EXHIBIT 13 SELECTED FINANCIAL AND OPERATING DATA (UNAUDITED) (in thousands, except per share and operating data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- PER SHARE (1) Net income $ 0.67 $ 0.50 $ 0.37 $ 0.68 $ 1.09 Pro forma net income (2) -- -- -- 0.65 0.68 Book value at year-end 5.35 4.65 4.13 3.76 1.58 FOR THE YEAR Revenues $ 75,802 $ 67,101 $ 61,413 $ 39,650 $ 23,431 Income from operations 2,713 2,211 1,750 1,970 1,484 Income before income taxes 2,506 1,950 1,442 2,008 1,471 Net income 1,381 1,015 749 1,236 1,471 Pro forma net income (2) -- -- -- 1,180 920 Weighted average shares outstanding (1) 2,059 2,031 2,038 1,822 1,353 AT YEAR-END Total assets $ 20,271 $ 16,935 $ 14,586 $ 14,046 $ 4,111 Long-term debt 3,350 2,508 3,738 3,072 -- Redeemable common stock (3) -- -- -- -- 232 Shareholders' equity 10,860 9,400 8,222 7,320 2,018 Working capital 5,163 3,596 4,540 3,649 1,246 OPERATING DATA Operating margin(4) 1.8% 1.5% 1.2% 3.0% 3.9% Offices at period-end 42 35 33 32 7 Clients served during the period 2,480 2,330 1,890 1,350 500 Total temporary personnel utilized 34,400 32,900 27,500 16,600 8,500 Staffing hours billed 7,618,500 6,699,400 6,315,800 4,013,800 2,515,500 1 The Company declared a ten percent stock dividend in March 1995 and a 135 to 1 stock split in December 1993. Per share data and weighted average shares outstanding have been adjusted for this stock dividend and split. 2 During the year ended October 31, 1993 and the quarter ended January 31, 1994, the Company was treated for income tax purposes as an S Corporation. Consequently, no income tax provision was made for 1993 or the first quarter of 1994. Pro forma net income includes pro forma income tax adjustments. 3 Represents shares of common stock purchased by two Company officers prior to the initial public offering with the proceeds of bank debt that was guaranteed by the Company. These shares were repurchased by the Company during the year ended October 31, 1994. 4 Represents net income (pro forma net income for 1994 and 1993) as a percentage of revenues. Since January 1994, the Company has purchased twelve temporary staffing companies and completed an initial public offering of its common stock. These events affect the comparability of the Company's finanacial data for 1994 through 1997. The Selected Financial and Operating Data are qualified with reference to, and should be read in conjunction with, the consolidated financial statements and "Management's Discussion and Analysis of Financial" Condition and Results of Operations" contained herein. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Personnel Management, Inc and subsidiaries The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and accompanying notes. OVERVIEW The Company provides staffing and human resource services to businesses throughout most of Indiana, portions of northern Kentucky, Atlanta, Georgia and Jacksonville and Tampa, Florida. The Company's business primarily involves providing temporary employees to industrial clients, although it also provides clerical, technical and professional temporary staffing and long-term placement services. The Company has expanded its operations through the acquisition of other staffing companies and opening new offices. In July 1994, the Company acquired the assets of the four Porter Temporary Companies with six offices based in Tampa, Florida. In September 1994, the Company acquired the assets of Human Resource Services, Inc. and Human Resources, Inc. with 13 offices in northern Indiana. On October 18, 1994, the Company acquired the common stock of Southern Indiana Temporaries, Inc. and Quest Personnel Search, Inc. with eight offices in southern Indiana and northern Kentucky. The Company acquired the assets of Temporaries of Atlanta, Inc. with one office in Atlanta, Georgia in November 1995. In February 1996, the Company acquired the assets of Progressive Personnel II, Inc. with three offices in Jacksonville, Florida. During fiscal 1997, the Company opened five new staffing offices, and acquired two staffing businesses and a minority equity investment in a professional employer organization. The Company acquired on March 17, 1997 the assets of Garner-Scott Enterprises, Inc., a staffing business with two offices based in Madison, Indiana and Carrolton, Kentucky, and on March 24, 1997, the assets of First In Temporaries, Inc.'s one office staffing operations in Louisville, Kentucky. A minority equity investment was acquired on April 25, 1997 in Adminiserve, Inc., a professional employer organization based in Greenwood, Indiana. Management intends to pursue a strategy of opening new staffing offices, acquiring other staffing businesses and expanding its services to client companies. All temporary employees are placed on the Company's payroll and the Company therefore assumes responsibility for all employee-related expenses, including workers' compensation, payroll taxes, unemployment compensation insurance and general payroll expenses. The Company bills its clients for the hourly wages paid to the temporary employee placed with the client, plus a negotiated markup. Because the Company pays its temporary employees only for the hours actually worked, these wages are a variable cost that increase or decrease in proportion to revenues. The Company also generates fee income from the placement of staff in long-term positions with clients. RESULTS OF OPERATIONS Revenues - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- (in thousands) 1997 Change 1996 Change 1995 - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Revenues $75,802 13.0% $67,101 9.3% $61,413 - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Revenues are recognized as income at the time staffing services are provided to customers. The increase in revenues of $8,701,000 or 13.0% in fiscal 1997 compared to the prior year period was a result of internal growth of 7.3% and revenues from acquired companies. Staffing services volume, as measured by hours billed, increased 13.7% while prices decreased 0.7%. Revenue growth in the Company's Indiana and northern Kentucky operations was 11.5% while revenues grew 17.3% in its southeastern U.S. operations. Staffing services to light industrial customers accounted for 85% of total revenues in the current fiscal year while clerical staffing services and placement fees accounted for the remaining portion of revenues. The increase in revenues of $5,688,000 or 9.3% in fiscal 1996 compared to the prior year period was due entirely to revenues from the Company's southeastern U.S. operations, which accounted for approximately 26.0% of consolidated revenues for the year. As noted above, the Company acquired two temporary staffing companies in the southeastern U.S. in fiscal 1996 and experienced an 11.9% increase in revenues in its Tampa operations. Revenues from the Company's Indiana and northern Kentucky customer base for fiscal 1996 decreased 4.9% compared to the previous year as a result of competitive pressures and reduced demand. This decrease in revenues occurred in the first two quarters of fiscal 1996, since revenues from the last two quarters of the fiscal year increased 5.2% compared to the corresponding previous year period. 3 Gross Margin - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- (in thousands) 1997 Change 1996 Change 1995 - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Gross margin $15,077 10.2% $13,684 12.6% $12,152 Percentage of revenues 19.9% 20.4% 19.8% - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- 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. Between fiscal 1996 and 1997 gross margin improved $1,393,000 or 10.2% primarily as a result of an increased volume of services to customers. Gross margin as a percentage of revenues decreased from 20.4% in fiscal 1996 to 19.9% in fiscal 1997 due to a new temporary employee benefit program and competitive pricing pressures. In order to attract and retain qualified employees, a new benefit program was introduced in January 1997 that provided the Company's temporary employees with health, life insurance, vacation and holiday benefits. Gross margin improved $1,532,000 or 12.6% between fiscal 1995 and 1996. Approximately $1,125,000 or 73.4% of this improvement was due to an increased volume of services provided to customers, while the remaining amount was attributable to lower workers compensation costs and higher margin business acquired in fiscal 1996 from the acquisitions in Atlanta, Georgia, and Jacksonville, Florida. The lower workers' compensation costs were due to favorable results from claims management practices and safety programs, and favorable overall workers' compensation cost trends. Operating Expenses - ------------------------------ -------------- -------------- -------------- -------------- -------------- (in thousands) 1997 Change 1996 Change 1995 - ------------------------------ -------------- -------------- -------------- -------------- -------------- Selling, general and administrative $11,969 7.6% $11,126 9.9% $10,126 Percentage of revenues 15.8% 16.6% 16.5% Amortization of goodwill $395 13.8% $347 25.7% $276 Percentage of revenues 0.5% 0.5% 0.5% - ------------------------------ -------------- -------------- -------------- -------------- -------------- Selling, general and administrative expenses increased $843,000 or 7.6% from fiscal 1996 to 1997 due to $616,000 of expenses from businesses acquired in the current fiscal year and $953,000 of expenses incurred by the Company to achieve the higher revenue volume. These expenses were related to expanded sales and marketing programs, five new branch office start-ups, six new Vendor-on-Premise locations, and an overall inflationary increase in expenses. The Company expects to continue these types of expenditures in personnel, systems and programs to better meet its customers' needs and to increase revenues. Offsetting the increase in selling, general and administrative expenses was a $726,000 decrease in bad debt expense and professional fees as a result of strengthened credit policies and procedures and reduced demand for professional services. Selling, general and administrative expenses increased $1,000,000 or 9.9% from fiscal 1995 to 1996 due entirely to the expenses associated with the new businesses acquired by the Company in 1996. Expenses for the Indiana and Tampa operations decreased approximately $536,000 primarily as a result of reduced compensation expense and the Company's ongoing expense reduction program. Offsetting this decrease in selling, general and administrative expenses was higher bad debt expense of approximately $421,000 compared to the prior year period. Goodwill represents the unamortized cost in excess of fair value of net assets acquired in the purchase of the previously mentioned companies, and is being amortized on a straight-line basis over 20 years. The increase in goodwill amortization between fiscal years was a result of additional acquisitions and the amortization of payments of additional purchase price under earnout provisions of prior acquisition agreements. 4 Other Income (expense) - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- (in thousands) 1997 Change 1996 Change 1995 - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Other income (expense) $(207) 20.7% $(261) 15.3% $(308) Percentage of revenues 0.3% 0.4% 0.5% - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Other income (expense) consists primarily of interest expense net of interest income. The $54,000 or 20.7% improvement in other income (expense) from fiscal 1996 to 1997 was due primarily to lower borrowing costs. Lower overall market interest rates and reduced interest rate spreads on borrowings as a result of refinancing the Company's credit facility in January 1997 reduced the Company's average borrowing costs from 8.41% in fiscal 1996 to 7.16% in fiscal 1997. The $47,000 or 15.3% improvement in other income (expense) from fiscal 1995 to 1996 was due to increased interest income on outstanding notes receivable and reduced interest expense from lower interest rates on outstanding borrowings. Income Tax Expense - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- (in thousands) 1997 Change 1996 Change 1995 - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- Income tax expense $1,125 20.3% $935 34.9% $693 Percentage of revenue 1.5% 1.4% 1.1% Effective tax rate 44.9% 48.0% 48.0% - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- The $190,000 or 20.3% increase in income tax expense in fiscal 1997 compared to the prior year period was due to higher income before income taxes. Partially offsetting this increase was a reduction in the Company's effective tax rate from 48.0% in fiscal 1996 to 44.9% in the current fiscal year due primarily to lower state income tax expense. The increase in income tax expense of $242,000 or 34.9% in fiscal 1996 compared to the prior year period was due entirely to increased income before income taxes. The effective tax rate in both years remained constant at 48.0%. Net Income and Income Per Share - --------------------------- --------------- ---------------- ---------------- --------------- ---------------- (in thousands, except per share 1997 Change 1996 Change 1995 data) - --------------------------------- -------------- -------------- ------------- -------------- -------------- Net income $1,381 36.1% $1,015 35.5% $749 Percentage of revenue 1.8% 1.5% 1.2% Net income per share $0.67 34.0% $0.50 35.1% $0.37 - --------------------------------- -------------- -------------- ------------- -------------- -------------- Factors contributing to the changes in net income for fiscal 1996 and 1997 are discussed in the detail above. Inflation The effects of inflation on the Company's operations were not significant during the periods presented in the financial statements. Seasonality The Company's revenues and quarterly results have typically been seasonal because of the Company's concentration towards staffing the personnel needs of industrial clients. Industrial production is typically seasonal due to year-end inventory reduction goals of many of the Company's manufacturing clients and the holiday season from Thanksgiving through New Year's Day. This seasonal downtime in industrial operations greatly reduces the needs for the Company's temporary personnel during winter months. As a result, the Company historically has experienced its highest revenues of each fiscal year during its fiscal fourth quarter that ends October 31 and has experienced its weakest revenues in the first quarter, which ends January 31. 5 Financial Condition, Liquidity and Capital Resources - ----------------------------------------------------- ---------------- ----------------- ----------------- (in thousands) 1997 1996 1995 - ----------------------------------------------------- ---------------- ----------------- ----------------- Working capital $ 5,163 $ 3,596 $ 4,540 Notes payable 3,883 3,008 3,855 Cash provided (used) by operating activities (438) 2,494 767 Cash used by investing activities (1,497) (1,788) (1,003) Cash provided (used) by financing activities 1,938 (698) 170 - ----------------------------------------------------- ---------------- ----------------- ----------------- The Company's primary sources of funds over the past three years were from operations and borrowings under its credit facility. The Company's principal uses of cash were to fund working capital, capital expenditures, acquisitions (including payments under the earnout provisions of acquisition agreements), and the repayment of outstanding borrowings. Temporary employees are generally paid weekly for their services while payments from customers are generally received within 30 to 45 days from the date of invoice. As new offices are established or acquired, or as existing offices expand, there will be increasing requirements for cash resources to fund current operations. Net income and related non-cash adjustments provided $2,105,000 in fiscal 1997, while net borrowings on the bank line of credit provided $1,375,000. Other sources of cash included $69,000 from the exercise of stock options. Uses of cash in the current fiscal year were $2,543,000 for changes in working capital, $600,000 for acquisitions of other staffing companies, $406,000 for payments under the earnout provisions of prior acquisition agreements, $491,000 for capital expenditures, and $500,000 for payments on outstanding borrowings. The use of cash for changes in working capital was due primarily to a $2,429,000 increase in accounts and note receivable as a result of the increase in revenues. The Company's accounts receivable days sales outstanding slightly increased to 36.9 days from 35.1 days in the prior fiscal year. Total capitalization at October 31, 1997 was $14,743,000, comprised of $3,883,000 of debt and $10,860,000 of equity. Debt as a percentage of total capitalization increased from 24.2% in fiscal 1996 to 26.3% in 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 October 31, 1997, the Company's availability under the line of credit was approximately $5,900,000. The $2,500,000 term loan is payable in equal monthly principal installments of $42,000. The credit facility is secured and collateralized by account receivable, equipment, cash, general intangibles, contract rights, and proceeds thereof. In addition, the Company has agreed with the bank under the credit facility 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 capital stock repurchases, and restrictions on future mergers, consolidations, acquisitions or joint ventures. At October 31, 1997, the Company was in compliance with its covenants. The Company has issued irrevocable letters of credit in the amount of $900,000 on behalf of the Company's workers' compensation insurance carriers to pay third parties in accordance with state workers' compensation regulations. These letters of credit reduce the amount available to the Company under its credit facility. The Company believes that cash provided by operations, augmented by borrowings for working capital purposes under its credit facility, will be sufficient to cover its capital expenditures and working capital needs in fiscal year 1998. OTHER MATTERS In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting for Stock Based Compensation", which became effective for the Company for the fiscal year ended October 31, 1997. The Company adopted only the disclosure provisions of the statement. Adoption of this statement did not materially affect the consolidated results of operations. In 1997, the FASB issued SFAS No. 128 "Earnings per Share" and SFAS No. 129 "Disclosure of Information about Capital Structure". Both statements become effective for the Company for the first quarter ended January 31, 1998. Adoption of these statements will not materially affect the disclosures in the consolidated financial statements. In 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which does not become effective for the Company until the fiscal year ended October 31, 1999. Adoption of this statement will not materially affect the disclosures in the consolidated financial statements. 6 FORWARD-LOOKING STATEMENTS From time to time, the Company may publish or otherwise disclose forward-looking statements relating to such matters as (a) the Company's expectations for continued growth of the temporary staffing industry, (b) the Company's plans to achieve increased revenues and earnings through internal growth, the opening of new offices, the introduction of new products and programs, and expense reductions, and (c) the Company's plans to expand and diversify its revenues through the acquisition of other temporary staffing companies. In order to comply with the terms of a "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 that protects the making of such forward-looking statements from liability under certain circumstances, the Company notes that a variety of factors could cause the Company's actual results or experience to differ materially from the anticipated results or other expectations described or implied by these forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the following: (a) the risk of adverse changes in the future level of business activity of the Company's clients and prospective clients caused by geographic or industry-specific economic downturns which might cause such clients and prospective clients to require fewer temporary employees, (b) the potential for adverse shifts in demand for temporary employees nationwide that might be caused by future national economic downturns, adverse legal or regulatory developments, or other staffing industry factors, (c) the risk of adverse changes in the availability of qualified temporary employees in the geographic areas in which the Company operates, (d) the possible inability of the Company to identify, finance and complete suitable acquisitions of other staffing companies upon reasonable acquisition terms and conditions on a timely basis, and the potential that such acquisitions might prove to be unprofitable due to undisclosed liabilities, loss of customers, management of the acquired businesses, or other risks generally associated with business acquisitions, and (e) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. 7 Report of Independent Auditors Shareholders and Board of Directors Personnel Management, Inc. We have audited the accompanying consolidated balance sheets of Personnel Management, Inc. as of October 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Personnel Management, Inc. at October 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Indianapolis, Indiana December 5, 1997 8 Consolidated Balance Sheets (in thousands, except share data) October 31, -------------------------------------- Assets 1997 1996 ---- ---- Current Assets: Cash $ 183 $ 180 Accounts receivable, net of allowance of $153 in 1997 and 1996 10,005 7,549 Current portion of notes receivable 72 99 Income taxes receivable 17 25 Prepaid expenses 180 110 Deferred tax asset 515 434 Other current assets 79 71 ---------------- ------------- Total current assets 11,051 8,468 Property and equipment, net 1,301 1,209 Notes receivable, shareholder 553 508 Goodwill, net 7,220 6,636 Other 146 114 ---------------- ------------- 7,919 7,258 ---------------- ------------ Total assets $ 20,271 $ 16,935 ================ ============= Liabilities and Shareholders' Equity Current Liabilities: Cash overdraft $ 1,100 $ 106 Accounts payable 332 285 Accrued compensation and benefits 2,537 2,822 Accrued workers' compensation claims 1,024 752 Income taxes payable 125 160 Other current liabilities 237 247 Current portion of notes payable 533 500 ---------------- ------------- Total current liabilities 5,888 4,872 Notes payable, less current portion 3,350 2,508 Deferred tax liability 173 155 Commitments and contingencies Shareholders' equity: Preferred stock, without par value, authorized 4,000,000 shares, no shares issued or outstanding - - Common stock, without par value, authorized 20,000,000 shares, issued and outstanding 2,028,918 and 2,020,156 shares in 1997 and 1996, respectively 7,925 7,846 Retained earnings 2,935 1,554 ---------------- ------------- Total shareholders' equity 10,860 9,400 ---------------- ------------- Total liabilities and shareholders' equity $ 20,271 $ 16,935 ================ ============= See accompanying notes. 9 Consolidated Statements of Income (in thousands, except per share data) Year ended October 31, ----------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Revenues $ 75,802 $ 67,101 $ 61,413 Cost of services 60,725 53,417 49,261 ------------- ------------- ------------- Gross margin 15,077 13,684 12,152 Operating expenses: General and administrative 11,562 10,770 9,691 Selling 407 356 435 Amortization of goodwill 395 347 276 ------------- ------------- ------------- 12,364 11,473 10,402 Income from operations 2,713 2,211 1,750 Other income (expense): Interest expense (260) (319) (341) Interest and other income 53 58 33 ------------- ------------- ------------- (207) (261) (308) ------------- ------------- ------------- Income before income taxes 2,506 1,950 1,442 Income taxes 1,125 935 693 ------------- ------------- ------------- Net income $ 1,381 $ 1,015 $ 749 ============= ============= ============= Net income per share $ 0.67 $ 0.50 $ 0.37 ============= ============= ============= Weighted average shares outstanding 2,059 2,031 2,038 ============= ============= ============= See accompanying notes. 10 Consolidated Statements of Cash Flows (in thousands) Year ended October 31, ---------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Operating activities: Net income $ 1,381 $ 1,015 $ 749 Adjustments to reconcile net income to net cash provided (used) by operating activities: Amortization of goodwill 395 347 276 Depreciation 417 364 281 Deferred income taxes (63) (114) (13) Shareholder loan activity, net (35) (39) (22) Loss on disposal of property and equipment 10 14 - Changes in operating assets and liabilities, net of purchases of businesses and additions to goodwill: Accounts and notes receivable (2,429) (1,251) 23 Prepaid expenses and other assets (103) 204 (141) Accounts payable 47 55 (306) Accrued liabilities and other payables (58) 1,899 (80) -------------- --------------- --------------- Net cash provided (used) by operating activities (438) 2,494 767 Investing activities: Purchases of businesses and additions to goodwill (1,006) (1,517) (583) Purchases of property and equipment (491) (271) (420) -------------- --------------- --------------- Net cash used by investing activities (1,497) (1,788) (1,003) Financing activities: Proceeds from the exercise of stock options 69 225 - Loan to officer, net of repayment - (62) - Tax benefit resulting from exercise of stock options - - 153 Net change in bank overdrafts 994 (15) 16 Payments on notes payable (500) (116) (779) Net borrowings (payments) on bank line of credit 1,375 (730) 780 -------------- --------------- --------------- Net cash provided (used) by financing activities 1,938 (698) 170 -------------- --------------- --------------- Increase (decrease) in cash 3 8 (66) Cash at beginning of period 180 172 238 ============== =============== =============== Cash at end of period $ 183 $ 180 $ 172 ============== =============== =============== See accompanying notes. 11 Consolidated Statements of Shareholders' Equity (in thousands, except share data) Common Stock Retained -------------------------------- Shares Amount Earnings Total Balance at October 31, 1994 $ 1,771,172 $ 4,564 $ 2,756 $ 7,320 Net income - - 749 749 Exercise of stock options 40,122 - - - Stock dividend 179,793 2,966 (2,966) - Tax benefit resulting from exercise of stock options - 153 - 153 ------------ ------------ -------------- ------------ Balance at October 31, 1995 1,991,087 7,683 539 8,222 Net income - - 1,015 1,015 Exercise of stock options 29,069 225 - 225 Loan to officer, net of repayment - (62) - (62) ------------ ------------ -------------- ------------ Balance at October 31, 1996 2,020,156 7,846 1,554 9,400 Net income - - 1,381 1,381 Exercise of stock options 8,762 69 - 69 Reduction in loan to officer - 10 - 10 ============ ============ ============== ============ Balance at October 31, 1997 2,028,918 $ 7,925 $ 2,935 $ 10,860 ============ ============ ============== ============ See accompanying notes. 12 Notes to the Consolidated Financial Statements October 31, 1997 1. Basis of Presentation and Significant Accounting Policies Personnel Management, Inc. was founded in 1986 to provide temporary help and human resource services in areas of industrial, clerical and technical support. The Company services customers in Indiana, Florida, Georgia and Kentucky. The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform prior years' information to the current year's presentation. ACCOUNTS RECEIVABLE Due to the nature of the business, accounts receivable are due primarily from manufacturing and distribution companies located in Indiana, Florida, Georgia and Kentucky. Collateral is generally not required. PROPERTY AND EQUIPMENT Property and equipment is carried at cost and depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, ranging from 3 to 7 years. GOODWILL Goodwill consists of the amount of purchase price above the fair value of net assets acquired and is being amortized on a straight-line basis over a period of 20 years. Additional purchase price arising from earnout provisions as stated in Note 2 is also allocated to goodwill. Management periodically reviews the potential impairment of goodwill using expected cash flows in order to determine its proper carrying value as of each balance sheet date presented. At October 31, 1997 and 1996, accumulated amortization of goodwill was $1,040,000 and $645,000, respectively. CASH OVERDRAFT Cash overdraft includes checks drawn on various disbursement accounts that exceed net book cash balances at each financial institution. Such disbursement accounts are subsequently replenished upon presentation of these checks for payment. ACCRUED WORKERS' COMPENSATION CLAIMS The Company is self-insured for certain workers' compensation risks and is covered by insurance policies for certain other risks. The Company records liabilities for losses and premium adjustments using various case basis evaluations. The liabilities for losses and premium adjustments include estimates of future trends in claim severity and frequency and other factors that can vary as losses and premium adjustments are ultimately settled. These estimates are continually reviewed and adjustments are reflected in current operations. Although it is not possible to measure the degree of variability inherent in such estimates, management believes the recorded liability is adequate. 13 REVENUE RECOGNITION Revenues and the related costs are recognized as temporary services are provided. PER SHARE DISCLOSURES Per share amounts have been calculated based on the average common and common equivalent shares outstanding for the respective periods. Stock options and warrants are considered common stock equivalents. 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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has estimated that the fair value of cash, accounts and notes receivable, prepaid expenses, other current assets, accounts payable and accrued liabilities approximates the carrying value due to the relatively short period of time until expected realization. The aggregate fair value of notes payable approximates its carrying amount because of the recent and frequent repricing based on market conditions. ACCOUNTING PRINCIPLES PENDING ADOPTION In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share (EPS)". This statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion ("APB") No. 15 "Earnings per Share". The Company will adopt the Statement in fiscal 1998 as required by SFAS No. 128. The Company does not expect the statement to have a material impact on the earnings per share calculations given the current capital structure of the Company. 2. Acquisitions The Company acquired the assets of Temporaries of Atlanta, Inc. on November 13, 1995 for $600,000, plus 42% of future income before taxes and other adjustments derived from the areas served by the business through October 31, 2000. Effective February 5, 1996, the Company acquired the assets of Progressive Personnel II, Inc. for $250,000, plus 71% of future income before taxes and other adjustments derived from one significant customer served by the business through January 31, 2001. On March 17, 1997, the Company acquired the assets of Garner-Scott Enterprise, Inc. for $250,000 plus 33.3% of income before income taxes and other adjustments derived from the areas served by the businesses through February 28, 2002. The Company acquired the assets of the Louisville, Kentucky branch office of First In Temporaries, Inc. on March 24, 1997 for $311,000. 14 These acquisitions were recorded using the purchase method of accounting which allocates the purchase price to the assets and liabilities acquired, based upon the fair value at the time of acquisition. The Company has recorded $2,100,000 of goodwill related to these acquisitions. The results of operations of these acquired companies have been included in the Company's consolidated financial statements since the respective dates of acquisition. The impact of these acquisitions was not material in relation to the Company's results of operations. Consequently, pro forma information is not presented. 3. Property and Equipment The composition of property and equipment was as follows: October 31, ---------------------------------------------------- (in thousands) 1997 1996 ---- ---- Equipment, furniture and fixtures $ 2,233 $ 1,793 Leasehold improvements 353 320 Vehicles 113 96 ------------------- ------------------ 2,699 2,209 Accumulated depreciation (1,398) (1,000) ------------------- ------------------ $ 1,301 $ 1,209 =================== =================== 4. Credit Arrangements The composition of notes payable was as follows: October 31, ---------------------------------------------------- (in thousands) 1997 1996 ---- ---- Bank line of credit $ 1,725 $ 350 Bank term loan 2,125 2,500 Note payable - seller 33 158 ------------------- ------------------- 3,883 3,008 Less current portion: Bank term loan 500 375 Note payable - seller 33 125 ------------------- ------------------ 533 500 ------------------- ------------------ Notes payable beyond one year $ 3,350 $ 2,508 =================== ================== 15 The Company's credit facility provides the ability to borrow up to $11,000,000 for general working capital purposes, acquisition financing and letters of credit. 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 certain borrowing base requirements. Interest is charged on the outstanding balance of the line of credit at rates reflecting the bank's prime rate or the London Interbank Offered Rate (LIBOR) plus a margin of up to 2.75% depending upon certain financial ratios. The Company also pays fees of 1/8% on the unused portion of the line during the term of this agreement. The revolving line of credit terminates on January 31, 1999. Upon termination, borrowings for acquisition financing under this line convert to a five year term loan. At October 31, 1997, the Company's availability under the line of credit was $5,875,000 at an interest rate of LIBOR plus 1.25%. The term loan is payable in equal monthly principal installments of $42,000 beginning February 1997. The term loan matures on January 31, 2002, and bears interest at rates reflecting the bank's prime rate or LIBOR plus a margin of up to 3.0% depending upon certain financial ratios. At October 31, 1997, the interest rate was LIBOR plus 1.50%. Amounts due to the bank under the credit facility are secured and collateralized by the Company's accounts receivable, equipment, cash, general intangibles, contract rights, and proceeds thereof. In addition, the Company is subject 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. The sellers of entities previously acquired by the Company accepted a non-interest bearing note in the amount of $400,000, payable in twelve equal quarterly installments beginning on March 31, 1995. The $400,000 note payable has been discounted at 7.28%. The Company has issued irrevocable letters of credit in the amount of $900,000 on behalf of the Company's workers' compensation insurance carriers to pay third parties in accordance with state workers' compensation regulations. These letters of credit reduce the amount available to the Company under its credit facility. Cash paid for interest during 1997, 1996, and 1995 was $260,000, $328,000, and $309,000, respectively. At October 31, 1997, aggregate future principal payments are as follows: During the year ending October 31, (in thousands) 1998 $ 533 1999 2,225 2000 500 2001 500 2002 125 ================= $ 3,883 ================= 16 5. Shareholders' Equity On April 15, 1997, the Company forgave $10,000 of the outstanding loan balance to an officer of the Company. The remaining loan balance of $52,000 is reflected as a deduction from common stock and interest is credited to income as it accrues. The loan matures in January 1998. On April 15, 1996, the Company extended a loan to an officer of the Company in the amount of $123,000 for the purpose of paying income taxes in connection with the officer's December 29, 1994 exercise of non-qualified stock options to purchase 49,486 shares of common stock of the Company. The loan bears interest at 8.25% and is secured by 24,670 shares of common stock of the Company. The loan is reflected as a deduction from common stock and interest is credited to income as it accrues. On June 6, 1996, $61,000 of the loan was repaid by the officer. EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS On April 30, 1995, the Company adopted the 1994 Directors Stock Option Plan which authorizes the grant of stock options to non-employee directors in lieu of fees. This plan reserves 44,000 shares of common stock for future issuance. Concurrent with an acquisition in 1994, the Company issued an option to the principal shareholder of the sellers to buy cumulatively up to 43,757 shares of common stock at $8.23 per share, subject to certain conditions. No options have been exercised as of October 31, 1997. Effective with the Company's 1994 initial public offering, the Company adopted the 1994 Stock Option Plan which authorizes the grant of stock options to employees. This Plan reserves 198,000 shares of common stock for future issuance. The Plan terminates on December 1, 2003. At the time of the offering, the Company also granted warrants to the managing underwriter and its assignees to purchase an aggregate of 52,416 shares of common stock at an exercise price of $9.27 per share. The warrants are exercisable through January 26, 1999. In February 1993, the Company adopted a Stock Option Plan which provides for the granting of stock options to certain salaried employees. A total of 178,717 shares of common stock have been reserved for issuance under the Plan. Options under the Plan are to be granted at no less than the estimated fair market value of the underlying shares at the date of the grant (calculated in accordance with a formula set forth in the plan document). The Plan also provided for replacement options to be granted at current market prices to replace shares tendered in lieu of cash to exercise options. The Plan terminates in February 2003. 17 Information pertaining to employee and director stock option plans is as follows: Stock Option Plans ---------------------------------------------------- 1994 1993 1994 Weighted average Employee Plan Employee Plan Directors Plan exercise price per share Outstanding at October 31, 1994 - 178,717 - $ 7.54 Granted 7,040 62,252 13,200 12.44 Exercised - (105,055) - 7.41 Canceled - (45,104) - 12.05 ------------ ------------ ------------ --------- Outstanding at October 31, 1995 7,040 90,810 13,200 9.47 Granted 113,000 - 11,825 7.56 Exercised - (29,069) - 7.73 Canceled - (17,148) - 13.73 ------------ ------------ ------------ --------- Outstanding at October 31, 1996 120,040 44,593 25,025 8.09 Granted 42,125 - 10,450 10.09 Exercised (1,000) (7,762) - 7.83 Canceled (8,000) (29,069) - 7.92 ============ =========== ============ ========= Outstanding at October 31, 1997 153,165 7,762 35,475 $ 8.68 ============ =========== ============ ========= Options exercisable at: October 31, 1995 7,040 90,810 - $ 9.09 October 31, 1996 30,040 44,593 6,600 $ 8.43 October 31, 1997 61,665 7,762 19,113 $ 8.94 The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" in 1997 which establishes a fair value based method of accounting for stock-based compensation plans. As permitted by SFAS No. 123, the Company has elected to continue to account for employee stock options following APB No. 25, "Accounting for Stock Issued to Employees" and related Interpretations. Under APB No. 25, because the exercise price of the Company's employee stock options is equal or greater than the market price of the underlying stock on the date of grant, no compensation expense has been recognized in the 1997 and 1996 financial statements. The weighted average fair value of the options granted during 1997 and 1996 is estimated at $2.60 and $1.92 per share, respectively, on the grant date. These estimates were made using the Black-Scholes option pricing model with the following weighted average assumptions used for valuing option grants: risk-free interest rate of 6.0%, expected dividend yield of zero, expected lives of 3-5 years, and expected volatility of 22.7%. SFAS No. 123 is applicable only to options granted subsequent to October 31, 1995. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods (1 - 4 years). As a result, the pro forma effect of options granted will not be fully reflected until 2000. Pro forma information is as follows: 18 Year ended October 31, (in thousands, except per share data) 1997 1996 ---- ---- Net income: As reported $1,381 $1,015 Pro forma 1,274 941 Net income per share: As reported $0.67 $0.50 Pro forma 0.62 0.46 Options outstanding at October 31, 1997 expire from February 1999 to October 2007. A total of 52,360 shares are reserved for future grants as of October 31, 1997 under the option plans. The following table summarizes information concerning outstanding and exercisable options and warrants at October 31, 1997: Range of Exercise Prices $5 - 9 $9 - 13 $13 - 17 ------ ------- -------- Options outstanding: Weighted average remaining contractual life 6.1 years 4.1 years 2.6 years Weighted average exercise price $7.68 $9.94 $15.74 Number 171,344 116,281 4,950 Options exercisable: Weighted average exercise price $7.56 $9.78 $15.74 Number 58,675 77,331 4,950 6. Income Taxes 19 The provision for income taxes is as follows: Year ended October 31, -------------------------------------------------------------------------------- (in thousands) 1997 1996 1995 ---- ---- ---- Current: Federal $ 943 $ 787 $ 424 State 245 262 170 -------------------- -------------------- -------------------- 1,188 1,049 594 Deferred: Federal (49) (87) 85 State (14) (27) 14 -------------------- -------------------- -------------------- (63) (114) 99 ==================== ==================== ==================== $ 1,125 $ 935 $ 693 ==================== ==================== ==================== 20 The reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows: Year ended October 31, -------------------------------------------------------------------------------- 1997 1996 1995 ---- ---- ---- Tax at US statutory rates 34.0% 34.0% 34.0% State income tax, net of federal tax benefit 6.1 8.0 6.3 Amortization of nondeductible goodwill 2.5 3.2 4.0 Targeted jobs tax credit (0.7) - (2.5) Other, net 3.0 2.8 6.2 ==================== ==================== ==================== 44.9% 48.0% 48.0% ==================== ==================== ==================== Deferred income taxes reflect the net tax effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax liabilities relate primarily to amortization of goodwill and depreciation of property and equipment over longer periods for financial reporting purposes. Deferred tax assets relate primarily to the recording of workers' compensation claims and provision for doubtful accounts for financial reporting purposes in advance of tax treatment. Deferred income tax components are as follows: October 31, ------------------------------------ (in thousands) 1997 1996 ---- ---- Deferred tax liabilities: Tax depreciation in excess of book depreciation $ 92 $ 108 Tax amortization in excess of book amortization 81 47 ============ ============= Noncurrent deferred tax liability $ 173 $ 155 ============ ============= Deferred tax assets: Accrued workers' compensation claims $ 409 $ 303 Allowance for bad debts 61 62 Other deductible temporary differences 45 69 ============ ============= Current deferred tax asset $ 515 $ 434 ============ ============= Payments for income taxes during 1997, 1996 and 1995 were $1,220,000, $993,000, and $618,000, respectively. 7. Leases The Company leases vehicles and office space under noncancelable operating leases which terminate at various dates through 2001. Rental expense was approximately $725,000, $628,000 and $506,000 for 1997, 1996 and 1995, respectively. Certain of the office space is leased from an entity owned by certain officers and directors of the Company. Rental expense under these leases, which is included in the above amounts, aggregated $123,000, $123,000 and $106,000 in 1997, 1996 and 1995, respectively. 21 At October 31, 1997, aggregate future minimum noncancelable lease payments are as follows: During the year ending October 31, (in thousands) 1998 $ 753 1999 554 2000 248 2001 46 ================= $ 1,601 ================= 8. Notes Receivable, Shareholder The Company has unsecured notes receivable from an officer, director, and shareholder maturing December 1999 with an outstanding balance of $553,000 and $508,000 at October 31, 1997 and 1996, respectively. At October 31, 1997 these notes accrued interest at a rate of 8.75%. 9. Major Customers The Company derives a significant amount of revenue from several major customers. In 1997, three customers accounted for 15% of revenues. In 1996, two customers accounted for 11% of revenues. In 1995, no one customer accounted for more than 5% of total revenues. 10. Commitments and Contingencies In the ordinary course of business, the Company may, from time to time, be charged for allegations of discrimination or other employment related claims by temporary employees. There are no cases of this nature pending or threatened, individually or in the aggregate, that management believes will result in a material loss. In January 1997, the Company was named in a lawsuit by an insurance carrier against certain Florida staffing companies acquired by the Company in 1994. The Plaintiff alleges breach of contract and tort causes of action for underpayment of workers' compensation insurance premiums in the amount of $1,402,000 plus unspecified damages. The Company denies the validity of the Plaintiff's claims. The agreement by which the Company acquired the staffing companies specifically disclaims any obligation with regard to undisclosed liabilities of the acquired staffing companies. Management regards as unlikely that the outcome of this action will have a material adverse effect on the financial position of the Company. 22 11. Quarterly Results of Operations (Unaudited) The following table presents the quarterly results of operations for each period presented. Condensed Consolidated Statements of Income (in thousands, except per share Three Months ended data) January 31, April 30, July 31, October 31, 1997 1997 1997 1997 ----------------- ----------------- ----------------- ---------------- Revenues $ 16,627 $ 17,954 $ 19,075 $ 22,146 Gross margin 3,239 3,641 3,819 4,378 Income from operations 370 758 701 884 Income before income taxes 323 710 651 822 Net income 168 369 381 463 Net income per share $ 0.08 $ 0.18 $ 0.19 $ 0.22 Three Months ended January 31, April 30, July 31, October 31, 1996 1996 1996 1996 ----------------- ----------------- ----------------- ---------------- Revenues $ 14,030 $ 16,388 $ 17,145 $ 19,538 Gross margin 2,802 3,407 3,475 4,000 Income from operations 216 568 601 826 Income before income taxes 146 503 539 762 Net income 82 282 252 399 Net income per share $ 0.04 $ 0.14 $ 0.12 $ 0.20 23 CORPORATE DATA Personnel Management, Inc. and subsidiaries Executive Officers and Directors Don R. Taylor, Director Chief Executive Officer Personnel Management, Inc. Gary F. Hentschel President & Chief Operating Officer Personnel Management, Inc. Robert R. Millard Vice President of Finance and Administration, Secretary and Treasurer Personnel Management, Inc. Joseph C. Cook, Jr., Director President, Cambrian Associates LLC, a consulting firm Max K. DeJonge, Director President and Chief Executive Officer O'Neal Steel, Inc., a steel distributor David L. Swider, Director 1,2 Partner, Bose McKinney & Evans, an Indianapolis law firm Richard L. VonDerHaar, Director 1,2 Senior Vice President of Municipal Finance David A. Noyes & Company, an investment banking firm 1. Member of the Compensation Committee 2. Member of the Audit Committee Independent Auditors Ernst & Young LLP Indianapolis, Indiana Legal Counsel Leagre Chandler & Millard Bose McKinney and Evans Indianapolis, Indiana Form 10-K PMI's annual report to the SEC is available without charge upon written request to Robert R. Millard, Vice President, at our corporate offices. 24 Registrar and Transfer Agent National City Bank Cleveland, Ohio Common Stock The Company's common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol: TPMI. The following are the high and low id prices by fiscal quarters, as reported by Nasdaq. 1997 1996 -------------- ----------------- Quarter ended High Low High Low Jan. 31 $9.25 $6.75 $ 9.75 $5.25 April 30 10.00 9.25 8.50 5.75 July 31 9.75 9.25 9.00 6.25 Oct. 31 12.50 9.75 8.75 6.00 These bid quotations reflect interdealer prices, do not include retail markups, markdowns or commissions, and do not necessarily represent actual transactions. The Company's common stock is held by approximately 1,000 holders (including those whose shares are held in "street name"). The Company has not declared or paid any cash dividends, and presently does not intend to do so in the foreseeable future. Annual Meeting of Shareholders March 5, 1998 Bank One Center/Tower 3rd Floor, Conference Room A Indianapolis, Indiana Investor Relations Robert R. Millard Vice President of Finance and Administration Personnel Management, Inc. 1499 Windhorst Way, Suite 100 Greenwood, Indiana 46143 (317) 888-4400