-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DS9YE9eCzCmtiqO8vjQNfcz38eWfsnt4W8sNfbRPJqKYHq2WCxCfrYCzDLNNu9GC usifQb6YL/xqwuQl4u/XMA== 0000950134-96-006046.txt : 19961115 0000950134-96-006046.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950134-96-006046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAFFMARK INC CENTRAL INDEX KEY: 0001017968 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 710788538 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20971 FILM NUMBER: 96661098 BUSINESS ADDRESS: STREET 1: 302 EAST MILLSAP CITY: FAYETTEVILLE STATE: AR ZIP: 72703 BUSINESS PHONE: 5019736000 MAIL ADDRESS: STREET 1: 302 EAST MILLSAP CITY: FAYETTEVETTE STATE: AR ZIP: 72703 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 or [ ] 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, ARKANSAS 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 12, 1996 was 13,298,249. 1 2 STAFFMARK INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 INDEX
Index ----- PART I - FINANCIAL INFORMATION Item I - Financial Statements STAFFMARK, INC. CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS Introduction to Condensed Pro Forma Combined Financial Statements 4 Condensed Pro Forma Combined Statements of Income 5 Condensed Pro Forma Combined Balance Sheet 6 Notes to Condensed Pro Forma Combined Financial Statements 7 STAFFMARK, INC. Condensed Balance Sheet 9 Notes to Condensed Balance Sheet 10 FOUNDING COMPANY FINANCIAL STATEMENTS BREWER PERSONNEL SERVICES, INC. Statements of Income 11 Balance Sheets 12 Statements of Cash Flows 13 Notes to Financial Statements 14 THE PROSTAFF COMPANIES Combined Statements of Income 15 Combined Balance Sheets 16 Combined Statements of Cash Flows 17 Notes to Combined Financial Statements 18 THE MAXWELL COMPANIES Combined Statements of Income 19 Combined Balance Sheets 20 Combined Statements of Cash Flows 21 Notes to Combined Financial Statements 22 HRA, INC. Statements of Income 23 Balance Sheets 24 Statements of Cash Flows 25 Notes to Financial Statements 26 FIRST CHOICE STAFFING, INC. Statements of Income 27 Balance Sheets 28 Statements of Cash Flows 29 Notes to Financial Statements 30 THE BLETHEN GROUP Combined Statements of Income 31 Combined Balance Sheets 32 Combined Statements of Cash Flows 33 Notes to Combined Financial Statements 34 Item II - Management's Discussion and Analysis of Financial Condition and Results of Operations 36 PART II - OTHER INFORMATION
2 3 Item 1 - Legal Proceedings 42 Item 6 - Exhibits and Reports on Form 8-K 42 (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K None Signatures 43 3 4 STAFFMARK, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 PART I - FINANCIAL INFORMATION ITEM I - FINANCIAL STATEMENTS INTRODUCTION TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS StaffMark, Inc. (the "Company" or "StaffMark") was founded in March 1996 to create a leading provider of diversified staffing services to businesses, healthcare providers, professional and service organizations and governmental agencies, primarily in growth markets in the southeastern and southwestern United States. On October 2, 1996, StaffMark and six staffing service businesses, Brewer Personnel Services, Inc. ("Brewer"), Prostaff Personnel, Inc. and its related entities ("Prostaff"), Maxwell Staffing, Inc. and its related entities ("Maxwell"), HRA, Inc. ("HRA"), First Choice Staffing, Inc. ("First Choice") and Blethen Temporaries, Inc. and its related entities ("Blethen"), (each a "Founding Company" and collectively, the "Founding Companies"), merged through a series of separate transactions (the "Merger") simultaneously with the closing of the Company's initial public offering (the "Offering"). The consideration for the stock of the Founding Companies consisted of a combination of cash and common stock of the Company. Between March 1996 and the consummation of the Offering, the Company had not conducted any operations and all activities prior to the Offering related to the Merger and the Offering. Pursuant to the requirements of the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB 97"), which was issued and became effective July 31, 1996, Brewer was designated as the acquirer, for financial reporting purposes, of Prostaff, Maxwell, HRA, First Choice, and Blethen. For purposes of the presentation of the financial statements herein, September 30, 1996 has been used as the effective date of the Merger. Based upon the provisions of SAB 97, these acquisitions were accounted for as combinations at historical cost because: (i) the Founding Companies' stockholders transferred assets to StaffMark in exchange for common stock simultaneously with the Company's initial public offering; (ii) the nature of future operations of the Company will be substantially identical to the combined operations of the Founding Companies; (iii) the stockholders of each of the Founding Companies may be considered promoters; and (iv) no former stockholder group of any of the Founding Companies obtained a majority of the outstanding voting shares of the Company. Accordingly, for financial reporting purposes, the historical financial statements of the Founding Companies have been combined throughout all relevant periods as if the Founding Companies had always been members of the same operating group. However, since the Founding Companies were not under common control or management, historical combined results may not be comparable to, or indicative of, future performance. The following unaudited pro forma combined financial statements present Brewer combined with StaffMark and give effect to the following pro forma adjustments: (i) the acquisition of the other Founding Companies at historical cost in accordance with applicable provisions of SAB 97; (ii) the effect of the acquisitions of Caldwell Services, Inc. ("Caldwell"), On Call Employment Services, Inc. ("On Call") and Strategic Sourcing, Inc. ("SSI") made by Brewer, Brewer, and First Choice, respectively; (iii) the adjustment to reflect reductions in salaries to certain owners of the Founding Companies which have been agreed to in connection with the Merger; (iv) federal and state income taxes have been provided for at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization; (v) the 1,326,000 shares of common stock used for the cash consideration paid to the stockholders of the Founding Companies; (vi) the issuance of 5,618,249 shares of common stock to stockholders of the Founding Companies in connection with the Merger; (vii) the issuance of 1,355,000 shares of common stock by StaffMark prior to the Offering; and (viii) the adjustment to record the net deferred income tax liabilities attributable to the temporary differences between the financial reporting and income tax basis of assets and liabilities held in S Corporations as of September 30, 1996. In addition, the condensed pro forma combined balance sheet of StaffMark includes post merger adjustments for the sale of 6,325,000 shares of common stock and the application of the estimated net proceeds. These condensed pro forma combined financial statements should be read in conjunction with the combined financial statements of the Company and the Founding Companies and the notes thereto included in Staffmark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. 4 5 STAFFMARK, INC. CONDENSED PRO FORMA COMBINED STATEMENTS OF INCOME (UNAUDITED) (In Thousands, Except Per Share Data)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1995 1996 1995 1996 --------- --------- --------- --------- SERVICE REVENUES $ 45,874 $ 52,689 $ 128,414 $ 144,119 COST OF SERVICES 36,643 41,321 102,399 113,313 --------- --------- --------- --------- Gross profit 9,231 11,368 26,015 30,806 --------- --------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 6,267 7,354 18,352 21,547 Depreciation and amortization 462 484 1,271 1,443 --------- --------- --------- --------- Operating income 2,502 3,530 6,392 7,816 --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (608) (660) (1,752) (1,774) Other, net 44 44 118 428 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 1,938 2,914 4,758 6,470 INCOME TAX PROVISION 806 1,196 1,905 2,699 --------- --------- --------- --------- NET INCOME $ 1,132 $ 1,718 $ 2,853 $ 3,771 ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,300 8,300 8,300 8,300 ========= ========= ========= ========= PRO FORMA EARNINGS PER SHARE $ 0.14 $ 0.21 $ 0.34 $ 0.45 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 5 6 STAFFMARK, INC. CONDENSED PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1996 (UNAUDITED) (In Thousands, Except Share Data) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 22,881 Restricted cash and certificates of deposit 50 Accounts receivable, net 20,285 Prepaid expenses 1,265 Investments 36 -------- Total current assets 44,517 PROPERTY AND EQUIPMENT, net 2,912 INTANGIBLE ASSETS, net 19,508 OTHER ASSETS 791 -------- $ 67,728 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,670 Outstanding checks 256 Payroll and related liabilities 5,476 Reserve for workers' compensation claims 3,544 Income taxes payable 400 Deferred income taxes 988 -------- Total current liabilities 12,334 LONG TERM DEBT, less current maturities -- DEFERRED INCOME TAXES 112 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized shares of 1,000,000; no shares issued or outstanding -- Common stock, $.01 par value; authorized shares of 26,000,000; shares issued and outstanding of 13,298,249 133 Paid-in capital 55,294 Retained earnings (145) -------- Total stockholders' equity 55,282 -------- $ 67,728 ========
The accompanying notes are an integral part of this balance sheet. 6 7 STAFFMARK, INC. NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION StaffMark was founded in March 1996 to create a leading provider of diversified staffing services to businesses, healthcare providers, professional and service organizations and governmental agencies, primarily in growth markets in the southeastern and southwestern United States. On October 2, 1996, StaffMark merged through a series of separate transactions simultaneously with the closing of an initial public offering with the following six companies (each a Founding Company and collectively, the Founding Companies): Brewer, Prostaff, Maxwell, HRA, First Choice, and Blethen. The Merger has been effected by StaffMark through issuance of common stock and cash. The consideration for the stock of the Founding Companies consisted of a combination of cash and common stock of the Company. 2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER On October 2, 1996, the Company completed the Offering, which involved the public sale of 6.325 million shares (including underwriters' over-allotment) of common stock at a price of $12.00 per share. The proceeds from the transaction, net of underwriting discounts and commissions and after deducting expenses of the Offering, were approximately $67.0 million. Of this amount, $15.9 million was used to pay the cash portion of the purchase price for the Founding Companies and approximately $29.5 million of the net proceeds was used to repay indebtedness of the Founding Companies and approximately $4.1 million was used for S Corporation distributions to stockholders of the Founding Companies. The remaining net proceeds will be used for working capital and for general corporate purposes, which are expected to include future acquisitions. Concurrent with the completion of the Offering discussed above, the Company issued 5.618 million shares of common stock to the stockholders of the Founding Companies, in addition to the cash consideration discussed above, to the effect the Merger. 3. BASIS OF PRESENTATION Between March 1996 and the consummation of the Offering, the Company had not conducted any operations and all activities prior to the Offering related to the Merger and the Offering. Interim Financial Information The financial information included herein includes the financial results of StaffMark and the Founding Companies and is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The results of operations for the three and nine-month periods ended September 30, 1995 and 1996 are not necessarily indicative of the results to be expected for the full year. It is suggested that these condensed pro forma combined financial statements be read in conjunction with the audited financial statements and notes thereto of the combined Founding Companies included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. 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. 4. INCOME TAXES Certain of the Founding Companies were S Corporations for income tax purposes and, accordingly, any income tax liabilities for the periods prior to the Merger are the responsibility of the respective stockholders. Effective with the Merger, these S Corporations converted to C Corporation status which will require them to recognize the tax consequences of operations in their respective statements of income. For purposes of these condensed pro forma combined financial statements, federal and state income taxes have been provided for at an estimated effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. 7 8 5. EARNINGS PER COMMON SHARE The computation of earnings per common share for the three and nine months ended September 30, 1996 is based upon 8,299,708 weighted average shares outstanding which includes (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares issued to the stockholders of the Founding Companies in connection with the Merger; and (iii) 1,326,459 shares issued in connection with the Offering to pay the cash portion of the consideration for the Founding Companies, but excludes 4,173,541 shares sold to the public on October 2, 1996 (in conjunction with the Offering), the 825,000 shares issued representing the underwriters' over-allotment and up to 935,494 shares subject to options to be issued under the Company's 1996 Stock Option Plan. Fully diluted earnings per common equivalent share is equal to primary earnings per share for all periods presented. 8 9 STAFFMARK, INC. CONDENSED BALANCE SHEET SEPTEMBER 30, 1996 (UNAUDITED) ASSETS Cash and cash equivalents $ 36,813 Property and equipment, net 20,011 Deferred offering costs 3,710,601 ---------- Total assets $3,767,425 ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable $2,892,484 Line of credit 155,000 Advances from Founding Companies 685,708 ---------- Total liabilities 3,733,192 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized shares of 1,000,000; no shares issued or outstanding -- Common stock, $.01 par value; authorized shares of 26,000,000; shares issued and outstanding of 1,355,000 13,550 Paid-in capital 17,710 Retained earnings 2,973 ---------- Total stockholders' equity 34,233 ---------- $3,767,425 ==========
The accompanying notes are an integral part of this balance sheet. 9 10 STAFFMARK, INC. NOTES TO CONDENSED BALANCE SHEET (UNAUDITED) 1. ORGANIZATION StaffMark was originally founded as One Source Staffing, Inc. on March 12, 1996, to create a nationwide provider of temporary staffing services. On June 14, 1996, the Company changed its name to StaffMark, Inc. On October 2, 1996, StaffMark merged with the following six Founding Companies: Brewer, Prostaff, Maxwell, HRA, First Choice, and Blethen. The Merger has been effected by StaffMark through issuance of its common stock and cash. 2. INITIAL PUBLIC OFFERING OF COMMON STOCK AND MERGER On October 2, 1996, the Company completed the Offering, which involved the public sale of 6.325 million shares (which includes the underwriters' over-allotment as of October 18, 1996) of common stock at a price of $12.00 per share. The proceeds from the transaction, net of underwriting discounts and commissions and after deducting expenses of the Offering, were approximately $67.2 million. Of this amount, $15.9 million was used to pay the cash portion of the purchase price for the Founding Companies. Concurrent with the completion of the Offering discussed above, the Company issued 5.618 million shares of common stock to the stockholders of the Founding Companies, in addition to the cash consideration discussed above, to effect the Merger. 3. BASIS OF PRESENTATION The unaudited condensed balance sheet has been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. Between March 1996 and the consummation of the Offering, the Company did not conduct any operations and all activities prior to the Offering related to the Merger and the Offering. Accordingly, statements of operations and cash flows would not provide meaningful information and have been omitted. 10 11 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- ---------------------------- OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 14,627,786 $ 18,018,255 $ 30,555,854 $ 48,574,636 COST OF SERVICES 11,576,433 14,235,121 24,545,243 38,263,006 ------------ ------------ ------------ ------------ Gross profit 3,051,353 3,783,134 6,010,611 10,311,630 OPERATING EXPENSES: Selling, general and administrative 1,515,867 2,206,726 3,634,760 6,652,188 Depreciation and amortization 203,230 298,830 339,693 864,804 ------------ ------------ ------------ ------------ Operating income 1,332,256 1,277,578 2,036,158 2,794,638 OTHER INCOME (EXPENSE): Interest expense (383,759) (485,402) (415,831) (1,365,326) Interest and other income (expense) (2,983) 147 16,221 (3,035) ------------ ------------ ------------ ------------ Net income $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277 ============ ============ ============ ============ PRO FORMA DATA: Historical income before income taxes $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277 Less pro forma provision for income taxes 418,475 368,806 687,978 732,290 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME $ 527,039 $ 423,517 $ 948,570 $ 693,987 ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 11 12 BREWER PERSONNEL SERVICES, INC. BALANCE SHEETS
DECEMBER 31, SEPTEMBER 29, 1995 1996 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 319,159 $ 397,459 Accounts receivable, net 4,798,476 6,868,193 Prepaid expenses and other 253,143 199,985 ----------- ----------- Total current assets 5,370,778 7,465,637 PROPERTY AND EQUIPMENT, net 796,930 956,481 INTANGIBLE ASSETS, net 15,555,459 18,449,821 OTHER ASSETS: Advance to StaffMark -- 519,454 Other 29,192 40,799 ----------- ----------- Total other assets 29,192 560,253 ----------- ----------- $21,752,359 $27,432,192 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 272,329 $ 580,472 Outstanding checks 226,307 -- Payroll and related liabilities 1,020,973 1,719,718 Reserve for workers' compensation claims 775,801 709,013 Line of credit 309,068 2,684,175 Current maturities of long-term debt 882,487 2,473,387 Accrued interest and other 375,777 135,344 ----------- ----------- Total current liabilities 3,862,742 8,302,109 LONG-TERM DEBT, less current maturities 15,103,831 15,607,663 STOCKHOLDERS' EQUITY: Common stock, $.01 par value at December 31, 1995 and September 29, 1996; authorized shares of 10,000 at December 31, 1995 and September 29, 1996; shares issued and outstanding of 117.5 at December 31, 1995 and 132.5 at September 29, 1996 1 1 Paid-in capital 98,059 497,208 Retained earnings 2,687,726 3,025,211 ----------- ----------- Total stockholders' equity 2,785,786 3,522,420 ----------- ----------- $21,752,359 $27,432,192 =========== ===========
The accompanying notes to financial statements are an integral part of these balance sheets. 12 13 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------- ---------------------------- OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29, 1995 1996 1995 1996 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 945,514 $ 792,323 $ 1,636,548 $ 1,426,277 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 203,230 298,830 339,692 864,804 Provision for bad debts 253 14,396 142 72,328 Net loss on sale of property and equipment -- -- 4,968 -- Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (1,026,082) (622,307) (1,409,205) (1,868,978) Prepaid expenses and other (144,750) 32,491 (123,873) 10,228 Other assets (1,145) (634) (5,700) (2,729) Accounts payable 182,923 182,831 (33,898) 197,987 Bank overdrafts (744,810) (341,652) (396,304) (226,307) Payroll and related liabilities 15,258 150,645 227,528 401,378 Reserve for workers' compensation claims (89,321) (40,384) 82,155 (66,788) Accrued interest and other (245,141) (95,115) (217,962) (359,423) ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (904,071) 371,424 104,091 448,777 ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Caldwell (11,620,714) -- -- -- Acquisition of On Call -- -- (11,500,000) (3,000,000) Capital expenditures (195,014) (121,027) (290,932) (355,170) Acquisition of training licenses and rights (65,262) -- (65,262) -- Proceeds from the sale of property and equipment 16,652 -- 16,652 -- Advances to StaffMark -- (289,024) -- (476,524) Advances of notes receivable (8,504) -- (81,649) -- ------------ ------------ ------------ ------------ Net cash used in investing activities (11,872,842) (410,051) (11,921,191) (3,831,694) ------------ ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 13,795,611 1,138,312 13,366,512 5,875,106 Payment on note payable to a stockholder (1,172,580) (562,343) (835,851) (1,422,547) Cash dividends (25,500) (998,092) (597,984) (1,015,092) Contributions from stockholder 57,636 80,000 57,636 80,000 Deferred financing costs -- -- (271,750) (56,250) ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 12,655,167 (342,123) 11,718,563 3,461,217 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (121,746) (380,750) (98,537) 78,300 CASH AND CASH EQUIVALENTS, beginning of period 131,275 778,209 108,066 319,159 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of period $ 9,529 $ 397,459 $ 9,529 $ 397,459 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 224,542 $ 591,723 $ 243,315 $ 1,613,962 ============ ============ ============ ============ Non-cash transactions: Notes payable issued in conjunction with certain acquisitions $ 3,100,000 $ -- $ 3,100,000 $ -- ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 13 14 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION Brewer was incorporated in the state of Arkansas on June 27, 1988. The Company's primary business purpose is to provide temporary personnel services. The Company is headquartered in Fayetteville, Arkansas and as of September 29, 1996, operated staffing services offices in Arkansas, Georgia, Colorado, Virginia, and Tennessee. Brewer and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of Brewer's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although Brewer believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. Interim Financial Information The interim financial statements as of September 29, 1996 and for the three and nine months ended October 1, 1995 and September 29, 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Brewer and the results of operations and cash flows with respect to the interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION In conjunction with the merger with StaffMark, Brewer changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires Brewer to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if Brewer had been a C Corporation for tax reporting purposes during the three and nine months ended October 1, 1995 and September 29, 1996, respectively. 14 15 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 9,777,292 $ 10,590,194 $ 25,840,311 $ 29,509,631 COST OF SERVICES 8,100,662 8,650,927 21,339,195 24,034,483 ------------ ------------ ------------ ------------ Gross profit 1,676,630 1,939,267 4,501,116 5,475,148 OPERATING EXPENSES: Selling, general and administrative 1,365,793 1,276,494 3,796,754 4,043,409 Depreciation and amortization 57,695 58,220 160,700 186,171 ------------ ------------ ------------ ------------ Operating income 253,142 604,553 543,662 1,245,568 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (6,032) (20,490) (16,088) (49,443) Interest and other income 7,284 17,544 20,949 28,515 ------------ ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 254,394 601,607 548,523 1,224,640 PROVISION FOR INCOME TAXES -- -- 96,716 -- ------------ ------------ ------------ ------------ Net income $ 254,394 $ 601,607 $ 451,807 $ 1,224,640 ============ ============ ============ ============ PRO FORMA DATA: Historical income before income taxes $ 254,394 $ 601,607 $ 548,523 $ 1,224,640 Less pro forma provision for income taxes 99,213 234,626 213,924 477,609 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME $ 155,181 $ 366,981 $ 334,599 $ 747,031 ============ ============ ============ ============
The accompanying notes to combined financial statements are an integral part of these statements. 15 16 THE PROSTAFF COMPANIES COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1995 1996 ---------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 188,145 $ 69,587 Certificates of deposit 155,154 -- Accounts receivable, net 3,020,622 3,952,688 Prepaid expenses and other 135,673 120,604 ---------- ---------- Total current assets 3,499,594 4,142,879 PROPERTY AND EQUIPMENT, net 756,983 735,737 OTHER ASSETS: Cash surrender value of officer's life insurance 41,280 -- Advance to StaffMark -- 40,703 Other 4,730 7,440 ---------- ---------- Total other assets 46,010 48,143 ---------- ---------- $4,302,587 $4,926,759 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 20,000 $1,554,005 Current maturities of long-term debt 64,872 67,598 Note payable to stockholder 30,000 30,000 Accounts payable and accrued liabilities 117,339 84,911 Outstanding checks -- 71,212 Payroll and related liabilities 1,129,777 1,116,619 Reserve for workers' compensation claims 635,290 671,640 ---------- ---------- Total current liabilities 1,997,278 3,595,985 LONG TERM DEBT, less current maturities 111,459 65,874 STOCKHOLDERS' EQUITY: Common stock, (par values of $ .20 to $ 1.00) authorized shares of 201,000 in 1995 and at September 30, 1996, shares issued and outstanding of 55,000 at December 31, 1995 and at September 30, 1996 11,100 11,100 Retained earnings 2,182,750 1,253,800 ---------- ---------- Total stockholders' equity 2,193,850 1,264,900 ---------- ---------- $4,302,587 $4,926,759 ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. 16 17 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 254,394 $ 601,607 $ 451,807 $ 1,224,640 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,695 56,761 160,700 186,171 Provision for deferred income taxes -- -- 96,716 -- Provision for bad debts 8,200 20,000 20,300 45,659 Net gain on sale of property and equipment -- (18,631) -- (14,854) Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable (657,355) (21,108) (1,243,341) (977,725) Prepaid expenses and other 29,528 30,329 18,555 15,069 Other assets -- 50,020 (6,647) 39,875 Accounts payable and accrued liabilities (13,307) (12,687) (22,994) (32,428) Outstanding checks -- (178,626) (109,084) 71,212 Payroll and related liabilities 317,085 (116,647) 1,188,217 (13,158) Reserve for workers' compensation claims 51,750 33,640 144,306 36,350 Income taxes payable -- -- (54,883) -- ------------ ----------- ----------- ----------- Net cash provided by operating activities 47,990 444,658 643,652 580,811 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Advances to StaffMark -- (9,453) -- (40,703) Capital expenditures (43,620) (14,353) (279,848) (220,476) Other -- -- -- 155,154 ----------- ----------- ----------- ----------- Net cash used in investing activities (43,620) (23,806) (279,848) (106,025) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under line of credit 47,005 376,705 (369,995) 1,534,005 Payments on long-term debt (15,434) (10,841) (39,828) (42,859) Dividends -- (791,758) -- (2,084,490) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 31,571 (425,894) (409,823) (593,344) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,941 (5,042) (46,019) (118,558) CASH AND CASH EQUIVALENTS, beginning of period 146,412 74,629 228,372 188,145 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 182,353 $ 69,587 $ 182,353 $ 69,587 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 30,549 $ 21,006 $ 10,056 $ 28,953 =========== =========== =========== =========== Income taxes paid $ 284,847 $ -- $ 54,883 $ -- =========== =========== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. 17 18 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION: The combined financial statements of Prostaff include the activities of Prostaff Personnel, Inc. ("Prostaff PI"), d.b.a. Prostaff Staffing Services, Office Staffing and Medical Staffing, Excel Temporary Staffing, Inc. ("Excel") and Professional Resources, Inc. ("Professional"), d.b.a. Performance Staffing, which have common ownership. All intercompany transactions have been eliminated in the combined financial statements. Prostaff PI was originally incorporated in the state of Arkansas in 1973 as Dunhill Personnel Agency of Little Rock, Inc. ("Dunhill"). Dunhill changed its name to Prostaff PI in 1988. Prostaff PI's primary business purpose is to provide temporary personnel services. At September 30, 1996, Prostaff PI operated staffing offices in 23 locations in Arkansas. Excel was incorporated in the state of Arkansas on October 25, 1990 and is engaged in providing temporary personnel services to one large cosmetic manufacturer in Little Rock, Arkansas which represents 100% of the revenue and accounts receivable of Excel. Professional was incorporated in the State of Arkansas on October 24, 1995 ("inception date"). On October 31, 1995, Professional purchased the assets of an existing temporary personnel service business in Little Rock, Arkansas. The combined financial statements of Prostaff include the results of operations of Professional from the inception date. Prostaff and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of Prostaff's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION: The unaudited combined financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although Prostaff believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these combined financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. Interim Financial Information The interim financial statements as of September 30, 1996 and for the three and nine months ended September 30, 1995 and 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Prostaff and the results of operations and cash flows with respect to the combined interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION: In conjunction with the merger with StaffMark, Prostaff changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires Prostaff to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if Prostaff had been a C Corporation for tax reporting purposes during the three and nine months ended September 30, 1995 and 1996, respectively. 18 19 THE MAXWELL COMPANIES COMBINED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 5,621,701 $ 7,196,814 $ 17,154,803 $ 20,428,988 COST OF SERVICES 4,364,844 5,493,219 13,009,183 15,385,451 ------------ ------------ ------------ ------------ Gross profit 1,256,857 1,703,595 4,145,620 5,043,537 OPERATING EXPENSES: Selling, general and administrative 989,048 1,334,828 3,233,692 3,815,406 Depreciation and amortization 37,497 26,490 107,187 98,997 ------------ ------------ ------------ ------------ Operating income 230,312 342,277 804,741 1,129,134 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense -- (62,540) -- (62,540) Other, net 8,562 34,648 960 68,109 ------------ ------------ ------------ ------------ Net income $ 238,874 $ 314,385 $ 805,701 $ 1,134,703 ============ ============ ============ ============ PRO FORMA DATA: Historical income before income taxes $ 238,874 $ 314,385 $ 805,701 $ 1,134,703 Less pro forma provision for income taxes 93,161 122,610 314,223 442,534 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME $ 145,713 $ 191,775 $ 491,478 $ 692,169 ============ ============ ============ ============
The accompanying notes to combined financial statements are an integral part of these statements. 19 20 THE MAXWELL COMPANIES COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1995 1996 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,041,373 $ 162,562 Restricted cash 253,171 50,279 Investments 273,354 -- Accounts receivable, net 2,536,603 2,898,083 Prepaid expenses and other 24,628 153,609 ----------- ----------- Total current assets 4,129,129 3,264,533 PROPERTY AND EQUIPMENT, net 499,792 337,774 INTANGIBLE ASSETS, net -- 294,632 ADVANCE TO STAFFMARK -- 31,250 ----------- ----------- $ 4,628,921 $ 3,928,189 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 169,250 $ 327,728 Payroll and related liabilities 570,444 851,469 Reserve for workers' compensation claims 1,153,000 912,000 Current maturities of long-term debt -- 1,827,361 Accrued dividends 151,000 -- Other accrued liabilities 25,462 18,993 ----------- ----------- Total current liabilities 2,069,156 3,937,551 LONG-TERM DEBT, less current maturities -- 77,562 STOCKHOLDERS' EQUITY: Common stock, $ 1.00 par value in 1995 and 1996; authorized shares of 110,000 in 1995 and 160,000 at September 30, 1996; shares issued and outstanding of 4,000 at December 31, 1995 and 5,000 at September 30, 1996 4,000 5,000 Unrealized gain on investments 43,296 -- Retained earnings 2,512,469 (91,924) ----------- ----------- Total stockholders' equity 2,559,765 (86,924) ----------- ----------- $ 4,628,921 $ 3,928,189 =========== ===========
The accompanying notes to combined financial statements are an integral part of these balance sheets. 20 21 THE MAXWELL COMPANIES COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 238,874 $ 314,385 $ 805,701 $ 1,134,703 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 37,497 26,490 107,187 98,997 Provision for bad debts 77,450 4,136 274,187 50,056 Change in operating assets and liabilities, net of effects of acquisitions: Restricted cash (62,901) 58,902 (34,096) 202,892 Accounts receivable (246,436) (225,968) (77,936) (411,536) Prepaid expanses and other (950) (16,925) 60,524 (128,981) Accounts payable (78,394) 89,692 (23,898) 158,478 Payroll and related liabilities (255,239) (34,335) 49,385 281,025 Reserve for workers' compensation claims 75,750 -- 520,250 (241,000) Other accrued liabilities 52,375 14,866 (8,827) (726) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (161,974) 231,243 1,672,477 1,143,908 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Sumner-Ray -- -- -- (168,000) Capital expenditures (112,676) (66,436) (164,168) (135,246) Purchase of investments (106,371) -- (117,847) -- Advances to StaffMark -- -- -- (31,250) ----------- ----------- ----------- ----------- Net cash used in investing activities (219,047) (66,436) (282,015) (334,496) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (119,397) (667,884) (1,176,956) (3,439,223) Proceeds from (payments on) long-term debt -- -- -- 1,750,000 Issuance of stock -- -- -- 1,000 ----------- ----------- ----------- ----------- Net cash used in financing activities (119,397) (667,884) (1,176,956) (1,688,223) ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (500,418) (503,077) 213,506 (878,811) CASH AND CASH EQUIVALENTS, beginning of period 1,270,468 665,639 556,544 1,041,373 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 770,050 $ 162,562 $ 770,050 $ 162,562 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ -- $ 30,038 $ -- $ 48,085 =========== =========== =========== =========== Non-cash transactions: Notes payable issued in conjunction with acquisitions $ -- $ -- $ -- $ 149,180 =========== =========== =========== =========== Transfer of investment to stockholders $ -- $ -- $ -- $ 273,354 =========== =========== =========== =========== Transfer of property to stockholders $ -- $ -- $ -- $ 220,815 =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 21 22 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION: The combined financial statements of Maxwell include the activities of Maxwell Staffing, Inc. ("Staffing"), Maxwell Staffing of Bristow, Inc. ("Bristow"), Maxwell/Healthcare, Inc. ("Healthcare"), Square One Rehab, Inc. ("Square One") and Technical Staffing, Inc. ("Technical"), all of which are incorporated in Oklahoma and primarily have common ownership. All significant intercompany transactions and balances have been eliminated. Staffing, which was incorporated in 1979, and Bristow, which was incorporated in 1993, both provide temporary personnel services in the northeastern Oklahoma area to the clerical, industrial and medical fields. Healthcare, which was incorporated in 1989 to provide foreign-trained temporary and permanent physical and occupational therapists services, is licensed to do business in 22 states. Square One, which was incorporated in 1991, provides contract management and physical and occupational therapists services to companies located in the midwestern and southwestern United States. Technical, which was incorporated in 1996, provides permanent and temporary personnel services to companies located primarily in Oklahoma. Maxwell and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of Maxwell's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION: The unaudited combined financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although Maxwell believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these combined financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. Interim Financial Information The interim financial statements as of September 30, 1996 and for the three and nine months ended September 30, 1995 and 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Maxwell and the results of operations and cash flows with respect to the combined interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION: In conjunction with the merger with StaffMark, Maxwell changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires Maxwell to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if Maxwell had been a C Corporation for tax reporting purposes during the three and nine months ended September 30, 1995 and 1996, respectively. 22 23 HRA, INC. STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- --------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 5,132,591 $ 7,746,565 $ 14,064,083 $ 19,286,664 COST OF SERVICES 4,194,124 5,975,131 11,469,095 15,173,991 ------------ ------------ ------------ ------------ Gross profit 938,467 1,771,434 2,594,988 4,112,673 OPERATING EXPENSES: Selling, general and administrative 1,053,999 1,238,978 2,762,502 3,302,853 Depreciation and amortization 31,859 39,797 57,115 89,702 ------------ ------------ ------------ ------------ Operating income (147,391) 492,659 (224,629) 720,118 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (37,422) (41,725) (97,831) (95,664) Interest and other, net 7,202 2,061 10,126 335,930 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES (177,611) 452,995 (312,334) 960,384 PROVISION (BENEFIT) FOR INCOME TAXES (66,253) 178,633 (108,970) 388,371 ------------ ------------ ------------ ------------ Net income (loss) $ (111,358) $ 274,362 $ (203,364) $ 572,013 ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 23 24 HRA, INC. BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30, 1995 1996 ------------ ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 367,978 $ 354,417 Restricted cash 50,251 -- Accounts receivable, net 1,998,724 2,944,791 Prepaid expenses and other 467,002 756,836 Income taxes receivable 25,125 -- Deferred income taxes 160,000 281,300 ---------- ---------- Total current assets 3,069,080 4,337,344 PROPERTY AND EQUIPMENT, net 144,179 258,087 INTANGIBLE ASSETS, net 37,156 1,001,308 OTHER ASSETS: Advance to StaffMark -- 31,250 Deferred income taxes 65,000 55,300 Other 21,071 1,423 ---------- ---------- Total other assets 86,071 87,973 ---------- ---------- $3,336,486 $5,684,712 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Borrowing under accounts receivable financing agreement $ 502,512 $ -- Accounts payable 193,096 164,199 Income tax payable -- 443,896 Outstanding checks 166,761 184,558 Current portion of deferred compensation arrangements 43,699 108,939 Payroll and related liabilities 621,317 766,417 Reserve for workers' compensation claims 1,390,351 1,224,378 Line of credit -- 1,340,000 Current maturities of long-term debt -- 255,238 Accrued expenses 138,416 169,594 ---------- ---------- Total current liabilities 3,056,152 4,657,219 LONG-TERM DEBT, less current maturities -- 386,156 DEFERRED COMPENSATION ARRANGEMENTS, less current portion 127,332 247,383 NOTE PAYABLE TO STOCKHOLDER 122,000 116,000 STOCKHOLDERS' EQUITY: Common stock, no par value, 1,000 shares authorized, 790 shares issued and outstanding 12,600 12,600 Retained earnings 18,402 265,354 ---------- ---------- Total stockholders' equity 31,002 277,954 ---------- ---------- $3,336,486 $5,684,712 ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. 24 25 HRA, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (111,358) $ 274,362 $ (203,364) $ 572,013 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,859 39,797 57,115 89,702 Provision for bad debts 847 (31,000) 2,041 (5,581) Provision for deferred income taxes (28,050) (53,200) (135,500) (77,350) Change in operating assets and liabilities: Restricted cash (12,975) -- (49,981) -- Accounts receivable (114,628) (130,174) 114,722 (989,015) Income taxes receivable (25,125) -- (22,752) 44,240 Prepaid expenses and other (46,206) 18,499 (467,002) (149,386) Other assets (19,648) -- (19,648) -- Outstanding checks 5,188 (76,682) 166,761 (13,109) Accounts payable 79,226 (31,825) 20,222 150,257 Notes and other payables -- 254,248 -- -- Payroll and related liabilities 116,522 56,135 331,455 406,689 Reserve for workers' compensation claims 162,987 103,131 757,629 250,172 Accrued expenses 38,666 19,445 139,897 3,565 Income taxes payable (72,207) -- -- 443,896 ----------- ----------- ----------- ----------- Net cash provided by operating activities 5,098 442,736 691,595 726,093 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,895) (74,454) (119,350) (161,613) Purchase of business -- (863,151) -- (863,151) Advances to StaffMark -- -- -- (31,250) Other (16,000) -- (16,000) -- ----------- ----------- ----------- ----------- Net cash used in investing activities (18,895) (937,605) (135,350) (1,056,014) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on deferred compensation arrangements (5,302) (19,324) (24,961) (55,378) Net borrowings (payments) under an accounts receivable financing agreement 129,757 -- (379,621) -- Net borrowings under a revolving line of credit -- 320,000 -- 745,000 Principal payments on note payable to a stockholder (6,295) -- (24,295) -- Advances to stockholders 25,988 340,089 -- 250,000 Distributions to stockholders -- (297,289) -- (297,289) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 144,148 343,476 (428,877) 642,333 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 130,351 (151,393) 127,368 312,412 CASH AND CASH EQUIVALENTS, beginning of period 237,627 505,810 240,610 42,005 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 367,978 $ 354,417 $ 367,978 $ 354,417 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 45,699 $ 39,295 $ 60,768 $ 76,866 =========== =========== =========== =========== Taxes paid $ 61,324 -- $ 206,298 $ 18,000 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
During the nine month period ended September 30,1996, HRA recorded a deferred compensation arrangement liability for the purchase of a noncompete agreement with a former stockholder totaling $139,637. The accompanying notes to financial statements are an integral part of these statements. 25 26 HRA, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION: HRA was incorporated on November 20, 1991, in the state of Tennessee and provides temporary personnel services throughout central Tennessee. Headquartered in Nashville, Tennessee, HRA does business under the name of Human Resources and operates staffing offices in the following Tennessee locations: Clarksville, Columbia, Franklin, Gallatin, Lebanon, Lewisburg, Murfreesboro, Nashville, Pulaski, Portland, Smyrna, Springfield and Tullahoma. HRA and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of HRA's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION: The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although HRA believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. On July 11, 1996, HRA completed the purchase of the assets and intellectual property of Dorothy Johnson's Career Consultants, Inc. ("Career Consultants"). Career Consultants provides permanent placement services on a fee basis to companies primarily in the Nashville, Tennessee area. The purchase price was $850,000 and included a payment for assets and a non-compete agreement with the principal stockholder of Career Consultants. The purchase was financed with borrowings under HRA's line of credit, which was extended in contemplation of this transaction. The acquisition was accounted for as a purchase business combination. The operations of Career Consultants were not significant to HRA's historical operating results. Interim Financial Information The interim financial statements as of September 30, 1996 and the three and nine months ended September 30, 1995 and 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of HRA and the results of operations and cash flows with respect to the interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 3. LITIGATION: On September 27, 1996, HRA settled a lawsuit with its former workers' compensation insurance carrier, in which HRA had disputed the amount of insurance premiums owed for fiscal years 1993 and 1994 and a portion on fiscal year 1995. The settlement totaled $641,394 and calls for HRA to make an initial payment of $100,000, with the balance due in 36 monthly installments of $16,470, including interest at 6%. The note may be prepaid in whole or in part at any time without penalty. In the event that HRA elects to prepay the note, HRA will be entitled to a 10% discount of the present value of the balance outstanding at prepayment date. HRA had accrued for these disputed amounts in the fiscal years in which such amounts arose. Annual maturities pursuant to this note are as follows: 1997 $ 255,238 1998 179,353 1999 190,415 2000 16,388 ---------- $ 641,394 ==========
26 27 FIRST CHOICE STAFFING, INC. STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- --------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 3,316,224 $ 4,811,081 $ 9,956,709 $ 12,695,551 COST OF SERVICES 2,701,431 3,800,236 8,105,090 10,186,083 ------------ ------------ ------------ ------------ Gross profit 614,793 1,010,845 1,851,619 2,509,468 OPERATING EXPENSES: Selling, general and administrative 577,588 642,960 1,605,478 1,780,660 Depreciation and amortization 8,241 32,533 24,693 79,068 ------------ ------------ ------------ ------------ Operating income 28,964 335,352 221,448 649,740 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (4,490) (19,649) (15,717) (33,416) Other expense -- (1,053) -- (1,053) ------------ ------------ ------------ ------------ Net income $ 24,474 $ 314,650 $ 205,731 $ 615,271 ============ ============ ============ ============ PRO FORMA DATA: Historical income before income taxes $ 24,474 $ 314,650 $ 205,731 $ 615,271 Less pro forma provision for income taxes 9,545 122,713 80,235 239,956 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME $ 14,929 $ 191,937 $ 125,496 $ 375,315 ============ ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 27 28 FIRST CHOICE STAFFING, INC. BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1995 1996 ---------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 268,440 $ 174,946 Accounts receivable, net 1,145,532 1,835,493 Prepaid expenses and other 72,171 31,467 ---------- ---------- Total current assets 1,486,143 2,041,906 ---------- ---------- PROPERTY AND EQUIPMENT, net 327,240 348,628 OTHER ASSETS: Investment in captive insurance pool 36,000 36,000 Advance to StaffMark -- 31,801 Other -- 727,194 ---------- ---------- Total other assets 36,000 794,995 ---------- ---------- $1,849,383 $3,185,529 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 65,608 $ 99,853 Payroll and related benefits 534,047 510,688 Accrued workers' compensation 46,359 27,083 Line of credit 200,000 225,000 Current maturities of long-term debt -- 1,488,754 Note payable to stockholder 180,000 -- Other accrued expenses 5,735 -- ---------- ---------- Total current liabilities 1,031,749 2,351,378 ---------- ---------- LONG-TERM DEBT, less current maturities -- 500,000 STOCKHOLDERS' EQUITY: Common stock, $1 par value, 100,000 shares authorized, 10,000 shares issued and outstanding 10,000 10,000 Retained earnings 807,634 324,151 ---------- ---------- Total stockholders' equity 817,634 334,151 ---------- ---------- $1,849,383 $3,185,529 ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. 28 29 FIRST CHOICE STAFFING, INC. STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- -------------------------- 1995 1996 1995 1996 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,474 $ 314,650 $ 205,731 $ 615,271 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 8,241 32,533 24,693 79,068 Net loss on sale of property and equipment -- 1,053 -- 1,053 Change in operating assets and liabilities: Accounts receivable, net (157,097) (163,699) (67,512) (689,961) Prepaid expanses and other 3,141 7,505 42,486 40,704 Other assets -- (721,055) -- (735,406) Accounts payable 37,819 3,313 46,555 34,245 Accrued workers' compensation (90,109) (22,880) (132,269) (19,276) Payroll and related liabilities 51,144 10,213 (3,820) (23,359) Other accrued expenses -- -- (7,000) (5,735) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (122,387) (538,367) 108,864 (703,396) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (81,211) (23,164) (150,833) (93,297) Advances to StaffMark -- (551) -- (31,801) ----------- ----------- ----------- ----------- Net cash used in investing activities (81,211) (23,715) (150,833) (125,098) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments on) line of credit -- (25,000) -- 25,000 Proceeds from long term debt -- 1,988,754 -- 1,988,754 Payments on note payable to stockholder (70,000) (140,000) (70,000) (180,000) Cash distributions to stockholders -- (1,098,754) -- (1,098,754) ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities (70,000) 725,000 (70,000) 735,000 ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (273,598) 162,918 (111,969) (93,494) CASH AND CASH EQUIVALENTS, Beginning of period 355,740 12,028 194,111 268,440 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, End of period $ 82,142 $ 174,946 $ 82,142 $ 174,946 =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ -- $ 5,551 $ 6,285 $ 19,502 =========== =========== =========== =========== Taxes paid $ -- $ -- $ -- $ -- =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 29 30 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION: First Choice, a South Carolina corporation, provides temporary personnel services primarily for industrial and clerical needs in the greater Charlotte, North Carolina, metropolitan region. The business was initially founded and incorporated in 1986 as a Dunhill Temporary Systems franchise. In 1989, the founders bought out the Dunhill franchise contract and formed First Choice Temporary Staffing, Inc. In 1993, First Choice Temporary Staffing, Inc. changed its name to First Choice Staffing, Inc. Prior to reorganization on April 1, 1994, First Choice was a wholly owned subsidiary of Gregory Personnel, Inc. ("Gregory Personnel"). Gregory Personnel was formed as a holding company in connection with the acquisition by one 50% stockholder of the other 50% stockholder's interest in First Choice in 1990. Gregory Personnel had no operations and had assets consisting primarily on a noncompete agreement arising from the acquisition of the former 50% stockholder's interest in First Choice. The noncompete agreement was amortized over three years. On April 1, 1994, Gregory Personnel was merged downstream with First Choice, leaving First Choice as the surviving entity. First Choice and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of First Choice's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION: The unaudited financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although First Choice believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. On July 1, 1996, First Choice acquired certain of the operating assets of SSI, a provider of permanent and temporary placement services to companies in the market for information technology professionals. SSI was incorporated in May 1993 and is located in Charlotte, North Carolina. The total purchase price of $700,000 and noncompete agreement with the seller of $50,000 were financed through borrowings from a bank and execution of a promissory note payable to the seller. All financing related to this acquisition is secured by the personal guaranty of the majority stockholder. The acquisition was accounted for using the purchase method of accounting. Interim Financial Information The interim financial statements as of September 30, 1996 and for the three and nine months ended September 30, 1995 and 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of First Choice and the results of operations and cash flows with respect to the interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 3. S CORPORATION DISTRIBUTIONS: On September 25, 1996, First Choice borrowed $1.2 million and made distributions to its owners equal to First Choice's S Corporation Accumulated Adjustment Account. 4. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION: In conjunction with the merger with StaffMark, First Choice changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires First Choice to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if First Choice had been a C Corporation for tax reporting purposes during the three and nine months ended September 30, 1995 and 1996, respectively. 30 31 THE BLETHEN GROUP COMBINED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ---------------------------- 1995 1996 1995 1996 ------------ ------------ ------------ ------------ SERVICE REVENUES $ 3,283,065 $ 4,326,533 $ 9,743,890 $ 12,047,667 COST OF SERVICES 2,444,637 3,166,415 7,341,899 9,084,803 ------------ ------------ ------------ ------------ Gross profit 838,428 1,160,118 2,401,991 2,962,864 OPERATING EXPENSES: Selling, general and administrative 659,659 972,048 1,985,510 2,274,816 Depreciation and amortization 29,386 27,849 83,578 83,475 ------------ ------------ ------------ ------------ Operating income 149,383 160,221 332,903 604,573 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (31,979) (30,330) (100,702) (112,958) Interest and other income (expense) 8,231 (9,553) 4,760 (8,392) ------------ ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES 125,635 120,338 236,961 483,223 PROVISION FOR INCOME TAXES 34,000 16,596 71,000 76,755 ------------ ------------ ------------ ------------ Net income $ 91,635 $ 103,742 $ 165,961 $ 406,468 ============ ============ ============ ============ PRO FORMA DATA: Historical income before income taxes $ 125,635 $ 120,338 $ 236,961 $ 483,223 Less pro forma provision for income taxes 48,998 46,932 92,415 188,457 ------------ ------------ ------------ ------------ PRO FORMA NET INCOME $ 76,637 $ 73,406 $ 144,546 $ 294,766 ============ ============ ============ ============
The accompanying notes to combined financial statements are an integral part of these statements. 31 32 THE BLETHEN GROUP COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1995 1996 ------------ ------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 44,644 $ 115,773 Accounts receivable, net 1,377,799 1,785,287 Deferred tax asset 11,000 16,000 Prepaid expenses and other 14,510 2,776 ---------- ---------- Total current assets 1,447,953 1,919,836 PROPERTY AND EQUIPMENT, NET 307,286 255,298 OTHER ASSETS: Due from stockholders 194,163 -- Deferred tax asset 20,760 -- Advance to StaffMark -- 31,250 Other 12,232 14,492 ---------- ---------- Total other assets 227,155 45,742 ---------- ---------- $1,982,394 $2,220,876 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 105,648 $ 62,446 Outstanding checks 25,329 -- Payroll and related liabilities 301,258 511,412 Line of credit 971,436 1,175,203 Note payable to shareholder -- 105,582 Current maturities of long-term debt 10,151 10,678 Current maturities of capital lease obligations 47,148 -- Current maturities of notes payable to related parties 62,813 -- Income taxes payable 82,583 49,638 Accrued interest and other 55,043 25,967 ---------- ---------- Total current liabilities 1,661,409 1,940,926 LONG-TERM DEBT, less current maturities 24,922 17,057 CAPITAL LEASE OBLIGATIONS, less current maturities 22,475 -- NOTES PAYABLE TO RELATED PARTIES, less current maturities 45,271 -- DEFERRED TAX LIABILITY -- 26,300 STOCKHOLDERS' EQUITY: Common stock 8,399 8,399 Paid-in capital 8,940 8,940 Retained earnings 210,978 219,254 ---------- ---------- Total stockholders' equity 228,317 236,593 ---------- ---------- $1,982,394 $2,220,876 ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. 32 33 THE BLETHEN GROUP COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 1995 1996 1995 1996 --------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 91,635 $ 103,742 $ 165,961 $ 406,468 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,386 27,849 83,578 83,475 Provision for bad debts (500) 8,300 (1,400) 42,060 Change in operating assets and liabilities: Accounts receivable 107,263 (99,218) (211,584) (404,490) Prepaid expenses and other (17,630) 12,775 (26,299) 11,734 Other assets 11,750 (2,308) 11,750 (2,260) Accounts payable (233,716) (1,998) 10,471 (43,202) Notes payable 17,383 -- -- -- Outstanding checks -- -- -- (25,329) Payroll and related liabilities 7,222 6,842 1,099 210,154 Income taxes payable (receivable) -- (29,173) 56,040 (32,945) Accrued interest and other 83,078 (16,931) 98,575 (29,076) --------- --------- --------- --------- Net cash provided by operating activities 95,871 9,880 188,191 216,589 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,395) (4,666) (6,396) (31,487) Advances to StaffMark -- -- -- (31,250) --------- --------- --------- --------- Net cash used in investing activities (6,395) (4,666) (6,396) (62,737) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (payments) from lines of credit (177,462) 122,436 48,151 203,767 Proceeds from issuance of long-term debt -- -- -- -- Payments on long-term debt (2,263) (1,851) (5,170) (7,338) Payments on capital lease obligations (19,297) -- (61,240) (69,623) Change in note payable to related parties 79,025 (23,767) (8,049) (2,502) Cash distributions to stockholders (31,291) (353,325) (94,181) -- Cash contributions by stockholders -- -- -- (398,192) Change in due from stockholders (72,917) 247,754 (40,126) 191,165 --------- --------- --------- --------- Net cash used in financing activities (224,205) (8,753) (160,615) (82,723) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (134,729) (3,539) 21,180 71,129 CASH AND CASH EQUIVALENTS, beginning of period 187,830 119,312 31,921 44,644 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 53,101 $ 115,773 $ 53,101 $ 115,773 ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 63,725 $ 51,422 $ 122,591 $ 131,963 ========= ========= ========= ========= Taxes paid $ 18,551 $ 33,930 $ 41,476 $ 66,939 ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. 33 34 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION: Blethen's primary business purpose is to provide temporary personnel services. Blethen's administrative headquarters are in Burlington, North Carolina, and as of September 30, 1996, Blethen operated staffing offices in Burlington, Henderson, Durham, West End, Research Triangle Park and Winston-Salem, North Carolina. The accompanying combined financial statements include the accounts of the following separate entities which comprise Blethen:
FORM OF CORPORATION DATE OF INCORPORATION FOR INCOME ENTITY IN NORTH CAROLINA TAX PURPOSES SERVICE TYPE - ------ --------------------- ------------ ------------ Blethen Temporaries, Inc. . . . . . October 6, 1981 S Corporation Clerical and light industrial Dixon Enterprises of Burlington, Inc. . . . . . . . . . . . . . . February 7, 1992 C Corporation Clerical and light industrial DP Pros of Burlington, Inc. . . . . June 6, 1985 C Corporation Information technology and clinical Personnel Placement, Inc. . . . . . October 6, 1981 C Corporation Permanent Placement TRASEC Corp. . . . . . . . . . . . . February 7, 1992 C Corporation Clerical and light industrial Jaeger Personnel Services, Ltd. . . December 20, 1985 S Corporation Clerical and light industrial
All significant intercompany transactions and balances have been eliminated. Blethen and its stockholders entered into a definitive agreement to merge with StaffMark in conjunction with the Offering. All outstanding shares of Blethen's common stock were exchanged for cash and shares of StaffMark's common stock concurrent with the consummation of the Offering on October 2, 1996. 2. BASIS OF PRESENTATION: The unaudited combined financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although Blethen believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that these combined financial statements be read in conjunction with the audited financial statements and notes thereto included in StaffMark's Registration Statement on Form S-1 (Reg. No. 333-7513) related to the Offering. Interim Financial Information The interim financial statements as of September 30, 1996 and for the three and nine months ended September 30, 1995 and 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of Blethen and the results of operations and cash flows with respect to the combined interim financial statements, have been included. The operating results for the interim periods are not necessarily indicative of results for the full year. 34 35 3. PRO FORMA ADJUSTMENTS TO FINANCIAL STATEMENT PRESENTATION: In conjunction with the merger with StaffMark, Blethen changed from an S Corporation to a C Corporation for federal and state income tax reporting purposes, which requires Blethen to recognize the tax consequences of operations in its statements of income. The supplemental pro forma information included in the accompanying statements of income reflect the estimated impact of recognizing income tax expense as if Blethen had been a C Corporation for tax reporting purposes during the three and nine months ended September 30, 1995 and 1996, respectively. 35 36 PART I ITEM II-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION On October 2, 1996, StaffMark acquired simultaneously with the closing of the Offering, the Founding Companies. Pursuant to the requirements of SAB 97, which was issued and became effective July 31, 1996, Brewer was designated as the acquirer of the other Founding Companies for financial reporting purposes. The information below is intended to discuss the pro forma and combined results of operations as well as the results of operations for Brewer and each of the other Founding Companies for the three months ended September 30, 1996 compared to the three months ended September 30, 1995, and for the nine months ended September 30, 1996 compared to the nine months ended September 30, 1995. The Company's revenues are derived from temporary staffing and permanent placement services provided to its clients. Because the Company compensates its temporary employees only for the hours actually worked, wages for the Company's temporary personnel are a variable cost that increase or decrease in proportion to revenues. Cost of services consists primarily of wages paid to temporary employees, workers' compensation expenses and payroll taxes related to temporary employees. Selling, general and administrative expenses consist primarily of compensation and related benefits to the Founding Companies' owners, administrative salaries and benefits, marketing and rent. The Founding Companies have been managed throughout the periods presented as independent private companies, and, as such, their results of operations reflect two tax structures, S Corporations and C Corporations, which have influenced, among other things the historical levels of their owners' compensation. Certain owners have agreed to reductions in their compensation and benefits in connection with the Merger. The compensation differential and the related income tax effects have been reflected as pro forma adjustments in the accompanying pro forma financial information. The Company has analyzed the savings that it expects to realize as a result of: (i) consolidating certain general and administrative functions, including workers' compensation insurance programs, (ii) the reduction in interest payments related to the prepayment of the Founding Companies' debt, and (iii) its ability to borrow at lower interest rates than the Founding Companies. The Company cannot currently quantify these savings. It is anticipated that these savings will be partially offset by the costs of being a public company and the incremental increase in costs related to the Company's new corporate management. However, these costs also cannot be accurately quantified. Accordingly, neither the anticipated savings nor the anticipated costs have been included in the pro forma financial information included herein. As a result, historical combined results may not be comparable to, or indicative of, future performance. 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. 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 financial statements, the notes thereto and the other financial data included elsewhere in this document. Also, the pro forma combined results discussed below occurred when the combined companies were not under common control or management and may not be comparable to, or indicative of future performance. PRO FORMA COMBINED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995. RESULTS OF OPERATIONS - PRO FORMA COMBINED PRO FORMA COMBINED REVENUES Pro forma combined revenues increased $6.8 million or 14.9% to $52.7 million for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. This increase was largely attributable to an increase in HRA's revenues of $2.6 million primarily related to the opening of several new branches. Also contributing to the increase in pro forma combined revenues was an increase in Maxwell's, Blethen's, and First Choice's revenues of $1.6 million, $1.0 million, and $1.5 million, respectively. PRO FORMA COMBINED GROSS PROFIT Pro forma combined gross profit increased $2.1 million or 23.2% to $11.4 million for the three months ended September 30, 1996 as compared to three months ended September 30, 1995. Pro forma combined gross profit as a percentage of revenues increased to 21.6% at September 30, 1996 from 20.1% at September 30, 1995. These increases are primarily attributable to an increase in Brewer's gross margin, exclusive of acquisitions. 36 37 PRO FORMA COMBINED OPERATING EXPENSES Pro forma combined selling, general and administrative ("SG&A") expenses increased $1.1 million or 17.3% to $7.4 million for the three months ended September 30, 1996 as compared to the three months ended September 30, 1995. This increase was primarily attributable to the opening of several new branches in the Founding Companies. Pro forma combined SG&A as a percentage of revenues increased to 14.0% for the three months ended September 30, 1996 compared to 13.7% for the three months ended September 30, 1995. Pro forma combined depreciation and amortization expense remained relatively consistent. PRO FORMA COMBINED OPERATING INCOME Pro forma combined operating income increased $1.0 million or 41.1% to $3.5 million for the three months ended September 30, 1996 as compared to three months ended September 30, 1995. Pro forma combined operating income as a percentage of revenues increased to 6.7% for the three months ended September 30, 1996 as compared to 5.5% for the three months ended September 30, 1995. These increases are primarily attributable to the increased gross profit and gross profit as a percentage of revenues as discussed above while operating expenses remained relatively stable. PRO FORMA COMBINED INTEREST EXPENSE Pro forma combined interest expense was $.7 million for the three months ended September 30, 1996 as compared to $.6 million for the three months ended September 30, 1995. Concurrent with the Merger, all debt was repaid. PRO FORMA COMBINED NET INCOME Pro forma combined net income increased $.6 million or 51.8% to $1.7 million for three months ended September 30, 1996 compared to $1.1 million for the three months ended September 30, 1995. Pro forma combined net income as a percentage of revenues increased to 3.3% for the three months ended September 30, 1996 compared to 2.5% for the three months ended September 30, 1995. PRO FORMA COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995. PRO FORMA COMBINED REVENUES Pro forma combined revenues increased $15.7 million or 12.2% to $144.1 million for the nine months ended September 30, 1996 compared to $128.4 million for the nine months ended September 30, 1995. This increase was largely attributable to an increase in Prostaff's revenues of $3.7 million primarily due to the opening of new branches and an increase in the amount of business conducted with a significant client and an increase in HRA's revenues of $5.2 million primarily attributable to the opening of several new branches. Also contributing to the increase in pro forma combined revenues was an increase Maxwell's, Blethen's, and First Choice's revenues of $3.3 million, $2.3 million, and $1.7 million, respectively. PRO FORMA COMBINED GROSS PROFIT Pro forma combined gross profit increased $4.8 million or 18.4% to $30.8 million for the nine months ended September 30, 1996 as compared to $26.0 million for the nine months ended September 30, 1995. Pro forma combined gross profit as a percentage of revenues increased to 21.4% at September 30, 1996 from 20.3% at September 30, 1995. These increases are primarily attributable to an increase in Brewer's gross margin, exclusive of acquisitions and the opening of several new branches in the Founding Companies. PRO FORMA COMBINED OPERATING EXPENSES Pro forma combined SG&A expenses increased $3.2 million or 17.4% to $21.5 million for the nine months ended September 30, 1996 as compared to $18.4 million for the nine months ended September 30, 1995. This increase was primarily attributable to the opening of several new branches in the Founding Companies. Pro forma combined SG&A as a percentage of revenues increased to 15.0% for the nine months ended September 30, 1996 compared to 14.3% for the nine months ended September 30, 1995. Pro forma combined depreciation and amortization expense increased $.2 million or 13.5% to $1.4 million for the nine months ended September 30, 1996 compared to $1.3 million for the nine months ended September 30, 1995. 37 38 PRO FORMA COMBINED OPERATING INCOME Pro forma combined operating income increased $1.4 million or 22.3% to $7.8 million for the nine months ended September 30, 1996 as compared to $6.4 million for the nine months ended September 30, 1995. Pro forma combined operating income as a percentage of revenues increased to 5.4% for the nine months ended September 30, 1996 as compared to 5.0% for the nine months ended September 30, 1995. These increases are primarily attributable to the increased gross profit and gross profit as a percentage of revenues as discussed above, offset somewhat by the increase in SG&A expense. PRO FORMA COMBINED INTEREST EXPENSE Pro forma combined interest expense was $1.8 million for the nine months ended September 30, 1996 and September 30, 1995. Concurrent with the Merger, all debt was repaid. PRO FORMA COMBINED NET INCOME Pro forma combined net income increased $.9 million or 32.2% to $3.8 million during the nine months ended September 30, 1996 as compared to $2.9 million for the nine months ended September 30, 1995. COMBINED RESULTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
Three Months Ended Nine Months Ended September 30, September 30, ====================================== ======================================== 1995 % 1996 % 1995 % 1996 % ====================================== ======================================== REVENUES $ 41,759 100.0% $ 52,689 100.0% $ 107,316 100.0% $142,543 100.0% COST OF SERVICES 33,398 80.0 41,429 78.6 85,810 80.0 112,128 78.7 -------- ------- -------- ------- --------- -------- -------- ------- Gross profit 8,361 20.0 11,260 21.4 21,506 20.0 30,415 21.3 OPERATING EXPENSES: Selling, general and administrative 6,211 14.9 7,563 14.4 17,019 15.9 21,869 15.3 Depreciation and amortization 368 0.8 485 0.9 773 0.7 1,402 1.0 -------- ------- -------- ------- --------- -------- -------- ------- Operating income $ 1,782 4.3% $ 3,212 6.1% $ 3,714 3.4% $ 7,144 5.0% ======== ======= ======== ======= ========= ======== ======== =======
COMBINED RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1995. COMBINED REVENUES Combined revenues increased $10.9 million or 26.2% to $52.7 million for the three months ended September 30, 1996 compared to $41.8 million for the three months ended September 30, 1995. This increase was largely attributable to (i) an increase in Brewer's revenues of $3.4 million primarily attributable to the acquisition of On Call in February 1996, (ii) an increase in Prostaff's revenues of $.8 million primarily due to the opening of new branches and an increase in business conducted with a significant client, and (iii) an increase in HRA's revenues of $2.6 million primarily attributable to the opening of several new branches. Also contributing to the increase in combined revenues was an increase in Maxwell's, Blethen's, and First Choice's revenues of $1.6 million, $1.0 million, and $1.5 million respectively. COMBINED GROSS PROFIT Combined gross profit increased $2.9 million or 34.7% to $11.3 million for the three months ended September 30, 1996 as compared to $8.4 million for the three months ended September 30, 1995. Combined gross profit as a percentage of revenues increased to 21.4% at September 30, 1996 from 20.0% at September 30, 1995. These increases are primarily attributable to Brewer's acquisition of Caldwell, as well as an increase in Brewer's gross profit as a percentage of revenues as the result of lower expenses in workers' compensation and state unemployment taxes. COMBINED OPERATING EXPENSES Combined SG&A expenses increased $1.4 million or 21.8% to $7.6 million for the three months ended September 30, 1996 compared to $6.2 million for the three months ended September 30, 1995. This increase was primarily attributable to the opening of several new branches in the Founding Companies as well as an increase in Brewer's SG&A of $.7 million primarily attributable to the acquisition of On Call. Combined SG&A as a percentage of revenues decreased to 14.4% for the three months ended September 30, 1996 compared to 14.9% for the three months ended September 30, 1995. Combined depreciation and amortization expense increased $.1 million or 31.8% to $.5 million for the three months ended September 30, 1996 compared to $.4 million for the three months ended September 30, 1995. COMBINED OPERATING INCOME Combined operating income increased $1.4 million or 80.3% to $3.2 million for the three months ended September 30, 1996 as compared to $1.8 million for the three months ended September 30, 1995. Combined operating income as a percentage of revenues increased to 6.1% for the three months ended September 30, 1996 as compared to 4.3% for the three months ended September 30, 1995. These increases are primarily attributable to the increased gross profit and gross profit as a percentage of revenues, offset by a small increase in SG&A expense as discussed above. 38 39 COMBINED RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1995. COMBINED REVENUES Combined revenues increased $35.2 million or 32.8% to $142.5 million for the nine months ended September 30, 1996 compared to $107.3 million for the nine months ended September 30, 1995. This increase was largely attributable to (i) an increase in Brewer's revenues of $18.0 million primarily attributable to the acquisitions of Caldwell in July 1995 and On Call in February 1996, (ii) an increase in Prostaff's revenues of $3.7 million primarily due to the opening of new branches and an increase in the amount of business conducted with a significant client, and (iii) an increase in HRA's revenues of $5.2 million primarily attributable to the opening of several new branches. Also contributing to the increase in combined revenues was an increase in Maxwell's, Blethen's, and First Choice's revenues of $3.3 million, $2.3 million, and $2.7 million, respectively. COMBINED GROSS PROFIT Combined gross profit increased $8.9 million or 41.4% to $30.4 million for the three months ended September 30, 1996 as compared to $21.5 million for the three months ended September 30, 1995. Combined gross profit as a percentage of revenues increased to 21.3% at September 30, 1996 from 20.0% at September 30, 1995. These increases are primarily attributable to Brewer's acquisition of Caldwell, as well as an increase in Brewer's gross margin, exclusive of acquisitions. COMBINED OPERATING EXPENSES Combined SG&A increased $4.9 million or 28.5% to $21.9 million for the nine months ended September 30, 1996 compared to $17.0 million for the nine months ended September 30, 1995. This increase was primarily attributable to the opening of several new branches by many of the Founding Companies as well as an increase of Brewer's SG&A of $3.0 million primarily attributable to the acquisitions of Caldwell and On Call. Combined SG&A as a percentage of revenues decreased to 15.3% for the nine months ended September 30, 1996 compared to 15.9% for the nine months ended September 30, 1995. Combined depreciation and amortization expense increased $.6 million or 81.4% to $1.4 million for the nine months ended September 30, 1996 compared to $.8 million for the nine months ended September 30, 1995. This increase was primarily attributable to an increase of Brewer's depreciation and amortization of $.5 million largely due to increased amortization of intangibles which resulted from the acquisitions of Caldwell and On Call. COMBINED OPERATING INCOME Combined operating income increased $3.4 million or 92.4% to $7.1 million for the nine months ended September 30, 1996 as compared to $3.7 million for the nine months ended September 30, 1995. Combined operating income as a percentage of revenues increased to 5.0% for the nine months ended September 30, 1996 as compared to 3.5% for the nine months ended September 30, 1995. These increases are primarily attributable to the increased gross profit and gross profit margin offset somewhat by the increase in SG&A expense as discussed above. 39 40 COMBINED LIQUIDITY AND CAPITAL RESOURCES On October 2, 1996, the Company completed the Offering which involved the public sale of 6.325 million shares of common stock (including the underwriters' over-allotment) at a price of $12.00 per share. The proceeds from the transaction, net of underwriting discounts and commissions and after deducting expenses of the Offering were approximately $67.0 million. Of this amount $15.9 million was used to pay the cash portion of the purchase price for the Founding Companies. In addition, approximately $29.5 million of the net proceeds was used to repay indebtedness of the Founding Companies. The remaining net proceeds will be used for working capital and for general corporate purposes, which are expected to include future acquisitions. On October 4, 1996, the Company completed a $50 million credit facility with Mercantile Bank of St. Louis to be used for working capital and other general corporate purposes, including future acquisitions. The facility includes a $20 million revolving credit facility and $30 million acquisition facility. The maturity of the facility is October 1, 2001 and the interest will be computed at the Company's option at either LIBOR or the bank's prime rate and incrementally adjusted based on certain of the Company's operating leverage ratios. The credit facility is secured by all assets of the Company and a pledge of 100% of the stock of all subsidiaries. The Company has also recently registered an additional 4.0 million shares of its common stock for use as consideration for future acquisitions. While there can be no assurance, management believes that the funds currently on hand, funds to be provided by operations and funds available through the existing credit facility, coupled with management's assessment of the Founding Companies additional borrowing capacity will be sufficient to meet the Company's additional anticipated needs for working capital, capital expenditures, and future acquisitions through the expiration date of the credit facility discussed above. Management plans to periodically reassess the adequacy of the Company's credit facility, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, and acquisition plans, in order to ensure the Company's negotiated credit facilities are adequate to meet the Company's liquidity needs on a short-term and long-term basis. RESULTS OF OPERATIONS -- FOUNDING COMPANIES INTERIM RESULTS -- BREWER Revenues increased $3.4 million or 23.2% and $18.0 million or 59.0% to $18.0 million and $48.6 million, respectively for the three and nine months ended September 29, 1996 as compared to the three and nine months ended October 1, 1995. This increase is primarily due to the acquisitions of Caldwell in July 1995 and On Call in February 1996. Gross profit increased $.7 million or 24.0% and $4.3 million or 71.6% to $3.8 million and $10.3 million, respectively for the three and nine months ended September 29, 1996 as compared to the three and nine months ended October 1, 1995. Gross margin increased to 21.2% during the first nine months of 1996 compared to 19.7% during the first nine months of 1995. These increases were primarily attributable to the acquisition of Caldwell, as well as the increase in Brewer's gross margin resulting from a decrease in the Arkansas state unemployment tax rate. Operating expenses increased $.8 million or 45.8% and $3.5 million or 89.1% to $2.5 million and $7.5 million, respectively for the three and nine months ended September 29, 1996 as compared to the three and nine months ended October 1, 1995. This increase was primarily attributable to the acquisitions of Caldwell and On Call and was also influenced by Brewer's decision to enhance its organizational structure in order to achieve its growth strategy which resulted in an increase in personnel costs and costs associated with moving into its new corporate headquarters. Operating income increased/(decreased) ($.1) million or (4.1%) and $.8 million or 37.3% to $1.3 million and $2.8 million, respectively for the three and nine months ended September 29, 1996 as compared to the three and nine months ended October 1, 1995. As a percentage of revenues operating income decreased to 5.8% for the nine months ended September 29, 1996 from 6.7% for the nine months ended October 1, 1995. Net income decreased $.2 million or 16.2% and $.2 million or 12.9% to $.8 million and $1.4 million, respectively for the three and nine months ended September 29, 1996 as compared to the three and nine months ended October 1, 1995 as a result of the increase in SG&A costs discussed above. INTERIM RESULTS -- PROSTAFF Revenues increased $.8 million or 8.3% and $3.7 million or 14.2% to $10.6 million and $29.5 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. This increase is primarily due to the opening of several new branches during 1995 and during the first nine months of 1996, a significant increase in business conducted with its largest client and the addition of a new significant client in 1996. Gross margin increased to 18.6% during the first nine months of 1996 compared to 17.4% during the first nine months of 1995. This increase was primarily attributable to a decrease in the Arkansas state unemployment tax rate. Operating expenses decreased $.1 million or 6.2% and increased $.3 million or 6.9% to $1.3 million and $4.2 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. The increase for the nine months ended September 30, 1996 was primarily attributable to the opening of several new branches in 1995 and the hiring of a significant number of new employees, partially offset by a decrease in bonuses to the owners of Prostaff. Operating income increased $.4 million or 138.8% and $.7 million or 129.1% to $.6 million and $1.2 million, respectively for the three and nine months ended September 30, 40 41 1996 as compared to the three and nine months ended September 30, 1995. As a percentage of revenues, operating income increased to 4.2% for the nine months ended September 30, 1996 from 2.1% for the nine months ended September 30, 1995. Net income increased $.3 million or 136.5% and $.8 million or 171.1% to $.6 million and $1.2 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. INTERIM RESULTS -- MAXWELL Revenues increased $1.6 million or 28.0% and $3.3 million or 19.1% to $7.2 million and $20.4 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. This increase is primarily due to a significant client contract, which began in July 1995, and the acquisition of Sumner-Ray Technical Resources, Inc. in February 1996. This increase was partially offset by a decrease in the staffing needs of another client and the result of government shutdowns in December 1996 and January 1996, which caused delays in the issuance of H1-B Visas to foreign-trained therapists and delays in the therapists' arrival in the U.S. Gross profit increased $.4 million or 35.5% and $.9 million or 21.7% to $1.7 million and $5.0 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Gross margin increased to 24.7% during the first nine months of 1996 compared to 24.2% during the first nine months of 1995. This increase was primarily attributable to increased revenues and a reduction in workers' compensation expense of approximately $.6 million due to a reduction in the actuarially determined reserves. The reduction was partially offset by an increase of approximately $.2 million in compensation paid to the Company's foreign-trained therapists resulting from a one-time change in the Company's orientation policy. Operating expenses increased $.3 million or 32.6% and $.6 million or 17.2% to $1.4 million and $3.9 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Net income increased $.1 million or 31.6% and $.3 million or 40.8% to $.3 million and $1.1 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. INTERIM RESULTS -- HRA Revenues increased $2.6 million or 50.9% and $5.2 million or 37.2% to $7.7 million and $19.3 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. This increase is primarily due to the opening of new branches and the acquisition of Dorothy Johnson's Career Consultants, Inc. in July 1996. Gross profit increased $.8 million or 88.8% and $1.5 million or 58.5% to $1.8 million and $4.1 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Gross margin increased to 21.3% for the nine months ended September 30, 1996 compared to 18.5% for the nine months ended September 30, 1995. This increase was primarily attributable to the opening of new branches. Operating expenses increased $.2 million or 17.8% and $.6 million or 20.3% to $1.3 million and $3.4 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. These increases were primarily attributable to the opening of new branches. In addition, HRA expensed a severance arrangement of approximately $.1 million during the nine months ended September 30, 1996. Operating income increased $.6 million or 434.3% and $.9 million or 420.6% to $.5 million and $.7 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. As a percentage of revenues operating income increased to 3.7% for the nine months ended September 30, 1996 from (1.6)% for the nine months ended September 30, 1995. Net income increased $.4 million or 346.4% and $.8 million or 381.3% to $.3 million and $.6 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. INTERIM RESULTS -- FIRST CHOICE Revenues increased $1.5 million or 45.1% and $2.7 million or 27.5% to $4.8 million and $12.7 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. This increase is primarily due to the opening of a new branch location in the first quarter of 1996 and the acquisition of SSI in July 1996. Gross profit increased $.4 million or 64.4% and $.7 million or 35.5% to $1.0 million and $2.5 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Gross margin increased to 19.8% during the first nine months of 1996 compared to 18.6% during the first nine months of 1995. This increase was primarily attributable to increased revenues partially offset by a decrease in workers' compensation expense. Operating expenses increased $0.1 million or 15.3% and $.2 million or 14.1% to $.7 million and $1.9 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. These increases were primarily attributable to an increase in recruiting and testing expenses, communication costs and occupancy costs. These increases were partially offset by decreases in training costs. Operating income increased $.3 million or 1,057.8% and $.4 million or 193.4% to $.3 million and $.6 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. As a percentage of revenues, operating income 41 42 increased to 5.1% for the nine months ended September 30, 1996 from 2.2% for the nine months ended September 30, 1995. Net income increased $.3 million or 1185.7% and $.4 million or 199.1% to $.3 million and $.6 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. INTERIM RESULTS -- BLETHEN Revenues increased $1.0 million or 31.8% and $2.3 million or 23.6% to $4.3 million and $12.0 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. This increase is primarily due to increased demand for clinical trial support services. Gross profit increased $.3 million or 38.4% and $.6 million or 23.4% to $1.2 million and $3.0 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Gross margin remained relatively consistent at 24.6% during the first nine months of 1996 compared to 24.7% during the first nine months of 1995. Operating expenses increased $.3 million or 45.1% and $0.3 million or 14.0% to $1.0 million and $2.4 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. Operating income increased $.01 million or 7.3% and $.3 million or 81.6% to $.2 million and $.6 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. As a percentage of revenues, operating income increased to 5.0% for the nine months ended September 30, 1996 from 3.4% for the nine months ended September 30, 1995. Net income increased $.01 million or 13.2% and $.2 million or 144.9% to $.1 million and $.4 million, respectively for the three and nine months ended September 30, 1996 as compared to the three and nine months ended September 30, 1995. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On September 27, 1996, HRA settled a lawsuit with its former workers' compensation insurance carrier, in which HRA had disputed the amount of insurance premiums owed for fiscal years 1993 and 1994 and a portion of fiscal year 1995. The settlement totaled $641,394 and calls for HRA to make an initial payment of $100,000, with the balance due in 36 monthly installments of $16,470, including interest at 6%. The note may be prepaid in whole or in part at any time without penalty. In the event that HRA elects to prepay the note, HRA will be entitled to a 10% discount of the present value of the balance outstanding at prepayment date. HRA had accrued for these disputed amounts in the fiscal years in which such amounts arose. Annual maturities pursuant to this note are as follows: 1997 $ 255,238 1998 179,353 1999 190,415 2000 16,388 ---------- $ 641,394 ==========
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 27.1 Financial Data Schedule. (b) Reports on Form 8-K None. 42 43 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 12, 1996 /s/ CLETE T. BREWER ------------------------------------ Clete T. Brewer Chief Executive Officer and President Date: November 12, 1996 /s/ TERRY C. BELLORA ------------------------------------ Terry C. Bellora Chief Financial Officer 44 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 - Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 22,931 36 20,729 444 0 44,517 5,964 3,052 67,728 12,334 0 0 0 133 55,149 67,728 144,119 144,119 113,313 113,313 22,357 205 1,774 6,470 2,699 3,771 0 0 0 3,771 .45 .45
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