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UNITED STATES
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 March 31, 1999
[ ] 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 May 13, 1999 was 29,289,224.
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STAFFMARK, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
INDEX
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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 10
Results for the Three Months Ended March 31, 1999
Compared to Results for the Three Months
Ended March 31, 1998 11
Liquidity and Capital Resources 12
PART II - OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS 14
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 15
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STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
--------- ---------
SERVICE REVENUES $ 280,312 $ 214,550
COST OF SERVICES 211,367 159,637
--------- ---------
Gross profit 68,945 54,913
--------- ---------
OPERATING EXPENSES:
Selling, general and administrative 50,514 39,396
Depreciation and amortization 4,816 2,817
--------- ---------
Operating income 13,615 12,700
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense (3,305) (679)
Other, net (46) --
--------- ---------
INCOME BEFORE INCOME TAXES 10,264 12,021
PROVISION FOR INCOME TAXES 3,857 4,814
--------- ---------
NET INCOME $ 6,407 $ 7,207
========= =========
BASIC EARNINGS PER SHARE $ 0.22 $ 0.26
========= =========
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.25
========= =========
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,356 $ 12,812
Accounts receivable, net 168,173 155,796
Prepaid expenses and other 10,861 10,063
Deferred income taxes 2,669 2,569
--------- ---------
Total current assets 191,059 181,240
PROPERTY AND EQUIPMENT, net 24,065 22,450
INTANGIBLE ASSETS, net 398,393 375,682
OTHER ASSETS 1,707 1,573
--------- ---------
$ 615,224 $ 580,945
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 23,724 $ 35,068
Payroll and related liabilities 47,971 40,309
Reserve for workers' compensation claims 8,817 8,087
Income taxes payable 3,357 3,318
--------- ---------
Total current liabilities 83,869 86,782
LONG TERM DEBT 253,262 176,700
OTHER LONG TERM LIABILITIES 19 47,737
DEFERRED INCOME TAXES 11,382 9,634
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued or outstanding -- --
Common stock, $.01 par value; 29,132,209 and 29,083,379 shares issued
and outstanding as of March 31, 1999 and December 31, 1998 291 291
Paid-in capital 215,856 214,271
Retained earnings 52,670 46,263
Accumulated other comprehensive income (2,125) (733)
--------- ---------
Total stockholders' equity 266,692 260,092
--------- ---------
$ 615,224 $ 580,945
========= =========
The accompanying notes are an integral part of these balance sheets.
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STAFFMARK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,407 $ 7,207
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,816 2,817
Provision for bad debts 166 366
Deferred income taxes 1,648 (817)
Effect of compensatory stock options -- 1,171
Change in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable (10,903) (10,164)
Prepaid expenses and other (780) (186)
Other assets (126) 1,204
Accounts payable and other accrued liabilities (3,352) 3,421
Payroll and related liabilities 7,221 5,568
Payment of nonrecurring merger expenses (9,058) --
Reserve for workers' compensation claims 441 (60)
Income taxes payable 39 2,020
Accrued interest and other (977) (10,593)
--------- ---------
Net cash (used in) provided by operating activities (4,458) 1,954
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired (71,640) (36,850)
Capital expenditures (2,995) (3,388)
--------- ---------
Net cash used in investing activities (74,635) (40,238)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 168,180 46,785
Payments on borrowings (91,580) (7,350)
Proceeds from employee stock plans 948 142
Deferred financing costs (519) (276)
--------- ---------
Net cash provided by financing activities 77,029 39,301
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Net (Decrease) Increase in Cash and Cash Equivalents (2,064) 1,017
Effect of Foreign Currency Translation on Cash and Cash Equivalents (1,392) 1,269
CASH AND CASH EQUIVALENTS, beginning of period 12,812 6,655
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 9,356 $ 8,941
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid $ 1,356 $ 2,854
========= =========
Interest paid, including commitment fees $ 3,097 $ 503
========= =========
The accompanying notes are an integral part of these statements.
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STAFFMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION:
We (StaffMark, Inc. and our subsidiaries) are an international provider
of diversified staffing, information technology ("IT"), professional, consulting
and solutions services to businesses, professional and service organizations and
governmental agencies. Revenues are recognized upon the performance of services.
We generally compensate our associates and consultants only for hours actually
worked and, therefore, wages of associates and consultants are a variable cost
that increase or decrease as revenues increase or decrease. However, we do have
associates and consultants that are full-time, salaried employees who are paid
even when not engaged in staffing or consulting. Cost of services primarily
consists of wages paid to associates and consultants, payroll taxes, workers'
compensation, foreign statutory taxes, national insurance and other related
employee benefits. Selling, general and administrative expenses are comprised
primarily of administrative salaries and benefits, marketing, rent, recruitment,
training, IT systems and communications expenses.
As of March 31, 1999, we operated over 300 offices in 31 states and 12
countries and provide staffing in the Commercial and Professional/Information
Technology ("Professional/IT") service lines. We extend trade credit to
customers representing a variety of industries. There are no individual
customers that account for more than 5% of our service revenues 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
(the "Commission"). 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 we believe 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 our financial position, results of operations
and cash flows as of and for the interim periods presented. 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 our audited
financial statements and notes thereto included in our 1998 Annual Report on
Form 10-K as filed with the Commission on March 16, 1999.
3. SEASONALITY:
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause our results of operations to fluctuate. We generally expect
to realize higher revenues, operating income and net income during the second
and third quarters and relatively 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.
4. BUSINESS COMBINATIONS:
During the first quarter of 1999, we acquired two companies specializing
in information technology and consulting services. These companies, located in
Richardson, Texas and Orlando, Florida, had cumulative fiscal 1998 revenues of
approximately $19.7 million.
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The accompanying balance sheet as of March 31, 1999 includes preliminary
allocations of the respective purchase prices and is 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.
On November 25, 1998, we completed our acquisition of Robert Walters plc
("Robert Walters"). In connection with the acquisition, each outstanding share
of Robert Walters common stock was converted into the right to receive 0.272
shares of StaffMark's common stock, totaling 6,687,704 common shares in the
aggregate. The merger has been accounted for as a pooling-of-interests.
Accordingly, the accompanying consolidated financial statements have been
restated to include the accounts of Robert Walters for all periods presented.
We acquired 18 staffing and professional service companies during 1998.
The 1998 acquisitions of Strategic Legal Resources, Inc., and Progressive
Personnel Resources, Inc. were considered significant. These significant 1998
acquisitions are 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 1998 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 our
pooling-of-interests transactions. The remaining 1998 acquisitions were not
individually 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 months ended March
31, 1999 and 1998 are not necessarily indicative of the results to be expected
for the full year.
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
Revenues $ 280,312 $ 240,116
=========== ===========
Net income $ 6,407 $ 6,864
=========== ===========
Basic earnings per share $ 0.22 $ 0.24
=========== ===========
Diluted earnings per share $ 0.22 $ 0.23
=========== ===========
Consideration paid with respect to acquisitions during the three months
ended March 31 1999 includes cash 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. The aggregate consideration
related to these payments consisted of $70.8 million in cash and 0.2 million
shares of common stock.
5. MERGER AND INTEGRATION EXPENSES:
During the fourth quarter of 1998, we recorded merger and integration
expenses totaling approximately $24.6 million that relate to the merger with
Robert Walters and other pooling-of-interests transactions completed during
1998. Included in these costs are approximately $13.3 million for professional
and financial advisors' fees, approximately $10.8 million related to integration
expenses and approximately $500,000 for severance and employee-related expenses.
Integration expenses consist primarily of costs related to office closings and
contract terminations pursuant to management's plan of integration, which is
expected to be completed by September 1999. Substantially all costs associated
with severance had been incurred as of December 31, 1998. The following is a
summary of our merger and integration accrual:
(IN THOUSANDS)
Total merger and integration expenses $ 24,626
Cash outlays (18,319)
---------
Accrual at March 31, 1999 $ 6,307
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6. EARNINGS PER COMMON SHARE:
A reconciliation of net income and weighted average shares used in
computing basic and diluted earnings per share is as follows:
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BASIC EARNINGS PER SHARE:
Net income applicable to common shares $ 6,407 $ 7,207
======= =======
Weighted average common shares outstanding 29,289 27,956
======= =======
Basic earnings per share of common stock $ 0.22 $ 0.26
======= =======
DILUTED EARNINGS PER SHARE:
Net income applicable to common shares $ 6,407 $ 7,207
======= =======
Weighted average common shares outstanding 29,289 27,956
Dilutive effect of stock options 337 1,140
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Weighted average common shares, assuming
dilutive effect of stock options 29,626 29,096
======= =======
Diluted earnings per share of common stock $ 0.22 $ 0.25
======= =======
Options to purchase 1,445,076 shares of common stock at prices ranging
from $15.38 to $40.75 per share were outstanding during the three months ended
March 31, 1999, but were not included in the computation of diluted EPS because
the options' exercise prices were greater than the average market price of our
common shares. These options, which expire ten years from the date of issue,
were still outstanding as of March 31, 1999.
7. COMPREHENSIVE INCOME:
Comprehensive income was as follows for the three months ended
March 31:
1999 1998
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income $ 6,407 $ 7,207
Other comprehensive income:
Change in cumulative foreign currency translation
adjustments (1,392) 1,269
------- -------
Total comprehensive income $ 5,015 $ 8,476
======= =======
8. SEGMENT INFORMATION:
In 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which requires reporting segment
information consistent with the way management internally disaggregates an
entity's operations to assess performance and to allocate resources. As
required, we have adopted the provisions of SFAS No. 131 and have presented
below the required segment information for the three months ended March 31, 1999
and 1998.
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We segment our operations based upon differences in services provided.
Our Commercial Segment provides clerical and light industrial staffing
services in the United States. Our Professional/IT Segment provides staffing,
consulting, technical and support services primarily in the areas of finance,
accounting, information technology and legal services in the United States, the
United Kingdom, Australia and nine other foreign countries. The "corporate"
column includes general corporate expenses, headquarters facilities and
equipment, internal-use software, and other expenses not allocated to the
segments.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 2 to our audited financial
statements and notes thereto included in our 1998 Annual Report on Form 10-K as
filed with the Commission on March 16, 1999. We evaluate performance of the
segments based on segment operating income, excluding corporate overhead,
nonrecurring and unusual items. We do not have any significant intersegment
sales or transfers.
The results of the business segments as of and for the three months
ended March 31, 1999 and 1998 are as follows:
PROFESSIONAL/
INFORMATION CONSOLIDATED
TECHNOLOGY COMMERCIAL CORPORATE TOTALS
------------- ---------- --------- ------------
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1999
Total service revenues $145,733 $134,579 $ -- $280,312
Operating income 9,072 7,289 (2,746) 13,615
Capital expenditures 535 901 1,559 2,995
Total assets 378,005 201,918 35,301 615,224
Depreciation and amortization 2,863 1,613 340 4,816
THREE MONTHS ENDED MARCH 31, 1998
Total service revenues $116,495 $ 98,055 $ -- $214,550
Operating income 8,578 6,408 (2,286) 12,700
Capital expenditures 1,690 210 1,488 3,388
Total assets 233,580 105,351 18,080 357,011
Depreciation and amortization 1,736 764 317 2,817
THREE MONTHS ENDED MARCH 31,
---------------------------
REVENUES BY COUNTRY 1999 1998
-------- --------
United States $211,714 $157,982
United Kingdom 53,896 43,508
Australia 11,595 10,582
Other 3,107 2,478
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Total revenues $280,312 $214,550
======== ========
THREE MONTHS ENDED MARCH 31,
----------------------------
PROPERTY AND EQUIPMENT BY COUNTRY 1999 1998
------- -------
United States $19,930 $12,202
United Kingdom 2,679 3,387
Australia 519 600
Other 937 813
------- -------
Total property and equipment $24,065 $17,002
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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
months ended March 31, 1999 as compared to the results of operations for the
three months ended March 31, 1998. Our services are provided through two
segments: Professional/IT and Commercial. The Professional/IT segment provides
staffing, consulting, technical support and solutions services primarily in the
areas of finance, accounting, information technology, and legal services. The
Commercial segment provides clerical and light industrial staffing services. Our
services are provided through our network of over 300 branch offices located in
31 states and 12 countries including the United States, the United Kingdom,
Australia, Germany, New Zealand, Belgium, Holland, Singapore, and South Africa.
Revenues are recognized upon the performance of services. We generally
compensate our associates and consultants only for hours actually worked and,
therefore, wages of associates and consultants are a variable cost that increase
or decrease as revenues increase or decrease. However, we do have associates and
consultants that are full-time, salaried employees who are paid even when not
engaged in staffing or consulting. Cost of services primarily consists of wages
paid to associates and consultants, payroll taxes, workers' compensation,
foreign statutory taxes, national insurance and other related employee benefits.
Selling, general and administrative expenses are comprised primarily of
administrative salaries and benefits, marketing, rent, recruitment, training, IT
systems and communications expenses.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") is included in the following discussion because we believe the
period-to-period change in EBITDA is a meaningful measure due principally to the
role acquisitions have played in our development and since the non-cash expenses
of depreciation and amortization have a significant impact on operating income
and operating margins. EBITDA should not be construed as an alternative measure
to net income or cash flows from operations as determined by generally accepted
accounting principles as EBITDA excludes certain significant costs of doing
business. The EBITDA per share information that follows has been calculated
using diluted shares outstanding for the relevant period.
RECENT INFORMATION
On March 2, 1999, based on a detailed review of January results and an
accelerated review of preliminary February results, we announced that a decline
in demand from our finance, banking and legal clients and lower growth from
IntelliMark's domestic IT staffing business would cause our earnings per share
for the first quarter of 1999 and the 1999 year to be lower than the
pre-announcement I/B/E/S consensus analyst estimate for each of these periods.
In response to this circumstance, we implemented executive and organizational
changes at IntelliMark for the purpose of improving IT staffing growth rates,
consolidating administrative functions and building an IT solutions network that
compliments our business units and core competencies. To focus our efforts in
these areas, we plan to be less acquisitive during the balance of the 1999 year
as compared to 1998.
FINANCIAL INFORMATION
The financial information provided below has been rounded in order to simplify
its presentation. The percentages below have been calculated using the detailed
financial information contained in the financial statements, the notes thereto
and the other financial data included in this Quarterly Report on Form 10-Q.
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RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 1998
Revenues. Consolidated revenues increased $65.8 million, or 30.7%, to
$280.3 million for the three months ended March 31, 1999 compared to $214.5
million for the three months ended March 31, 1998. The acquisitions completed
during 1998 in both the Professional/IT and Commercial segments accounted for
approximately $41.4 million of the increase. The acquisitions completed during
the three months ended March 31, 1999 accounted for approximately $5.3 million
of this increase.
Revenues for the Professional/IT segment increased $29.2 million, or
25.1%, to $145.7 million for the three months ended March 31, 1999 compared to
$116.5 million for three months ended March 31, 1998. This increase is primarily
the result of acquisitions and internal growth particularly in the expansion of
contracting professional and information technology consultants in the United
Kingdom and other European locations, as well as in Australia and certain Asian
markets. Approximately $12.7 million of the increase results from the full
quarter's operations of the companies purchased during 1998. The acquisitions
completed during the three months ended March 31, 1999 accounted for
approximately $5.3 million of this increase.
Revenues for the Commercial segment increased $36.5 million, or 37.2%,
to $134.6 million for the three months ended March 31, 1999 compared to $98.1
million for the three months ended March 31, 1998. This revenue growth is the
result of acquisitions and internal growth. Commercial companies purchased
during 1998 accounted for $34.0 million of this change.
EBITDA and Gross Profit. EBITDA increased $2.9 million, or 18.8 %, to
$18.4 million for the three months ended March 31, 1999 as compared to $15.5
million for the three months ended March 31, 1998. EBITDA as a percentage of
revenues was 6.6% for the three months ended March 31, 1999 and 7.2% for the
three months ended March 31, 1998. Gross profit as a percentage of revenue
decreased from 25.6% to 24.6% while selling, general and administrative expenses
("SG&A") as a percentage of revenue decreased from 18.4% to 18.0%. The decrease
in gross margin and EBITDA margin is the result of a decrease in permanent
placements as a percentage of revenue for the three months ended March 31, 1999
as compared to the three months ended March 31, 1998. Also attributing to the
decrease was the higher growth rates in the international IT staffing sector
which has lower margins than the domestic IT staffing sector.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $2.0 million, or 70.9%, to $4.8 million for the three months
ended March 31, 1999 as compared to $2.8 million for the three months ended
March 31, 1998. This increase is primarily attributable to amortization of
goodwill associated with our purchase business combinations. Depreciation
increased as a result of continuing development of our corporate infrastructure
and information systems network as well as assets acquired in acquisitions.
Operating Income. Operating income increased $916,000, or 7.2%, to $13.6
million for the three months ended March 31, 1999 compared to $12.7 million for
the same period last year. Operating margin was 4.9% for the three months ended
March 31, 1999 as compared to 5.9% for the three months ended March 31, 1998.
The following operating income discussion at the Professional/IT and
Commercial segment levels excludes unallocated corporate SG&A of $2.7 million
for the three months ended March 31, 1999 and $2.3 million for the three months
ended March 31, 1998.
Operating income for the Professional/IT segment increased $494,000, or
5.8%, to $9.1 million for the three months ended March 31, 1999 as compared to
$8.6 million for the three months ended March 31, 1998. The Professional/IT
segment incurred a decrease in operating margin from 7.4% for the three months
ended March 31, 1998 to 6.2% for the three months ended March 31, 1999. Slower
growth in domestic IT staffing along with decreased demand for permanent
placements were the primary reasons for the operating margin decrease. The
domestic purchase acquisitions completed during 1998 provided approximately
$543,000 in operating income.
Operating income for the Commercial segment increased $881,000, or
13.7%, to $7.3 million for the three months ended March 31, 1999 as compared to
$6.4 million in the same period last year. Continued growth in our existing
markets and increases in our strategic alliance relationships have provided the
majority of operating income. Commercial purchase acquisitions completed during
1998 added operating income of approximately $1.7 million. The activity from our
strategic alliances,
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which provide clients with dedicated on-site account management, tend to have
lower gross margins than traditional temporary staffing services. However, the
higher volumes, comparatively lower operating expenses and relatively long-term
contracts associated with these relationships have resulted in operating profit
growth and a stable source of revenue. The operating margin of the Commercial
segment decreased from 6.5% for the three months ended March 31, 1998 to 5.4%
for the three months ended March 31, 1999.
Interest Expense. We incurred interest expense of $3.3 million for the
three months ended March 31, 1999 as compared to $680,000 of interest expense
for the three months ended March 31, 1998. Interest expense in both periods is
primarily related to borrowings on our Credit Facility (as defined below) to
fund the cash portion of several of our acquisitions.
Net Income. Net income decreased 11.1% to $6.4 million for the three
months ended March 31, 1999 as compared to $7.2 million for the same period last
year. This decrease of $800,000 is a result of the factors described above. Net
margin was 2.3% for the three months ended March 31, 1999 as compared to 3.4%
for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is from operations, the proceeds of common
stock offerings and borrowings under our Credit Facility. Our principal uses of
cash are to fund acquisitions, working capital and capital expenditures. We
generally pay our temporary associates and professionals weekly for their
services, while receiving payments from customers 30 to 60 days from the date of
the invoice. We have increasing requirements for cash resources to fund working
capital increases, new office openings and the expansion of existing offices.
We currently have a $300 million credit facility with a consortium of
banks (the "Credit Facility"), which is secured by all of the issued and
outstanding capital stock of our domestic subsidiaries and 65% of the issued and
outstanding capital stock of our foreign subsidiaries. The Credit Facility
matures in August 2003. Interest on any borrowings is computed at our option of
either the bank group's prime rate or the London interbank offered rate
incrementally adjusted based on our operating leverage ratios. We pay a
quarterly facility fee determined by multiplying the total amount of the Credit
Facility by a percentage which varies based on our operating leverage ratios.
During the three months ended March 31, 1999, we borrowed approximately $76.6
million on our Credit Facility, the majority of which was used to pay the cash
consideration for several of our acquisitions and for general corporate
purposes. In 1998, we entered into fixed interest rate swap agreements with a
notional amount of $60.0 million related to borrowings under the Credit Facility
to hedge against increases in interest rates which would increase the cost of
variable rate borrowings under the Credit Facility. As of May 12, 1999, $247.3
million was outstanding on the Credit Facility.
Net cash (used in) provided by operating activities was ($4.5) million
and $2.0 million for the three months ended March 31, 1999 and 1998,
respectively. The net cash provided by or used in operating activities for the
periods presented was primarily attributable to net income and changes in
operating assets and liabilities. Excluding approximately $9.0 million in
nonrecurring merger expenses paid during the three months ended March 31, 1999,
net cash provided by operating activities was $4.6 million.
Net cash used in investing activities was $74.6 million and $40.2
million for the three months ended March 31, 1999 and 1998, respectively. Cash
used in investing activities for both periods was primarily related to the
Company's acquisitions and capital expenditures.
Net cash provided by financing activities was $77.0 million, and $39.3
million for the three months ended March 31, 1999 and 1998, respectively. Cash
provided by financing activities for both periods was primarily attributable to
the proceeds from debt issued in conjunction with the Company's acquisitions.
As a result of the foregoing, combined cash and cash equivalents
decreased $3.5 million in the first quarter of 1999 and increased $2.3 million
in the first quarter of 1998.
We believe that our cash flows from operations and borrowings available
under our Credit Facility will provide sufficient liquidity for our existing
operations during 1999. However, if we continue to make acquisitions or there is
a slowdown in the economy or our business, we would need to seek additional
financing through the public or private sale of
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equity or debt securities, or we will request our bank group to increase the
Credit Facility. There can be no assurance that we could secure such financing,
if and when it is needed, or on terms we deem acceptable. We periodically
reassess the adequacy of our liquidity position, taking into consideration
current and anticipated operating cash flow, anticipated capital expenditures,
acquisition plans, public or private offerings of debt or equity securities and
borrowing availability under the Credit Facility.
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. We have assembled a Year 2000 compliance team that is working on these
compliance matters company-wide. As part of this project and consistent with our
operating strategy, we are implementing one primary front office software
package (Caldwell-Spartin) in a majority of our Commercial offices. In a
majority of our Professional/IT offices, we are implementing one primary search
and retrieval software package (EZ Access) and one primary front office software
package (MAS 90). In addition, we have selected and implemented the PeopleSoft
system for our 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, we believe that
Year 2000 costs with respect to these software systems are not expected to have
a material impact on our 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), we believe there is no single system or vendor service that is material
to our operations. As to banking needs, our banking relationships are primarily
with large national and international financial institutions which are
undertaking their own Year 2000 compliance procedures and certifying their
compliance to us. Certain of our utility vendors are certifying their Year 2000
compliance to us. To the extent that a utility vendor fails to certify its Year
2000 compliance capability, our contingency plan is to ensure that we have
back-up utility sources necessary to maintain the critical information systems
at our corporate headquarters. Utility failures at our branch offices or the
inability of our customers to operate could have a material adverse effect on
our revenue sources and could disrupt our customers' payment cycle. We are
working with our customers to address the Year 2000 issues that will affect our
business and our plan is to ensure that our Year 2000 compliance project is
materially complete by June 30, 1999. We believe that the costs of our Year 2000
compliance project for each matter individually and all matters in the aggregate
will not be material to our financial condition or results of operations.
As to software systems and applications utilized by entities acquired or
to be acquired by us, we anticipate that upgrades and/or conversions may be
required to ensure that these systems and applications are Year 2000 compliant.
We believe that any such upgrades and/or conversions will be timely made and are
not expected to have a material impact on our financial condition or results of
operations.
Management believes that Year 2000 issues could affect our results of
operations during the remainder of 1999 if our customers delay projects or
implement hiring freezes due to their focus on Year 2000 spending and/or delay
requests for services or expenditure decisions with regard to their existing IT
systems until the beginning of the 2000 year. Due to the diverse services we
provide and the unknown effect of Year 2000 issues on customer spending
decisions that could impact our revenues and results, these Year 2000
uncertainties could have a material adverse impact on our results of operations
for the balance of the 1999 fiscal year.
FOREIGN CURRENCY EXCHANGE RATES
Operations outside of the United States expose us to foreign currency
exchange rate changes and could impact translations of foreign denominated
assets and liabilities into U.S. dollars and future earnings and cash flows
from transactions denominated in different currencies. We operate outside the
United States primarily through wholly owned subsidiaries in the United Kingdom
and Australia. These foreign subsidiaries use the local currency as their
functional currency as sales are generated and expenses are incurred in such
currencies.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Some of the statements in this Quarterly Report on Form 10-Q (this
"10-Q") constitute forward-looking statements under Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including statements made with respect to our future
earnings per share, liquidity, results of operations, revenues, plans to
accelerate IT staffing revenue growth, slow down in acquisition program,
operations and/or future growth opportunities. These statements involve known
and unknown risks, uncertainties and other factors that may cause results,
levels of activity, growth, performance, earnings per share or achievements to
be materially different from any future results, levels of activity, growth,
performance, earnings per share or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, those
listed under "Business - Factors Affecting Finances, Business Prospects and
Stock Volatility" and elsewhere in our 1998 Annual Report on Form 10-K as filed
with the Commission on March 16, 1999 and under "Potential Risks, Detriments
and Other Considerations Associated with the Transaction," "Forward Looking
Statements" and elsewhere in our proxy statement filed with the Commission on
September 25, 1998.
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The forward-looking statements included in this 10-Q relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "believe,"
"anticipate," "future," "could," "forward," "potential," "opportunity,"
"growth," "leader," "expect," "intend," "plan," "expand," "focus," "implement,"
"increase," or the negative of such terms or comparable terminology. These
forward-looking statements inherently involve certain risks and uncertainties,
although they are based on our current plans or assessments which are believed
to be reasonable as of the date of this 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: (1) an inability to successfully implement the executive and
organizational changes at IntelliMark; (2) the continuation or worsening of
declines in demand for placement (permanent or temporary) or staffing services;
(3) unanticipated problems associated with integrating acquired companies and
their operations; (4) failure to obtain new customers or retain significant
existing customers; (5) inability to carry out marketing and sales plans; (6)
inability to obtain capital or refinance debt for future internal and external
growth; (7) loss of key executives; (8) general economic and business conditions
(whether foreign, national, state or local) which are less favorable than
expected; (9) changes in industry trends such as changes in demand for
commercial or professional information technology staffing personnel, whether on
a temporary or permanent placement basis and whether arising out of Year 2000
uncertainties and spending delays or otherwise; and (10) adverse developments
involving currency exchange rates that have an effect on our operations. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Business - Factors Affecting Finances, Business Prospects and Stock Volatility"
in our 1998 Annual Report on Form 10-K. These factors may cause our actual
results to differ materially from any forward-looking statement.
Although we believe that the expectations in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, growth, earnings per share or achievements. However,
neither we nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this 10-Q to conform such
statements to actual results.
PART II
ITEM 1. LEGAL PROCEEDINGS
From March 12, 1999 through April 22, 1999, John A. Jennen, Richard A.
Watson, Rick W. Johnson, Edward D. LaFrance and Trust Equity Advisors Plus, LLC,
each purporting to act on behalf of a class of our stockholders, filed
complaints against us in the United States District Court for the Eastern
District (in the case of each plantiff except Mr. LaFrance) and Western District
(in the case of Mr. LaFrance) of Arkansas, alleging that the defendants (which
in addition to us includes one of our officer/directors and one of our
officers), violated the federal securities laws, and seeks unspecified
compensatory and other damages. The defendants believe that these complaints are
without merit and deny all of the allegations of wrongdoing and are vigorously
defending the suits. We also are a party to litigation incidental to our
business. We believe that these routine legal proceedings will not have a
material adverse effect on the results of operations or financial condition. We
maintain insurance in amounts, with coverages and deductibles, that we believe
are reasonable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 1998, we issued 150,611 shares of common stock in addition
to cash consideration with respect to our acquisition of WorldTec Group
International, Inc.'s ("WGI") staffing services division that was completed in
the fourth quarter of 1998. We relied on the exemption from registration in
Section 4(2) of the Securities Act of 1933, as amended, in issuing the shares
to WGI.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings,
reference is made to Note 6 of the StaffMark, Inc.
Consolidated Financial Statements contained in
this Form 10-Q.
10.29 Third Amended and Restated Credit Agreement dated
January 20, 1999 by and among StaffMark, Inc.,
Robert Walters plc, Robert Walters Tristar pty
ltd., the lenders named therein (the "Lenders"),
The First National Bank of Chicago, as syndication
agent on behalf of Lenders, Mercantile Bank
National Association, as administrative agent on
behalf of Lenders, Bank of America National Trust
and Saving Association, Credit Lyonnais New York
Branch, Fleet National Bank and First Union
National Bank, as co-agents on behalf of the
Lenders.
27.1 Financial Data Schedule for the three months
ended March 31, 1999, submitted to the SEC in
electronic format.
(b) Reports on Form 8-K
1. Report on Form 8-K/A filed with the SEC on February 5, 1999
relating to the November 25, 1998 acquisition of Robert
Walters plc.
2. Report on Form 8-K filed with the SEC on March 8, 1999
relating to the Company's press release which was disseminated
publicly on March 2, 1999.
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: May 13, 1999 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chief Executive Officer and President
Date: May 13, 1999 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
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INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- -----------
11.1 Statement re: computation of per share earnings,
reference is made to Note 6 of the StaffMark, Inc.
Consolidated Financial Statements contained in
this Form 10-Q.
10.29 Third Amended and Restated Credit Agreement dated
January 20, 1999 by and among StaffMark, Inc.,
Robert Walters plc, Robert Walters Tristar pty
ltd., the lenders named therein (the "Lenders"),
The First National Bank of Chicago, as syndication
agent on behalf of Lenders, Mercantile Bank
National Association, as administrative agent on
behalf of Lenders, Bank of America National Trust
and Saving Association, Credit Lyonnais New York
Branch, Fleet National Bank and First Union
National Bank, as co-agents on behalf of the
Lenders.
27.1 Financial Data Schedule for the three months
ended March 31, 1999, submitted to the SEC in
electronic format.