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