compensation
costs. Gross margin for the three months ended January 31,
1997 was $3,239,000 or 19.5% of revenues, compared to
$2,802,000 or 20.0% of revenues for the corresponding prior
year period. The increase in gross margin of $437,000 was
primarily due to increased revenues. The decline in gross
margin as a percent of revenues was attributable to
competitive pricing, adjustments to the workers' compensation
accrual, and the introduction of benefits for temporary
employees.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling,
general and administrative expenses ("SG&A") for the three
months ended January 31, 1997 were $2,777,000 or 16.7% of
revenues compared to $2,504,000 or 17.8% of revenues in the
corresponding prior year period. The increase in SG&A
expenses of $273,000 was entirely associated with the staffing
business purchased by the company in Jacksonville, Florida in
February 1996. Other increases in SG&A expenses associated
with internal growth were offset by lower professional fees
and provision for bad debts.
AMORTIZATION OF GOODWILL. Goodwill represents the unamortized
cost in excess of fair value of net assets acquired and is
being amortized on a straight-line basis over 20 years.
Goodwill amortization for the three months ended January 31,
1997 increased 11.6% or $10,000 compared to the previous year
period. This increase was a result of the amortization of
goodwill related to the businesses acquired in the prior
fiscal year and payments of additional purchase price to prior
owners of acquired businesses under the earnout provisions of
the acquisition agreements.
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INTEREST EXPENSE, NET. The decrease of $24,000 or 33.7% in
interest expense, (net of interest income) for the three
months ended January 31, 1997 compared to the prior year
period was due primarily to lower average borrowings compared
to the corresponding prior year period.
INCOME TAXES. Income tax expense for the three months ended
January 31, 1997 increased $91,000 or 142.3% compared to the
prior year period as a result of increases in net income
before income taxes and the effective income tax rate. The
effective income tax rate for the three months ended January
31, 1997 was 48% compared to 44% in the prior year period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the three months
ended January 31, 1997 was $228,000. Primary uses of cash
were $380,000 for net repayments on borrowings, $121,000 for
capital expenditures and $13,000 for payments under the
earnout provisions of acquisition agreements.
Management believes that cash provided by operations,
augmented by borrowings for working capital purposes under the
bank credit facility, will be adequate to satisfy the
Company's operating cash requirements during fiscal 1997.
On January 21, 1997, the Company refinanced its bank credit
facility with KeyBank, NA. The refinanced bank credit
facility provides the Company with the ability to borrow up to
$11,000,000 for general working capital purposes, acquisition
financing, letters of credit and the refinancing of
outstanding borrowings. The facility consists of a two year
$8,500,000 revolving line of credit and a five year $2,500,000
term loan. Borrowings under the line of credit are subject to
meeting certain borrowing base requirements. Upon maturity,
up to $4,000,000 of borrowings for acquisition financing
under this line convert to a five year term loan. At January
31, 1997, the Company's availability under the line of credit
was approximately $4,200,000. The $2,500,000 term loan is
payable in equal monthly principal installments of $42,000
beginning February 1997. The Company's existing and committed
credit facilities are secured and collateralized by accounts
receivable, equipment, cash, general intangibles, contract
rights, and proceeds thereof. In addition, the Company has
agreed with the bank under the credit facilities to certain
financial and non-financial restrictive covenants, which
include, among other things, minimum levels of tangible net
worth, minimum cash flow coverage ratios, maximum ratio of
indebtedness to earnings, restrictions on capital
expenditures, restrictions on common stock repurchases, and
restrictions on future mergers, consolidations, acquisitions
or joint ventures. At January 31, 1997, the Company was in
compliance with its covenants.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and certain of its subsidiaries have been named
Defendants in a lawsuit pending in the Hillsborough County
Circuit Court (13th Judicial Circuit, Florida) under the
caption Liberty Mutual Insurance Co. vs. Allen Staffing Inc.,
et al. (Case No. 97C452). This action was filed January 22,
1997 against certain Florida temporary staffing companies (the
"Porter Temporary Companies"); R. Gale Porter and other
entities and individuals associated with the Porter Temporary
Companies; and the Company and certain of its subsidiaries.
The Company acquired substantially all the operating assets of
certain of the Porter Temporary Companies effective July 4,
1994.
Plaintiff Liberty Mutual alleges that premiums for workers'
compensation insurance charged to the Porter Temporary
Companies for certain policy periods ended prior to July 4,
1994 were undercharged on the basis of fraudulent
misrepresentations or omissions by the Porter Temporary
Companies in their applications for workers' compensation
insurance. Liberty Mutual seeks damages from the Company and
its subsidiaries for alleged breach of contract, alleged fraud
in the inducement, and alleged violations of Florida statutes,
by the Porter Temporary Companies in the amount of the alleged
earned but unpaid premium of approximately $872,000 plus
unspecified additional damages, or, in the alternative, ten
times the amount of the premium underpaid pursuant to Florida
statutory provisions, plus attorney fees, costs and interest.
Liberty Mutual claims that the Company should be held liable
for these alleged pre-acquisition obligations of the Porter
Temporary Companies on the alternative theories that (a) the
continued operation by the Company of the businesses of the
Porter Temporary Companies at the same location and under the
same management personnel constitutes a de facto merger or
mere continuation of the business, and/or (b) the sale of the
assets to the Company was a fraudulent effort to avoid debts
and liability incurred by the Porter Temporary Companies.
In the agreement by which it acquired the assets of the Porter
Temporary Companies, the Company expressly disclaimed that it
was assuming any obligation whatsoever with regard to the
Porter Temporary Companies' undisclosed liabilities. The
Company intends to vigorously defend the lawsuit and has filed
a motion to dismiss the claims made against it and its
subsidiaries, and a motion to strike Liberty Mutual's attorney
fees demand. Although due to the early stage of this lawsuit,
10
the Company has not undertaken any comprehensive evaluation of
Liberty Mutual's claims, and although there can be no such
assurance, the Company does not expect that resolution of this
lawsuit will have a material adverse impact upon the Company's
consolidated financial condition or results of operations.
The preceding sentence is a forward-looking statement; as with
any litigation, a variety of factors could cause the financial
impact of the resolution of this lawsuit to differ materially
from the immaterial impact that is presently expected,
including the possibility that relevant facts or law may exist
that are presently unknown to Company management.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1997 Annual Meeting of Shareholders on
February 25, 1997. At the Annual Meeting, the Shareholders
elected as Director the one nominee, Don R. Taylor, proposed
by the Board of Directors. Mr. Taylor was elected for a three
year term to the Board of Directors. In addition to Mr.
Taylor, Directors whose term of office continued after the
Annual Meeting consisted of Richard L. VonDerHaar, David L.
Swider, Max K. DeJonge, and Joseph C. Cook, Jr. The results
of the proxy solicitation were as follows:
Votes
Abstained
Votes Votes and
Cast For Withheld Non-Votes
Nominee:
Don R. Taylor 1,906,956 3,104 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the Exhibit Index on page 12 (which
Exhibit Index is incorporated herein by reference) are filed
as part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during
the three months ended January 31, 1997.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PERSONNEL MANAGEMENT, INC.
Dated: March 17, 1997 By: /s/ Robert R. Millard
--------------------------
Robert R. Millard, Vice
President of Finance and
Administration (Principal
Financial Officer and
Authorized Signatory)
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EXHIBIT INDEX
Exhibit No. Description of Exhibit Sequential Page
Number
10.1 Schedule of Options 13
Granted Under 1994 Director
Stock Option Plan
10.2 Third Amended and Restated N/A
Credit Facility and Security
Agreement, dated January 21,
1997, by and among the Registrant,
PMI Administration, Inc., PMI LP I,
PMI LP II and KeyBank National
Association. The copy of this
exhibit filed as Exhibit 4.2 to
the Registrant's Annual Report
on Form 10K for the fiscal year
ended October 31, 1996 is incorporated
herein by reference.
11 Statement Re: Computation of 14
Earnings Per Share for the Three
Months Ended January 31, 1997
and 1996
27 Financial Data Schedule 15