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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 JULY 1, 1997, THE COMPANY HAD 31,397,745 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 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
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PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
JUNE 30, DECEMBER 31,
1997 1996
---------- ----------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 12,451 $ 6,521
Accounts receivable, net of allowance of $2,837 and $1,637 175,299 126,302
Prepaid expenses and other 18,937 10,450
Deferred income taxes 3,291 2,817
--------- ---------
Total current assets 209,978 146,090
Fixed Assets, net 36,420 16,503
Intangible Assets, net of accumulated amortization of $11,350 and $8,106 279,053 231,475
Other Assets 4,967 2,329
--------- ---------
Total Assets $ 530,418 $ 396,397
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 1,916 $ 456
Accounts payable 16,451 17,089
Payroll and related taxes 35,070 21,045
Self-insurance reserve 1,270 2,374
Amounts due sellers of acquired companies 216 9,615
Other current liabilities 4,988 1,196
--------- ---------
Total current liabilities 59,911 51,775
Non-current Self-insurance Reserve 2,564 2,279
Long-term Debt, net of current maturities 216,787 107,839
Deferred Income Taxes and Other 5,346 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;
32,081,745 and 31,944,657 shares issued 321 319
Class B (non-voting) - 3,000,000 shares authorized;
707,232 shares issued 7 7
Additional paid-in capital 211,683 210,034
Retained earnings 34,929 21,767
--------- ---------
246,940 232,127
--------- ---------
Less - 684,000 shares of common stock in treasury, at cost (188) (188)
Less - notes receivable from stockholders (787) (787)
Less - deferred compensation (155) (235)
--------- ---------
Total stockholders' equity 245,810 230,917
--------- ---------
Total Liabilities and Stockholders' Equity $ 530,418 $ 396,397
========= =========
See notes to unaudited consolidated financial statements.
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CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues from Services $ 241,351 $ 134,159 $ 458,299 $ 237,545
Cost of Services 181,178 101,541 348,271 179,225
--------- --------- --------- ---------
Gross Profit 60,173 32,618 110,028 58,320
Operating Costs and Expenses:
Selling, general and administrative 41,293 22,501 76,379 40,995
Depreciation and amortization 3,103 1,757 5,651 3,139
--------- --------- --------- ---------
44,396 24,258 82,030 44,134
--------- --------- --------- ---------
Operating Income 15,777 8,360 27,998 14,186
Other Income (Expense):
Interest expense (2,878) (1,542) (5,081) (2,827)
Other, net (128) 142 (223) 203
--------- --------- --------- ---------
(3,006) (1,400) (5,304) (2,624)
--------- --------- --------- ---------
Income before Income Taxes 12,771 6,960 22,694 11,562
Provision for Income Taxes 5,364 2,922 9,532 4,855
--------- --------- --------- ---------
Net Income $ 7,407 $ 4,038 $ 13,162 $ 6,707
========= ========= ========= =========
Earnings per Common Share $ 0.23 $ 0.14 $ 0.41 $ 0.24
========= ========= ========= =========
Number of Shares Used to Compute
Earnings per Common Share 32,455 29,177 32,450 28,212
========= ========= ========= =========
See notes to unaudited consolidated financial statements.
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CORESTAFF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
SIX MONTHS ENDED
JUNE 30,
----------------------
` 1997 1996
--------- ---------
Cash Flows from Operating Activities:
Net income $ 13,162 $ 6,707
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,651 3,139
Amortization of deferred loan costs 53 177
Amortization of deferred compensation 80 --
Provision for doubtful accounts 1,546 477
Deferred income taxes 1,122 44
Self-insurance reserve (997) (890)
Loss on disposal of assets -- (29)
Changes in assets and liabilities net of effects of acquisitions:
Accounts receivable (34,226) (11,071)
Prepaid expenses and other (6,769) 24
Accounts payable (5,681) 631
Accrued liabilities 4,661 995
--------- ---------
Net cash provided by (used in) operating activities (21,398) 204
--------- ---------
Cash Flows from Investing Activities:
Cash paid for acquisitions, net of cash acquired (65,300) (81,272)
Capital expenditures (17,517) (4,810)
Proceeds from sale of physical therapy staffing business 2,500 --
Payments received on stockholders' notes -- 63
Proceeds from sale of assets -- 71
Other (3,162) 6
--------- ---------
Net cash used in investing activities (83,479) (85,942)
--------- ---------
Cash Flows from Financing Activities:
Principal payments on long-term debt (218) (114,454)
Net proceeds from issuance of long-term debt 109,374 68,204
Net proceeds from sale of common stock 1,651 137,640
--------- ---------
Net cash provided by financing activities 110,807 91,390
--------- ---------
Net Increase in Cash and Cash Equivalents 5,930 5,652
Cash and Cash Equivalents at Beginning of Year 6,521 4,091
--------- ---------
Cash and Cash Equivalents at End of Period $ 12,451 $ 9,743
========= =========
Cash paid during the period for:
Interest, net of amounts capitalized $ 4,853 $ 2,890
Income taxes $ 10,130 $ 5,039
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 and
six-month periods ended June 30, 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 six months ended June 30, 1997, the Company acquired six
businesses, which are summarized below:
Acquisitions completed:
IT Services - -
COMSYS 2
IT Solutions 3
Staffing Services 1
-------
Total 6
=======
Purchase consideration (in thousands):
Cash paid $66,517
Liabilities assumed 10,047
-------
Fair value of assets acquired (including intangibles) $76,564
=======
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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
$8.8 million in cash. In March 1997, the Company acquired Metamor
Technologies, Ltd., an Illinois-based IT Solutions business, for $16.0 million
in cash. In April 1997, the Company acquired Business Management Data, Inc., a
California-based IT Solutions business, and its India-based affiliate, Sriven
Computer Solutions (PVT.), Ltd., for $16.8 million. In May 1997, the Company
acquired Active Software, Inc., a Minnesota-based IT Services business, for
$5.1 million. In June 1997, the Company acquired Millennium Computer
Corporation, a New York-based IT Solutions business, and its affiliate,
CompuCorps Resources, Inc., a New York-based IT Services business, for $19.2
million.
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 June 30, 1997, the
maximum aggregate contingent consideration based on EBIT for future periods was
$48.2 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 June 30, 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.
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
-------- --------
(in thousands, except
per share amounts)
Revenues $481,076 $367,399
Net income $ 14,661 $ 7,876
Earnings per common share $ 0.45 $ 0.28
5. LONG-TERM DEBT
At June 30, 1997, the Company had outstanding borrowings under its $250
million Senior Credit Agreement (the "Credit Agreement") of $216.6 million and
remaining availability (after deducting outstanding letters of credit of $9.3
million) of $24.1 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 June 30, 1997 was 6.86%. A commitment fee of 0.18% to
0.25%, depending on the leverage ratio, is payable on the unused portion of the
commitment.
The Company is in the process of amending it Credit Agreement to, among
other things, increase the borrowing capacity under the agreement to the lesser
of $350 million or 4.0 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 $400 million. The amended terms also provide that,
after the debt offering described below, the Company's total debt capacity will
be raised from 4.0 times to 4.25 times Pro Forma Adjusted EBITDA and the
borrowing capacity under the Credit Agreement
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CORESTAFF INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
will be lowered to 3.0 times Pro Forma Adjusted EBITDA. The amended Credit
Agreement is expected to be completed on or before July 31, 1997.
On June 24, 1997, the Company entered into a three-year interest rate swap
agreement to reduce a portion of its interest rate exposure on borrowings under
the Credit Agreement. Under the terms of the agreement, the Company will pay
the counterparty 6.05% on notional principal of $25.0 million and the
counterparty will pay the Company interest at a variable rate based on the
LIBOR rate.
6. SUBSEQUENT EVENT
On July 17, 1997, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission covering the sale of $180,000,000
aggregate principal amount of convertible subordinated notes due 2004 (the
"Notes Offering") and the sale of 6.0 million shares of its common stock by
certain selling stockholders. The Company intends to use the net proceeds from
the Notes Offering to repay outstanding borrowings under its Credit Agreement.
The Company will not receive any proceeds from the sale of the common stock.
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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 June 30, 1997, the Company had completed 32
acquisitions, including 17 information technology ("IT") services businesses
and 12 staffing services 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 June 30, 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 JUNE 30, 1997
COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1996
HISTORICAL PRO FORMA
------------------------------------------ -------------------------------------------------
1997 1996 1997 1996
------------------- -------------------- -------------------- --------------------
Revenues:
IT Services $126,474 52.4% $ 56,204 41.9% $132,560 53.6% $ 95,437 50.1%
Staffing Services 114,877 47.6 75,831 56.5 114,877 46.4 94,870 49.9
Other 2,124 1.6
-------- -------- -------- -------- -------- -------- -------- --------
Total $241,351 100.0% $134,159 100.0% $247,437 100.0% $190,307 100.0%
Gross profit:
IT Services $ 36,554 60.7% $ 15,840 48.6% $ 39,550 62.6% $ 28,293 58.6%
Staffing Services 23,619 39.3 16,245 49.8 23,619 37.4 19,995 41.4
Other 533 1.6
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 60,173 100.0% $ 32,618 100.0% $ 63,169 100.0% $ 48,288 100.0%
Operating income $ 15,777 $ 8,360 $ 17,202 $ 13,084
Net income $ 7,407 $ 4,038 $ 7,919 $ 4,589
Earnings per share $ 0.23 $ 0.14 $ 0.24 $ 0.16
COMPARISON OF HISTORICAL OPERATING RESULTS
SUMMARY. Net income for the current quarter increased 83.4% to $7.4
million, or $0.23 per share, from $4.0 million, or $0.14 per share, for the
second quarter of 1996. Revenues in the current quarter increased 79.9% to
$241.4 million from $134.2 million in the second quarter of 1996. Operating
income increased 88.7% to $15.8 million from $8.4 million in the same period a
year ago. Gross margin for the current quarter was 24.9% compared with 24.3%
for the second quarter of 1996. The expansion in gross margin primarily
related to the shift in
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mix toward higher margin IT services, resulting from the acquisition of IT
Services businesses and the higher internal growth rate of the IT Services
Group compared with the lower margin Staffing Services Group. Operating margin
for the current quarter was 6.5% compared with 6.2% for the second quarter of
1996. This improvement related to the higher gross margin, partially offset by
investments in infrastructure and in IT technical practices.
IT SERVICES GROUP. The IT Services Group, which is comprised of COMSYS
Information Technology Services (COMSYS) and the newly formed IT Solutions
unit, accounted for 52.4% and 60.7% of the Company's consolidated revenues and
gross profit, respectively, up from 41.9% and 48.6%, respectively, in the
second quarter of 1996. These increases reflect the higher internal growth
rate of this group compared with the Staffing Services Group and the effects of
the businesses acquired in this sector, including three IT Solutions businesses
in 1997. Revenues and gross profit for the current quarter were up 125.0% and
130.8%, respectively, over the second quarter of 1996. Gross margin for the
current quarter was 28.9% compared with 28.2% for the second quarter of 1996,
primarily due to the IT Solutions unit, which accounted for approximately 10.5%
of the group's revenues and 14.8% of its gross profit.
STAFFING SERVICES GROUP. For the current quarter, the Staffing Services
Group accounted for 47.6% and 39.3% of the Company's consolidated revenues and
gross profit, respectively, down from 56.5% and 49.8%, respectively, in the
second quarter of 1996. Revenues and gross profit for the current quarter were
up 51.5% and 45.4%, respectively, over the second quarter of 1996. Gross
margin for the current quarter was 20.6%, down from 21.4% in the second quarter
of 1996. The lower gross margin primarily related to the acquisition of a low
margin staffing services business in January 1997, and the higher proportion of
revenues being generated from the Company's large on-site programs (VIP
programs). VIP programs have lower gross margins than the Group's other
staffing services business, but higher operating leverage.
OPERATING COSTS AND EXPENSES. Selling, general and administrative
("SG&A") expenses for the second quarter of 1997 totaled $41.3 million,
compared with $22.5 million for the second quarter of 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.
Depreciation totaled $1.3 million and $0.7 million for the second 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 $1.8 million and
$1.1 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 $2.9 million compared with $1.5 million for 1996. The $1.4
million increase was primarily due to increased borrowings for acquisitions and
lower long-term debt levels during the second quarter of 1996 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 provision for income taxes for the
current quarter was $5.4 million, as compared with $2.9 million for 1996. The
Company's effective tax rate of 42.0% 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
$7.4 million compared with $4.0 million for 1996. Net income as a percentage
of revenues ("Net Income Margin") increased to 3.1% for the second quarter of
1997, from 3.0% for the second quarter of 1996.
COMPARISON OF PRO FORMA OPERATING RESULTS
SUMMARY. Pro forma operating results, which assume all acquisitions
consummated through June 30, 1997, and the sale of the physical therapy
staffing business in January 1997 occurred as of the beginning of the periods
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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 $247.4 million, up 30.0% from $190.3 million in the second quarter of
1996. Pro forma net income rose 72.6% to $7.9 million, or $0.24 per share,
compared with pro forma net income of $4.6 million, or $0.16 per share, in
1996.
IT SERVICES GROUP. Pro forma revenues and gross profit for the current
quarter increased 38.9% and 39.8%, respectively, from the second 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 29.8%, up from
29.6% for 1996. The improvement in gross margin primarily related to the
higher internal growth rate of the IT Solutions unit, which accounted for 13.3%
and 20.1% of the group's revenues and gross profit, respectively, in the
current quarter compared with 10.1% and 15.0% in the second quarter of 1996.
The gross margin for COMSYS for the current quarter was 27.5% compared
with 28.0% in the second quarter of 1996 and 26.3% in the first quarter of
1997. The lower gross margin for the current quarter compared with the second
quarter of 1996 reflects the high growth of certain large accounts, which
generally have lower gross margins than the other accounts of COMSYS, but
comparable or higher operating margins due to higher operating leverage. The
improvement in gross margin over the first quarter of 1997 resulted from
increased revenues from ongoing projects and less bench time for the salaried
consultants.
STAFFING SERVICES GROUP. Pro forma revenues and gross profit for the
current quarter increased 21.1% and 18.1%, respectively, from the second
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 20.6%, compared with 21.1% for
the second quarter of 1996. The lower gross margin primarily resulted from the
higher proportion of revenues from the Company's VIP programs.
OPERATING COSTS AND EXPENSES. Pro forma SG&A expenses for the second
quarter of 1997 totaled $42.7 million compared with $32.3 million for the
second 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 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 $1.3 million and $0.9 million for 1997 and 1996,
respectively, related primarily to the fixed assets of the acquired companies.
Amortization of $2.0 million for both 1997 and 1996 related to amortization of
intangible assets (goodwill and non-compete agreements) related to the
businesses acquired.
NON-OPERATING COSTS AND EXPENSES. Pro forma interest expense for second
quarter of 1997 totaled $3.4 million compared with $5.5 million for the second
quarter of 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 second
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 $7.9 million compared with $4.6 million for the second
quarter of 1996. The pro forma Net Income Margin for the current quarter was
3.2% compared with 2.4% for 1996.
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SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996
HISTORICAL PRO FORMA
---------------------------------- ----------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
Revenues:
IT Services $229,356 50.0% $ 96,607 40.7% $252,133 52.4% $182,640 49.7%
Staffing Services 228,943 50.0 136,617 57.5 228,943 47.6 184,759 50.3
Other - - 4,321 1.8 - - - -
-------- ----- -------- ----- -------- ----- -------- -----
Total $458,299 100.0% $237,545 100.0% $481,076 100.0% $367,399 100.0%
Gross profit:
IT Services $ 63,778 58.0% $ 27,682 47.5% $ 74,016 61.5% $ 53,318 58.0%
Staffing Services 46,250 42.0 29,569 50.7 46,250 38.5 38,632 42.0
Other - - 1,069 1.8 - - - -
-------- ----- -------- ----- -------- ----- -------- -----
Total $110,028 100.0% $ 58,320 100.0% $120,266 100.0% $ 91,950 100.0%
Operating income $ 27,998 $ 14,186 $ 32,313 $ 24,090
Net income $ 13,162 $ 6,707 $ 14,661 $ 7,876
Earnings per share $ 0.41 $ 0.24 $ 0.45 $ 0.28
COMPARISON OF HISTORICAL OPERATING RESULTS
SUMMARY. Net income for the first six months of 1997 increased 96.2% to
$13.2 million, or $0.41 per share, from $6.7 million, or $0.24 per share, in
1996. Revenues in the first six months of 1997 increased 92.9% to $458.3
million from $237.5 million in the first six months of 1996. Operating income
increased 97.4% to $28.0 million from $14.2 million in the same period a year
ago. Gross margin for the first six months of 1997 was 24.0% compared with
24.6% for the first six months of 1996. The lower gross margin primarily
resulted from the effects of acquisitions of lower margin businesses made after
June 30, 1996, and a higher proportion of revenues from large customers,
partially offset by the effects of acquisitions of IT Solutions businesses,
which have higher gross margins than the Company's other business units.
Although larger accounts generally have lower gross margins than smaller
accounts, they tend to have higher operating leverage. Despite the lower gross
margin, operating margin for the first six months of 1997 was 6.1%, which was
slightly higher than the margin for the first six months 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 technical practices in the IT Services Group.
IT SERVICES GROUP. The IT Services Group accounted for 50.0% and 58.0% of
the Company's consolidated revenues and gross profit, respectively, up from
40.7% and 47.5%, respectively, in the first six months of 1996. These
increases reflect the higher internal growth rate of this group compared with
the Staffing Services Group and the effects of the businesses acquired in this
sector, including three IT Solutions businesses in 1997. Revenues and gross
profit for the first six months of 1997 were up 137.4% and 130.4%,
respectively, over the first six months of 1996. Gross margin for the first
six months of 1997 was 27.8% compared with 28.7% for the first six months of
1996. This lower gross margin reflects the high growth of certain large
accounts in the Company's COMSYS unit, which generally have lower gross margins
but comparable or higher operating margins due to higher operating leverage.
STAFFING SERVICES GROUP. For the first six months of 1997, the Staffing
Services Group accounted for 50.0% and 42.0% of the Company's consolidated
revenues and gross profit, respectively, down from 57.5% and 50.7%,
respectively, in the first six months of 1996. Revenues and gross profit for
the first six months of 1997 were up 67.6% and 56.4%, respectively, over the
first six months of 1996. Gross margin for the first six months of 1997 was
20.2%, down from 21.6% for the first six months of 1996. The lower gross
margin primarily related to the acquisition of a low margin staffing services
business in January 1997 and higher proportion of revenues being
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generated from the Company's large on-site programs (VIP programs). VIP
programs have lower gross margins than the Group's other staffing services
business, but higher operating leverage.
OPERATING COSTS AND EXPENSES. SG&A expenses for the first six months of
1997 totaled $76.4 million, compared with $41.0 million for the first six
months of 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.
Depreciation totaled $2.1 million and $1.2 million for the first six
months 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 $3.5 million
and $1.9 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 first six
months of 1997 totaled $5.1 million compared with $2.8 million for the first
six months of 1996. The $2.3 million increase was primarily due to increased
borrowings for acquisitions and lower long-term debt levels during the first
six months of 1996 as a result of the Companys' second public offering in May.
PROVISION FOR INCOME TAXES. The provision for income taxes for the first
six months of 1997 was $9.5 million (an effective tax rate of 42.0%), as
compared with $4.9 million (an effective tax rate of 42.0%) for the first six
months 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, net income for the first
six months of 1997 was $13.2 million compared with $6.7 million for the first
six months of 1996. Net Income Margin increased to 2.9% for the first six
months of 1997, from 2.8% for the first six months of 1996.
COMPARISON OF PRO FORMA OPERATING RESULTS
SUMMARY. Pro forma operating results, which assume all acquisitions
consummated through June 30, 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 first six months of 1997. Pro forma revenues for the first
half of 1997 were $481.1 million, up 30.9% from $367.4 million for the first
half of 1996. Pro forma net income rose 86.2% to $14.7 million, or $0.45 per
share, from $7.9 million, or $0.28 per share, in 1996.
IT SERVICES GROUP. Pro forma revenues and gross profit for the first half
of 1997 increased 38.0% and 38.8%, respectively, from the first half of 1996.
These improvements reflect the continued strong demand for the Company's IT
services. Pro forma gross margin for the first half of 1997 increased to
29.4%, up from 29.2% for 1996. The improvement in gross margin primarily
related to the higher internal growth rate of the IT Solutions unit, which
accounted for 12.9% and 19.8% of the Group's pro forma revenues and gross
profit, respectively, in the first half of 1997, compared with 10.0% and 15.1%
in 1996.
STAFFING SERVICES GROUP. Pro forma revenues and gross profit for the
first six months of 1997 increased 23.9% and 19.7%, respectively, from the
first six months of 1996. These improvements primarily related to the increase
in revenues from the VIP programs, including new programs that were added in
1997. Pro forma gross margin for the first six months of 1997 was 20.2%,
compared with 20.9% for the first six months 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.
OPERATING COSTS AND EXPENSES. Pro forma SG&A expenses for the first six
months of 1997 totaled $81.6 million compared with $62.1 million for the first
six months of 1996. The increase in pro forma SG&A
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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 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 $2.4 million and $1.7 million for the first half of 1997
and 1996, respectively, related primarily to the fixed assets of the acquired
companies. Amortization of $4.0 million for both the first half of 1997 and
1996 related to amortization of intangible assets (goodwill and non-compete
agreements) related to the businesses acquired.
NON-OPERATING COSTS AND EXPENSES. Pro forma interest expense for the
first half of 1997 totaled $6.8 million compared with $10.9 million for 1996.
The decrease related 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 first half of 1997 was 42.0%, which was also the rate for the first
half 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 first half of 1997 was $14.7 million compared with $7.9 million for the
first half of 1996. The pro forma Net Income Margin for the first half of 1997
was 3.0% compared with 2.1% for the first half of 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 six months of 1997 and 1996, the Company made cash
payments for acquisitions of $65.3 million and $81.3 million, respectively.
Capital expenditures totaled $17.5 million and $4.8 million for the six months
ended June 30, 1997 and 1996, respectively. The Company estimates that its
capital expenditures for 1997 will be approximately $40.0 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 primarily with borrowings under its Senior Credit Agreement
(the "Credit Agreement") and cash flows from operations.
The Company had working capital of $150.1 million and $94.3 million at
June 30, 1997 and December 31, 1996, respectively. The Company had cash and
cash equivalents of $12.5 million and $6.5 million at June 30, 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 $(21.4) million and $0.2million
for the six months ended June 30, 1997 and 1996, respectively. The decrease in
operating cash flows for 1997 reflected the significant growth in revenues in
the first six months of 1997 from a number of the Company's larger accounts,
which generally have a longer billing and collection cycle.
At June 30, 1997, the Company had a $250 million Credit Agreement. Under
terms of the Credit Agreement, the Company could borrow under a revolving
credit facility up to the lesser of $250 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).
Borrowings under the Credit Agreement bear interest, at the
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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 June 30, 1997, the Company had outstanding borrowings
under the Credit Agreement of $216.6 million and remaining availability (after
deducting outstanding letters of credit of $9.3 million) of $24.1 million. The
weighted average interest rate of the Company's outstanding borrowings under
the Credit Agreement was 6.86% at June 30, 1997.
The Company is in the process of amending it Credit Agreement to, among
other things, increase the borrowing capacity under the agreement to the lesser
of $350 million or 4.0 times Pro Forma Adjusted EBITDA. The Company may
request that the commitment be raised to $400 million. The amended terms also
provide that, after the Notes Offering, the Company's total debt capacity will
be raised from 4.0 times to 4.25 times Pro Forma Adjusted EBITDA and the
borrowing capacity under the Credit Agreement will be lowered to 3.0 times Pro
Forma Adjusted EBITDA. The amended Credit Agreement is expected to be
completed on or before July 31, 1997.
On June 24, 1997, the Company entered into a three-year interest rate swap
agreement to reduce a portion of its interest rate exposure on borrowings under
the Credit Agreement. Under the terms of the agreement, the Company will pay
the counterparty 6.05% on notional principal of $25.0 million and the
counterparty will pay the Company interest at a variable rate based on the
LIBOR rate.
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.
On July 17, 1997, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission covering the sale of $180,000,000
aggregate principal amount of convertible subordinated notes due 2004 (the
"Notes Offering") and the sale of 6.0 million shares of its common stock by
certain selling stockholders. The Company intends to use the net proceeds from
the Notes Offering to repay outstanding borrowings under the Credit Agreement.
The Company will not receive any proceeds from the sale of the common stock by
the selling stockholders.
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
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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
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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: July 22, 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
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