-----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, LaohK34yMQOsIsB0eRg/M2JZeGTyTznl2QKvKuXRE78MjTY/76+HNTaBEwDBcuzT iosYFP5uYfh0o1un06U0ZQ== 0000950134-98-007096.txt : 19980819 0000950134-98-007096.hdr.sgml : 19980819 ACCESSION NUMBER: 0000950134-98-007096 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980109 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980818 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAFFMARK INC CENTRAL INDEX KEY: 0001017968 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 710788538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-20971 FILM NUMBER: 98693866 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 8-K 1 FORM 8-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): January 9, 1998 STAFFMARK, INC. (Exact name of registrant as specified in its charter) Delaware 0-20971 71-0788538 (State of other jurisdiction of (Commission File Number) (I.R.S. Employer incorporation) Identification No.) 302 East Millsap Road Fayetteville, Arkansas 72703 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (501) 973-6000 2 Item 5. Other Information On January 9, 1998, StaffMark, Inc. (the "Company") completed the purchase of all of the outstanding membership interests of Strategic Legal Resources, LLC, a New York limited liability company ("SLR"). SLR provides legal professionals to law firms, corporations and financial institutions and is headquartered in New York, New York. The total consideration paid for the membership interests of SLR was approximately $13.8 million, consisting of approximately $12.3 million in cash and 46,320 shares of the Company's common stock, plus a contingent earnout based upon the future performance of SLR. The purchase price was determined as a result of direct negotiations with SLR and its members. On June 5, 1998, the Company completed the purchase of substantially all of the assets of Progressive Resources, Inc., a New York corporation, Progressive Personnel Resources, Inc., a New York corporation, Strategic Computer Resources, LLC, a New York limited liability company, and Progressive Personnel Resources of New Jersey, Inc., a New Jersey corporation (collectively "Progressive"). Progressive provides staffing services and is headquartered in the New York City metropolitan area. The total consideration paid for the assets was approximately $22.0 million, consisting of approximately $14.3 million in cash and 211, 496 shares of the Company's common stock, plus a contingent earnout based upon the future performance of Progressive. The purchase price was determined as a result of direct negotiations with Progressive. As StaffMark's acquisitions of SLR and Progressive were both considered to be individually insignificant at the time of their acquisition based on the significant subsidiary test provisions of Regulation S-X, no audited financial statements or pro forma financial statements were required to be filed. With the completion of StaffMark's acquisition of Brady & Company on July 31, 1998, the aggregate consideration of StaffMark's individually insignificant 1998 acquisitions represented 51.1% of StaffMark's 1997 total assets. As a result, financial statements covering at least the substantial majority of the business acquired must be furnished pursuant to Rule 3-05 of Regulation S-X. Total consideration paid in conjunction with the acquisitions of SLR and Progressive as a percentage of StaffMark's 1997 total assets was 14.7% and 12.9% respectively, which, in the aggregate, represented 54.0% of the total consideration paid in conjunction with the individually insignificant acquisitions. Item 7. Financial Statements and Exhibits (a) Strategic Legal Resources, LLC Audited Financial Statements for the Twelve Months Ended December 31, 1997. (b) Progressive Personnel Resources, Inc. and Affiliates Audited Financial Statements for the Twelve Months Ended December 31, 1997 and Compiled Financial Statements for the Four Months Ended April 30, 1998. (c) Pro Forma Statements of Income for the Twelve Months Ended December 31, 1997 and Six Months Ended June 30, 1998. 3 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Members of Strategic Legal Resources, LLC We have audited the accompanying balance sheet of Strategic Legal Resources, LLC as of December 31, 1997 and the related statements of income, members' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Strategic Legal Resources, LLC as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supporting schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them. Povol and Feldman, CPA, PC Lake Success, New York March 18, 1998 4 STRATEGIC LEGAL RESOURCES, LLC BALANCE SHEET DECEMBER 31, 1997 ASSETS Current Assets: Note receivable $ 502,760 Accounts receivable, net of allowance for doubtful accounts of $107,200 3,163,905 Prepaid expenses and other 27,223 ---------- Total Current Assets 3,693,888 Fixed assets, net 82,913 Security deposit 6,300 ---------- Total Assets $3,783,101 ========== LIABILITIES AND MEMBERS' EQUITY Current Liabilities: Cash overdraft $ 31,495 Loans payable 825,000 Accounts and accrued expenses payable 331,677 Deferred compensation payable 625,000 ---------- Total Current Liabilities 1,813,172 Members' Equity 1,969,929 ---------- Total Liabilities and Members' Equity $3,783,101 ==========
See the accompanying notes and auditors' report. 5 STRATEGIC LEGAL RESOURCES, LLC STATEMENTS OF INCOME AND MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 Revenues $11,781,534 Cost of Revenues 7,496,763 ----------- Gross Profit 4,284,771 Operating Expenses 2,902,249 ----------- Net Income 1,382,522 Members' Equity - Beginning of Year 87,407 Contributed Equity 500,000 ----------- Members' Equity - End of Year $ 1,969,929 ===========
See the accompanying notes and auditors' report. 6 STRATEGIC LEGAL RESOURCES, LLC STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997
Increase (Decrease) in Cash --------------------------- Cash Flows From Operating Activities: Net Income $ 1,382,522 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 19,399 Provision for doubtful accounts 117,598 Accounts receivable (2,556,134) Prepaid expenses and other (15,451) Accrued interest income (2,760) Accrued expenses and payables 286,633 Deferred compensation payable 625,000 ----------- Net Cash Used in Operating Activities (143,193) =========== Cash Flows From Investing Activities: Capital expenditures (40,487) Loans and exchanges (9,334) ----------- Net Cash Used in Investing Activities (49,821) =========== Cash Flows Used in Financing Activities: Loans payable (50,000) ----------- Net Decrease in Cash (243,014) ----------- Cash - Beginning of Year 243,014 ----------- Cash - End of Year $ -- =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest expense $ 662 =========== LLC fee $ 325 =========== Noncash Investing and Financing Transactions: Equity issued for note receivable $ 500,000 ===========
See the accompanying notes and auditors' report. 7 STRATEGIC LEGAL RESOURCES, LLC NOTES TO FINANCIAL STATEMENTS NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business description Strategic Legal Resources, LLC (the Company) was organized under the limited liability laws of New York State, and was formed July 20, 1995. The Company is engaged in temporary legal personnel placement in the metropolitan New York area. The Company will cease operations no later than December 31, 2020. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Doubtful accounts The Company reviews individual customer's credit histories before extending credit, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical and economic trends, and other pertinent data. Advertising Advertising costs are deducted as incurred, with substantially all costs representing current expenses for media placements. Depreciation Depreciation is provided for on a straight-line basis over the estimated useful lives of the assets. Income taxes The members operate as a partnership for income tax purposes. Taxes are borne directly by the Company members on all profits, with an annual filing fee paid to New York State, and an unincorporated business tax paid to New York City. Concentration of credit risk Financial instruments that subject the Company to concentration of credit risk consist principally of cash and revenues. Periodically, temporary cash exceeds federally insured limitations. Concentration of credit risk with respect to revenues are due to two customers representing approximately 24% of total revenues during the year ended December 31, 1997. NOTE 2 - FIXED ASSETS, NET: Fixed assets are stated at cost. Major renewals and betterments are capitalized, whereas replacements, maintenance and repairs are expensed as incurred. Fixed assets as of December 31, 1997, are comprised of the following:
Estimated Useful Category Amount Asset Lives --------------------------------- ----------- ----------- Furniture and fixtures $ 12,392 7 years Machinery and equipment 108,394 5 years ---------- 120,786 Accumulated depreciation 37,873 ---------- $ 82,913 ===========
8 STRATEGIC LEGAL RESOURCES, LLC NOTES TO FINANCIAL STATEMENTS NOTE 3 - LOANS PAYABLE: Under the terms of an inter-affiliate loan agreement, the 50% member has advanced funds to the Company for capitalization and operations. The bank-financed portion of member loans bears interest at prime plus 0.50%, and is due upon demand. During the year ended December 31, 1997, interest expense amounted to $68,057, and was unpaid. All Company assets collateralize the member loan to the bank. Under the bank-financed member loan agreement, certain financial covenants are required to be maintained. During 1998, the loan was liquidated. NOTE 4 - NOTE RECEIVABLE: Under the terms of a 1997 deferred compensation agreement amounting to $625,000, management awarded an employee for past services rendered. In connection with that agreement, an equity interest was issued amounting to $500,000, secured by a note receivable. Interest accrues at the rate of 6.5% per annum, with payments due as follows:
Note Principal Deferred Benefit --------------- ---------------- (including accrued interest) January 9, 1998 $ 300,000 $ 303,473 September 1, 1998 200,000 208,370 January 9, 1999 - 125,000 --------------- -------------- $ 500,000 $ 636,843 =============== ==============
The right of offset is permitted, and the employee must maintain certain conditions, under the terms of both agreements. As at December 31, 1997, accrued interest income amounted to $2,760. NOTE 5 - COMMITMENTS: A. The Company is obligated under the terms of a three-year non-cancelable operating lease for office space, with annual minimum rental payments of $27,000, expiring July 30, 1998. Standard annual escalation clauses exist for rent, taxes and utilities. Effective October 1, 1996, additional space was taken with terms of annual minimum lease payments of $48,600 running concurrently with the original lease. The landlord holds a security deposit amounting to $6,300. During the year ended December 31, 1997, rent expense amounted to $73,063. B. Consulting and employment agreements Consulting agreement - August 1, 1997 through July 31, 1999, a 50% Company member is engaged to consult at the rate of $40,000 per annum, increasing to $50,000 from August 1, 1999 through termination of the Company. Certain early termination provisions, as well as reimbursement for out of pocket expenses, exist. During 1997, the terms of this agreement were waived. 9 STRATEGIC LEGAL RESOURCES, LLC NOTES TO FINANCIAL STATEMENTS NOTE 5 - COMMITMENTS: (continued) B. Consulting and employment agreements (continued) Employment agreements - The Company employs a management team comprised of two members, under the terms of an agreement guaranteeing annual base salaries of $70,000 each, with certain escalation clauses based upon operational results. Termination and non-competition provisions exist under specific circumstances. C. Commission agreements The Company pays commissions to its sales force at varying rates depending upon the resulting gross profits of each contract. NOTE 6 - SUBSEQUENT EVENTS: Effective January 1, 1998, the members sold their equity interests. All liabilities were paid in the normal course of business and the member-financed loan was liquidated. 10 STRATEGIC LEGAL RESOURCES, LLC SUPPORTING SCHEDULES FOR THE YEAR ENDED DECEMBER 31, 1997 Revenues Temporary placements fees $10,851,685 Permanent placement fees 734,051 Other fees 191,732 Interest income 4,066 ----------- $11,781,534 =========== Cost of Revenues Placement salaries $ 6,884,281 Placement payroll taxes 612,482 ----------- $ 7,496,763 =========== Operating Expenses Advertising $ 163,975 Commissions 255,914 Contributions 210 Depreciation 19,399 Dues and subscriptions 6,824 Entertainment and gifts 27,009 Guaranteed payments to management 306,255 Insurances 82,357 Interest and bank charges 72,807 Licenses and fees 646 Office and postage 49,697 Office salaries 1,438,917 Outside services 34,218 Payroll processing 11,324 Payroll tax expense - administration 75,574 Professional fees 43,210 Provision for doubtful accounts 117,597 Reimbursed expenses 13,458 Rent and related costs 85,502 Repairs and maintenance 10,181 Seminars and conventions 10,476 Taxes 3,969 Telephone and fax 40,554 Travel and lodging 32,176 ----------- $ 2,902,249 ===========
See auditors' report. 11 INDEPENDENT AUDITORS' REPORT To the Board of Directors Progressive Personnel Resources, Inc. and Affiliates We have audited the accompanying combined balance sheet of Progressive Personnel Resources, Inc. and Affiliates as of December 31, 1997 and the related combined statements of income, changes in equity and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Progressive Personnel Resources, Inc. and Affiliates as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The accompanying combined supporting schedules are presented for purposes of additional analysis and are not a required part of the basic combined financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, accordingly, we express no opinion on them. Povol and Feldman, CPA, PC Lake Success, New York July 31, 1998 12 ACCOUNTANTS' REPORT To the Board of Directors and Members Progressive Personnel Resources, Inc. and Affiliates We have compiled the accompanying combined balance sheet of Progressive Personnel Resources, Inc. and Affiliates as of April 30, 1998, and the related combined statements of income, changes in equity and cash flows for the four months then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying combined April 30, 1998 financial statements and, accordingly, we do not express an opinion or any other form of assurance on them. Management has elected to omit substantially all of the disclosures required by generally accepted accounting principles relating to the compiled financial statements of April 30, 1998. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the Company's financial position, results of operations, and cash flows. Accordingly, these combined financial statements are not designed for those who are not informed about such matters. The combined financial statements for the year ended December 31, 1997, were audited by us, and we expressed an unqualified opinion on them in our report dated July 31, 1998, but we have not performed any auditing procedures since that date. These combined financial statements are presented for comparative purposes only. Our audit was conducted for the purpose of forming an opinion on the basic combined financial statements taken as a whole. The accompanying combined supporting schedules are presented for purposes of additional analysis and are not a required part of the basic combined financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, accordingly, we express no opinion on them. Povol and Feldman, CPA, PC Lake Success, New York July 31, 1998 13 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES COMBINED BALANCE SHEETS APRIL 30, 1998 AND DECEMBER 31, 1997 ASSETS
1998 1997 ---------- ---------- (Unaudited) Current Assets: Cash and cash equivalents $ 832,339 $ 135,499 Accounts receivable, net of allowance for doubtful accounts of $220,498 5,256,602 4,460,509 Prepaid expenses and other 235,343 72,736 ---------- ---------- Total Current Assets 6,324,284 4,668,744 Fixed assets, net of accumulated depreciation of $185,166 and $160,244, respectively 254,420 264,360 Security deposits 33,730 32,773 ---------- ---------- Total Assets $6,612,434 $4,965,877 ========== ========== LIABILITIES AND EQUITY Current Liabilities: Accounts and accrued expenses payable $1,215,882 $1,014,542 ---------- ---------- Rent concession, net of current portion 4,673 8,411 ---------- ---------- Officer and/or member loans 2,602,823 2,380,929 ---------- ---------- Equity: Common stock 20,200 20,200 Paid in capital 167,500 167,500 Retained earnings and members' equity 2,601,356 1,374,295 ---------- ---------- 2,789,056 1,561,995 ---------- ---------- Total Liabilities and Equity $6,612,434 $4,965,877 ========== ==========
See the accompanying notes and accountants' report. 14 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES COMBINED STATEMENTS OF INCOME AND CHANGES IN EQUITY FOR THE FOUR MONTHS ENDED APRIL 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
1998 1997 ----------- ----------- Revenues $11,283,734 $26,578,545 Cost of Revenues 7,931,981 19,172,567 ----------- ----------- Gross Profit 3,351,753 7,405,978 Operating Expenses 2,123,310 6,546,182 ----------- ----------- Income Before Taxes 1,228,443 859,796 Provision for Income Taxes 1,382 16,731 ----------- ----------- Net Income 1,227,061 843,065 Equity - Beginning of Year 1,374,295 531,230 ----------- ----------- Equity - End of year $ 2,601,356 $ 1,374,295 =========== ===========
See the accompanying notes and accountants' report. 15 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS FOR THE FOUR MONTHS ENDED APRIL 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
Increase (Decrease) in Cash and Cash Equivalents -------------------------- 1998 1997 ----------- ----------- (Unaudited) Cash Flows From Operating Activities: Net Income $ 1,227,061 $ 843,065 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 24,922 73,960 Provision for doubtful accounts 22,266 125,795 Rent concession (3,738) (11,215) Accounts receivable (818,359) (2,002,308) Prepaid expenses and other (162,607) 20,873 Security deposits (957) 1,761 Accounts and accrued expenses payable 201,340 699,497 ----------- ----------- Net Cash Provided by (Used in) Operating Activities 489,928 (248,572) ----------- ----------- Cash Flows Used in Investing Activities: Capital expenditures (14,982) (47,835) ----------- ----------- Cash Flows From Financing Activities: Repayment of officer loans (636,439) (886,080) Officer loans 858,333 1,153,014 ----------- ----------- Net Cash Provided by Financing Activities 221,894 266,934 ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 696,840 (29,473) Cash and Cash Equivalents - Beginning of Year 135,499 164,972 ----------- ----------- Cash and Cash Equivalents - End of Year $ 832,339 $ 135,499 ----------- ----------- Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest expense $ 65,538 $ 300,487 ----------- ----------- Income taxes $ 1,123 $ 9,950 ----------- -----------
See the accompanying notes and accountants' report. 16 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1 - PRINCIPLES OF COMBINATION: The accompanying combined financial statements include the accounts of Progressive Resources, Inc., Progressive Personnel Resources, Inc., Progressive Personnel Resources of New Jersey, Inc., and Strategic Computer Resources, LLC (collectively the Company). Affiliate transactions and balances have been eliminated in combination. NOTE 2 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Business description Progressive Resources, Inc. (PRI) was incorporated in New York on September 14, 1992, and is engaged in permanent personnel placement in the metropolitan New York area. Progressive Personnel Resources, Inc. (PPRI) was incorporated in New York on September 9, 1992, and is engaged in temporary office personnel placement in the metropolitan New York area. Progressive Personnel Resources of New Jersey, Inc. (PPRINJ), was incorporated in New Jersey on November 25, 1992, and is engaged in temporary office personnel placement in New Jersey. Strategic Computer Resources, LLC (SCR), was organized under the limited liability laws of New York State, and was formed March 1, 1996 and is engaged in temporary computer personnel placement in the metropolitan New York area. Operations will cease no later than December 31, 2050. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash and Cash Equivalents For purposes of the statement of cash flows, cash and cash equivalents are considered to be all unrestricted liquid investments with a maturity of three months or less. At December 31, 1997, cash equivalents amounted to approximately $9,600. Doubtful accounts The Company reviews individual customer's credit histories before extending credit, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical and economic trends and other pertinent data. 17 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 2 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (continued) Advertising Advertising costs are deducted as incurred, with substantially all costs representing current expenses of media placements. Depreciation Depreciation is provided for on the straight-line basis over the estimated useful lives of the assets. Income taxes At inception, PRI, PPRI and PPRINJ elected Subchapter "S" status of the Internal Revenue and New York State tax codes. State and local taxes are provided for as incurred. The tax returns are filed on a cash basis and considers any additional income taxes to be non-material for deferred purposes. SCR operates as a partnership for income tax purposes. Taxes on income are borne directly by the members on all profits, with an annual filing fee paid to New York State, and an unincorporated business tax paid to New York City. Concentration of credit risk Financial instruments that subject the Company to concentration of credit risk consist principally of cash and revenues. Periodically, temporary cash exceeds federally insured limitations. Concentration of credit risk with respect to revenues is due to two customers representing approximately 17% of total revenues during the year ended December 31, 1997. Concentration of credit with respect to trade receivables is due to seven customers representing approximately 20% of trade receivables at December 31, 1997. NOTE 3 - FIXED ASSETS, NET: Fixed assets are stated at cost. Major renewals and betterments are capitalized, whereas replacements, maintenance and repairs are expensed as incurred. Fixed assets as of December 31, 1997, are comprised of the following:
Estimated Useful Amount Asset Lives ----------- ----------- Leasehold improvements $ 48,000 39 years Machinery and equipment 365,611 5 years Furniture and fixtures 10,993 7 years ----------- 424,604 Less: Accumulated depreciation 160,244 ----------- $ 264,360 ===========
18 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 4 - RELATED PARTY TRANSACTIONS: The majority shareholder and member has advanced funds to the Company for capitalization and operations. Interest is incurred at 10% per annum, and paid during the year. Portions of the amounts are bank-financed, and therefore $850,000 is subordinated to the bank. At December 31, 1997, interest expense amounted to $297,669. All Company assets collateralize the member and shareholder loans to the bank. Under the bank-financed loan agreement, certain financial covenants are required to be maintained. During 1998, the bank-financed portion was liquidated. NOTE 5 - COMMITMENTS AND CONTINGENCIES: The Company is obligated under the terms of several operating leases for office space. The leases include minimum lease and escalation clauses relating to real estate taxes. For the year ended December 31, 1997, rent expense amounted to $240,847. The annual minimum lease rentals under the leases are as follows:
December 31, 1998 $ 267,072 December 31, 1999 195,493 December 31, 2000 110,739 December 31, 2001 69,210 ---------- $ 642,514 ==========
A rent concession was received pertaining to the lease of $33,643, which is being amortized over a 36-month lease term. At December 31, 1997, the unamortized rent concession amounted to $19,625. NOTE 6 - SUBSEQUENT EVENTS: During 1998, substantially all of the Company's assets were sold with related liabilities assumed, exclusive of shareholder and member debt. 19 PROGRESSIVE PERSONNEL RESOURCES, INC. AND AFFILIATES COMBINED SUPPORTING SCHEDULES FOR THE FOUR MONTHS ENDED APRIL 30, 1998 AND FOR THE YEAR ENDED DECEMBER 31, 1997
1998 1997 ------------ ------------ Revenues Temporary and placement fees $ 11,280,060 $ 26,562,557 Other fees 3,674 15,988 ------------ ------------ $ 11,283,734 $ 26,578,545 ============ ============ Cost of Revenues Placement salaries $ 5,499,125 $ 15,867,105 Placement payroll taxes 612,912 2,008,631 Sub-contract labor 1,819,944 1,296,831 ------------ ------------ $ 7,931,981 $ 19,172,567 ============ ============ Operating Expenses Advertising $ 79,092 $ 290,040 Auto 5,002 40,716 Bank charges 18,851 55,535 Commissions 547,692 1,125,055 Computer expenses 12,265 16,617 Consulting fees -- 20,360 Contributions 75 7,749 Depreciation 24,922 73,960 Dues and licenses 2,596 18,244 Executive search 5,000 37,900 Expense reimbursement 26,932 82,258 Financing costs 105,189 300,487 Holiday expense -- 28,926 Insurances 98,820 502,305 Miscellaneous 4,630 17,381 Office expenses 56,153 149,610 Outside services 100,034 127,277 Payroll processing 27,281 56,623 Professional fees 16,853 163,840 Provision for doubtful accounts 22,266 125,795 Rent and occupancy costs 86,253 240,847 Repairs and maintenance 14,722 41,824 Salaries 673,117 2,416,565 Seminars and conventions 2,024 8,898 Taxes - commercial rent 245 734 Taxes - payroll 98,879 250,298 Telephone and fax 58,277 174,220 Transportation 12,327 43,034 Travel and entertainment 23,813 129,084 ------------ ------------ $ 2,123,310 $ 6,546,182 ============ ============
See accountants' report. 20 STAFFMARK, INC. - FORM 8-K UNAUDITED PRO FORMA FINANCIAL STATEMENTS INTRODUCTION StaffMark, Inc. ("StaffMark" or the "Company") provides diversified staffing, professional and consulting services to businesses, professional and service organizations, governmental agencies and medical niches. The Company recognizes revenues upon the performance of services. The Company generally compensates its temporary associates and consultants only for hours actually worked; therefore, wages of the temporary associates and consultants are a variable cost that increase or decrease as revenues increase or decrease. However, certain of the Company's professional and information technology consultants are full-time, salaried employees. Cost of services primarily consists of wages paid to temporary associates, payroll taxes, workers' compensation and other related employee benefits. Selling, general and administrative expenses are comprised primarily of administrative salaries, benefits, marketing, rent and recruitment expenses. Effective March 1, 1997, StaffMark acquired Flexible Personnel, Inc., Great Lakes Search Associates, Inc., and HR America, Inc. (collectively, "Flexible"). Located in Fort Wayne, Indiana, Flexible operates offices in Indiana, Michigan and Ohio and provides clerical, light industrial, professional/information technology, accounting and staff leasing services. Flexible operates in the Commercial and Professional/Information Technology divisions. Effective April 1, 1997, StaffMark acquired Global Dynamics, Inc. ("Global"). Global, located in Walnut Creek, California, provides information technology staffing services to several Fortune 500 companies. Global operates in the Professional/Information Technology division. Effective July 1, 1997, StaffMark acquired Expert Business Systems, Inc. ("EBS"). EBS, located in Hurst, Texas, provides information technology services, specialized help desk support, distributed services and application developments. EBS operates in the Professional/Information Technology division. Effective October 1, 1997, StaffMark acquired Structured Logic Company, Inc. ("SLC"). Headquartered in New York, New York, SLC is a full-service information technology recruiting firm providing services for client/server, mainframe programming and development, web site development, internet consultation, network implementation, and SAP development and implementation. SLC operates in the Professional/Information Technology division. These acquisitions are collectively referred to as the "Other Significant Acquisitions." Effective January 1, 1998, StaffMark acquired Strategic Legal Resources, LLC ("SLR"). Located in New York City, New York, SLR provides legal professionals to law firms, corporations and financial institutions. SLR had 1997 revenues of approximately $11.8 million and operates in the Professional/Information Technology division. The total consideration paid for SLR was approximately $13.8 million, consisting of approximately $12.3 million in cash and 46,320 restricted shares of StaffMark Common Stock, plus a contingent earnout based upon the future performance of SLR. Effective May 1, 1998, StaffMark acquired Progressive Resources, Inc., Progressive Personnel Resources, Inc., Progressive Personnel Resources of New Jersey, Inc., and Strategic Computer Resources, LLC (collectively referred to as "Progressive"). Progressive, located in the New York City metropolitan area, provides staffing services. Progressive had 1997 revenues of approximately $26.6 million and operates in the Commercial division. The total consideration paid for Progressive was approximately $22.0 million, consisting of approximately $14.3 million in cash and 211,496 restricted shares of StaffMark Common Stock, plus a contingent earnout based upon the future performance of Progressive. The following unaudited pro forma financial statements present the historical results of StaffMark and give effect to the following pro forma adjustments: (i) the effect of the Other Significant Acquisitions; (ii) the effect of the January 1998 acquisition of the SLR; (iii) the effect of the May 1998 acquisition of Progressive; (iv) the adjustment to compensation expense for the difference between the historical compensation paid to certain previous owners of the Other Significant Acquisitions, SLR and Progressive and the employment contract compensation negotiated in conjunction with the respective mergers and acquisitions ("Compensation Differential"); and (v) the incremental provision for income taxes attributable to the income of subchapter S Corporations, net of the income tax provision related to the Compensation Differential and adjusted for nondeductible goodwill amortization. Note that no pro forma balance sheet is provided as of June 30, 1998 as the June 30, 1998 StaffMark balance sheet already includes the effect of the acquisitions of SLR and Progressive. Also note that no pro forma amounts are included for SLR for the six months ended June 30, 1998 as the SLR acquisition was effective January 1, 1998 and therefore is already included in StaffMark's results for the six months ended June 30, 1998. The pro forma financial data do not purport to represent what the Company's financial position or results of operations would actually have been if such transactions in fact had occurred at the beginning of 1997 or to project the Company's financial position or results of operations for any future period. 21 STAFFMARK, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 (Dollars in Thousands)
Acquisition Related Adjustments ------------------------------------------ Pro Forma Total StaffMark Progressive(a) Adjustments Adjustments Pro Forma --------- ------------- ----------- ----------- --------- SERVICE REVENUES $ 325,859 $ 11,284 $ 11,284 $ 337,143 COST OF SERVICES 244,116 7,932 7,932 252,048 --------- --------- --------- --------- --------- Gross profit 81,743 3,352 -- 3,352 85,095 OPERATING EXPENSES: Selling, general and administrative 51,630 1,994 (90)(b) 1,904 53,534 Depreciation and amortization 5,032 25 177(c) 202 5,234 --------- --------- --------- --------- --------- Operating income 25,081 1,333 (87) 1,246 26,327 --------- --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense (1,777) (105) (324)(d) (429) (2,206) Other, net (49) -- -- (49) --------- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 23,255 1,228 (411) 817 24,072 INCOME TAX PROVISION 9,534 1 334(e) 335 9,869 --------- --------- --------- --------- --------- Net income (loss) $ 13,721 $ 1,227 $ (745) $ 482 $ 14,203 ========= ========= ========= ========= ========= PRO FORMA NET INCOME PER COMMON SHARE BASIC $ 0.70 ========= DILUTED $ 0.66 ========= WEIGHTED AVERAGE SHARES OUTSTANDING BASIC 20,415(f) ========= DILUTED 21,365(g) =========
The accompanying notes are an integral part of this statement. 22 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1998 (a) Records the unaudited financial results of Progressive for the period from January 1, 1998 through the effective date of the acquisition. (b) Adjusts compensation to the level the owner has agreed to receive from StaffMark subsequent to the acquisition. (c) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisition of Progressive for the six months ended June 30, 1998. Intangible assets recorded in conjunction with this acquisition include goodwill of approximately $16.0 million which is being amortized over thirty years. (d) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of Progressive. This pro forma expense calculation is based on approximately $14.3 million borrowed by StaffMark under its credit facility. Pro forma interest expense is computed based upon the applicable rate in effect on the credit facility which, based upon the terms of the agreement, would have approximated 6.8% during the pro forma period. (e) Records the incremental provision to reflect federal and state income taxes as if Progressive had been a subchapter C Corporation. This adjustment records income tax expense at an effective combined tax rate of 41%. (f) Represents the actual weighted average basic shares outstanding for the six months ended June 30, 1998 of 20,275,185 adjusted to reflect the issuance as of January 1, 1998 of the 211,496 shares issued in conjunction with the May 1998 acquisition of Progressive. (g) Pro forma diluted weighted average shares outstanding for the six months ended June 30, 1998 include the shares discussed in Note (f) above and 949,189 shares representing the incremental dilutive effect of the Company's outstanding stock options. 23 STAFFMARK, INC. UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (Dollars in Thousands)
Acquisition Related Adjustments --------------------------------------------------------------- Other Significant Pro Forma Total StaffMark Acquisition(a) SLR(b) Progressive(c) Adjustments Adjustments Pro Forma --------- -------------- -------- --------------- ----------- ----------- --------- SERVICE REVENUES $426,496 $ 44,127 $ 11,781 $ 26,579 $ -- $ 82,487 $508,983 COST OF SERVICES 329,728 31,898 7,497 19,173 -- 58,568 388,296 -------- -------- -------- -------- -------- -------- -------- Gross profit 96,768 12,229 4,284 7,406 -- 23,919 120,687 OPERATING EXPENSES: Selling, general and administrative 63,013 8,434 2,809 6,172 (1,050)(d) 16,365 79,378 Depreciation and amortization 5,317 805 19 74 953(e) 1,851 7,168 -------- -------- -------- -------- -------- -------- -------- Operating income 28,438 2,990 1,456 1,160 97 5,703 34,141 -------- -------- -------- -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest expense (1,256) (710) (73) (300) (1,774)(f) (2,857) (4,113) Other, net 732 13 -- -- -- 13 745 -------- -------- -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 27,914 2,293 1,383 860 (1,677) 2,859 30,773 INCOME TAX PROVISION 11,445 943 -- 17 212 1,172 12,617 -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 16,469 $ 1,350 $ 1,383 $ 843 $ (1,889) $ 1,687 $ 18,156 ======== ======== ======== ======== ======== ======== ======== PRO FORMA NET INCOME PER COMMON SHARE BASIC $ 1.12 ======== DILUTED $ 1.08 ======== WEIGHTED AVERAGE SHARES OUTSTANDING BASIC 16,272(h) ======== DILUTED 16,778(i) ========
The accompanying notes are an integral part of this statement. 24 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 (a) Represents the unaudited financial results and pro forma effects related to the acquisitions of: (i) Flexible, which was purchased by StaffMark effective March 1, 1997; (ii) Global, which was purchased by StaffMark effective April 1, 1997; (iii) EBS, which was purchased by StaffMark effective July 1, 1997; and (iv) SLC, which was purchased by StaffMark effective October 1, 1997. (b) Records the audited financial results of SLR, which was purchased by StaffMark effective January 1, 1998. (c) Records the audited financial results of Progressive, which was purchased by StaffMark effective May 1, 1998. (d) Adjusts compensation to the level the owners have agreed to receive from StaffMark subsequent to the acquisition. (e) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisitions of SLR and Progressive for fiscal year 1997. Intangible assets recorded in conjunction with these acquisitions include goodwill of approximately $12.6 million for SLR and $16.0 million for Progressive which are being amortized over thirty years. (f) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisitions of SLR and Progressive. This pro forma expense calculation is based on approximately $11.8 million and $14.3 million borrowed by StaffMark under its credit facility in conjunction with the acquisitions of SLR and Progressive, respectively. Pro forma interest expense is computed based upon the applicable rate in effect on the credit facility which, based upon the terms of the agreement, would have approximated 6.8% during the pro forma period. (g) Records the incremental provision to reflect federal and state income taxes as if SLR and Progressive had been subchapter C Corporations. This adjustment records income tax expense at an effective combined tax rate of 41%. (h) Represents the actual weighted average basic shares outstanding for the twelve months ended December 31, 1997 of 16,015,601 adjusted to reflect the issuance as of January 1, 1997 of: (i) the 189,557 shares issued in conjunction with the March 1997 acquisition of Flexible; (ii) the 690,855 shares issued in conjunction with the April 1997 acquisition of Global; (iii) the 129,500 shares issued in conjunction with the July 1997 acquisition of EBS; (iv) the 276,846 shares issued in conjunction with the October 1997 acquisition of SLC; (v) the 46,320 shares issued in conjunction with the January 1998 acquisition of SLR; and (vi) the 211,496 shares issued in conjunction with the May 1998 acquisition of Progressive. (i) Pro forma diluted weighted average shares outstanding for the twelve months ended December 31, 1997 include the shares discussed in Note (h) above and 505,908 shares representing the incremental dilutive effect of the Company's outstanding stock options. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. STAFFMARK, INC. (Registrant) Dated: August 18, 1998 By: /s/ Terry C. Bellora -------------------- Terry C. Bellora Chief Financial Officer EXHIBIT INDEX Item 7. Financial Statements and Exhibits (a) Strategic Legal Resources, LLC Audited Financial Statements for the Twelve Months Ended December 31, 1997. (b) Progressive Personnel Resources, Inc. and Affiliates Audited Financial Statements for the Twelve Months Ended December 31, 1997 and Compiled Financial Statements for the Four Months Ended April 30, 1998. (c) Pro Forma Statements of Income for the Twelve Months Ended December 31, 1997 and Six Months Ended June 30, 1998. -----END PRIVACY-ENHANCED MESSAGE-----