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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
| | 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 0-26970
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CORESTAFF, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0407849
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
4400 POST OAK PARKWAY, SUITE 1130
HOUSTON, TEXAS 77027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(281) 602-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
AS OF APRIL 1, 1997, THE COMPANY HAD 31,308,048 SHARES OF COMMON
STOCK, PAR VALUE $0.01 PER SHARE, AND 707,232 SHARES OF CLASS B (NON-VOTING)
COMMON STOCK, PAR VALUE $0.01 PER SHARE, OUTSTANDING.
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CORESTAFF, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
MARCH 31, DECEMBER 31,
1997 1996
----------- -----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 11,679 $ 6,521
Accounts receivable, net of allowance of $2,348 and $1,637 153,163 126,302
Prepaid expenses and other 11,152 10,450
Deferred income taxes 3,113 2,817
----------- -----------
Total current assets 179,107 146,090
Fixed Assets, net 25,581 16,503
Intangible Assets, net of accumulated amortization of $9,521 and $8,106 249,072 231,475
Other Assets 4,564 2,329
=========== ===========
Total Assets $ 458,324 $ 396,397
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 1,011 $ 456
Accounts payable 22,243 17,089
Payroll and related taxes 25,262 21,045
Self-insurance reserve 2,075 2,374
Amounts due sellers of acquired companies 4,805 9,615
Other current liabilities 4,530 1,196
----------- -----------
Total current liabilities 59,926 51,775
Non-current Self-insurance Reserve 2,564 2,279
Long-term Debt, net of current maturities 152,366 107,839
Deferred Income Taxes and Other 6,131 3,587
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares authorized;
none issued -- --
Common stock, par value $.01 --
Common Stock - 40,000,000 shares authorized;
31,992,048 and 31,944,657 shares issued 320 319
Class B (non-voting) - 3,000,000 shares authorized;
707,232 shares issued 7 7
Additional paid-in capital 210,640 210,034
Retained earnings 27,522 21,767
----------- -----------
238,489 232,127
----------- -----------
Less - 684,000 shares of common stock in treasury, at cost (188) (188)
Less - notes receivable from stockholders (787) (787)
Less - deferred compensation (177) (235)
----------- -----------
Total stockholders' equity 237,337 230,917
----------- -----------
Total Liabilities and Stockholders' Equity $ 458,324 $ 396,397
=========== ===========
See notes to unaudited consolidated financial statements.
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4
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
--------- ---------
Revenues from Services $ 216,948 $ 103,386
Cost of Services 167,093 77,684
--------- ---------
Gross Profit 49,855 25,702
Operating Costs and Expenses:
Selling, general and administrative 35,086 18,494
Depreciation and amortization 2,548 1,382
--------- ---------
37,634 19,876
--------- ---------
Operating Income 12,221 5,826
Other Income (Expense):
Interest expense (2,203) (1,285)
Other, net (95) 61
--------- ---------
(2,298) (1,224)
--------- ---------
Income before Income Taxes 9,923 4,602
Provision for Income Taxes 4,168 1,933
--------- ---------
Net Income $ 5,755 $ 2,669
========= =========
Earnings per Common Share $ 0.18 $ 0.10
========= =========
Number of Shares Used to Compute
Earnings per Common Share 32,429 27,339
========= =========
See notes to unaudited consolidated financial statements.
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CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
THREE MONTHS ENDED
MARCH 31
----------------------
1997 1996
--------- ---------
Cash Flows from Operating Activities:
Net income $ 5,755 $ 2,669
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,548 1,382
Amortization of deferred loan costs 26 82
Amortization of deferred compensation 58 --
Provision for doubtful accounts 635 180
Deferred income taxes (benefit) 484 (77)
Self-insurance reserve (192) (146)
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (17,434) (5,178)
Prepaid expenses and other (732) (1,324)
Accounts payable 2,115 2,815
Accrued liabilities 272 (395)
--------- ---------
Net cash provided by (used in) operating activities (6,465) 8
--------- ---------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired (25,030) (29,817)
Capital expenditures (8,510) (1,829)
Proceeds from sale of physical therapy staffing business 2,500 --
Payments received on stockholders' notes -- 63
Other (2,276) (3)
--------- ---------
Net cash used in investing activities (33,316) (31,586)
--------- ---------
Cash Flows from Financing Activities:
Principal payments on long-term debt (212) (350)
Net proceeds from issuance of long-term debt 44,544 33,757
Net proceeds from sale of common stock 607 171
--------- ---------
Net cash provided by financing activities 44,939 33,578
--------- ---------
Net Increase in Cash and Cash Equivalents 5,158 2,000
Cash and Cash Equivalents at Beginning of Period 6,521 4,091
--------- ---------
Cash and Cash Equivalents at End of Period $ 11,679 $ 6,091
========= =========
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,775 $ 1,047
Income taxes $ 2,879 $ 719
See notes to unaudited consolidated financial statements.
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CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated financial statements of CORESTAFF, Inc. and its
wholly-owned subsidiaries (the "Company") included herein have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. The Company believes that the
presentations and disclosures herein are adequate to make the information not
misleading. The consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the interim periods.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the full year. These
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in its Annual
Report on Form 10-K for the year ended December 31, 1996.
2. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted for
periods ending after December 15, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of common stock equivalents
("CSE") will be excluded. The exclusion of CSE from the calculation would not
have had a material effect on primary earnings per share for the three months
ended March 31, 1997 and 1996.
3. INCOME TAXES
The Company follows the liability method of accounting for income
taxes. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse. The Company's interim
provisions for income taxes were computed using its estimated effective tax
rate for the year.
4. ACQUISITIONS AND DISPOSITION
During the three months ended March 31, 1997, the Company acquired two
businesses, which are summarized below:
Acquisitions completed:
Staffing Services 1
IT Solutions 1
-------
Total 2
=======
Purchase consideration (in thousands):
Cash paid $25,033
Liabilities assumed 7,957
-------
Fair value of assets acquired (including intangibles) $32,990
=======
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CORESTAFF, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In January 1997, the Company acquired substantially all of the assets
of Roberta Enterprises, Inc., a California-based staffing services business,
for $8.4 million in cash. In March 1997, the Company acquired Metamor
Technologies, Ltd., an Illinois-based IT Solutions services business, for $16.0
million in cash.
All acquisitions made by the Company have been accounted for using the
purchase method of accounting. Accordingly, the results of operations of the
acquired businesses are included in the Company's consolidated results of
operations from the date of acquisition. In certain transactions, the sellers
are also entitled to contingent consideration based on the increase in earnings
before interest and taxes ("EBIT"), as defined. As of March 31, 1997, the
maximum aggregate contingent consideration based on EBIT for future periods was
$25.2 million. The payment of any contingent consideration will increase the
amount of goodwill related to the acquisitions.
In January 1997, the Company sold its non-core physical therapy
staffing business, which accounted for less than two percent of the Company's
1996 consolidated revenues and operating income. A loss of $1.4 million on the
sale was recognized in the fourth quarter of 1996.
The following unaudited results of operations have been prepared
assuming the acquisitions made through March 31, 1997 and the sale of the
Company's physical therapy staffing business had occurred as of the beginning
of the periods presented. The unaudited pro forma operating results are not
necessarily indicative of future operating results nor of results that would
have occurred had the acquisitions been consummated as of the beginning of the
periods presented:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1997 1996
----------------- -----------------
(in thousands, except
per share amounts)
Revenues $ 233,264 $ 171,357
Net income $ 6,035 $ 3,355
Earnings per common share $ 0.19 $ 0.12
5. LONG-TERM DEBT
At March 31, 1997, the Company had outstanding borrowings under its
$200 million Senior Credit Agreement (the "Credit Agreement") of $152.1 million
and remaining availability (after deducting outstanding letters of credit of
$4.9 million) of $43.0 million. The Company may request that the commitment be
raised to $250 million. Borrowings under the Credit Agreement bear interest, at
the Company's option, at LIBOR plus a margin of 0.625% to 1.375%, which depends
upon the leverage ratio, or the bank's base rate. The weighted average interest
rate at March 31, 1997 was 6.67%. A commitment fee of 0.18% to 0.25%, depending
on the leverage ratio, is payable on the unused portion of the commitment.
6. SUBSEQUENT EVENT
Subsequent to March 31, 1997, the Company acquired Business Mgmt.
Data, Inc., a California-based IT Solutions business, and its India affiliate
Sriven Computer Solutions (Pvt.), Ltd. for $16.1 million in cash. The sellers
are also entitled to contingent consideration of up to $8.0 million based on
the increase in EBIT, as defined. Payment of contingent consideration will
increase the amount of goodwill related to the acquisition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements.
INTRODUCTION
Since its inception in July 1993, the Company's growth has been the
result of acquisitions of businesses primarily in the staffing industry,
coupled with high internal growth. Through April 30, 1997, the Company had
completed 29 acquisitions, including 11 information technology ("IT") services
businesses, 12 staffing services businesses and three IT Solutions businesses.
The remaining three acquisitions were of physical therapy staffing businesses, a
non-core business that was sold by the Company in January 1997.
All acquisitions completed by the Company have been accounted for
under the purchase method of accounting. Accordingly, the historical
Consolidated Financial Statements of the Company include the operating results
of the acquired businesses from the date of acquisition. Because the Company's
historical consolidated operating results have been significantly affected by
the number, timing and size of the acquisitions, pro forma financial data are
provided herein for a more meaningful period-to-period comparison of the
Company's operating results. The pro forma financial data have been prepared
assuming all acquisitions completed through March 31, 1997 were consummated as
of the beginning of the periods presented. The pro forma results of operations
are not necessarily indicative of the results that would have occurred had the
acquisitions been consummated as of the beginning of the periods presented or
that might be attained in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1996
HISTORICAL PRO FORMA
---------------------------------------------------- ----------------------------------------------------
1997 1996 1997 1996
---------------------------------------------------- ------------------------- --------------------------
Revenues:
Staffing Services $ 114,066 52.6% $ 60,786 58.8% $ 114,066 51.1% $ 89,889 52.5%
IT Services 101,071 46.6 39,818 38.5 101,071 45.3 76,059 44.4
IT Solutions 1,811 0.8 585 0.6 8,127 3.6 5,409 3.1
Other - - 2,197 2.1 - - - -
---------- ------- ---------- -------- --------- --------- ---------- ----------
Total $ 216,948 100.0% $ 103,386 100.0% $ 223,264 100.0% $ 171,357 100.0%
Gross profit:
Staffing Services $ 22,631 45.4% $ 13,324 51.8% $ 22,631 43.3% 18,637 45.4%
IT Services 26,574 53.3 11,656 45.4 26,574 50.8 20,520 50.0
IT Solutions 650 1.3 186 0.7 3,106 5.9 1,882 4.6
Other - - 536 2.1 - - - -
---------- ------- ---------- -------- --------- --------- ---------- ----------
Total $ 49,855 100.0% $ 25,702 100.0% $ 52,311 100.0% $ 41,039 100.0%
Operating income $ 12,221 $ 5,826 $ 12,965 $ 10,204
Net income $ 5,755 $ 2,669 $ 6,035 $ 3,355
Earnings per share $ 0.18 $ 0.10 $ 0.19 $ 0.12
Margins:
Gross --
Staffing Services 19.8% 21.9% 19.8% 20.7%
IT Services 26.3 29.3 26.3 27.0
IT Solutions 35.9 31.8 38.2 34.8
Consolidated 23.0 24.9 23.4 23.9
Operating 5.6 5.6 5.8 6.0
8
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COMPARISON OF HISTORICAL OPERATING RESULTS
SUMMARY. Net income for the current quarter increased 115.6% to $5.8
million compared with net income of $2.7 million in the first quarter of 1996.
Earnings per share increased 80.0% to $0.18 per share, up from $0.10 per share
in 1996. The average number of shares outstanding during the current quarter
was 18.6% higher than a year ago as a result of the Company's second public
equity offering in May 1996.
Revenues in the current quarter increased 109.8% to $216.9 million
from $103.4 million in the first quarter of 1996. Operating income also
increased 109.8% to $12.2 million from $5.8 million in the same period a year
ago. Gross margin for the current quarter was 23.0% compared with 24.9% for the
first quarter of 1996. The lower gross margin primarily resulted from the
effects of acquisitions of lower margin businesses made after March 31, 1996,
and a higher proportion of revenues from large customers. These larger accounts
have lower gross margins than smaller accounts, but higher operating leverage.
Despite the lower gross margin, operating margin for the current quarter was
5.6%, which equaled the margin for the first quarter of 1996. This was the
result of the higher operating leverage and the higher proportion of revenues
from the IT Services group, partially offset by the effects of investments in
infrastructure and in IT technical practices to support the growth of the
Company.
IT SERVICES GROUP. For the current quarter, the IT Services group
accounted for 46.6% and 53.3% of the Company's consolidated revenues and gross
profit, respectively, up from 38.5% and 45.4%, respectively, in the first
quarter of 1996. These increases reflect the higher internal growth rate of
this group compared with staffing services and the nine businesses acquired in
this sector in 1996. Revenues and gross profit for the current quarter were up
153.8% and 128.0%, respectively, over the first quarter of 1996. Gross margin
for the current quarter was 26.3% compared with 29.3% for the first quarter of
1996. This reduction was due to a change in business mix related to the
acquisition of certain lower margin businesses in 1996 and the higher
proportion of revenues from large customers, which have lower gross margins
than smaller accounts, but higher operating leverage.
STAFFING SERVICES GROUP. For the current quarter, the Staffing
Services group accounted for 52.6% and 45.4% of the Company's consolidated
revenues and gross profit, respectively, down from 58.8% and 51.8%,
respectively, in the first quarter of 1996. Revenues and gross profit for the
current quarter were up 87.7% and 69.9%, respectively, over the first quarter
of 1996. Gross margin for the current quarter was 19.8% compared with 21.9% for
the first quarter of 1996. This reduction related to a change in business mix
caused by (i) the acquisition of a low margin staffing services business in
1997, (ii) the higher proportion of revenues being generated from the Company's
large on-site programs (VIP programs) and (iii) lower internal growth of the
Company's higher margin businesses. VIP programs have lower gross margins than
the group's other staffing services business, but higher operating leverage.
IT SOLUTIONS GROUP. During the current quarter, the Company formed a
new business unit, IT Solutions, to provide system integration and consulting
services. This new unit is currently comprised of one IT consulting and systems
integration business acquired in March 1997, and the Company's technical
communication business, which was formerly included in its IT Services group.
The historical results do not include the acquisition in April 1997 of Business
Mgmt. Data, Inc. a California-based IT solutions business and its India
affiliate, Sriven Computer Solutions (Pvt.), Ltd. (together "BMD").
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for 1997 totaled $35.1 million (16.2% of revenues), compared
with $18.5 million (17.9% of revenues) for 1996. The increase in SG&A expenses
primarily related to (i) the effects of the acquisitions, (ii) internal growth
of the operating companies post-acquisition, (iii) investments made to improve
infrastructure and to develop technical practices in the IT services group and
(iv) higher expenses at the corporate level. The SG&A Margin (i.e. SG&A
expenses as a percentage of revenues) for the first quarter of 1997 was 16.2%,
which was lower than 1996 due to (i) higher operating leverage of the operating
groups and (ii) lower corporate-level overhead as a percentage of consolidated
revenues.
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Depreciation totaled $0.9 million and $0.6 million for the first
quarter of 1997 and 1996, respectively. The increase primarily related to the
fixed assets of the businesses acquired and, to a lesser extent, depreciation
on capital expenditures made post-acquisition. Amortization of $1.7 million and
$0.8 million for 1997 and 1996, respectively, related to amortization of
intangible assets (goodwill and non-compete agreements) of the businesses
acquired.
NON-OPERATING COSTS AND EXPENSES. Interest expense for the current
quarter totaled $2.2 million compared with $1.3 million for 1996. The $0.9
million increase was primarily due to increased borrowings for acquisitions.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
current quarter was $4.2 million (an effective tax rate of 42.0%), as compared
with $1.9 million (an effective tax rate of 42.0%) for 1996. The Company's
effective tax rate includes the effects of state income taxes and the portion
of goodwill amortization not deductible for federal income tax purposes.
NET INCOME. Due to the factors described above, net income for 1997
was $5.8 million compared with $2.7 million for 1996. Net income as a
percentage of revenues ("Net Income Margin") increased to 2.7% for the 1997
period, from 2.6% for 1996.
COMPARISON OF PRO FORMA OPERATING RESULTS
SUMMARY. Pro forma operating results, which assume all acquisitions
consummated through March 31, 1997, and the sale of the physical therapy
staffing business in January 1997 occurred as of the beginning of the periods
presented, demonstrate the high internal growth rate of the Company's business
units during the current quarter. Pro forma revenues for the current quarter
were $223.3 million, up 30.3% from $171.4 million in the first quarter of 1996.
Pro forma net income rose 79.9% to $6.0 million, or $0.19 per share, compared
with pro forma net income of $3.4 million, or $0.12 per share, in 1996.
IT SERVICES GROUP. Pro forma revenues and gross profit for the current
quarter increased 32.9% and 29.5%, respectively, from the first quarter of
1996. These improvements reflect the continued strong demand for the Company's
IT services. Pro forma gross margin for the current quarter was 26.3% compared
with 27.0% for 1996. The lower gross margin primarily related to (i) a higher
proportion of revenues from large accounts, principally telecommunication
clients, (ii) higher bench time caused by delays in certain project work, (iii)
one less billing day in the current quarter and (iv) higher consultant costs.
STAFFING SERVICES GROUP. Pro forma revenues and gross profit for the
current quarter increased 26.9% and 21.4%, respectively, from the first quarter
of 1996. These improvements primarily reflect the increase in revenues from the
VIP programs, including new programs that were added in 1997. Pro forma gross
margin for the current quarter was 19.8%, compared with 20.7% for the first
quarter of 1996. The lower gross margin reflects the higher proportion of
revenues from the Company's VIP programs, which have lower gross margins, but
higher operating leverage.
IT SOLUTIONS GROUP. Pro forma revenues and gross profit for the
current quarter increased 50.2% and 65.0%, respectively, from the first quarter
of 1996. Pro forma gross margin was 38.2%, compared 34.8% for the first quarter
of 1996. The gross margin for this group is higher than that for the Company's
other business units due to the higher value-added nature of the services
provided. The growth rate for the group is also expected to exceed the
Company's other business units. The pro forma results do not include the
acquisition in April 1997 of BMD.
OPERATING COSTS AND EXPENSES. Pro forma SG&A expenses for the first
quarter of 1997 totaled $36.6 million (16.4% of revenues) compared with $28.3
million (16.5% of revenues) for the first quarter of 1996. The increase in pro
forma SG&A expenses primarily related to (i) internal growth of the operating
groups, (ii) investments made to infrastructure and to develop technical
practices in the IT Services group and (iii) higher expenses at the corporate
level. The pro forma SG&A Margin for 1997 was lower than 1996 due to (i) higher
10
11
operating leverage of the operating groups and (ii) lower corporate-level
overhead as a percentage of consolidated revenues. The pro forma SG&A expenses
reflect historical SG&A expenses at the corporate level and therefore do not
include the pro forma effects of personnel additions made subsequent to the
beginning of each period to accommodate the growth of the Company.
Depreciation of $1.0 million and $0.8 million for 1997 and 1996,
respectively, related primarily to the fixed assets of the acquired companies.
Amortization of $1.8 million for both 1997 and 1996 related to amortization of
intangible assets (goodwill and non-compete agreements) of the businesses
acquired.
NON-OPERATING COSTS AND EXPENSES. Pro forma interest expense for 1997
totaled $2.5 million compared with $4.5 million for 1996. The decrease relates
to lower long-term debt levels as a result of the repayment of indebtedness
with proceeds from the Company's public equity offering in May 1996.
PROVISION FOR INCOME TAXES. The Company's pro forma effective tax rate
for the current quarter was 42.0%, which was also the rate for the first
quarter of 1996. The Company's effective tax rate includes the effects of state
income taxes and the portion of goodwill amortization not deductible for
federal income tax purposes.
NET INCOME. Due to the factors described above, pro forma net income
for the current quarter was $6.0 million compared with $3.4 million for the
first quarter of 1996. The pro forma Net Income Margin for the current quarter
was 2.7% compared with 2.0% for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have related to the acquisition of
businesses and capital expenditures. These requirements have been met through a
combination of bank debt, issuances of equity securities and internally
generated funds.
During the first three months of 1997 and 1996, the Company made cash
payments for acquisitions of $25.0 million and $29.8 million, respectively.
Capital expenditures totaled $8.5 million and $1.8 million for the three months
ended March 31, 1997 and 1996, respectively. The Company estimates that its
capital expenditures for 1997 will be approximately $30.0 million. The majority
of these expenditures relate to (i) the installation and development of an
integrated front and back office information system, which is expected to be
operational in 1998, (ii) the roll-out of proprietary software to the staffing
services branches, (iii) up-grading of computer hardware to facilitate the new
integrated information system and new software tools and (iv) furniture,
fixtures and equipment for new offices. The Company expects to fund the
expenditures with cash flows from operations and borrowings under its Credit
Agreement.
The Company had working capital of $119.2 million and $94.3 million at
March 31, 1997 and December 31, 1996, respectively. The Company had cash and
cash equivalents of $11.7 million and $6.5 million at March 31, 1997 and
December 31, 1996, respectively. The Company's operating cash flows and working
capital requirements are significantly affected by the timing of payroll and
the receipt of payment from the customer. Generally, the Company pays the
temporary employees of its Staffing Services group weekly and the employees of
its IT Services group semi-monthly. Payments from customers are generally
received within 30 to 65 days from the date of invoice. Cash flows provided by
(used in) operating activities were $(6.5) million and $8,000 for the quarter
ended March 31, 1997 and 1996, respectively. The decrease in operating cash
flows for 1997 reflected the significant growth in revenues in the first
quarter of 1997 from a number of the Company's larger accounts, which generally
have a longer billing and collection cycle.
At March 31, 1997, the Company had a $200 million Senior Credit
Agreement with a syndicate of 12 banks (the "Credit Agreement"). Under terms of
the Credit Agreement, the Company may borrow under a revolving credit facility
up to the lesser of $200 million or 3.5 times Pro Forma Adjusted EBITDA
(earnings before interest, income taxes, depreciation and amortization of all
acquired companies for the preceding twelve-month period). The Company may
request that the commitment be raised to $250 million. Borrowings under the
Credit
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Agreement bear interest, at the Company's option, at LIBOR plus a margin of
0.625% to 1.375%, which depends upon the leverage ratio, or the bank's base
rate. A commitment fee of 0.18% to 0.25%, depending on the leverage ratio, is
payable on the unused portion of the facility. The Credit Agreement contains
certain covenants which, among other things, limit the payment of dividends and
require the maintenance of certain financial ratios. As of March 31, 1997, the
Company had outstanding borrowings under the Credit Agreement of $152.1 million
and remaining availability (after deducting outstanding letters of credit of
$4.9 million) of $43.0 million. The weighted average interest rate of the
Company's outstanding borrowings under the Credit Agreement was 6.67% at March
31, 1997.
The Company is in the process of amending the Credit Agreement to
increase the borrowing capacity to the lesser of four times pro forma EBITDA or
$400 million. The amendment, which is subject to the approval of the
participating banks, is expected to be completed by the end of the second
quarter.
The Company's acquisition program will require significant additional
capital resources. The Company intends to seek additional capital as necessary
to fund such acquisitions through one or more funding sources that may include
borrowings under the Credit Agreement or the issuance of debt or equity
securities or both. Cash flows from operations, to the extent available, may
also be used to fund acquisitions. Although management believes that the
Company will be able to obtain sufficient capital to fund acquisitions, there
can be no assurance that such capital will be available to the Company at the
time it is required or on terms acceptable to the Company.
SEASONALITY
The Company's quarterly operating results are affected primarily by
the number of billing days in the quarter and the seasonality of its customers'
businesses. Demand for services in the Staffing Services group has historically
been lower during the year-end holidays through February of the following year,
showing gradual improvement over the remainder of the year. Although less
pronounced than in the Staffing Services group, the demand for services of the
IT Services group is typically lower during the first quarter until customers'
operating budgets are finalized. The Company believes that the effects of
seasonality will be less severe in the future as revenues contributed by the IT
Services group continue to increase as a percentage of the Company's
consolidated revenues.
INFLATION
The effects of inflation on the Company's operations were not
significant during the periods presented in the financial statements.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements and information
that are based on management's beliefs, as well as assumptions made by, and
information currently available to, management. When used in this document, the
words "believe," "anticipate," "estimate," "project," "expect," and similar
expressions are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated, projected
or expected. Among the key factors that may have a direct bearing on the
Company's operating results are fluctuations in the economy, the degree and
nature of competition, demand for the Company's services, and the Company's
ability to acquire businesses that are accretive to earnings, to integrate the
operations of acquired businesses, to recruit and place temporary professionals,
to expand into new markets, to complete fixed price agreements in accordance
with their terms and to maintain profit margins in the face of pricing
pressures. In addition, important factors that could cause results to differ
materially are set forth under the caption "Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K Current Report ("Form 8-K") was filed with the
Commission on January 10, 1997 reporting the acquisition of
Telos Consulting Services ("Telos") on December 27, 1996.
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SIGNATURES
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 hereunto duly authorized.
CORESTAFF, INC.
(REGISTRANT)
Date: May 13, 1997 By: /s/ EDWARD L. PIERCE
-----------------------------
Edward L. Pierce
Senior Vice President, Chief Financial
Officer and Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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27 Financial Data Schedule