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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-26058
ROMAC INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3264661
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
120 WEST HYDE PARK PLACE
SUITE 150
TAMPA, FLORIDA 33606
(Address of principal executive offices) (zip-code)
Registrant's telephone number, including area code: (813) 251-1700
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) had been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
As of May 13, 1998, the registrant had 45,245,503 shares of common
stock, $.01 par value per share, issued and outstanding.
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ITEM 1. FINANCIAL STATEMENTS
ROMAC INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
MARCH 31, DECEMBER 31,
1998 1997
---- ----
(UNAUDITED)
Assets:
Current Assets:
Cash and cash equivalents $ 72,502 $ 77,946
Short-term investments 85 47
Trade receivables, net of allowance for doubtful
accounts of $901 and $880 respectively 45,381 35,475
Notes receivable from franchisees, current 84 109
Receivables from related parties, current 220 233
Deferred tax asset, current 352 352
Prepaid expenses and other current assets 2,298 1,637
--------- ---------
Total current assets 120,922 115,799
Note receivable from franchisees, less current portion -- 4
Receivables from related parties, less current portion 1,288 1,290
Deferred tax asset, less current portion 310 310
Furniture and equipment, net 8,458 8,206
Goodwill, net of accumulated amortization of $3,237
and $2,578, respectively 65,993 66,652
Other assets, net 6,288 4,878
--------- ---------
Total assets $ 203,259 $ 197,139
========= =========
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts payable and other accrued liabilities 3,522 $ 2,680
Accrued payroll costs 9,228 7,227
Bank line of credit 663 --
Current portion of capital lease obligations 743 731
Current portion of payables to related parties 987 4,265
Income taxes payable 5,322 3,396
--------- ---------
Total current liabilities 20,465 18,299
Capital lease obligations, less current portion 870 1,260
Payables to related parties, less current portion -- 1,375
Other long-term liabilities, less current portion 2,928 2,525
--------- ---------
Total liabilities 24,263 23,459
--------- ---------
Commitments and contingencies -- --
Shareholders' Equity:
Preferred stock, par value $.01; 15,000 shares
authorized, none issued and outstanding -- --
Common stock, par value $.01; 100,000 shares authorized,
30,200 and 29,863 issued, respectively 302 299
Additional paid-in-capital 153,642 152,188
Retained earnings 25,977 22,118
Less reacquired stock at cost; 677 shares, respectively (925) (925)
--------- ---------
Total shareholders' equity 178,996 173,680
--------- ---------
Total liabilities and shareholders' equity $ 203,259 $ 197,139
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
Net service revenues $ 67,285 $ 34,952
Direct costs of service 42,678 21,004
-------- --------
Gross profit 24,607 13,948
Selling, general and administrative expenses 16,594 10,532
Depreciation and amortization expense 1,388 659
Merger and acquisition related expenses 1,065 --
Other (income) expense (1,038) (609)
-------- --------
Income before income taxes 6,598 3,366
Provision for income taxes 2,739 1,287
-------- --------
Net income $ 3,859 $ 2,079
======== ========
Net income per share - Basic $ 0.13 $ 0.09
======== ========
Weighted average shares outstanding - Basic 29,373 23,902
======== ========
Net income per share - Diluted $ 0.12 $ 0.08
======== ========
Weighted average shares outstanding - Diluted 31,091 25,141
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997
---- ----
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 3,859 $ 2,079
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization 1,388 659
Provision for losses on accounts and notes receivable 92 20
(Increase) decrease in operating assets:
Trade receivables, net (9,998) (3,913)
Notes receivable from franchisees, current 25 (84)
Prepaid expenses and other current assets (661) (131)
Notes receivable from franchisees, less current portion 4 21
Other assets, net (970) (1,140)
Increase (decrease) in operating liabilities:
Accounts payable and other accrued liabilities 842 (258)
Accrued payroll costs 2,001 1,772
Income taxes payable 2,133 1,280
Other long-term liabilities 403 369
-------- --------
Cash provided by (used in) operating activities (882) 674
-------- --------
Cash flows from investing activities:
Capital expenditures (980) (627)
Acquisitions (9,089)
Increase in cash surrender value of life insurance policies (440)
Payments for the purchase of short-term investments (38) (34)
Cash provided by (used in) investing activities (1,458) (9,750)
-------- --------
Cash flows from financing activities:
Payments on notes receivable from stock subscriptions 13
Proceeds from bank line of credit 663
Payables on notes payable to related parties (4,653)
Payments on capital lease (377)
obligations
Payments on receivables from related parties 13 49
Issuance of payables to related parties 17
Expenses from issuance of common stock (57)
Issuance of receivables from related parties (394)
Proceeds from exercise of stock options 1307 853
-------- --------
Cash provided by (used in) financing activities (3,104) 538
-------- --------
Decrease in cash and cash equivalents (5,444) (8,538)
Cash and cash equivalents at beginning of period 77,946 39,555
-------- --------
Cash and cash equivalents at end of period 72,502 $ 31,017
-------- --------
Supplemental Cash Flows Information
Cash paid during the period for:
Income Taxes $ 607 $ 183
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
COMMON STOCK: Shares Amounts
Balance at December 31, 1997 29,863 $ 299
Exercise of stock options 337 3
------ --------
Balance at March 31, 1998 30,200 $ 302
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ADDITIONAL PAID-IN CAPITAL:
Balance at December 31, 1997 $152,188
Issuance of common stock (57)
Exercise of stock options 1,304
Tax benefit related to employee stock options 207
--------
Balance at March 31, 1998 $153,642
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RETAINED EARNINGS:
Balance at December 31, 1997 $22,118
Net income 3,859
-------
Balance at March 31, 1998 $25,977
=======
REACQUIRED STOCK:
Balance at December 31, 1997 $ (925)
Balance at March 31, 1998 $ (925)
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
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ROMAC INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
NOTE A --- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The Consolidated Financial Statements
include the accounts of Romac International, Inc. (the "Company") and its
subsidiaries. All material intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
Interim Financial Information. The Consolidated Financial Statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in management's opinion, include all
adjustments necessary for a fair statement of results for such interim periods.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules or regulations; however,
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
Revenue Recognition. Net service revenues consist of sales, net of
credits and discounts. The Company recognizes Flexible Billings based on hours
worked by assigned personnel on a weekly basis. Search Fees are recognized in
contingency search engagements upon the successful completion of the assignment.
Franchise fees were determined based upon a contractual percentage of the
revenue billed by franchisees. Costs relating to the support of franchised
operations were included in the Company's selling, general and administrative
expenses. The last remaining franchisee and licensee agreement was terminated at
the end of the second quarter of 1997. The Company was the legal employer of
flexible personnel under its licensing arrangements, and accordingly, included
revenues and related direct costs of licensed offices in its net service
revenues and direct costs of services, respectively. Commissions paid to
licensees were based upon a percentage of the gross profit generated, and were
included in the Company's direct cost of services.
Cash and Cash Equivalents. The Company classifies all highly-liquid
investments with an initial maturity of three months or less as cash
equivalents.
Income Taxes. The Company accounts for income taxes under the principles
of Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires an asset and liability approach to the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of differences between the carrying amounts and the tax bases of
other assets and liabilities. The tax effects of deductions attributable to
employees' disqualifying dispositions of shares obtained from incentive stock
options were reflected in additional paid-in capital.
Earnings Per Share. The Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") during 1997,
which requires disclosure of basic and diluted earnings per share. Under the new
standard, basic earnings per share is computed as earnings divided by weighted
average shares outstanding. Diluted earnings per share includes the dilutive
effects of stock options and other potentiallly dilutive securities. All prior
period disclosures have been restated to conform with current year presentation.
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Recently Issued Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which will require the Company to disclose, in financial statement
format, all non-owner changes in equity. Such changes include cumulative foreign
currency translation adjustments and certain minimum pension liabilities. Since
the Company has no such adjustments, comprehensive income is materially the
same as reported net income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual financial statements
and interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for fiscal years beginning after December 15, 1997 and
requires presentation of prior period financial statemnts for comparability
purposes. Romac is currently evaluating its required disclosures under SFAS No.
131 and expects to adopt this standard during the year ended December 31, 1998.
NOTE B---ACQUISITIONS
On April 20, 1998, the Company consummated a merger whereby Source
Services Corporation ("Source"), a Delaware corporation, was merged into the
Company pursuant to an Agreement and Plan of Merger dated February 1, 1998, as
amended on February 11, 1998 and April 17, 1998.
Pursuant to the terms of the Merger Agreement, each issued and
outstanding share of common stock, par value $.02, of Source was converted into
the right to receive 1.1351 shares of common stock, par value $.01 per share of
the Company's common stock. The Company issued approximately 15.6 million shares
of common stock upon conversion of the shares of Source common stock. In
addition, each option to purchase Source Common Stock outstanding under Source's
stock option plans was converted into an option to purchase the number of shares
of the Company's common stock subject to such option multiplied by the exchange
ratio for the merger.
The following unaudited, pro forma, selected income statement data has
been prepared to reflect the effect on the Company as if the acquisition (which
were accounted for under the pooling method) of Source Service Corporation
(April 1998) and the acquisitions (which were accounted for under the purchase
method) of Uni-Quality Systems Solutions, Inc and Sequent Associates, Inc.
(September 1997).
Three Months Ended
March 31,
1998 1997
(unaudited) (unaudited)
Pro forma net service revenues $155,402 $109,752
Pro forma gross profit 67,100 50,377
Pro forma income before income taxes 10,845 7,542
Pro forma net income 6,249 4,772
Pro forma net income per share - Basic .14 .12
Pro forma weighted average shares outstanding - Basic 44,985 39,455
Pro forma net income per share - Diluted .13 .12
Pro forma weighted average shares outstanding - Diluted 47,180 40,915
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements,
particularly with respect to the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Additional written or oral forward-looking statements may be made by
the Company from time to time, in filings with the SEC or otherwise. Such
forward-looking statements are within the meaning of that term in Section 27A of
the Securities Act of 1933 and Section 21 E of the Securities Exchange Act of
1934. Such statements may include, but not be limited to, projections of
revenue, income, losses, cash flows, capital expenditures, plans for future
operations, financing needs or plans, plans relating to products or services of
the Company, estimates concerning the effects of litigation or other disputes,
as well as assumptions to any of the foregoing.
Forward-looking statements are inherently subject to risks and
uncertainities, some of which can not be predicted. Future events and actual
results could differ materially from those set forth in or underlying the
forward looking statements.
Results of Operations
The following table sets forth certain items in Romac's consolidated
statement of operations, as a percentage of net service revenues, for the
indicated periods:
Three months ended March 31,
1998 1997
Flexible billings 89.5% 83.4%
Search Fees 10.5 16.6
Net service revenues 100.0 100.0
Gross profit 36.5 39.7
Selling, general, and administrative expenses 24.6 30.0
Income before taxes 9.8 9.7
Net income 5.7 6.0
Results of Operations for each of the Three Months Ended March 31, 1998 and
1997.
Net service revenues. Net service revenues increased 92.3% to $67.3
million for the three month period ending March 31, 1998 as compared to $35.0
million for the same period in 1997. These increases were comprised of a $31.1
million increase in Flexible Billings (Professional Temporary and Contract
Services revenues combined) and a $1.2 million increase in Search services for
the three month period ending March 31, 1998, as described below.
Flexible billings increased 106.5% to $60.3 million for the three month
period ending March 31, 1998 as compared to $29.2 million for the same period in
1997. This increase is a result of an increase in the number of hours billed by
Company-owned operations as compared to the same periods in 1997. The average
hourly bill rate for the three month period ended March 31, 1998 increased to
$43.53 from $31.69 for the three month period ended March 31, 1997 due to the
mix of contract business as a percentage of total flexible billings. In
addition, the Company's Emerging Technologies initiative increased its bill
rates 34% for the three month period ended March 31, 1998 compared to the same
period in 1997 as the demand for these knowledge workers continues to build.
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Search services increased 20.6% to $7.0 million for the three month
period ended March 31, 1998 compared to $5.8 million for the same period in
1997. The increase resulted primarily from an increase in the number of search
sales consultants, which increased the number of search placements made during
the three month period ended March 31, 1998 as compared to the same period in
1997. The average fee for each placement made during the periods remained
relatively constant.
Gross profit. Gross profit increased 76.9% to $24.6 million during the
three month period ended March 31, 1998 as compared to $13.9 million for the
same period in 1997. Gross profit as a percentage of net service revenues
decreased to 36.5% for the three month period ending March 31, 1998 as compared
to 39.7% for the same period in 1997. This decrease was primarily the result of
the continuing change in the Company's business mix whereby revenues from
Flexible Billings, traditionally lower gross margins than Search services,
increased to 89.5% of the Company's total revenues for the three month period
ending March 31, 1998 as compared to 83.5% for the same period in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 58.0% to $16.6 million for the three month
period ended March 31, 1998 as compared to $10.5 million for the same period in
1997. Selling, general and administrative expenses as a percentage of net
service revenues decreased to 24.6% for the three month period ended March 31,
1998 compared to 30.0% for the same period in 1997. This decrease in selling,
general and administrative expense as a percentage of net service revenues
resulted primarily from greater operating efficiencies and economies of scale
gained from a larger revenue base.
Depreciation and amortization expense. Depreciation and amortization
expense increased 112.4% to approximately $1.4 million for the three month
period ended March 31, 1998 compared to approximately $659,000 for the same
period in 1997. Depreciation and amortization expense as a percentage of net
service revenues increased to 2.0% for the three month period ended March 31,
1998 as compared to 1.9% for the same period in 1997. The increase as a
percentage of net service revenues in the three months ended March 31, 1998 as
compared to 1997 is due primarily to the goodwill amortization of the 1997
acquisitions of UQ and Sequent, in 1997.
Merger and acquisition related expenses relate to the acquisition of
Source Services Corporation (see Note B).
Other (income) expense. Other (income) expense increased 66.7% for the
three months ended March 31, 1998 compared to the same period in 1997. The
increase in other income during the three months ended March 31, 1998 was due to
interest earned on the investment of the proceeds from the November 1997 stock
offering.
Income Before Taxes. Income before taxes increased 94.1% to $6.6 million
for the three month period ended March 31, 1998 as compared to $3.4 million for
the same period in 1997, primarily as a result of the above factors.
Provision for income taxes. Provision for income taxes increased 107.6%
to $2.7 million for the three month period ended March 31, 1998 compared to $1.3
million for the same period in 1997. The effective tax rate was 41.5% for the
three months ended March 31, 1998 compared to 38.2% for the same period in 1997.
The change reflects the impact of state taxes and additional non-deductible
items.
Net Income. Net income increased approximately 85.7% to $3.9 million as
compared to the $2.1 million for the same period in 1997.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's sources of liquidity included
approximately $72.5 million in cash and cash equivalents, approximately $100.4
million in additional net working capital. In addition, as of March 31, 1998,
there was approximately $663,000 outstanding on the Company's line of credit and
$29.3 million was available for borrowing under the Company's line of credit.
The Company entered into a new Revolving Line of Credit Loan Agreement with
NationsBank, N.A. (the "Line of Credit") during September 1997. The Line of
Credit expires on March 31, 2000 and amounts outstanding under the line of
credit accrue interest at an annual rate equal to 150 basis points above the
90-day London Interbank Offering interest rate ("LIBOR"). As of March 31, 1998,
the interest rate on the Line of Credit was 6.36%.
During the three months ended March 31, 1998, cash flow used by
operations was approximately $882,000, resulting primarily from net income,
non-cash expenses (depreciation and amortization) and increases in operating
payroll liabilities, offset by an increase in accounts receivable. The increase
in accounts receivable reflects the increased volume of business during the
first three months of 1998 from existing locations and the initial funding of
the accounts receivable base in acquired operations.
During the three months ended March 31, 1998, cash flow used in
investing activities was appoximately $1.5 million, resulting primarily from the
Company's use of approximately $1.0 million for capital expenditures.
In November and December 1997, the Company received approximately $86.5
million as net proceeds of its common stock offering, part of which was used to
repay the indebtedness outstanding under the Line of Credit. The Company intends
to use the remaining net proceeds for general corporate purposes, including
possible acquisitions, expansion of the Company's operations and certain capital
expenditures related to the Company's expansion. Pending such uses, the net
proceeds will be invested in short term, investment grade securities,
certificates of deposit, or direct or guaranteed obligations of the United
States government.
The Company believes that cash flow from operations and borrowings under
the Company's Line of Credit, or other credit facilities that may become
available to the Company in the future will be adequate to meet the working
capital requirements of the Company's current operations for at least the next
12 months. The Company believes that the consummation of the merger with Source
Services which was effective April 20, 1998 will not adversely affect the
Company's liquidity. The Company's estimate of the period that existing
resources will fund its working capital requirements is a forward-looking
statement that is subject to risks and uncertainties. Actual results could
differ from those indicated as a result of a number of factors, including the
use of such resources for possible acquisitions.
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify years. As a result, such systems will
recognize the year 2000 as "00." This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company utilizes software or related computer technologies that are
essential to its operations. The Company believes all such software is currently
Year 2000 compliant, and therefore does not expect any material impact as a
result of the Year 2000 issue.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only).
(b) Reports:
Current Reports on Form 8-K and Form 8-K/A filed during the
quarter ended March 31, 1998 were as follows:
i) Form 8-K dated March 31, 1998 (filed on February 2, 1998)
regarding The election of James D. Swartz as President and
the definitive entering into a merger agreement between the
Company and Source Service Corporation.
ii) Form 8-K dated February 11, 1998 (filed on February 19,
1998) regarding Amendment No. 1 to Agreement and Plan of
Merger by and among Romac International, Inc. and Source
Services Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ROMAC INTERNATIONAL, INC.
(Registrant)
By: /s/ Thomas M. Calcaterra
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Thomas M. Calcaterra,
Chief Financial and Accounting Officer
and Secretary
Date: May 14, 1998