U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JANUARY 31, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___ TO ___.
Commission file number 0-23144
PERSONNEL MANAGEMENT, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1671569
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1499 Windhorst Way, Suite 100
Greenwood, Indiana 46143
(Address of principal executive offices) (Zip Code)
(317) 888-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1994 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes (X) No ( )
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Class Outstanding at March 13, 1998
Common Stock, without par value 2,048,771 shares
PERSONNEL MANAGEMENT, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
(Unaudited)
Condensed Consolidated Balance Sheets
at January 31, 1998 and October 31, 1997 3
Condensed Consolidated Statements of
Income for the three months ended
January 31, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows for the three months ended
January 31, 1998 and 1997 5
Notes to Condensed Consolidated
Financial Statements 6-8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-12
Item 3 - Quantitative and Qualitative
Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 13
Item 4 - Submission of Matters to a Vote of
Security Holders 13
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURE 14
EXHIBIT INDEX 15
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, October 31,
1998 1997
(unaudited)
ASSETS
CURRENT ASSETS
Cash $ 164,985 $ 182,980
Accounts receivable, net 7,717,413 10,004,512
Current portion of notes receivable 62,211 72,211
Income taxes receivable 17,296 17,296
Prepaid expenses 214,115 180,126
Deferred tax asset 515,500 515,500
Other current assets 105,196 78,633
Total current assets 8,796,716 11,051,258
Property and equipment, net 1,290,313 1,300,637
Notes receivable, shareholder 564,162 552,600
Goodwill, net 7,273,396 7,219,984
Other 169,125 146,337
Total assets $18,093,712 $20,270,816
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Cash overdraft $ 72,498 $ 1,100,511
Bank line of credit 189,000 -
Accounts payable 385,613 331,661
Accrued compensation and benefits 2,139,984 2,536,924
Accrued workers' compensation claims 1,050,892 1,024,035
Income taxes payable 20,028 125,228
Other current liabilities 189,933 236,803
Current portion of notes payable 500,000 532,732
Total current liabilities 4,547,948 5,887,894
Notes payable 2,060,986 3,349,987
Deferred tax liability 173,200 173,200
SHAREHOLDERS' EQUITY
Common stock 8,151,671 7,924,994
Retained earnings 3,159,907 2,934,741
Total shareholders' equity 11,311,578 10,859,735
Total liabilities and shareholders' equity $18,093,712 $20,270,816
See accompanying notes.
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
January 31,
1998 1997
Revenues $20,240,898 $16,626,425
Cost of services 16,335,430 13,387,427
Gross margin 3,905,468 3,238,998
Operating expenses:
General and administrative 3,157,245 2,695,114
Selling 175,131 82,186
Amortization of goodwill 106,403 91,473
3,438,779 2,868,773
Income from operations 466,689 370,225
Interest expense, net (67,723) (46,583)
Income before income taxes 398,966 323,642
Income taxes 173,800 155,300
Net income $ 225,166 $ 168,342
Basic net income per share $ 0.11 $ 0.08
Diluted net income per share $ 0.11 $ 0.08
Weighted average shares outstanding:
Basic 2,030,654 2,020,156
Diluted 2,104,352 2,033,024
See accompanying notes.
PERSONNEL MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
January 31,
1998 1997
OPERATING ACTIVITIES:
Net income $ 225,166 $ 168,342
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of goodwill 106,403 91,473
Depreciation 125,753 95,013
Deferred income taxes - (26,000)
Interest on shareholder loan (11,562) (10,837)
Changes in operating assets and
liabilities:
Accounts and notes receivable 2,297,099 1,111,826
Prepaid expenses and other assets (83,340) (82,460)
Accounts payable 53,952 (96,902)
Accrued liabilities and other payables (522,153) (1,022,115)
Net cash provided by operations 2,191,318 228,340
INVESTING ACTIVITIES:
Payments under earnout provisions of
acquisition agreements (159,815) (13,025)
Purchases of property and equipment (115,429) (121,290)
Net cash used by investing activities (275,244) (134,315)
FINANCING ACTIVITIES:
Proceeds from exercises of stock options 175,280 -
Repayment of officer loan 51,397 -
Net change in bank overdrafts (1,028,013) 482,030
Payments on notes payable (157,733) (30,434)
Net payments on line of credit (975,000) (350,000)
Net cash provided (used) by
financing activities (1,934,069) 101,596
Increase (decrease) in cash (17,995) 195,621
Cash at beginning of period 182,980 180,462
Cash at end of period $ 164,985 $ 376,083
See accompanying notes.
PERSONNEL MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
(unaudited)
1. Basis of Presentation
The Company, pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC), has prepared the accompanying financial statements.
This Report on Form 10-Q should be read in conjunction with the Company's
financial statements and notes thereto for the year ended October 31, 1997
included in the Company's 1997 Annual Report to Shareholders. Certain
information and footnote disclosures which are normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations. The
information reflects all normal and recurring adjustments which, in the opinion
of management, are necessary for a fair presentation of the financial position
of the Company and its results of operations for the interim periods set forth
herein. Especially because of the seasonality of the Company's business, the
results for the three months ended January 31, 1998 are not necessarily
indicative of the results to be expected for the full year. The financial
statements include the combined financial position, operations and cash flows
for Personnel Management, Inc. and its wholly-owned subsidiaries, hereafter
referred to as "the Company".
2. Net Income Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share" during the period. SFAS No. 128 replaced the
previously reported primary and fully diluted net income per share with basic
and diluted net income per share. Unlike primary net income per share, basic net
income per share excludes any dilutive effects of options and warrants. In
accordance with SFAS No. 128, net income per share for prior year periods has
been presented, and where necessary, restated. Previously reported net income
per share amounts were not materially affected by the adoption of SFAS No. 128.
The following table sets forth the computation of basic and diluted net income
per share:
Three months ended
January 31,
1998 1997
Numerator for both basic and diluted
net income per share:
Net income $ 225,166 $ 168,342
Denominator:
Denominator for basic net income per
share - weighted-average shares 2,030,654 2,020,156
Effect of dilutive securities:
Employee stock options 63,698 2,868
Warrants 10,000 10,000
Dilutive potential common shares 73,698 12,868
Denominator for diluted net income per
share - adjusted weighted-average shares 2,104,352 2,033,024
Basic net income per share $ 0.11 $ 0.08
Diluted net income per share $ 0.11 $ 0.08
Options to purchase 25,234 shares of common stock at prices ranging from $12.21
to $16.73 per share were outstanding during the three months ended January 31,
1998 but were not included in the computation of diluted net income per share
because the options' exercise price was greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
3. 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 upon the Company's financial
condition or results of operations. Accordingly, no provision has been recorded
in the accompanying financial statements.
On December 12, 1997, the Company, its Chief Executive Officer and the Company's
former Chief Financial Officer were named defendants in a complaint filed by two
investors who are seeking damages for trading losses they claim they incurred in
1995 as a consequence of alleged misstatements. The plaintiffs seek damages of
approximately $600,000 plus interest, attorney's fees, punitive damages, and
treble damages. The Company intends to vigorously defend the lawsuit. Management
believes that any potential loss resulting from this action would be
substantially covered by insurance. Management regards as unlikely that the
outcome of this lawsuit will have a material adverse effect upon the Company's
financial condition or results of operations. Accordingly, no provision has been
recorded in the accompanying financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in the
Company's 1997 Annual Report to Shareholders.
SELECTED INCOME STATEMENT COMPARISONS
REVENUES. For the three months ended January 31, 1998, revenues increased
$3,614,000 or 21.7% from $16,626,000 in fiscal 1997 to $20,241,000. Internal
revenue growth, which excludes acquired offices, was $2,725,000 or 16.4% over
the prior year period. Revenue increases from offices open more than one year
amounted to $2,324,000 or 14.0% over the prior year period. The remainder of the
increase in revenues of $1,290,000 or 7.7% came from acquired branches and
offices opened within the last year.
GROSS MARGIN. Gross margin is defined by the Company as revenues less the cost
of providing services, which includes hourly wages of temporary employees,
employer payroll taxes, benefits for temporary employees and workers'
compensation costs. Gross margin for the three months ended January 31, 1998,
was $3,905,000 or 19.3% of revenues. This compares to $3,239,000 or 19.5% of
revenues for the corresponding period in fiscal 1997. The increase in gross
margin of $666,000 or 20.6% was primarily due to increased revenues. The decline
in gross margin as a percent of revenues was primarily attributable to the costs
associated with the benefit program for temporary employees that became
effective in January 1997. These expenses were partially offset by slightly
lower workers' compensation costs measured as a percent of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") for the three months ended January 31, 1998
were $3,332,000 or 16.5% of revenues compared to $ 2,777,000 or 16.7% of
revenues in the corresponding prior year period. The increase in SG&A expenses
of $555,000 or 20.0% was primarily associated with expenses related to acquired
branches and offices opened within the last year which amounted to $240,000 or
43.2% of the increase in SG&A expense. Increases in SG&A expenses from offices
open more than one year amounted to $315,000 or 11.3% over the prior year
period. This increase in expense was associated with increased revenues, higher
selling expenses related to an increase in marketing efforts and sales staff,
data processing expenses related to converting all offices to common systems in
fiscal 1997, and increased professional fees. These increases in SG&A expenses
were offset by lower bad debt expense.
AMORTIZATION OF GOODWILL. Goodwill represents the unamortized cost in excess of
fair value of net assets acquired and is being amortized on a straight-line
basis over 20 years. Goodwill amortization for the three months ended January
31, 1998 increased $15,000 or 16.3% compared to the corresponding prior year
period. This increase was a result of acquisitions in the prior fiscal year and
the amortization of payments of additional purchase price under earnout
provisions of prior acquisition agreements.
INTEREST EXPENSE, NET. The increase of $21,000 or 45.4% in interest expense, net
of interest income, for the three months ended January 31, 1998 compared to the
prior year period was due primarily to higher average borrowings in the current
year period.
INCOME TAXES. Income tax expense for the three months ended January 31, 1998
increased $18,000 or 11.9% compared to the prior year period. This increase was
a result of an increase in net income before income taxes of $75,000 or 23.3%
which was partially offset by a decrease in the effective income tax rate. The
effective income tax rate for the three months ended January 31, 1998 was 43.6%
compared to 48.0% in the prior year period.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities during the three months ended January 31,
1998 was $2,191,000. Primary sources of operating cash flow were from net income
and related non-cash adjustments and the seasonal reduction in accounts
receivable. These sources of cash were partially offset by a reduction in
accrued liabilities and other payables. Other uses of cash were $1,133,000 for
net repayments on borrowings, $160,000 for payments under earnout provisions of
acquisition agreements and $115,000 for capital expenditures. Additional sources
of cash included $175,000 from the exercise of options to issue 19,853 common
shares and $51,000 from the repayment of a loan to a former officer of the
Company.
Total capitalization at January 31, 1998 was $14,062,000, comprised of
$2,750,000 of debt and $11,312,000 of equity. Debt as a percentage of total
capitalization decreased from 26.3% at October 31, 1997 to 19.6% at January 31,
1998.
The Company's bank 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
line of credit terminates on January 31, 1999. Upon termination, borrowings for
acquisition financing under this line, up to $4,000,000, convert to a five year
term loan with terms and conditions substantially similar to the existing term
loan. At January 31, 1998, up to $561,000 of the $750,000 outstanding under the
line of credit could be converted to a new five year term loan. The Company's
availability under its line of credit facility as of January 31, 1998, was
approximately $4,953,000 at an interest rate of LIBOR plus 1.25%.
The existing 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 January 31, 1998, the
interest rate was LIBOR plus 1.50%.
Currently, the Company is not in negotiations to renew its bank line of credit
that terminates in January 1999. The Company believes its has a favorable
relationship with its bank and at the appropriate time, Management believes a
new line of credit is expected to be arranged with terms and conditions similar
to the existing line of credit.
Management believes that cash provided by operations, augmented by borrowings
for working capital and acquisition purposes under the bank credit facility,
will be adequate to satisfy the Company's acquisition, capital expenditure and
operating cash requirements during fiscal 1998. At January 31, 1998, the Company
was in compliance with its debt covenants.
On February 2, 1998, the Company acquired Summit Temporaries, Inc. ("Summit"), a
staffing firm based in Atlanta, Georgia, for $2,742,000. Summit provides
clerical and light industrial staffing services through four offices and has
annual revenues of approximately $6 million. The purchase price was determined
as a result of arms-length negotiations between unrelated parties. A copy of the
purchase agreement with respect to the transaction are annexed as Exhibits ___
and ___. The purchase price was paid with $1,700,000 of cash, borrowed under the
Company's line of credit with KeyBank N.A. and $1,042,000 of sellers' notes
payable. Notes payable consist of a $950,000 note payable in 16 equal quarterly
installments of $59,000, plus accrued interest at 8.50%, through February 2002;
and a $100,000 non-interest bearing note discounted at 8.0%, payable in eight
equal quarterly installments of $12,500 through February 2000. The Company will
record goodwill and other intangible assets of approximately $2.9 million
including estimated acquisition related costs of $160,000.
The acquisition of Summit Temporaries, Inc. caused the Company to violate the
minimum level of tangible net worth covenant under its bank credit facility. The
bank has waived the violation of this debt covenant. Future acquisitions that
cause the Company's tangible net worth to decrease further require bank
approval. No other restrictions have been placed on the Company's ability to
borrow under the terms of the credit agreement.
YEAR 2000 COMPLIANCE
The Year 2000 issue arises with computer software that has been designed without
considering the impact of the upcoming change in the century and, therefore,
cannot distinguish between years such as 1900 and 2000. The vendor of the
software used by the Company and its subsidiaries to manage staffing functions
has informed the Company that it is evaluating the software to determine what
modifications will be needed to address Year 2000 issues. The vendor has assured
the Company that such evaluation and any modifications will be completed by
early 1999. The Company does not anticipate that the cost of resolving any Year
2000 issues will be material to its financial condition or results of
operations. If, however, Year 2000 issues are not resolved in a timely manner or
require substantial expenditures, the Company's business, financial condition
and/or results of operations could be adversely affected.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This item is currently not applicable to the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As previously reported in Item 1 of the Company's report on Form 10-K for the
year ended October 31, 1997, the Company, its Chief Executive Officer and the
Company's former Chief Financial Officer have been named defendants in a
complaint filed under the caption James H. Wright and V. Gene Wright v.
Personnel Management, Inc., James E. Burnette, and Don R. Taylor, on December
12, 1997, in Marion County Circuit Court, Indianapolis, Indiana (Cause No.
49CO19712 CP2844). The complaint was filed by two investors who are seeking
damages for trading losses they claim they incurred in 1995 as a consequence of
alleged misstatements. The plaintiffs seek damages of approximately $600,000
plus interest, attorney's fees, punitive damages, and treble damages. The
Company intends to vigorously defend the lawsuit. Although, due to the early
stage of this lawsuit, the Company has not undertaken any comprehensive
evaluation of the claims, and although there can be no such assurance, the
Company does not expect that resolution of this lawsuit will have a material
adverse impact upon the Company's consolidated financial condition or results of
operations. Management believes that any potential loss resulting from this
lawsuit would be substantially covered by insurance. The preceding sentences are
forward-looking statements; as with any litigation, a variety of factors could
cause the financial impact of the resolution of this lawsuit to differ
materially from the immaterial impact that is presently expected, including the
possibility that relevant facts or law may exist that are presently unknown to
Company management.
Item 2. Changes in Securities
(c) During the three months ended January 31, 1998, the Company issued an
aggregate of 8,103 shares of common stock to directors of the Company upon
exercises by such directors of stock options issued under the 1994 Director
Stock Option Plan for an aggregate purchase price of $76,620. These shares were
not registered in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 1998 Annual Meeting of Shareholders on March 5, 1998. At
the Annual Meeting, the Shareholders elected as Directors the two nominees,
David L. Swider and Richard L. VonDerHaar, proposed by the Board of Directors;
approved the 1998 Stock Option Plan; and amendments to the 1994 Director Stock
Option Plan. Messrs. Swider and VonDerHaar were elected for a three year term to
the Board of Directors. In addition to Messrs. Swider and VonDerHaar, Directors
whose term of office continued after the Annual Meeting consisted of Don R.
Taylor, Max K. DeJonge, and Joseph C. Cook, Jr.
The results of the proxy solicitation were as follows:
Votes Votes
Withheld Abstained
Votes and and
Cast For Against Non-Votes
Nominees to the
Board of Directors:
David L. Swider 1,253,596 0 0
Richard L. VonDerHaar 1,253,380 0 216
Approval of the 1998
Stock Option Plan 1,233,321 20,275 0
Approval of 1994 Director
Stock Option Plan amendments 1,251,791 1,805 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed in the Exhibit Index on page 15 (which Exhibit Index is
incorporated herein by reference) are filed as part of this report.
(b) Reports on Form 8-K
An amendment to the Form 8-K dated October 24, 1997, in which the Company
reported it dismissed Price Waterhouse LLP as its independent auditor, was filed
on November 6, 1997.
On November 20, 1997, the Company filed Form 8-K in which the Company reported
it had engaged Ernst & Young LLP as its independent auditor.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
PERSONNEL MANAGEMENT, INC.
Dated: March 16, 1998 By: /s/ Robert R. Millard
--------------------------
Robert R. Millard, Vice
President of Finance and
Administration (Principal
Financial Officer and
Authorized Signatory)
EXHIBIT INDEX
Exhibit No. Description of Exhibit
2 Asset Purchase Agreement, dated February 2, 1998,
by and amoung PMI LP II, Summit Temporaries, Inc.,
Leslie A. Barnett, Gary F. Nichols, and
Lyle D. Nichols
10.1 Schedule of Option Grants and Exercises
Under 1994 Director Stock Option Plan
10.2 Agreement and Right of First Refusal Regarding
Purchase of Stock, dated December 18, 1997, by
and between Personnel Management, Inc. and
Don R. Taylor
10.3 Amended Change of Control Severance Benefits
Agreement, dated December 18, 1997, by and
between Personnel Management, Inc. and
Don R. Taylor
10.4 Amended Change of Control Severance Benefits
Agreement, dated December 18, 1997, by and
between Personnel Management, Inc. and
Gary F. Hentschel
10.5 Amended Change of Control Severance Benefits
Agreement, dated December 18, 1997, by and
between Personnel Management, Inc. and
Robert R. Millard
10.6 Personnel Management, Inc. 1998 Stock Option Plan
27 Financial Data Schedule