1
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
[ ] 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: 0-20971
STAFFMARK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 71-0788538
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
302 EAST MILLSAP ROAD
FAYETTEVILLE, AR 72703
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(501) 973-6000
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 (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 [ ]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at July 28, 1997 was 14,795,795.
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STAFFMARK INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Index
-----
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
Introduction 3
StaffMark, Inc. Pro Forma Statements of Income
Pro Forma Statements of Income 4
Notes to Pro Forma Statements of Income 5
StaffMark, Inc. Consolidated Financial Statements
Consolidated Statements of Income 7
Consolidated Balance Sheets 8
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction 14
Pro Forma Results for the Three and Six Months Ended June 30, 1997 Compared to Pro Forma 14
Results for the Three and Six Months Ended June 30, 1996
Results for the Three and Six Months Ended June 30, 1997 Compared to Results for the Three 16
and Six Months Ended June 30, 1996
Results for the Three and Six Months Ended June 30, 1997 Compared to the Combined Results 17
for the Three and Six Months Ended June 30, 1996
Liquidity and Capital Resources 19
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS 20
ITEM 2 - CHANGES IN SECURITIES 20
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 21
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 22
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PART I
ITEM 1 - FINANCIAL STATEMENTS
INTRODUCTION
StaffMark, Inc. (the "Company" or "StaffMark") was founded in March
1996 to create a leading provider of diversified staffing and consulting
services to businesses, professional and service organizations, governmental
agencies and medical niches. On October 2, 1996, StaffMark and six staffing
service businesses, Brewer Personnel Services, Inc. ("Brewer"), Prostaff
Personnel, Inc. and its related entities ("Prostaff"), Maxwell Staffing, Inc.
and its related entities ("Maxwell"), HRA, Inc. ("HRA"), First Choice Staffing,
Inc. ("First Choice") and Blethen Temporaries, Inc. and its related entities
("Blethen"), (each a "Founding Company" and collectively, the "Founding
Companies"), merged through a series of separate transactions (the "Merger")
simultaneously with the closing of the Company's initial public offering (the
"Offering").
Between March 1996 and the consummation of the Offering, the Company
did not conduct any operations and all activities prior to the Offering related
to the Merger and the Offering. Pursuant to the requirements of the Securities
and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB 97"),
which was issued and became effective July 31, 1996, Brewer was designated as
the acquirer, for financial reporting purposes, of Prostaff, Maxwell, HRA,
First Choice, and Blethen (collectively, the "Other Founding Companies"). Based
on the applicable provisions of SAB 97, these acquisitions were accounted for
as combinations at historical cost. Additionally, the consolidated financial
information presented in this quarterly report on Form 10-Q relates to Brewer
through the date of the Offering and to StaffMark on a consolidated basis for
all periods subsequent to October 2, 1996.
Since the Offering, the Company has acquired 13 additional staffing and
consulting service businesses, allowing the Company to grow geographically and
expand its presence in the rapidly growing professional and information
technology fields, as well as in medical niches.
The following unaudited pro forma statements of income give effect to
the following pro forma adjustments: (i) Brewer's acquisition of the Other
Founding Companies; (ii) the effect of Brewer's February 1996 acquisition of On
Call Employment Services, Inc. ("On Call"); (iii) StaffMark's March 1997
acquisition of Flexible Personnel, Inc., Great Lakes Search Associates, Inc.,
and HR America, Inc. (collectively, "Flexible"); (iv) StaffMark's April 1997
acquisition of Global Dynamics, Inc. ("Global"); (v) the adjustment to
compensation expense for the difference between the historical compensation
paid to certain previous owners of the Founding Companies, Flexible and Global
and the employment contract compensation negotiated in conjunction with the
Merger and respective acquisitions ("Compensation Differential"); and (vi) the
incremental provision for income taxes attributable to the income of subchapter
S Corporations, net of the income tax benefits related to the Compensation
Differential and adjusted for nondeductible goodwill amortization.
These pro forma statements of income should be read in conjunction with
the audited financial statements and the notes thereto included in StaffMark's
1996 Annual Report on Form 10-K, as amended, and the respective Form 8-K
filings prepared in conjunction with the respective acquisitions of Flexible
and Global.
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STAFFMARK, INC.
PRO FORMA STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------------------ ------------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
SERVICE REVENUES $ 67,362,330 $ 96,123,410 $ 123,430,877 $ 173,298,495
COST OF SERVICES 53,053,593 74,675,962 97,417,454 134,965,004
------------- ------------- ------------- -------------
Gross profit 14,308,737 21,447,448 26,013,423 38,333,491
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 10,042,052 14,074,153 19,427,700 26,118,867
Depreciation and amortization 793,650 1,061,782 1,537,303 2,005,202
------------- ------------- ------------- -------------
Operating income 3,473,035 6,311,513 5,048,420 10,209,422
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (862,082) (475,593) (1,666,759) (781,618)
Other, net 328,162 14,833 398,454 254,388
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 2,939,115 5,850,753 3,780,115 9,682,192
PROVISION FOR INCOME TAXES 1,265,577 2,398,809 1,712,889 4,014,698
------------- ------------- ------------- -------------
NET INCOME $ 1,673,538 $ 3,451,944 $ 2,067,226 $ 5,667,494
============= ============= ============= =============
PRO FORMA PRIMARY EARNINGS
PER SHARE $ 0.18 $ 0.24 $ 0.23 $ 0.39
============= ============= ============= =============
PRO FORMA FULLY DILUTED
EARNINGS PER SHARE $ 0.18 $ 0.23 $ 0.23 $ 0.38
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
NOTES TO PRO FORMA STATEMENTS OF INCOME
(UNAUDITED)
1. ORGANIZATION:
StaffMark was founded in March 1996 to create a leading provider of
diversified staffing and consulting services to businesses, professional and
service organizations, governmental agencies and medical niches. On October 2,
1996, StaffMark merged through a series of separate transactions with the
Founding Companies. The Merger was effected by StaffMark simultaneously with
the closing of its Offering. The consideration for the stock of the Founding
Companies consisted of a combination of cash and Common Stock of the Company.
The Company recognizes revenues upon performance of services. The
Company generally compensates its temporary employees and consultants only for
hours actually worked, therefore wages of the temporary employees and
consultants are a variable cost that increase or decrease as revenues increase
or decrease. However, certain of the Company's professional and information
technology consultants are full-time, salaried employees. Cost of services
primarily consists of wages paid to temporary employees, payroll taxes,
workers' compensation and other related employee benefits. Selling, general and
administrative expenses are comprised primarily of administrative salaries,
benefits, marketing, rent and recruitment expenses.
2. BASIS OF PRESENTATION:
The pro forma financial information included herein is unaudited and
includes the financial results of StaffMark, the Founding Companies, On Call,
Flexible and Global as if these acquisitions had occurred at the beginning of
the periods presented. Other acquisitions made by the Company since its
Offering have not been significant and therefore have not been included in
these pro forma statements of income. Management believes this information
reflects all adjustments which are necessary for a fair presentation of results
for the interim periods. The pro forma results of operations for the three and
six months ended June 30, 1996 and 1997 are not necessarily indicative of the
results to be expected for the full year. These pro forma statements of income
should be read in conjunction with the audited financial statements and notes
thereto included in StaffMark's Annual Report on Form 10-K, as amended, and the
respective Form 8-K filings prepared in conjunction with the respective
acquisitions of Flexible and Global.
3. SEASONALITY:
The timing of certain holidays, weather conditions and seasonal
vacation patterns may cause the Company's quarterly results of operations to
fluctuate. The Company generally expects to realize higher revenues, operating
income and net income during the second and third quarters and lower revenues,
operating income and net income during the first and fourth quarters.
4. INCOME TAXES:
Certain of the Founding Companies and acquired companies were S
Corporations for income tax purposes and, accordingly, any income tax
liabilities for the periods prior to the Merger and respective acquisitions are
the responsibility of the respective stockholders. Effective with the Merger
and respective acquisitions, these S Corporations converted to C Corporation
status which require them to recognize the tax consequences of operations in
their respective statements of income. For purposes of preparing these pro
forma statements of income, federal and state income taxes have been provided
for at an estimated effective combined tax rate of 39%, adjusted for
nondeductible goodwill amortization.
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5. EARNINGS PER SHARE:
Primary and fully diluted earnings per share have been computed by
dividing net income by the weighted-average shares of Common Stock outstanding
during the periods presented, including the incremental shares that would have
been outstanding upon the assumed exercise of dilutive stock options even
though these options are not vested. The weighted-average shares used to
compute earnings per share were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1997 1996 1997
---------- ---------- ---------- ----------
Primary 9,174,386 14,677,299 9,174,386 14,561,699
========== ========== ========== ==========
Fully Diluted 9,174,386 14,892,201 9,174,386 14,815,536
========== ========== ========== ==========
The computation of earnings per share for the three and six months
ended June 30, 1996 was based upon 9,174,386 weighted average shares
outstanding which includes: (i) 1,355,000 shares issued by StaffMark prior to
the Offering; (ii) 5,618,249 shares issued to the stockholders of the Founding
Companies in connection with the Merger; (iii) 1,326,459 shares issued in
connection with the Offering to pay the cash portion of the consideration for
the Founding Companies; (iv) 183,823 shares issued in conjunction with the
March 1997 acquisition of Flexible; and (v) 690,855 shares issued in
conjunction with the April 1997 acquisition of Global.
The computation of both primary and fully diluted earnings per share
for the three months ended June 30, 1997 was based upon the actual weighted
average shares outstanding during the period since both the Flexible and Global
acquisitions were effective on or before the beginning of the second quarter.
The computation of both primary and fully diluted earnings per share
for the six months ended June 30, 1997 was based upon the actual weighted
average shares outstanding during the period adjusted to reflect the
acquisitions of Flexible and Global as if these acquisitions had occurred on
January 1, 1997.
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STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------------------ ------------------------------
1996 1997 1996 1997
------------- ------------- ------------- -------------
SERVICE REVENUES $ 16,690,130 $ 96,123,410 $ 30,556,381 $ 159,987,151
COST OF SERVICES 13,074,504 74,675,962 24,027,885 124,515,015
------------- ------------- ------------- -------------
Gross profit 3,615,626 21,447,448 6,528,496 35,472,136
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 2,410,152 14,074,153 4,445,462 24,005,794
Depreciation and amortization 301,390 1,061,782 565,974 1,749,616
------------- ------------- ------------- -------------
Operating income 904,084 6,311,513 1,517,060 9,716,726
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (455,031) (475,593) (879,924) (507,226)
Other, net (14,571) 14,833 (3,182) 253,539
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 434,482 5,850,753 633,954 9,463,039
PROVISION FOR INCOME TAXES -- 2,398,809 -- 3,879,846
------------- ------------- ------------- -------------
NET INCOME $ 434,482 $ 3,451,944 $ 633,954 $ 5,583,193
============= ============= ============= =============
PRIMARY EARNINGS PER SHARE $ 0.24 $ 0.39
============= =============
FULLY DILUTED EARNINGS PER SHARE $ 0.23 $ 0.39
============= =============
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,856,422 $ 2,639,536
Accounts receivable, net of allowance
for doubtful accounts 21,064,875 41,060,043
Advances to stockholders -- 175,635
Prepaid expenses and other 1,577,508 1,930,467
Deferred income taxes -- 753,515
------------ ------------
Total current assets 36,498,805 46,559,196
PROPERTY AND EQUIPMENT, net 4,003,638 6,663,478
INTANGIBLE ASSETS, net 30,512,571 86,734,041
ADVANCES TO STOCKHOLDERS 160,000 984,365
OTHER ASSETS 323,217 967,362
------------ ------------
$ 71,498,231 $141,908,442
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 1,907,331 $ 3,128,388
Outstanding checks 176,156 --
Payroll and related liabilities 3,515,743 11,649,723
Reserve for workers' compensation claims 3,771,398 6,556,738
Accrued interest -- 459,743
Income taxes payable 2,415,203 676,856
Deferred income taxes 662,505 --
------------ ------------
Total current liabilities 12,448,336 22,471,448
LONG-TERM DEBT -- 43,430,000
OTHER LONG TERM LIABILITIES 518,669 136,075
DEFERRED INCOME TAXES 421,147 396,226
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized shares of
1,000,000; no shares issued or outstanding -- --
Common stock, $.01 par value in 1996 and 1997; authorized
shares of 26,000,000 in 1996 and 1997; shares issued and
outstanding of 13,417,012 in 1996 and 14,509,633 in 1997 134,170 145,097
Paid-in capital 55,379,391 67,149,885
Retained earnings 2,596,518 8,179,711
------------ ------------
Total stockholders' equity 58,110,079 75,474,693
------------ ------------
$ 71,498,231 $141,908,442
============ ============
The accompanying notes are an integral part of these balance sheets.
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STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 434,482 $ 3,451,944 $ 633,954 $ 5,583,193
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 301,390 1,061,782 565,974 1,749,616
Provision for bad debts 57,821 108,681 57,932 148,528
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (232,496) (4,130,596) (1,246,671) (8,610,894)
Prepaid expenses and other 74,118 214,707 (22,263) (49,613)
Other assets 4 543,268 (2,095) 657,973
Deferred income taxes -- (1,190,040) -- (2,278,141)
Accounts payable and other accrued 33,012 904,257 8,644 359,817
liabilities
Outstanding checks (66,694) -- 115,345 (176,156)
Payroll and related liabilities 166,871 2,098,641 250,733 5,243,007
Reserve for workers' compensation claims 27,115 504,114 (26,404) 1,066,629
Income taxes payable/receivable -- (1,175,440) -- (1,906,114)
Accrued interest and other (213,825) (1,529,190) (445,296) (1,645,111)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 581,798 862,128 (110,147) 142,734
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired -- (41,800,708) (3,000,000) (50,930,702)
Capital expenditures (45,677) (1,553,794) (234,143) (1,923,674)
------------ ------------ ------------ ------------
Net cash used in investing activities (45,677) (43,354,502) (3,234,143) (52,854,376)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 485,088 43,430,000 4,736,794 43,430,000
Payments on borrowings (571,558) (1,935,244) (860,204) (1,935,244)
Cash dividends -- -- (17,000) --
Deferred financing costs -- -- (56,250) --
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities (86,470) 41,494,756 3,803,340 41,494,756
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 449,651 (997,618) 459,050 (11,216,886)
CASH AND CASH EQUIVALENTS,
beginning of period 328,558 3,637,154 319,159 13,856,422
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 778,209 $ 2,639,536 $ 778,209 $ 2,639,536
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 434,312 $ 290,014 $ 1,042,906 $ 326,243
============ ============ ============ ============
Income taxes paid $ -- $ 2,510,550 $ -- $ 4,533,450
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
In March 1996, StaffMark was founded to create a leading provider of
temporary staffing and consulting services. Effective October 2, 1996, the
Company acquired the Founding Companies and completed its Offering. Based on
the provisions of SAB 97, Brewer was designated as the acquirer, for financial
reporting purposes, of the Other Founding Companies. As Brewer was designated
as the acquirer for financial reporting purposes, the accompanying financial
statements reflect the results of its operations for the three and six months
ended June 30, 1996. Based on the applicable provisions of SAB 97, the
acquisition of assets and assumption of liabilities of the Other Founding
Companies are reflected at their historical cost. All significant intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.
The Company provides diversified staffing and consulting services to
businesses, professional and service organizations and medical niches. The
Company recognizes revenues upon performance of services. The Company generally
compensates its temporary employees and consultants only for hours actually
worked, therefore wages of the temporary employees and consultants are a
variable cost that increase or decrease as revenues increase or decrease.
However, certain of the Company's professional and information technology
consultants are full-time, salaried employees. Cost of services primarily
consists of wages paid to temporary employees, payroll taxes, workers'
compensation and other related employee benefits. Selling, general and
administrative expenses are comprised primarily of administrative salaries,
benefits, marketing, rent and recruitment expenses.
As of June 30, 1997, StaffMark operated offices in 19 states, British
Columbia and the United Kingdom and provides temporary staffing in the
commercial, professional and specialty medical staffing service lines.
StaffMark extends trade credit to customers representing a variety of
industries. There are no individual customers that account for more than 10% of
service revenues of StaffMark in any of the periods presented.
2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER:
On October 2, 1996, the Company completed the Offering, which involved
the public sale of 6,325,000 shares (including underwriters' over-allotment) of
Common Stock at a price of $12.00 per share. The proceeds from the transaction,
net of underwriting discounts, commissions and expenses of the Offering, were
approximately $67.0 million. Of this amount, $15.9 million was used to pay the
cash portion of the purchase price for the Founding Companies, approximately
$31.0 million was used to repay indebtedness of the Founding Companies and
approximately $4.1 million was used for S Corporation distributions to
stockholders of the Founding Companies. The remaining net proceeds were for
working capital and general corporate purposes, including acquisitions.
Concurrent with the completion of the Offering, the Company issued
5,618,249 shares of Common Stock to the stockholders of the Founding Companies,
in addition to the cash consideration discussed above, to effect the Merger.
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3. BASIS OF PRESENTATION:
The accompanying interim financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures made are adequate to ensure the information presented is not
misleading. Additionally, certain reclassifications have been made to prior
period balances in order to conform with the current period presentation. These
financial statements should be read in conjunction with the audited financial
statements of the Company and the Founding Companies and notes thereto included
in StaffMark's Annual Report on Form 10-K, as amended.
4. SEASONALITY:
The timing of certain holidays, weather conditions and seasonal
vacation patterns may cause the Company's quarterly results of operations to
fluctuate. The Company generally expects to realize higher revenues, operating
income and net income during the second and third quarters and lower revenues,
operating income and net income during the first and fourth quarters.
5. BUSINESS COMBINATIONS:
In February 1996, Brewer acquired the stock of On Call. On Call is
engaged in providing temporary personnel services through four staffing offices
in Colorado. On Call had 1995 revenues of approximately $12.5 million and
operates in the Commercial and Professional/Information Technology divisions.
The total consideration paid for On Call was approximately $3.8 million.
Advance Personnel Service, Inc. ("Advance") was acquired in February
1997. Advance, located in Memphis, Tennessee, provides clerical, light
industrial, assembly and packing services for several Fortune 500 companies.
Advance had 1996 revenues of approximately $6.3 million and operates in the
Commercial division. MRIC Medical Recruiters International, L.T.D. ("MRIC") was
also acquired in February 1997. Located in Vancouver, British Columbia, MRIC
provides physical therapists on a direct placement and locum basis in Canada
and the United States. MRIC had 1996 revenues of approximately $2.5 million and
operates in the Specialty Medical division. The aggregate consideration paid in
these transactions consisted of $2.5 million in cash.
Flexible was acquired in March 1997. Flexible, headquartered in Fort
Wayne, Indiana, operates a total of 40 offices located in Indiana, Michigan and
Ohio. Providing clerical, light industrial, professional/information technology
and accounting services, Flexible also operates a staff leasing company.
Flexible had 1996 revenues of approximately $49.3 million and operates in the
Commercial and Professional/Information Technology divisions. The consideration
paid for Flexible included $7.5 million in cash and 183,823 shares of StaffMark
Common Stock.
Global was acquired in April 1997. Located in Walnut Creek, California,
Global provides information technology staffing services to several Fortune 500
companies. Global had 1996 revenues of approximately $17.2 million and operates
in the Professional/Information Technology division. The consideration paid for
Global included $14.0 million in cash and 690,855 shares of StaffMark Common
Stock.
Lindenberg & Associates, Inc. ("Lindenberg") was acquired in April
1997. Lindenberg, headquartered in St. Louis, Missouri, provides information
technology staffing services through offices in St. Louis, Missouri; Kansas
City, Kansas; Omaha, Nebraska and Minneapolis/St. Paul, Minnesota. Lindenberg
had 1996 revenues of approximately $18.0 million and operates in the
Professional/Information Technology division. The consideration paid for
Lindenberg included $15.25 million in cash.
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5. BUSINESS COMBINATIONS (CONTINUED):
TPS/Furr & Associates, Inc. ("TPS") was acquired in May 1997.
TPS, located in Monroe, North Carolina, provides clerical and light industrial
services in the Charlotte, North Carolina area. TPS had 1996 revenues of
approximately $4.5 million and operates in the Commercial division. HR
Alternatives, Inc. ("Alternatives") was acquired in June 1997. Headquartered in
Kingsport, Tennessee, Alternatives provides clerical and light industrial
services through eight offices in the areas of Eastern Tennessee, Western
Carolina and Southwestern Virginia. Alternatives had 1996 revenues of
approximately $8.4 million and operates in the Commercial division. The Kleven
Group and Affiliates, Inc. ("Kleven") was acquired in June 1997. Located in
Lexington, Massachusetts, Kleven provides clerical and information technology
services in the New England area and had 1996 revenues of approximately $5.0
million. Kleven operates in the Commercial and Professional/Information
Technology divisions. Sterling Human Resource Company ("Sterling") was
acquired in June 1997. Located in Phoenix, Arizona and Boca Raton, Florida,
Sterling provides clerical, light industrial and information technology services
and had 1996 revenues of approximately $19.0 million. Sterling operates in the
Commercial and Professional/Information Technology divisions. The aggregate
consideration paid in these transactions consisted of $11.7 million in cash and
217,123 shares of StaffMark Common Stock.
In addition to the purchase prices disclosed above, certain of the
Company's acquisition agreements include provisions for the payment of
additional consideration which is contingent upon the achievement of certain
performance measures of the businesses acquired, typically during the twelve
months immediately following the respective acquisitions. Although the
contingent consideration could be significant to the accompanying financial
statements, the amounts are not currently determinable and, accordingly, have
not been reflected in the Company's financial statements. The obligations for
this contingent consideration, which will be payable in a combination of cash
and Common Stock, will be recorded in the Company's financial statements when
they become fixed and determinable.
The accompanying balance sheet as of June 30, 1997 includes preliminary
allocations of the respective purchase prices and are subject to final
adjustment. The excess of purchase price over net assets acquired has been
included in intangible assets and is being amortized over a period of 30 years.
The unaudited consolidated results of operations on a pro forma basis
as though Flexible, Global and Lindenberg had been acquired as of the beginning
of the respective periods are as follows:
Six Months Six Months
Ended Ended
June 30, 1996 June 30, 1997
------------- -------------
Revenues $ 134,136,209 $ 178,698,826
============= =============
Net income $ 1,827,642 $ 5,626,639
============= =============
Primary earnings per share $ 0.20 $ 0.39
============= =============
Fully diluted earnings per share $ 0.20 $ 0.38
============= =============
The unaudited pro forma statements of income presented elsewhere in
this Form 10-Q have been prepared in accordance with the applicable SEC
requirements for presenting pro forma financial information and, accordingly,
do not reflect the pro forma impact of the Lindenberg acquisition.
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6. CREDIT FACILITY:
During the three months ended June 30, 1997, StaffMark completed the
expansion of its line of credit with Mercantile Bank of St. Louis National
Association ("Mercantile") from $50.0 million to $100.0 million, which includes
a $30.0 million revolving credit facility and a $70.0 million acquisition
facility. As of June 30, 1997, the Company had borrowed approximately $42.6
million on the acquisition facility. These borrowing were used to pay the cash
portion for several of the Company's recent acquisitions. As of June 30, 1997,
the Company's net borrowing on the revolving credit facility totaled $800,000.
These funds were used for general operating purposes.
7. EARNINGS PER SHARE:
The weighted-average shares used to compute earnings per share were as
follows:
For the Three For the Six
Months Ended Months Ended
June 30, 1997 June 30, 1997
------------- -------------
Primary 14,677,376 14,158,260
========== ==========
Fully Diluted 14,892,278 14,412,097
========== ==========
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which requires the dual presentation of basic and diluted
earnings per share, as defined in SFAS 128, on the face of the statement of
income beginning with the year end 1997 and subsequent quarterly reporting
periods. Basic and diluted earnings per share as computed under SFAS 128 were
$0.24 for the three months ended June 30, 1997 and $0.40 for the six months
ended June 30, 1997.
8. SUBSEQUENT EVENTS:
Subsequent to quarter-end, StaffMark merged with Baker Street Group,
Inc. ("Baker Street"). Located in Houston, Texas, Baker Street provides
professional and information technology staffing, clerical services and
staffing in niche areas such as mortgage banking and title search. Baker
Street had 1996 revenues of approximately $11.0 million and operates in the
Professional/Information Technology and Commercial divisions. This transaction
will be accounted for as a pooling-of-interests.
13
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages provided below are
calculated using the detailed financial information contained in the applicable
financial statements, the notes thereto and the other financial data included
elsewhere in this Form 10-Q. Additionally, the pro forma and combined results
for the three and six months ended June 30, 1996 discussed below occurred when
the companies were not under common control or management and may not be
comparable to, or indicative of future performance.
This filing contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
based on current plans and expectations of the Company and involve risks and
uncertainties that could cause actual future activities and results of
operations to be materially different from those set forth in the
forward-looking statements. Important factors that could cause actual results
to differ include, among others, risks associated with acquisitions,
fluctuations in operating results because of acquisitions and variations in
stock prices, changes in government regulations, competition, risks of
operations and growth of the newly acquired businesses.
PRO FORMA RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO
PRO FORMA RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
The information below discusses the pro forma results of operations
for the three and six months ended June 30, 1997 as compared to the pro forma
results for the three and six months ended June 30, 1996. These pro forma
amounts include the effect of Brewer's February 1996 acquisition of On Call,
Brewer's October 1996 acquisition of the Other Founding Companies, StaffMark's
March 1997 acquisition of Flexible, StaffMark's April 1997 acquisition of
Global, adjustments to reflect the Compensation Differential and adjustments to
the provision for income taxes relating to the income of subchapter S
corporations, net of the income tax benefits related to the Compensation
Differential and adjusted for nondeductible goodwill.
Pro Forma Revenues. Pro forma revenues increased $28.8 million, or
42.7%, to $96.1 million for the three months ended June 30, 1997 as compared
$67.4 million for the three months ended June 30, 1996. Pro forma revenues
increased $49.9 million, or 40.4%, to $173.3 million for the six months ended
June 30, 1997 as compared $123.4 million for the six months ended June 30,
1996. These increases were primarily attributable to the acquisitions of The
Technology Source L.L.C. ("Technology Source"), Chandler Enterprises, Inc.
d/b/a Advantage Staffing ("Advantage"), and Tom Bain Personnel, Inc. ("Tom
Bain"), MRIC, Advance, Lindenberg, TPS, Alternatives and Kleven which totaled
$14.2 million for the three months ended June 30, 1997 and $19.5 million for
the six months ended June 30, 1997. The Company's internal growth accounted for
$14.6 million and $30.4 million of the increase for the three and six months
ended June 30, 1997, respectively, as a result of the Company's emphasis on
customer development and an overall increase in demand for staffing services
from existing customers.
Pro Forma Cost of Services. Pro forma cost of services increased $21.6
million, or 40.8%, to $74.7 million for the three months ended June 30, 1997
compared to $53.1 million for the three months ended June 30, 1996. Pro forma
cost of services increased $37.5 million, or 38.5%, to $135.0 million for the
six months ended June 30, 1997 compared to $97.4 million for the six months
ended June 30, 1996. These increases in staffing payroll and benefit costs were
related to the higher revenues resulting from the increased demand for staffing
services, the Company's internal growth and the acquisitions discussed above.
14
15
Pro Forma Gross Profit. Pro forma gross profit increased $7.1 million,
or 49.9%, to $21.4 million for the three months ended June 30, 1997 as compared
to $14.3 million for the three months ended June 30, 1996. Pro forma gross
profit increased $12.3 million, or 47.4%, to $38.3 million for the six months
ended June 30, 1997 as compared to $26.0 million for the six months ended June
30, 1996. The increases in pro forma gross profit are primarily attributable to
the increased revenues from the Company's acquisitions and internal growth. Pro
forma gross margin increased to 22.3% for the three months ended June 30, 1997
from 21.2% for the three months ended June 30, 1996. Pro forma gross margin
increased to 22.1% for the six months ended June 30, 1997 from 21.1% for the
six months ended June 30, 1996. The increases in pro forma gross margin are
primarily attributable to the Company's focus on increasing the
Professional/Information Technology division revenues, which generally provide
higher profit margins than the Commercial division due to the specialized
expertise of the consultants. Emphasis on the reduction of variable costs,
such as workers' compensation expense, have also contributed to increases in
the Company's gross margin.
Pro Forma Operating Expenses. Pro forma selling, general and
administrative expenses ("SG&A") increased $4.0 million, or 40.2%, to $14.1
million for the three months ended June 30, 1997 as compared to $10.0 million
for the three months ended June 30, 1996. Pro forma SG&A increased $6.7
million, or 34.4%, to $26.1 million for the six months ended June 30, 1997 as
compared to $19.4 million for the six months ended June 30, 1996. These
increases were primarily attributable to the Company's acquisition growth
as well as its internal growth. Pro forma SG&A as a percentage of revenues
decreased to 14.6% for the three months ended June 30, 1997 compared to 14.9%
for the three months ended June 30, 1996. Pro forma SG&A as a percentage of
revenues decreased to 15.1% for the six months ended June 30, 1997 compared to
15.7% for the six months ended June 30, 1996. These decreases relate to
efficiencies the Company has begun to realize from the Mergers in conjunction
with an overall increase in revenues, somewhat offset by higher SG&A associated
with being a public company and costs associated with maintaining the Company's
acquisition program. Pro forma depreciation and amortization expense increased
$268,000, or 33.8%, to $1.1 million for the three months ended June 30, 1997 as
compared to $794,000 for the three months ended June 30, 1996. Pro forma
depreciation and amortization expense increased $468,000, or 30.4%, to $2.0
million for the six months ended June 30, 1997 as compared to $1.5 million for
the six months ended June 30, 1996. These increases are primarily related to
the amortization of goodwill resulting from the Company's acquisitions.
Pro Forma Operating Income. Pro forma operating income increased $2.8
million, or 81.7%, to $6.3 million for the three months ended June 30, 1997 as
compared to $3.5 million for the three months ended June 30, 1996. Pro forma
operating income increased $5.2 million, or 102.2%, to $10.2 million for the
six months ended June 30, 1997 as compared to $5.0 million for the six months
ended June 30, 1996. Pro forma operating margin increased to 6.6% for the three
months ended June 30, 1997 as compared to 5.2% for the three months ended June
30, 1996. Pro forma operating margin increased to 5.9% for the six months ended
June 30, 1997 as compared to 4.1% for the six months ended June 30, 1996.
Pro Forma Interest Expense. Pro forma interest expense was $476,000 for
the three months ended June 30, 1997 as compared to $862,000 for the three
months ended June 30, 1996. Pro forma interest expense was $782,000 for the six
months ended June 30, 1997 as compared to $1.7 million for the six months ended
June 30, 1996. The decrease in interest cost was a result of all debt being
repaid with proceeds from the Offering. Interest expense for the three and six
months ended June 30, 1997 is primarily related to borrowings made to fund the
cash portion of several acquisitions.
Pro Forma Net Income. Pro forma net income increased $1.8 million, or
106.3%, to $3.5 million for three months ended June 30, 1997 compared to $1.7
million for the three months ended June 30, 1996. Pro forma net income
increased $3.6 million, or 174.2%, to $5.7 million for six months ended June
30, 1997 compared to $2.1 million for the six months ended June 30, 1996. Pro
forma net income as a percentage of revenues increased to 3.6% for the three
months ended June 30, 1997 compared to 2.5% for the three months ended June 30,
1996. Pro forma net income as a percentage of revenues increased to 3.3% for
the six months ended June 30, 1997 compared to 1.7% for the six months ended
June 30, 1996.
15
16
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO RESULTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
The following is a discussion of the results of operations for the
three and six months ended June 30, 1997 as compared to Brewer's results of
operations for the three and six months ended June 30, 1996 which have been
reported in accordance with the provisions of SAB 97.
Revenues. Revenues increased $79.4 million, or 475.9%, to $96.1 million
for the three months ended June 30, 1997 compared to $16.7 million for the
three months ended June 30, 1996. Revenues increased $129.4 million, or 423.6%,
to $160.0 million for the six months ended June 30, 1997 compared to $30.6
million for the six months ended June 30, 1996. These increases are largely
attributable to the fourth quarter 1996 acquisitions of the Other Founding
Companies, Technology Source, Advantage and Tom Bain as well as the 1997
acquisitions of Advance, MRIC, Flexible, Global, Lindenberg, TPS, Alternatives
and Kleven. These acquisitions accounted for approximately $74.2 million of
the increase for the three months ended June 30, 1997 and $120.1 million of the
increase for the six months ended June 30, 1997. The Company's internal growth
accounted for $5.2 million and $9.3 million of the increase for the three and
six months ended June 30, 1997, respectively, as a result of the Company's
emphasis on customer development and an overall increase in the demand for
staffing services.
Cost of Services. Cost of services increased $61.6 million, or 471.2%,
to $74.7 million for the three months ended June 30, 1997 compared to $13.1
million for the three months ended June 30, 1996. Cost of services increased
$100.5 million, or 418.2%, to $124.5 million for the six months ended June 30,
1997 compared to $24.0 million for the six months ended June 30, 1996. These
increases were primarily attributable to the acquisitions of the Other Founding
Companies and the subsequent acquisitions discussed above which accounted for
approximately $57.5 million of the increase for the three months ended June 30,
1997 and $93.3 million for the six months ended June 30, 1997. Also accounting
for these increases were increases in staffing payroll and related benefit
costs associated with increased revenues resulting from internal growth.
Gross Profit. Gross profit increased $17.8 million, or 493.2%, to
$21.4 million for the three months ended June 30, 1997 compared to $3.6 million
for the three months ended June 30, 1996. Gross profit increased $28.9 million,
or 443.3%, to $35.5 million for the six months ended June 30, 1997 compared to
$6.5 million for the six months ended June 30, 1996. These increases are
primarily attributable to the internal growth and acquisitions discussed above.
Gross margin increased to 22.3% for the three months ended June 30, 1997
compared to 21.7% for the three months ended June 30, 1996. Gross margin
increased to 22.2% for the six months ended June 30, 1997 compared to 21.4% for
the six months ended June 30, 1996. These increases in gross margin are
primarily attributable to the Company's focus on increasing the
Professional/Information Technology division revenues. The Professional/
Information Technology division generally provides higher profit margins than
the Commercial division due to the specialized expertise of the consultants.
Control of variable costs, such as workers' compensation expenses, also
contributed to the Company's increase in gross margins.
Operating Expenses. SG&A increased $11.7 million, or 484.0%, to $14.1
million for the three months ended June 30, 1997 compared to $2.4 million for
the three months ended June 30, 1996. SG&A increased $19.6 million, or 440.0%,
to $24.0 million for the six months ended June 30, 1997 compared to $4.4 million
for the six months ended June 30, 1996. These increases were primarily
attributable to the acquisitions discussed above which accounted for
approximately $10.5 million of the increase for the three months ended June 30,
1997 and $17.0 million of the increase for the six months ended June 30, 1997.
SG&A as a percentage of revenues increased to 14.6% for the three months ended
June 30, 1997 compared to 14.4% for the three months ended June 30, 1996. SG&A
as a percentage of revenues increased to 15.0% for the six months ended June 30,
1997 compared to 14.5% for the six months ended June 30, 1996. These increases
primarily result from the merger of the Founding Companies, new costs associated
with being a public company and costs associated with the Company's other
acquisitions. Depreciation and amortization expense increased $760,000, or
252.3%, to $1.1 million for the three months ended June 30, 1997 compared to
$301,000 for the three months ended June 30, 1996. Depreciation and amortization
expense increased $1.2 million, or 209.1%, to $1.7 million for the six months
ended June 30, 1997 compared to $566,000 for the six months ended June 30, 1996.
These increases are primarily attributable to amortization of goodwill
associated with the acquisitions subsequent to the Offering.
16
17
Operating Income. Operating income increased $5.4 million, or 598.1%,
to $6.3 million for the three months ended June 30, 1997 compared to $904,000
for the three months ended June 30, 1996. Operating income increased $8.2
million, or 540.5%, to $9.7 million for the six months ended June 30, 1997
compared to $1.5 million for the six months ended June 30, 1996. The Company's
operating margin increased to 6.6% for the three months ended June 30, 1997
compared to 5.4% for the three months ended June 30, 1997. The Company's
operating margin increased to 6.1% for the six months ended June 30, 1997
compared to 5.0% for the six months ended June 30, 1996.
Interest Expense. Interest expense was $476,000 for the three months
ended June 30, 1997 as compared to $455,000 for the three months ended June 30,
1996. Interest expense was $507,000 for the six months ended June 30, 1997 as
compared to $880,000 for the six months ended June 30, 1996. Interest expense
for the three and six months ended June 30, 1997 is primarily related to
borrowings made to fund the cash portion of several of the Company's
acquisitions.
Net Income. Net income increased $3.0 million, or 694.5%, to $3.5
million for three months ended June 30, 1997 compared to $434,000 for the three
months ended June 30, 1996. Net income increased $4.9 million, or 780.7%, to
$5.6 million for six months ended June 30, 1997 compared to $634,000 for the
six months ended June 30, 1996. Net income as a percentage of revenues
increased to 3.6% for the three months ended June 30, 1997 compared to 2.6% for
the three months ended June 30, 1996. Net income as a percentage of revenues
increased to 3.5% for the six months ended June 30, 1997 compared to 2.1% for
the six months ended June 30, 1996. The increases are primarily the result of
the factors described above.
RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THE
COMBINED RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996
The following information compares actual results for the three and six
months ended June 30, 1997 to the combined results of the Founding Companies
for the three and six months ended June 30, 1996 as if they had been members of
the same operating group. These combined amounts for the three and six months
ended June 30, 1996 have not been adjusted for significant acquisitions or
reductions in salaries to certain owners of the Founding Companies.
THREE MONTHS ENDED JUNE 30, Six Months Ended June 30,
(DOLLARS IN THOUSANDS) (Dollars in Thousands)
=====================================================================================
1996 1997 1996 1997
=================== =================== =================== ===================
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
SERVICE REVENUES $ 48,928 100.0 $ 96,123 100.0 $ 89,854 100.0 $159,987 100.0
COST OF SERVICES 38,357 78.4 74,676 77.7 70,807 78.8 124,515 77.8
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 10,571 21.6 21,447 22.3 19,047 21.2 35,472 22.2
OPERATING EXPENSES:
Selling, general and 7,258 14.8 14,074 14.6 14,197 15.8 24,006 15.0
administrative
Depreciation and amortization 491 1.0 1,061 1.1 919 1.0 1,749 1.1
-------- -------- -------- -------- -------- -------- -------- --------
Operating income $ 2,822 5.8 $ 6,312 6.6 $ 3,931 4.4 $ 9,717 6.1
======== ======== ======== ======== ======== ======== ======== ========
Combined Revenues. Revenues increased $47.2 million, or 96.5%, to $96.1
million for the three months ended June 30, 1997 compared to combined revenues
of $48.9 million for the three months ended June 30, 1996. Revenues increased
$70.1 million, or 78.1%, to $160.0 million for the six months ended June 30,
1997 compared to combined revenues of $89.9 million for the six months ended
June 30, 1996. These increases are largely attributable to the acquisitions of
Technology Source, Advantage, Tom Bain, Advance, MRIC, Flexible, Global,
Lindenberg, TPS, Alternatives and Kleven. These acquisitions accounted for
$33.2 million of the increase for the three months ended June 30, 1997 and
$42.5 million of the increase for the six months ended June 30, 1997. The
Company's internal growth accounted for $14.0 million and $27.6 million of the
increase for the three and six months ended June 30, 1997 as a result of the
Company's emphasis on customer development and the increased demand from
existing customers.
17
18
Combined Cost of Services. Cost of services increased $36.3 million, or
94.7%, to $74.7 million for the three months ended June 30, 1997 compared to
combined cost of services of $38.4 million for the three months ended June 30,
1996. Cost of services increased $53.7 million, or 75.9%, to $124.5 million for
the six months ended June 30, 1997 compared to combined cost of services of
$70.8 million for the six months ended June 30, 1996. These increases were
primarily due to increased staffing and benefit costs associated with the
increase in revenue.
Combined Gross Profit. Gross profit increased $10.9 million, or 102.9%,
to $21.4 million for the three months ended June 30, 1997 as compared to
combined gross profit of $10.6 million for the three months ended June 30,
1996. Gross profit increased $16.4 million, or 86.2%, to $35.5 million for the
six months ended June 30, 1997 as compared to combined gross profit of $19.0
million for the six months ended June 30, 1996. This increase is attributable
to higher revenues due to internal growth and the acquisitions discussed above.
Gross margin increased to 22.3% for the three months ended June 30, 1997 as
compared to combined gross margin of 21.6% for the three months ended June 30,
1996. Gross margin increased to 22.2% for the six months ended June 30, 1997 as
compared to combined gross margin of 21.2% for the six months ended June 30,
1996. The increases in gross margin are primarily attributable to the Company's
focus on increasing the Professional/Information Technology division revenues,
which generally provides higher profit margins than the Commercial division due
to the specialized expertise of the consultants. Emphasis on controlling
variable costs, such as workers' compensation expenses, also contributed to the
increase in gross margin.
Combined Operating Expenses. SG&A increased $6.8 million, or 93.9%, to
$14.1 million for the three months ended June 30, 1997 compared to combined
SG&A of $7.3 million for the three months ended June 30, 1996. SG&A increased
$9.8 million, or 69.1%, to $24.0 million for the six months ended June 30, 1997
compared to combined SG&A of $14.2 million for the six months ended June 30,
1996. These increases were primarily attributable to costs and expenses
associated with the acquisitions as well as the new costs associated with being
a public company. SG&A as a percentage of revenues decreased to 14.6% for the
three months ended June 30, 1997 compared to combined SG&A of 14.8% for the
three months ended June 30, 1996. SG&A as a percentage of revenues decreased to
15.0% for the six months ended June 30, 1997 compared to combined SG&A of 15.8%
for the six months ended June 30, 1996. These decreases relate to efficiencies
the Company has begun to realize from the Mergers in conjunction with an
overall increase in revenues, somewhat offset by higher SG&A associated with
being a public company and costs associated with maintaining the Company's
acquisition program. Depreciation and amortization expense increased $570,000,
or 116.1%, to $1.1 million for the three months ended June 30, 1997 compared to
combined depreciation and amortization of $491,000 for the three months ended
June 30, 1996. Depreciation and amortization expense increased $830,000, or
90.3%, to $1.7 million for the six months ended June 30, 1997 compared to
combined depreciation and amortization of $919,000 for the six months ended
June 30, 1996. These increases are primarily related to the amortization of
goodwill resulting from the Company's acquisitions.
Combined Operating Income. Operating income increased $3.5 million, or
123.6%, to $6.3 million for the three months ended June 30, 1997 as compared to
combined operating income of $2.8 million for the three months ended June 30,
1996. Operating income increased $5.8 million, or 147.2%, to $9.7 million for
the six months ended June 30, 1997 as compared to combined operating income of
$3.9 million for the six months ended June 30, 1996. Operating margin increased
to 6.6% for the three months ended June 30, 1997 as compared to combined
operating margin of 5.8% for the three months ended June 30, 1996. Operating
margin increased to 6.1% for the six months ended June 30, 1997 as compared to
combined operating margin of 4.4% for the six months ended June 30, 1996.
18
19
LIQUIDITY AND CAPITAL RESOURCES
In October 1996, the Company established a $50.0 million line of credit
with Mercantile to be used for working capital and other general corporate
purposes, including acquisitions (the "Credit Facility"). In May 1997, the
Company expanded its Credit Facility from $50.0 million to $100.0 million,
which includes a $30.0 million revolving credit facility and a $70.0 million
acquisition facility. The Credit Facility matures on April 1, 2002 and interest
on any borrowings is computed at the Company's option at either LIBOR or
Mercantile's prime rate and incrementally adjusted based on the Company's
operating leverage ratios. For the period ended March 31, 1997 the Company paid
a quarterly commitment fee equal to 0.25% of the revolving credit commitment.
Subsequent to March 31, 1997, the quarterly commitment fee is equal to 0.25% of
the unused portion of the total revolving credit commitment. The Credit Facility
is secured by all assets of the Company and a pledge of 100% of the stock of all
of the Company's subsidiaries. During the three months ended June 30, 1997, the
Company borrowed approximately $42.6 million on the acquisition facility which
was used to pay the cash portion for acquisitions during the quarter. The
Company's net borrowing on the revolving credit facility totaled $800,000 during
the three months ended June 30, 1997. These funds were used for general
corporate purposes.
The Company is obligated under various acquisition agreements to pay
additional consideration, which will be paid in a combination of cash and
Common Stock to certain former stockholders of the acquired companies as
discussed in Note 5 to the consolidated financial statements. The Company
cannot currently estimate the total amount of these contingent payments;
however, the Company believes that the cash generated from operations and its
ability to issue additional shares of Common Stock will provide sufficient
liquidity and capital to satisfy these obligations.
Net cash provided by (used in) operating activities was $862,000 and
$582,000 for the three months ended June 30, 1997 and 1996, respectively, and
$143,000 and ($110,000) for the six months ended June 30, 1997 and 1996,
respectively. The net cash provided by operating activities for the periods
presented was primarily attributable to net income adjusted for non-cash
expenses such as depreciation and amortization and changes in operating assets
and liabilities.
Net cash used in investing activities was $43.3 million and $46,000
for the three months ended June 30, 1997 and 1996, respectively, and $52.9
million and $3.2 million for the six months ended June 30, 1997 and 1996,
respectively. Cash used in investing activities in the first half of 1996 was
largely for the acquisition of On Call by Brewer for cash totaling $3.0
million. Cash used in investing activities in the first half of 1997 was
primarily related to the acquisition of Advance, MRIC, Flexible, Global,
Lindenberg, TPS, Alternatives, Kleven and Sterling for cash totaling $51.0
million and capital expenditures totaling approximately $1.9 million.
Net cash provided by (used in) financing activities was $41.5 million,
and ($86,000) for the three months ended June 30, 1996 and 1997, respectively,
and $41.5 million and $3.8 million for the six months ended June 30, 1997 and
1996, respectively. Cash provided by financing activities in the first half of
1996 was primarily attributable to the proceeds from debt issued by Brewer in
conjunction with the acquisition of On Call. Cash provided by financing
activities in the first half of 1997 was primarily attributable to the proceeds
from debt issued in conjunction with the acquisitions of Global, Lindenberg,
TPS, Alternatives, Kleven and Sterling.
As a result of the foregoing, combined cash and cash equivalents
decreased $1.0 million for the three months ended June 30, 1997, decreased
$11.2 million for the six months ended June 30, 1997, increased $450,000 for
the three months ended June 30, 1996, and increased $459,000 for the six months
ended June 30, 1996, respectively.
Management believes that the Credit Facility, its cash flows from
operations, and the issuance of shares of Common Stock in conjunction with
acquisitions will provide sufficient liquidity or acquisition currency to
execute the Company's acquisition and internal growth plans through the
expiration of the credit facility discussed above. Should the Company
accelerate its acquisition program, the Company may need to seek additional
financing through the public or private sale of equity or debt securities.
There can be no assurance that the Company could secure such financing if and
when it is needed or on terms the Company deems acceptable. Management plans to
continue to periodically reassess the adequacy of the Company's liquidity
position, taking into consideration current and anticipated operating cash
flow, anticipated capital expenditures, and acquisition plans, in order to
ensure the Company's negotiated credit facilities are adequate to meet the
Company's needs on a short-term and long-term basis.
19
20
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
The Company at times does have routine litigation incidental to its business.
In the opinion of the Company's management, such proceedings should not,
individually or in the aggregate, have a materially adverse effect on the
Company's results of operations or financial condition. The Company maintains
insurance in such amounts and with such coverage and deductibles as management
believes are reasonable.
ITEM 2. CHANGES IN SECURITIES
In connection with the acquisition of Global, the Company issued
690,855 shares of Common Stock to the stockholders of Global in April 1997. In
connection with the acquisition of Kleven, the Company issued 23,263 shares of
Common Stock to the stockholders of Kleven in June 1997. In connection with the
acquisition of Sterling, the Company issued 193,860 shares of Common Stock to
the stockholders of Sterling in June 1997. Each of these transactions was
effected without registration of the respective securities under the Securities
Act in reliance upon the exemption provided by Section 4(2) of the Securities
Act for transactions not involving a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 2, 1997.
For purposes of voting for the election of Directors and upon such other
business as may have properly come before the meeting, there were 13,600,836
shares of outstanding Common Stock entitled to vote at the meeting. Of those
outstanding shares, 12,693,293 were represented either in person or by proxy at
the meeting. The stockholders voted on the following items:
Election of Directors
----------------------------------------------------------------------------------
Authority
Name For Withheld
----------------------------- --------------- --------------
Jerry T. Brewer 12,682,393 10,900
Clete T. Brewer 12,681,393 11,900
W. David Bartholomew 12,682,393 10,900
Steven E. Schulte 12,682,393 10,900
John H. Maxwell, Jr. 12,682,393 10,900
Janice Blethen 12,682,193 11,100
William T. Gregory 12,682,393 10,900
William J. Lynch 12,682,393 10,900
R. Clayton McWhorter 12,682,393 14,900
Charles A. Sanders, M.D. 12,682,393 10,900
Proposal for Employee Stock Purchase Plan
--------------------------------------------------------
Shares Voted For 12,637,157
Shares Voted Against 37,245
Abstentions 13,320
Non-votes 5,571
No other matters to be voted upon were brought before the meeting.
20
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.2 Agreement and Plan of Reorganization, dated April 4, 1997,
among StaffMark, Inc., StaffMark Acquisition Corporation Four,
and Global Dynamics, Inc., Perry Butler, trustee of the Perry
Butler Charitable Remainder Trust, Carolyn J. Butler, trustee
of the Carolyn J. Butler Charitable Remainder Trust, Perry
Butler, individually, Carolyn J. Butler, individually, and
Paul Sharps, individually (Incorporated by reference from
Exhibit 2.1 to the Company's Form 8-K filed with the
Commission on April 18, 1997). /1/
2.3 Asset Purchase Agreement, dated April 24, 1997, among
StaffMark, Inc., StaffMark Acquisition Corporation Five, and
Lindenberg & Associates, Inc., Earl Lindenberg, and Mark
Tiemann (Incorporated by reference from Exhibit 2.1 to the
Company's Form 8-K filed with the Commission on May 9, 1997).
/1/
3.1 Certificate of Incorporation of the Company (Incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-07513)).
3.2 Certificate of amendment of Certificate of Incorporation
(Incorporated by reference from Exhibit 3.2 to the Company's
Registration Statement of Form S-1 (File No. 333-07513)).
3.3 Amended and Restated By-Laws of the Company, as amended to
date (Incorporated by reference from Exhibit 3.3 to the
Company's Registration Statement on Form S-1 (File No.
333-07513)).
4.1 Form of certificate evidencing ownership of Common Stock of
the Company (Incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No. 333-
07513)).
4.2 Article Four of the Certificate of Incorporation of the
Company (included in Exhibit 3.1).
10.1 Employment Agreement among StaffMark, Inc. and Gordon Y.
Allison dated June 23, 1997.
10.2 Second Amendment to Credit Agreement dated May 30, 1997 by and
between StaffMark, Inc., the Lenders named therein ("Lenders")
and Mercantile Bank National Association, as Agent on behalf
of the Lenders.
10.3 StaffMark, Inc.'s Employee Stock Purchase Plan adopted May 2,
1997 (Incorporated by reference from the Company's
Registration Statement on Form S-8 (File No. 333-29689)).
11 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
/1/ The Company will furnish supplementally a copy of any omitted
schedule to the Commission upon request.
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(b) Reports on Form 8-K
1. A report on Form 8-K was filed with the SEC on April 2,
1997 in connection with the acquisition by the Company
of Flexible on March 18, 1997.
2. A report on Form 8-K was filed with the SEC on April
18, 1997 in connection with the acquisition by the
Company of Global on April 4, 1997.
3. A report on Form 8-K was filed with the SEC on May 9,
1997 in connection with the acquisition by the Company
of Lindenberg on April 25, 1997.
4. A report on Form 8-K/A was filed with the SEC on May
30, 1997 in connection with the acquisition by the
Company of Flexible on March 18, 1997.
5. A report on Form 8-K/A was filed with the SEC on June
6, 1997 in connection with the acquisition by the
Company of Global on April 4, 1997.
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 thereunto duly authorized.
STAFFMARK, INC.
Date: July 28, 1997 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: July 28, 1997 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 -- Employment Agreement among StaffMark, Inc.
and Gordon Y. Allison dated June 23, 1997.
10.2 -- Second Amendment to Credit Agreement dated
May 30, 1997 by and between
StaffMark, Inc. the Lenders named
therein ("Lenders") and Mercantile
Bank National Association, as Agent
on behalf of the Lenders.
11 -- Statement re: Computation of per share earnings.
27.1 -- Financial Data Schedule.
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