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 JULY 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 September 11, 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 July 31, 1997 and October 31, 1996 3
Condensed Consolidated Statements of
Income for the three months ended
July 31, 1997 and 1996 4
Condensed Consolidated Statements of
Income for the nine months ended
July 31, 1997 and 1996 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
July 31, 1997 and 1996 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURE 13
EXHIBIT INDEX 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, October 31,
1997 1996
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 35,629 $ 180,462
Accounts receivable, net 7,652,287 7,548,919
Current portion of notes receivable 53,318 99,039
Income taxes receivable 25,911 25,099
Prepaid expenses 204,517 109,751
Other current assets 56,869 70,252
Deferred tax asset 474,900 433,900
Total current assets 8,503,431 8,467,422
Property and equipment, net 1,294,650 1,209,050
Notes receivable, shareholder 540,195 508,148
Goodwill, net 7,123,545 6,636,191
Other 126,316 113,728
Total assets $ 17,588,137 $16,934,539
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 143,500 $ 106,269
Accounts payable 222,309 284,669
Accrued compensation and benefits 2,669,750 2,822,341
Accrued workers' compensation claims 920,471 752,000
Income taxes payable - 159,500
Other current liabilities 247,693 247,208
Current portion of long-term debt 564,874 500,201
Total current liabilities 4,768,597 4,872,188
Notes payable 2,324,988 2,507,732
Deferred tax liability 166,300 154,600
SHAREHOLDERS' EQUITY
Common stock 7,856,384 7,846,105
Retained earnings 2,471,868 1,553,914
Total shareholders' equity 10,328,252 9,400,019
Total liabilities and
shareholders' equity $17,588,137 $16,934,539
See accompanying notes.
/TABLE
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PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
July 31,
1997 1996
Revenues $19,075,410 $17,144,732
Cost of services 15,256,736 13,669,668
Gross margin 3,818,674 3,475,064
Operating expenses:
General and administrative 2,920,412 2,690,193
Selling 105,728 95,123
Amortization of goodwill 91,475 89,425
3,117,615 2,874,741
Income from operations 701,059 600,323
Interest expense, net (50,102) (60,799)
Income before income taxes 650,957 539,524
Income taxes 269,600 287,100
Net income $ 381,357 $ 252,424
Net income per share $ 0.19 $ 0.12
See accompanying notes.
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PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Nine months ended
July 31,
1997 1996
Revenues $53,655,714 $47,563,110
Cost of services 42,957,017 37,879,325
Gross margin 10,698,697 9,683,785
Operating expenses:
General and administrative 8,346,928 7,721,362
Selling 248,367 321,235
Amortization of goodwill 274,421 256,623
8,869,716 8,299,220
Income from operations 1,828,981 1,384,565
Interest expense, net (144,727) (196,641)
Income before income taxes 1,684,254 1,187,924
Income taxes 766,300 572,400
Net income $ 917,954 $ 615,524
Net income per share $ 0.45 $ 0.30
See accompanying notes.
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PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
July 31,
1997 1996
OPERATING ACTIVITIES:
Net income $ 917,954 $ 615,524
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 567,802 517,095
Deferred income taxes (29,300) -
Shareholder loan activity, net (21,768) (29,179)
Changes in operating assets and
liabilities:
Accounts & notes receivable (57,647) (148,892)
Prepaid expenses and other assets (94,783) 275,782
Accounts payable (62,360) 141,522
Accrued liabilities & other payables (143,135) 475,987
Net cash provided by operating activities 1,076,763 1,847,839
INVESTING ACTIVITIES:
Purchases of businesses and additions to
goodwill (761,775) (1,348,082)
Purchases of property and equipment (378,981) (143,124)
Net cash used by investing activities (1,140,756) (1,491,206)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 224,625
Loan to officer, net of repayment - (61,676)
Payments on long-term debt (343,071) (28,297)
Net borrowings (payments) on line of
credit 225,000 (495,254)
Net cash used by financing activities (118,071) (360,602)
Decrease in cash (182,064) (3,969)
Cash (overdraft) at beginning of period 74,193 50,817
Cash (overdraft) at end of period $ (107,871) $ 46,848
See accompanying notes.
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PERSONNEL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 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. Because of the seasonality of the company's
business, the results for the three and nine months ended
July 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 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.
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3. Acquisitions
The company acquired on March 17, 1997 the assets of
Garner-Scott Enterprise, Inc., a staffing business based
in Madison, Indiana and Carrollton, Kentucky with annual
revenues of approximately $2,100,000. The business was
acquired for $250,000 plus 33.3% of future income before
income taxes and other adjustments derived from the areas
served by the business through February 28, 2002. The
acquired business operations provide predominately light
industrial staffing services.
The company acquired on March 24, 1997 the assets of First
In Temporaries, Inc.'s Louisville, Kentucky staffing
operations with annualized revenues of approximately
$1,700,000. The business was acquired for $311,000. The
acquired business operations provide clerical and light
industrial staffing services.
The company acquired on April 25, 1997 a minority equity
investment in Adminiserve, Inc., a professional employer
organization based in Greenwood, Indiana.
4. New Accounting Principles
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" becomes effective for the fiscal year
ended October 31, 1998. The company does not expect the
statement to have a material impact on the financial
statements.
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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 July 31, 1997, revenues
increased 11.3% or $1,931,000 compared to the 1996 period, to
$19,075,000. The increase was a result of internal revenue growth
of approximately 7.0% and the acquisition of the two staffing
businesses in March 1997.
For the nine months ended July 31, 1997, revenues increased 12.8% or
$6,093,000 compared to the prior year period, to $53,656,000. This
increase was due to internal revenue growth of approximately 7.0%
and the acquisitions of staffing businesses in February 1996 and
March 1997.
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 July 31, 1997 was $3,819,000 or 20.0% of
revenues, compared to $3,475,000 or 20.3% of revenues for the
corresponding prior year period. The increase in gross margin of
$344,000 was primarily due to increased revenues. The decline in
gross margin as a percentage of revenues was attributable primarily
to competitive pricing.
Gross margin for the nine months ended July 31, 1997 was $10,699,000
or 19.9% of revenues, compared to $9,684,000 or 20.4% of revenues
for the corresponding prior year period. The increase in gross
margin of $1,015,000 was primarily due to increased revenues. The
decline in gross margin as a percent of revenues was attributable
primarily to competitive pricing.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended July 31, 1997
were $3,026,000 or 15.9% of revenues compared to $2,785,000 or 16.2%
of revenues in the corresponding prior year period. Selling,
general and administrative expenses for the nine months ended July
31, 1997 were $8,595,000 or 16.0% of revenues compared to $8,043,000
or 16.9% of revenues in the corresponding prior year period. The
increase in SG&A expenses for both the three and nine month periods
was entirely associated with the staffing businesses purchased by
the company in February 1996 and March 1997. SG&A expenses as a
percentage of revenues declined as a result of 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 and nine months ended July 31, 1997
increased 2.3% and 6.9%, respectively, compared to the previous year
period. This increase was a result of the amortization of goodwill
related to the businesses acquired in February 1996 and March 1997,
and the amortization of payments of additional purchase price to the
prior owners of acquired businesses under the earnout provisions of
the acquisition agreements.
INTEREST EXPENSE, NET. The decrease of $11,000 or 17.6% and $52,000
or 26.4% in interest expense, net of interest income for the three
months and nine months ended July 31, 1997, respectively, compared
to the prior year period was due primarily to lower average
borrowings compared to the corresponding prior year period.
INCOME TAXES. The decrease in income tax expense for the three
months ended July 31, 1997 compared to the prior year period was due
to a reduction in the company's effective tax rate. Income tax
expense in the current quarterly period included the adjustment to
reflect income tax expense on a year-to-date basis at this new lower
effective tax rate.
The increase in income tax expense for the nine months ended July
31, 1997 compared to the prior year period was a result of an
increase in net income before income taxes. The effective income
tax rate for the current year nine month period was 45.5% compared
to 48.2% in the prior year period.
NET INCOME. Net income for the three months ended July 31, 1997
increased 51.1% to $381,000 compared to net income of $252,000 for
the prior year period. Earnings per share increased 58.3% to $0.19
from $0.12.
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For the nine months ended July 31, 1997, net income increased 49.1%
to $918,000 compared to net income of $615,500 in the prior year
period. Earnings per share increased 50.0% to $0.45 from $0.30.
The increases in net income for both the three and nine month
periods in fiscal 1997 were attributable to increases in revenues
and decreases in selling, general and administrative expenses as a
percentage of revenues.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the nine months ended
July 31, 1997 was $1,077,000 and net borrowings under the bank
credit facility were $225,000. Primary uses of cash were $343,000
for repayments on long-term borrowings, $379,000 for capital
expenditures and $762,000 for purchases of businesses and 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 accepted a commitment from KeyBank,
NA to refinance its bank credit facility which 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 July 31, 1997,
the company's availability under the line of credit was
approximately $4,920,000.
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,
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restrictions on capital expenditures, restrictions on common stock
repurchases, and restrictions on future mergers, consolidations,
acquisitions or joint ventures. At July 31, 1997, the company was
in compliance with its covenants.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments during the three months ended
July 31, 1997, in certain Florida litigation to which the company is
a party that was first described in Item 1 of the company's
quarterly report on Form 10-Q for the three months ended January 31,
1997.
Item 5. Other Information
Effective July 1, 1997, Gary F. Hentschel was promoted to President
and Chief Operating Officer of the company. Hentschel served as
Chief Operating Officer since joining the company in July 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the Exhibit Index on page 14 (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 July 31, 1997.
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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: September 11, 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
10.1 Amended Schedule of Options
Granted Under 1994 Director
Stock Option Plan
10.2 1994 Director Stock Option Plan
(As amended May 19, 1997, subject to
shareholder approval)
11.1 Statement Re: Computation of
Earnings Per Share for the Three
Months Ended July 31, 1997
11.2 Statement Re: Computation of
Earnings Per Share for the Nine
Months Ended July 31, 1997
27 Financial Data Schedule