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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 September 30,
1998
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934 for the transition period from
_________ to __________
COMMISSION FILE NUMBER: 0-20971
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 November 13, 1998 was 22,273,963.
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STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
INDEX
-------
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
StaffMark, Inc. Consolidated Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction 9
Results for the Three and Nine Months Ended September 30, 1998 Compared to
Results for the Three and Nine Months Ended September 30, 1997 9
Liquidity and Capital Resources 11
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 13
ITEM 2 -- CHANGES IN SECURITIES 13
ITEM 5 -- OTHER INFORMATION 13
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 14
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 15
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STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
SERVICE REVENUES $ 195,960,227 $ 121,557,009 $ 535,100,768 $ 287,262,762
COST OF SERVICES 145,357,836 94,637,419 398,734,724 223,383,622
------------- ------------- ------------- -------------
Gross profit 50,602,391 26,919,590 136,366,044 63,879,140
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 29,513,504 16,915,678 83,851,323 41,962,116
Depreciation and amortization 3,318,422 1,439,718 8,442,153 3,217,161
Nonrecurring merger costs 535,693 -- 1,656,189 --
------------- ------------- ------------- -------------
Operating income 17,234,772 8,564,194 42,416,379 18,699,863
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (2,044,740) (435,099) (3,835,501) (978,452)
Other, net (201,393) 153,638 (250,669) 407,177
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES 14,988,639 8,282,733 38,330,209 18,128,588
PROVISION FOR INCOME TAXES 5,845,569 3,395,921 15,402,582 7,432,722
------------- ------------- ------------- -------------
NET INCOME $ 9,143,070 $ 4,886,812 $ 22,927,627 $ 10,695,866
============= ============= ============= =============
BASIC EARNINGS PER SHARE $ 0.41 $ 0.30 $ 1.05 $ 0.71
============= ============= ============= =============
DILUTED EARNINGS PER SHARE $ 0.40 $ 0.28 $ 1.01 $ 0.70
============= ============= ============= =============
BASIC EARNINGS PER SHARE EXCLUDING MERGER COSTS $ 0.43 $ 0.30 $ 1.10 $ 0.71
============= ============= ============= =============
DILUTED EARNINGS PER SHARE EXCLUDING MERGER COSTS $ 0.42 $ 0.28 $ 1.06 $ 0.70
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,827,309 $ 304,995
Accounts receivable, net of allowance
for doubtful accounts 96,732,926 56,707,089
Prepaid expenses and other 4,851,240 4,706,313
Deferred income taxes 1,537,571 851,284
------------ ------------
Total current assets 108,949,046 62,569,681
PROPERTY AND EQUIPMENT, net 15,894,495 9,536,164
INTANGIBLE ASSETS, net 319,424,952 172,807,775
OTHER ASSETS 994,553 3,735,628
------------ ------------
$445,263,046 $248,649,248
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 7,304,300 $ 10,024,096
Payroll and related liabilities 30,076,997 11,580,706
Reserve for workers' compensation claims 7,018,534 6,108,748
Income taxes payable 3,466,735 2,677,191
------------ ------------
Total current liabilities 47,866,566 30,390,741
LONG TERM DEBT 138,808,135 12,000,000
OTHER LONG TERM LIABILITIES 17,034,103 9,658,774
DEFERRED INCOME TAXES 2,510,578 1,314,629
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized shares of
10,000,000; no shares issued or outstanding -- --
Common stock, $.01 par value; authorized shares of
200,000,000; shares issued and outstanding of
22,153,805 in 1998 and 19,138,636 in 1997 221,538 191,386
Paid-in capital 193,545,339 176,195,026
Retained earnings 45,276,787 18,898,692
------------ ------------
Total stockholders' equity 239,043,664 195,285,104
------------ ------------
$445,263,046 $248,649,248
============ ============
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,143,070 $ 4,886,812 $ 22,927,627 $ 10,695,866
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,318,422 1,439,718 8,442,153 3,217,161
Provision for bad debts 214,055 116,486 943,241 265,014
Deferred income taxes 21,775 (379,814) (1,202,783) (2,657,955)
Change in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (10,649,627) (2,020,419) (20,252,386) (11,980,918)
Prepaid expenses and other (13,089) 150,661 1,376,488 99,854
Other assets 602,752 (72,433) 2,680,175 585,540
Accounts payable and other accrued
liabilities 1,080,866 (143,879) (7,336,804) 294,747
Payroll and related liabilities 8,708,167 (69,125) 14,713,532 5,749,091
Reserve for workers' compensation claims 442,116 35,344 905,043 1,101,973
Income taxes payable 800,178 2,347,302 166,687 421,893
Other long-term liabilities (1,892,697) -- (2,754,793) --
Other (190,244) (1,767,288) (351,966) (3,126,167)
------------- ------------- ------------- -------------
Net cash provided by operating
activities 11,585,744 4,523,365 20,256,214 4,666,099
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (35,844,343) (26,003,694) (135,836,232) (76,934,396)
Capital expenditures (1,604,985) (1,443,570) (6,522,377) (3,367,244)
------------- ------------- ------------- -------------
Net cash used in investing activities (37,449,328) (27,447,264) (142,358,609) (80,301,640)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs -- 94,918,892 -- 94,918,892
Proceeds from borrowings 60,918,135 7,919,818 203,118,135 51,349,818
Payments on borrowings (34,670,000) (51,349,818) (76,310,000) (53,285,062)
Proceeds from stock purchase plan and stock option
exercises 282,316 -- 528,046 --
Deferred financing costs (268,636) -- (600,900) --
------------- ------------- ------------- -------------
Net cash provided by financing
activities 26,261,815 51,488,892 126,735,281 92,983,648
------------- ------------- ------------- -------------
Net increase in cash and cash equivalents 398,231 28,564,993 4,632,886 17,348,107
CASH AND CASH EQUIVALENTS, beginning of period 5,429,078 2,639,536 1,194,423 13,856,422
------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 5,827,309 $ 31,204,529 $ 5,827,309 $31,204,529
============= ============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 2,344,548 $ 529,868 $ 3,909,440 $ 856,111
============= ============= ============= =============
Income taxes paid $ 4,847,420 $ 2,714,425 $ 16,301,634 $ 7,247,875
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS:
StaffMark, Inc. ("StaffMark" or the "Company") provides diversified
staffing, professional, consulting and solutions services to businesses,
professional and service organizations and governmental agencies. The Company
recognizes revenues upon the performance of services. The Company generally
compensates its temporary associates and consultants only for hours actually
worked; therefore, wages of the temporary associates 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 associates and consultants, payroll taxes,
workers' compensation and other related employee benefits. Selling, general and
administrative expenses are comprised primarily of administrative salaries,
benefits, marketing, rent, communications and recruitment expenses.
As of September 30, 1998, StaffMark operated offices in 30 states,
Canada, South Africa, the United Kingdom and Thailand and provides staffing in
the Commercial and Professional/Information Technology ("Professional/IT")
service lines. StaffMark extends trade credit to customers representing a
variety of industries. There are no individual customers that account for more
than 5% of service revenues of StaffMark in any of the periods presented.
2. BASIS OF PRESENTATION:
The accompanying interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("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.
The accompanying interim financial statements reflect all adjustments
(which were of a normal, recurring nature) that, in the opinion of management,
are necessary to present fairly the Company's financial position, results
of operations and cash flows as of and for the interim periods presented.
The accompanying statements of income and cash flows for the nine months ended
September 30, 1998 have been restated to reflect the July 1998 acquisition of
Brady & Company, Inc. ("Brady") and the August 1998 acquisition of Enterprise
Systems Associates, Inc. ("ESA") which were accounted for as pooling-of-
interests. The 1997 financial statements have not been restated for Brady and
ESA due to immateriality. All significant intercompany transactions have been
eliminated in the accompanying consolidated financial statements. 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 notes thereto included in StaffMark's Annual Report on Form 10-K as filed
with the SEC on March 13, 1998.
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 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. Accordingly, the results of
operations for an interim period are not necessarily indicative of the results
of operations for a full fiscal year.
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4. BUSINESS COMBINATIONS:
During the third quarter of 1998, the Company acquired three businesses.
These acquired companies along with the eleven acquisitions made in the first
half of 1998 are collectively referred to as the "1998 Acquisitions." Brady is
located in Minneapolis, Minnesota and provides information technology and
consulting services. Headquartered in the Kansas City metropolitan area, ESA
provides information technology staffing and solution services. International
Team Consultants, Inc. ("ITC") is located in Houston, Texas and provides
commercial staffing services. The Company's 1998 Acquisitions had cumulative
fiscal 1997 revenues of approximately $134.9 million.
The Company's mergers with Brady and ESA have been accounted for as
pooling-of-interests transactions. Nonrecurring merger costs incurred for these
transactions, as well as the Company's previous 1998 pooling-of-interests
transactions, totaled approximately $536,000 and $1.7 million for the three and
nine months ended September 30, 1998, respectively. In accordance with
Accounting Principles Board Opinion No. 16, these transaction costs have been
reflected as expense in the period incurred.
The accompanying balance sheet as of September 30, 1998 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 Company acquired 19 staffing and professional service companies
during 1997. The 1997 acquisitions of Flexible Personnel, Inc. and related
entities, Global Dynamics, Inc., Lindenberg & Associates, Inc., Expert Business
Systems, Incorporated, H. Allen & Company, Inc., RHS Associates, Inc., EMJAY
Careers, Inc. and EMJAY Contracts, Inc., and Structured Logic Company, Inc. were
considered significant. These significant 1997 acquisitions along with Strategic
Legal Resources, Inc., and Progressive Personnel Resources, Inc. and related
entities acquired during 1998 are collectively referred to as the "Significant
Acquisitions." The unaudited consolidated results of operations on a pro forma
basis as though the Significant Acquisitions had been acquired as of the
beginning of 1997 are presented below. Note that the pro forma information
presented below does not reflect the reductions in salaries that certain owners
of the Significant Acquisitions agreed to in conjunction with the acquisitions
discussed above or nonrecurring merger costs incurred in connection with several
of the Company's pooling-of-interests transactions. The remaining 1997 and 1998
acquisitions have not been significant and, therefore, have not been included in
the following pro forma presentation. Management believes this information
reflects all adjustments necessary for a fair presentation of results for the
interim periods. The pro forma results of operations for the three and nine
months ended September 30, 1998 and 1997 are not necessarily indicative of the
results to be expected for the full year.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
Revenue $ 195,960,227 $ 150,583,616 $ 546,305,189 $ 393,717,700
=============== =============== =============== ===============
Net income $ 9,469,843 $ 6,066,503 $ 24,474,503 $ 10,606,800
=============== =============== =============== ===============
Basic earnings per share $ 0.43 $ 0.35 $ 1.12 $ 0.66
=============== =============== =============== ===============
Diluted earnings per share $ 0.42 $ 0.34 $ 1.08 $ 0.64
=============== =============== =============== ===============
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In addition to the purchase prices disclosed below, certain of the
acquisition agreements include provisions for the payment of additional
consideration which is contingent upon the achievement of certain performance
measures of the acquired company, typically during the twelve months immediately
following the transaction. 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 the Company's
common stock ("Common Stock"), will be recorded in the Company's financial
statements when they become fixed and determinable.
The aggregate consideration of acquisitions during the nine months ended
September 30, 1998, which includes consideration paid for companies acquired in
the current period, as well as contingent consideration paid to the former
owners of companies acquired in previous periods consisted of $135.8 million in
cash and 3.0 million shares of Common Stock.
In August 1998, StaffMark announced its intention to merge with Robert
Walters plc ("Robert Walters"). Based in London and operating in 14 cities and
10 countries around the world, Robert Walters specializes in placing
accounting, finance and information technology professionals on a contract,
temporary and permanent basis. Under the terms of the transaction agreement,
holders of Robert Walters shares will, subject to adjustment, receive 0.272
shares of StaffMark Common Stock for each share of Robert Walters. The proposed
transaction will be accounted for as a pooling-of-interests under U.S.
generally accepted accounting principles. In late October 1998, the transaction
was approved by stockholders of both companies. Although the transaction must
be approved by the High Court of Justice in England and Wales, such approval is
expected in late November 1998, resulting in the finalization of the
transaction before year-end.
5. EARNINGS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
established new standards for computing and presenting earnings per share
information. Basic earnings per share is determined by dividing net income by
the weighted average common shares outstanding during each period. Diluted
earnings per share reflects the potential dilution that could occur assuming
exercise of all outstanding stock options. A reconciliation of net income and
weighted average shares used in computing basic and diluted earnings per share
is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
BASIC EARNINGS PER SHARE:
Net income applicable to common shares $ 9,143,070 $ 4,886,812 $ 22,927,627 $ 10,695,866
============ ============ ============ ============
Weighted average common shares outstanding 22,153,137 16,530,263 21,809,342 14,968,380
============ ============ ============ ============
Basic earnings per share of common stock $ 0.41 $ 0.30 $ 1.05 $ 0.71
============ ============ ============ ============
Basic earnings per share of common stock excluding
merger costs $ 0.43 $ 0.30 $ 1.10 $ 0.71
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Net income applicable to common shares $ 9,143,070 $ 4,886,812 $ 22,927,627 $ 10,695,866
============ ============ ============ ============
Weighted average common shares outstanding 22,153,137 16,530,263 21,809,342 14,968,380
Dilutive effect of stock options 552,669 710,321 850,829 400,998
------------ ------------ ------------ ------------
Weighted average common shares including
dilutive effect of stock options 22,705,806 17,240,584 22,660,171 15,369,378
============ ============ ============ ============
Diluted earnings per share of common stock $ 0.40 $ 0.28 $ 1.01 $ 0.70
============ ============ ============ ============
Diluted earnings per share of common stock excluding
merger costs $ 0.42 $ 0.28 $ 1.06 $ 0.70
============ ============ ============ ============
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The information below discusses the results of operations for the three
and nine months ended September 30, 1998 as compared to the results of
operations for the three and nine months ended September 30, 1997. 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.
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, changes in government regulations,
competition, risks of operations and growth of the newly acquired businesses.
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues increased $74.4 million, or 61.2%, to $196.0 million
for the three months ended September 30, 1998 compared to $121.6 million for the
three months ended September 30, 1997. Revenues increased $247.8 million, or
86.3%, to $535.1 million for the nine months ended September 30, 1998 compared
to $287.3 million for the nine months ended September 30, 1997. These increases
are attributable to the continued growth of the Company's existing operations
and from acquisitions made by the Company in 1997 and 1998. The 1998
Acquisitions accounted for approximately $46.3 million of the increase for the
three months ended September 30, 1998 and $105.7 million of the increase for the
nine months ended September 30, 1998.
Cost of Services. Cost of services increased $50.7 million, or 53.6%, to
$145.4 million for the three months ended September 30, 1998 compared to $94.6
million for the three months ended September 30, 1997. Cost of services
increased $175.4 million, or 78.5%, to $398.7 million for the nine months ended
September 30, 1998 compared to $223.4 million for the nine months ended
September 30, 1997. These increases were primarily attributable to an increase
in staffing payroll and related benefit costs associated with increased revenues
and a change in the Company's business mix toward the Professional/IT division
which has higher payroll rates. Also accounting for the increase were the
results from the 1998 Acquisitions, which accounted for approximately $32.3
million of the increase for the three months ended September 30, 1998 and $72.4
million of the increase for the nine months ended September 30, 1998.
Gross Profit. Gross profit increased $23.7 million, or 88.0%, to $50.6
million for the three months ended September 30, 1998 compared to $26.9 million
for the three months ended September 30, 1997. Gross profit increased $72.5
million, or 113.5%, to $136.4 million for the nine months ended September 30,
1998 compared to $63.9 million for the nine months ended September 30, 1997. The
increase in gross profit is primarily attributable to the Company's increased
revenues from internal growth and the Company's acquisitions. Gross margin
increased to 25.8% for the three months ended September 30, 1998 compared to
22.1% for the three months ended September 30, 1997 and to 25.5% for the nine
months ended September 30, 1998 compared to 22.2% for the nine months ended
September 30, 1997. The increases in gross margin are primarily a result of a
larger portion of the Company's revenue base being directly related to the
Professional/IT division, which provides higher profit margins than the
Commercial division.
Operating Expenses. SG&A increased $12.6 million, or 74.5%, to $29.5
million for the three months ended September 30, 1998 compared to $16.9 million
for the three months ended September 30, 1997. SG&A increased $41.9 million, or
99.8%, to $83.9 million for the nine months ended September 30, 1998 compared to
$42.0 million for the nine months ended September 30, 1997. These increases
were partially attributable to the results from the 1998 Acquisitions, which
accounted for approximately $6.0 million of the increase for the three months
ended September 30, 1998 and $15.5 million of the increase for the nine months
ended September 30, 1998. Also accounting for the increase were
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increased costs associated with a larger revenue base and costs associated with
the development of corporate infrastructure. SG&A as a percentage of revenues
increased to 15.1% for the three months ended September 30, 1998 compared to
13.9% for the three months ended September 30, 1997. SG&A as a percentage of
revenues increased to 15.7% for the nine months ended September 30, 1998
compared to 14.6% for the nine months ended September 30, 1997. The increases in
SG&A as a percentage of revenue are related to the Company's efforts to increase
the revenue obtained from the Professional/IT division which generally has
higher SG&A, nonrecurring merger costs and the development of the corporate
infrastructure which includes technology, education, communications and
professional staff. Depreciation and amortization expense increased $1.9
million to $3.3 million for the three months ended September 30, 1998 compared
to $1.4 million for the three months ended September 30, 1997. Depreciation and
amortization expense increased $5.2 million to $8.4 million for the nine months
ended September 30, 1998 compared to $3.2 million for the nine months ended
September 30, 1997. These increases are primarily attributable to amortization
of goodwill associated with the Company's acquisitions. The Company has
incurred nonrecurring merger costs associated with several of the 1998
Acquisitions. These amounts totaled $536,000 and $1.7 million for the three and
nine months ended September 30, 1998, respectively.
Operating Income. Operating income increased $8.7 million, or 101.2%,
to $17.2 million for the three months ended September 30, 1998 compared to $8.6
million for the three months ended September 30, 1997. Operating income
increased $23.7 million, or 126.8%, to $42.4 million for the nine months ended
September 30, 1998 compared to $18.7 million for the nine months ended September
30, 1997. The Company's operating margin increased to 8.8% for the three months
ended September 30, 1998 compared to 7.0% for the three months ended September
30, 1997. The Company's operating margin increased to 7.9% for the nine months
ended September 30, 1998 compared to 6.5% for the nine months ended September
30, 1997. Excluding the nonrecurring merger costs associated with several of the
1998 Acquisitions, the Company's operating income increased $9.2 million, or
107.5%, to $17.8 million for the three months ended September 30, 1998 and
increased $25.4 million, or 135.7%, to $44.1 million for the nine months ended
September 30, 1998. Operating margin, exclusive of these merger costs, was 9.1%
for the three months ended September 30, 1998 and 8.2% for the nine months ended
September 30, 1998.
Interest Expense. Interest expense was $2.0 million and $3.8 million
for the three and nine months ended September 30, 1998, respectively, as
compared to $435,000 and $978,000 for the three and nine months ended September
30, 1997, respectively. These increases in interest expense are primarily
related to borrowings on the Credit Facility (as defined below) used to fund the
cash portion of acquisition consideration.
Earnings before interest, taxes, depreciation and amortization.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased to $20.6 million and $50.9 million for the three and nine months ended
September 30, 1998, respectively, as compared to $10.0 million and $21.9 million
for the three and nine months ended September 30, 1997, respectively. EBITDA as
a percentage of revenue increased to 10.5% and 9.5% for the three and nine
months ended September 30, 1998, respectively, as compared to 8.2% and 7.6% for
the three and nine months ended September 30, 1997. Exclusive of nonrecurring
merger costs, EBITDA was $21.1 million and $52.5 million for the three and nine
months ended September 30, 1998, respectively. EBITDA margin excluding
nonrecurring merger costs was 10.8% and 9.8% for the three and nine months ended
September 30, 1998, respectively.
Net Income. Net income increased $4.3 million, or 87.1%, to $9.1
million for the three months ended September 30, 1998 compared to $4.9 million
for the three months ended September 30, 1997. Net income increased $12.2
million, or 114.4%, to $22.9 million for the nine months ended September 30,
1998 compared to $10.7 million for the nine months ended September 30, 1997.
Excluding the nonrecurring merger costs associated with several of the 1998
Acquisitions, the Company's net income increased $4.6 million, or 93.8%, to $9.5
million for the three months ended September 30, 1998 and increased $13.2
million, or 123.7%, to $23.9 million for the nine months ended September 30,
1998 as a result of the factors described above.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of funds is from operations, proceeds of
Common Stock offerings and borrowings under the Credit Facility (as defined
below). The Company's principal uses of cash are to fund acquisitions, working
capital and capital expenditures. The Company generally pays its temporary
associates and consultants weekly for their services, while receiving payments
from customers 30 to 60 days from the date of the invoice. As new offices are
established or acquired, or as existing offices are expanded, the Company has
increasing requirements for cash resources to fund growing operations.
In August 1998, the Company amended and restated its credit facility
with the members of its bank group to increase the borrowing availability from
$175.0 million to $250.0 million (the "Credit Facility"). The Credit Facility
matures on August 20, 2003. Interest on any borrowings is computed at the
Company's option of either the bank group's prime rate or LIBOR incrementally
adjusted based on the Company's operating leverage ratios. The Company pays a
quarterly commitment fee which is determined by multiplying the unused portion
of the Credit Facility by a percentage which varies from 0.1875% to 0.30% per
annum based on the Company's operating leverage ratios. The Credit Facility is
secured by all of the issued and outstanding capital stock of each domestic
subsidiary and 65% of the issued and outstanding capital stock of each foreign
subsidiary. During the three and nine months ended September 30, 1998, the
Company had net borrowings of approximately $26.2 million and $126.8 million,
respectively, on the Credit Facility which were used: (i) to pay the cash
consideration for several of the Company's acquisitions; (ii) to fund the
additional cash consideration for several of the Company's 1997 acquisitions;
and (iii) for general corporate purposes. As of November 10, 1998, $159.0
million was outstanding on the Credit Facility.
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 acquired companies. Management believes
that neither the total amount of these contingent payments nor the specific
combination of cash and Common Stock consideration can be currently determined.
Management believes that its cash flows from operations, the Credit Facility and
its ability to issue equity or debt securities will provide sufficient liquidity
and capital resources to satisfy these obligations.
Net cash provided by operating activities was $11.6 million and $4.5
million for the three months ended September 30, 1998 and 1997, respectively,
and $20.3 million and $4.7 million for the nine months ended September 30, 1998
and 1997, respectively. The net cash provided by operating activities for the
periods presented was primarily attributable to net income and changes in
operating assets and liabilities.
Net cash used in investing activities was $37.4 million and $27.4
million for the three months ended September 30, 1998 and 1997, respectively,
and $142.4 million and $80.3 million for the nine months ended September 30,
1998 and 1997, respectively. Net cash used in investing activities for all
periods presented was primarily related to the Company's acquisitions.
Net cash provided by financing activities was $26.3 million, and $51.5
million for the three months ended September 30, 1998 and 1997, respectively,
and $126.7 million and $93.0 million for the nine months ended September 30,
1998 and 1997, respectively. Cash provided by financing activities for all
periods presented was primarily attributable to the proceeds from the debt
issued in conjunction with the Company's acquisitions.
As a result of the foregoing, combined cash and cash equivalents
increased $398,000 and $28.6 million for the three months ended September 30,
1998 and 1997, respectively, and increased $4.6 million and $17.3 million for
the nine months ended September 30, 1998 and 1997, respectively.
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Management believes that its cash flows from operations, borrowings
available under the Credit Facility, offerings of debt or equity securities and
the use of Common Stock as partial consideration for acquisitions will provide
sufficient liquidity or acquisition currency to execute the Company's
acquisition and internal growth plans through the Company's 1999 fiscal year.
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 periodically reassess the adequacy of the Company's
liquidity position, taking into consideration current and anticipated operating
cash flow, anticipated capital expenditures, acquisition plans and offerings of
debt or equity securities, in order to ensure the Credit Facility is adequate to
meet the Company's needs on a short-term and long-term basis.
RECENT EVENT
In August 1998, StaffMark announced its intention to merge with Robert
Walters. Based in London and operating in 14 cities and 10 countries around the
world, Robert Walters specializes in placing accounting, finance and information
technology professionals on a contract, temporary and permanent basis. Under the
terms of the transaction agreement, holders of Robert Walters shares will,
subject to adjustment, receive 0.272 shares of StaffMark Common Stock for each
share of Robert Walters. The proposed transaction will be accounted for as a
pooling-of-interests under U.S. generally accepted accounting principles. In
late October 1998, the transaction was approved by stockholders of both
companies. Although the transaction must be approved by the High Court of
Justice in England and Wales, such approval is expected in late November 1998,
resulting in the finalization of the transaction before year-end.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs (whether related
to IT systems or non-IT systems) being written using two digits rather than four
digits to define the applicable year. Computer programs that have time sensitive
software may recognize a date using "00" as the Year 1900 rather than the Year
2000. The Company has assembled a Year 2000 compliance team that is working on
these compliance matters company-wide. As part of this project and consistent
with its operating strategy, the Company is implementing one primary front
office software package (Caldwell-Spartin) in a majority of its Commercial
offices and one primary search and retrieval software package (EZ Access) in a
majority of its Professional/IT offices. In addition, the Company has selected
and implemented the PeopleSoft system for its back office, administrative and
accounting systems. All of these software systems have the ability to process
transactions with dates for the Year 2000 and beyond at no incremental cost and,
accordingly, the Company believes that Year 2000 costs with respect to these
software systems are not expected to have a material impact on the Company's
financial condition or results of operations.
As to non-IT systems and vendor services, other than banking
relationships and utilities (which includes electrical power, water and related
items), there is no such system or vendor service which is material to the
operations of the Company. As to banking needs, the Company's banking
relationships are primarily with large national financial institutions which are
undertaking their own Year 2000 compliance procedures and certifying their
compliance to the Company. As to the utilities, the Company's utility vendors
are certifying their Year 2000 compliance to the Company. To the extent that a
utility vendor fails to certify its Year 2000 compliance capability, StaffMark's
contingency plan is to ensure that the Company has adequate back-up utility
sources necessary for maintaining the Company's operations network and
day-to-day operations. Accordingly, the Company does not believe that any non-IT
system or vendor service failure involving the Company will be material to the
Company's financial condition or operations. In any event, the Company's overall
contingency plan is to ensure that the Company's Year 2000 compliance project is
materially complete by June 30, 1999. As to the Company's completion of its Year
2000 compliance project and the implementation of contingency plans, if
necessary, the Company believes that the costs of each matter individually and
both matters in the aggregate will not be material to the Company's financial
condition or results of operations.
As to software systems and applications utilized by entities acquired
or to be acquired by the Company, the Company anticipates that upgrades and/or
conversions may be required to ensure that these systems and applications are
Year 2000 compliant. As to these software systems and applications, the Company
believes that any such upgrades and/or conversions will be timely made and are
not expected to have a material impact on the Company's financial condition or
results of operations.
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FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements concerning
StaffMark within the meaning of the Private Securities Litigation Reform Act of
1995, including statements made with respect to StaffMark's future operations,
growth opportunities and earnings and the potential impact of other acquisitions
on StaffMark's future results. These forward-looking statements inherently
involve risks and uncertainties, although they are based on management's current
plans or assessments which are believed to be reasonable as of the date of this
Form 10-Q. Factors that may cause actual results, goals, targets or objectives
to differ materially from those contemplated, projected, forecast, estimated,
anticipated, planned or budgeted in such forward-looking statements include,
among others, the following possibilities: (i) heightened competition,
specifically the intensification of price competition, the entry of new
competitors, and new services by new and existing competitors; (ii)
unanticipated problems associated with integrating acquired companies and their
operations; (iii) failure to identify, acquire or profitably manage additional
acquired businesses, if any, into StaffMark without substantial costs, delays or
other operational or financial problems; (iv) failure to obtain new customers or
retain existing customers; (v) inability to carry out marketing and sales plans;
(vi) inability to obtain capital for future internal and external growth; (vii)
loss of key executives; (viii) general economic and business conditions (whether
foreign, national, state or local) which are less favorable than expected; and
(ix) changes in industry trends such as changes in demand for commercial or
professional information technology staffing personnel. Actual events or results
may differ materially from those discussed in the forward-looking statements as
a result of various factors described above and under "Potential Risks,
Detriments and Other Considerations Associated with the Transaction" in the
Company's Definitive Proxy Statement (File No. 0-20971) filed with the SEC on
September 25, 1998 or as a result of those risk factors set forth under "Risk
Factors" in StaffMark's Amendment No. 1 to Form S-1 (File No.
333-32371) filed with the SEC on August 6, 1997, under the Securities Act of
1933.
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 material 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 Brady, the Company issued 344,361
shares of Common Stock to the stockholders of Brady in July 1998. In connection
with the acquisition of ESA, the Company issued 961,554 shares of Common Stock
to the stockholders of ESA in August 1998. In connection with the acquisition of
the assets of ITC, the Company issued 72,211 shares of Common Stock to ITC in
August 1998. Each of these issuances described above was effected without
registration of the relevant 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 5. OTHER INFORMATION
The SEC requires a registrant to provide stockholders notice of
deadlines for timely submission of certain types of stockholder proposals that
stockholders wish to present for a vote at a registrant's annual meeting. These
deadlines are set based on certain SEC rules as they relate to the registrant's
annual meeting date and relevant provisions of its charter and by-laws. Set
forth below are the deadlines applicable to the Company's stockholders. The
Company's Board of Directors has not yet acted to set a 1998 Annual Meeting,
thus the following dates are based on an assumed Annual Meeting date of May 7,
1999 and an assumed proxy statement mailing date of March 25, 1999 for the
Company's 1998 Annual Meeting.
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Stockholder proposals submitted outside the process of Rule 14a-8 under
the Securities Exchange Act of 1934, as amended, must be received by February 8,
1999, or they will be considered untimely. In the event a stockholder does not
timely notify the Company concerning stockholder proposals, the Company will
have the right to exercise its discretionary authority (through the right
conferred upon its proxies) to vote against such stockholder proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.28 Second Amended and Restated Credit Agreement dated
August 20, 1998 by and among StaffMark, Inc., the
lenders named therein ("Lenders"), The First National
Bank of Chicago, as syndication agent on behalf of
the Lenders, and Mercantile Bank National
Association, as administrative agent on behalf of the
Lenders.
11.1 Statement re: computation of per share earnings,
reference is made to Note 5 of the StaffMark, Inc.
Consolidated Financial Statements contained in this
Form 10-Q.
27.1 Financial Data Schedule for the three months ended
September 30, 1998, submitted to the SEC in
electronic format.
(b) Reports on Form 8-K
1. Report on Form 8-K filed with the SEC on August 18, 1998 in
connection with the January 1998 acquisition of Strategic
Legal and the June 1998 acquisition of Progressive.
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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 thereunto duly authorized.
STAFFMARK, INC.
Date: November 13, 1998 /s/ CLETE T. BREWER
-------------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: November 13, 1998 /s/ TERRY C. BELLORA
-------------------------------------
Terry C. Bellora
Chief Financial Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.29 Second Amended and Restated Credit Agreement dated August 20,
1998 by and among StaffMark, Inc., the lenders named therein
("Lenders"), The First National Bank of Chicago, as syndication agent
on behalf of the Lenders, and Mercantile Bank National Association, as
administrative agent on behalf of the Lenders.
11.2 Statement re: computation of per share earnings, reference is made to
Note 5 of the StaffMark, Inc. Consolidated Financial Statements
contained in this Form 10-Q.
27.1 Financial Data Schedule for the three months ended September 30, 1998
, submitted to the SEC in electronic format.