-----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, Lrf44F/9Qxc9iSywbJHRkRXpW0KIGp8YfBegUrxhiVWZoDjPEH5R0eKoMaY1mC9o MHid/uXI8JobvQceez2uoA== 0000950134-98-006821.txt : 19980814 0000950134-98-006821.hdr.sgml : 19980814 ACCESSION NUMBER: 0000950134-98-006821 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-20971 FILM NUMBER: 98685085 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 JUNE 30, 1998 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 June 30, 1998 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to ----------- ---------- COMMISSION FILE NUMBER: 0-20971 STAFFMARK, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 71-0788538 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 302 EAST MILLSAP ROAD FAYETTEVILLE, AR 72703 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 973-6000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Common Stock of the Registrant, par value $.01 per share, outstanding at August 12, 1998 was 22,079,913. 2 STAFFMARK, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX
Index ----- PART I -- FINANCIAL INFORMATION ITEM 1 -- FINANCIAL STATEMENTS StaffMark, Inc. Consolidated Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statement of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction 10 Results for the Three and Six Months Ended June 30, 1998 Compared to Results for the Three and Six Months Ended June 30, 1997 10 Liquidity and Capital Resources 11 PART II - OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS 13 ITEM 2 -- CHANGES IN SECURITIES 13 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13 ITEM 5 -- OTHER INFORMATION 14 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K 15 (a) Exhibits (b) Reports on Form 8-K SIGNATURES 15
2 3 STAFFMARK, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ SERVICE REVENUES $174,913,328 $ 99,296,583 $325,859,523 $165,705,753 COST OF SERVICES 130,327,995 76,969,432 244,115,779 128,746,203 ------------ ------------ ------------ ------------ Gross profit 44,585,333 22,327,151 81,743,744 36,959,550 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 27,694,915 14,658,446 51,630,474 25,046,438 Depreciation and amortization 2,656,882 1,071,867 5,032,091 1,777,443 Nonrecurring merger costs 1,120,496 - 1,120,496 - ------------ ------------ ------------ ------------ Operating income 13,113,040 6,596,838 23,960,683 10,135,669 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (1,147,651) (492,865) (1,777,034) (543,353) Other, net (50,249) 14,833 (49,276) 253,539 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 11,915,140 6,118,806 22,134,373 9,845,855 PROVISION FOR INCOME TAXES 4,885,207 2,508,711 9,075,093 4,036,801 ------------ ------------ ------------ ------------ NET INCOME $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054 ============ ============ ============ ============ BASIC EARNINGS PER SHARE $ 0.34 $ 0.25 $ 0.64 $ 0.41 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE $ 0.33 $ 0.24 $ 0.62 $ 0.40 ============ ============ ============ ============ BASIC EARNINGS PER SHARE EXCLUDING MERGER COSTS $ 0.37 $ 0.25 $ 0.68 $ 0.41 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE EXCLUDING MERGER COSTS $ 0.36 $ 0.24 $ 0.65 $ 0.40 ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 3 4 STAFFMARK, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1998 1997 ------------- --------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,409,997 $ 304,995 Accounts receivable, net of allowance for doubtful accounts 81,086,180 56,707,089 Prepaid expenses and other 4,701,497 4,706,313 Deferred income taxes 1,609,881 851,284 ------------- --------------- Total current assets 91,807,555 62,569,681 PROPERTY AND EQUIPMENT, net 14,357,314 9,536,164 INTANGIBLE ASSETS, net 304,573,919 172,807,775 OTHER ASSETS 1,451,738 3,735,628 ------------- --------------- $ 412,190,526 $ 248,649,248 ============= =============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other accrued liabilities $ 5,990,345 $ 10,024,096 Payroll and related liabilities 19,245,239 11,580,706 Reserve for workers' compensation claims 6,526,418 6,108,748 Income taxes payable 2,322,166 2,677,191 ------------- --------------- Total current liabilities 34,084,168 30,390,741 LONG TERM DEBT 112,560,000 12,000,000 OTHER LONG TERM LIABILITIES 36,313,782 9,658,774 DEFERRED INCOME TAXES 1,968,883 1,314,629 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; authorized shares of 10,000,000; no shares issued or outstanding - - Common stock, $.01 par value; authorized shares of 200,000,000; shares issued and outstanding of 20,764,308 in 1998 and 19,138,636 in 1997 207,643 191,386 Paid-in capital 191,914,652 176,195,026 Retained earnings 35,141,398 18,898,692 ------------- --------------- Total stockholders' equity 227,263,693 195,285,104 ------------- --------------- $ 412,190,526 $ 248,649,248 ============= ===============
The accompanying notes are an integral part of these balance sheets. 4 5 STAFFMARK, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
COMMON STOCK --------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ---------- -------- ------------ ----------- ------------ BALANCE, December 31, 1997 19,138,636 $191,386 $176,195,026 $18,898,692 $195,285,104 Effect of business combinations 1,596,862 15,968 15,191,869 3,183,426 18,391,263 Exercise of stock options 13,344 134 104,608 - 104,742 Employee stock purchase plan 15,466 155 423,149 - 423,304 Net income - - - 13,059,280 13,059,280 ---------- -------- ------------ ----------- ------------ BALANCE, June 30, 1998 20,764,308 $207,643 $191,914,652 $35,141,398 $227,263,693 ========== ======== ============ =========== ============
The accompanying notes are an integral part of this statement. 5 6 STAFFMARK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- -------------------------- 1998 1997 1998 1997 ---------- ---------- ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $7,029,933 $3,610,095 $13,059,280 $5,809,054 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,656,882 1,071,867 5,032,091 1,777,443 Provision for bad debts 489,338 - 729,186 148,528 Deferred income taxes (787,941) (1,190,040) (1,347,470) (2,278,141) Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (3,149,542) (4,077,792) (9,048,659) (9,960,499) Prepaid expenses and other 799,452 214,707 2,290,074 (50,807) Other assets 902,748 549,968 677,203 657,973 Accounts payable and other accrued liabilities (4,173,456) 180,283 (8,994,599) 438,626 Payroll and related liabilities (449,084) 2,533,598 5,870,111 5,818,216 Reserve for workers' compensation claims 422,932 497,840 462,927 1,066,629 Income taxes payable (2,846,162) (1,183,093) (918,614) (1,925,409) Accrued interest 59,653 460,552 185,615 438,421 Other long-term liabilities 460,969 (1,457,184) 126,641 (1,561,833) Other 149,253 (141,939) (407,484) (203,463) ---------- ---------- ------------ ---------- Net cash provided by operating activities 1,564,975 1,068,862 7,716,302 174,738 ---------- ---------- ------------ ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses, net of cash acquired (62,770,650) (41,800,708) (99,620,650) (50,930,702) Capital expenditures (2,604,721) (1,553,794) (4,746,432) (1,923,674) ---------- ---------- ------------ ---------- Net cash used in investing activities (65,375,371) (43,354,502) (104,367,082) (52,854,376) ---------- ---------- ------------ ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 96,900,000 43,110,750 142,200,000 43,430,000 Payments on borrowings (34,290,000) (1,935,244) (41,640,000) (1,935,244) Proceeds from stock purchase plan and stock option exercises 385,856 - 528,046 - Deferred financing costs (56,333) - (332,264) - ---------- ---------- ------------ ---------- Net cash provided by financing activities 62,939,523 41,175,506 100,755,782 41,494,756 ---------- ---------- ------------ ---------- Net increase (decrease) in cash and cash equivalents (870,873) (1,110,134) 4,105,002 (11,184,882) CASH AND CASH EQUIVALENTS, beginning of period 5,280,870 3,781,674 304,995 13,856,422 ---------- ---------- ------------ ---------- CASH AND CASH EQUIVALENTS, end of period $4,409,997 $2,671,540 $ 4,409,997 $2,671,540 ========== ========== ============ ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $1,048,347 $ 290,014 $ 1,428,516 $ 326,243 ========== ========== ============ ========== Income taxes paid $8,206,060 $2,510,550 $ 11,000,145 $4,533,450 ========== ========== ============ ==========
The accompanying notes are an integral part of these statements. 6 7 STAFFMARK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. DESCRIPTION OF BUSINESS: 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. As of June 30, 1998, StaffMark operated offices in 29 states, Canada, South Africa, the United Kingdom and Thailand and provides staffing in the Commercial and Professional/Information Technology ("Professional/IT") service lines. StaffMark extends trade credit to customers representing a variety of industries. There are no individual customers that account for more than 10% of service revenues of StaffMark in any of the periods presented. 2. BASIS OF PRESENTATION: The accompanying interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to ensure the information presented is not misleading. The accompanying interim financial statements reflect all adjustments (which were of a normal, recurring nature) that, in the opinion of management, are necessary to present fairly the Company's financial position, results of operations and cash flows as of and for the interim periods presented. The accompanying statements of income and cash flows for the three and six months ended June 30, 1997 have been restated to reflect the July 1997 acquisition of Baker Street Group, Inc., which was accounted for as a pooling-of-interests. All significant intercompany transactions have been eliminated in the accompanying consolidated financial statements. Additionally, certain reclassifications have been made to prior period balances in order to conform with the current period presentation. These financial statements should be read in conjunction with the audited financial statements of the Company and notes thereto included in StaffMark's Annual Report on Form 10-K as filed with the SEC on March 13, 1998. 3. SEASONALITY: The timing of certain holidays, weather conditions and seasonal vacation patterns may cause the Company's quarterly results of operations to fluctuate. The Company expects to realize higher revenues, operating income and net income during the second and third quarters and lower revenues, operating income and net income during the first and fourth quarters. Accordingly, the results of operations for an interim period are not necessarily indicative of the results of operations for a full fiscal year. 7 8 4. BUSINESS COMBINATIONS: During the second quarter of 1998, the Company acquired seven businesses. These acquired companies along with the four acquisitions made in the first quarter of 1998 are collectively referred to as the "1998 Acquisitions." DPSC Technology Consultants, Inc. ("DPSC") is located in Baltimore Maryland and provides information technology and consulting services. Tempway Services, Inc. ("Tempway") provides clerical and administrative staffing services in the Atlanta, Georgia metropolitan area. Tribase Systems, Inc. ("Tribase") is located in Florham Park, New Jersey and provides information technology and consulting services primarily to customers in New York City. Progressive Resources, Inc. ("Progressive") is headquartered in New York City and provides traditional office staffing as well as clerical, office automation, and desktop publishing services in New York and New Jersey. KnowledgeSoft, Inc. ("KSI") is located in Mechanicsburg, Pennsylvania and provides information technology solutions. The Matrix Group ("Matrix") is located in Las Vegas, Nevada and provides clerical, technical and administrative staffing and placement services. Essex Computer Service, Inc. ("Essex") is located in Ft. Lauderdale, Florida and provides information technology services. The Company's 1998 Acquisitions had cumulative fiscal 1997 revenues of approximately $101.1 million. The Company's mergers with DPSC, Tempway and Tribase have been accounted for as pooling-of-interest transactions. Nonrecurring merger costs incurred for these transactions totaled approximately $1.1 million and, in accordance with Accounting Principles Board Opinion No. 16, have been reflected in expense in the current period. The accompanying balance sheet as of June 30, 1998 includes preliminary allocations of the respective purchase prices and are subject to final adjustment. The excess of purchase price over net assets acquired has been included in intangible assets and is being amortized over a period of 30 years. The Company acquired 19 staffing and professional service companies during 1997. The 1997 acquisitions of Flexible Personnel, Inc. and related entities ("Flexible"), Global Dynamics, Inc., Lindenberg & Associates, Inc., Expert Business Systems, Incorporated, H. Allen & Company, Inc., RHS Associates, Inc., EMJAY Careers, Inc. and EMJAY Contracts, Inc., and Structured Logic Company, Inc. ("Structured Logic") were considered significant. These significant 1997 acquisitions along with Strategic Legal and Progressive during 1998 are collectively referred to as the "Significant Acquisitions." The unaudited consolidated results of operations on a pro forma basis as though the Significant Acquisitions had been acquired as of the beginning of 1997 are presented below. Note that the pro forma information presented below does not reflect the reductions in salaries that certain owners of the Significant Acquisitions agreed to in conjunction with the acquisitions discussed above or nonrecurring merger costs incurred in connection with several of the Company's pooling-of-interest transactions. The remaining 1998 acquisitions have not been significant and, therefore, have not been included in the following pro forma presentation. Management believes this information reflects all adjustments necessary for a fair presentation of results for the interim periods. The pro forma results of operations for the three and six months ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenue $178,104,578 $126,199,582 $337,063,944 $233,900,424 ============ ============ ============ ============ Net income $ 7,911,196 $ 4,825,817 $ 14,190,642 $ 7,745,610 ============ ============ ============ ============ Basic earnings per share $ 0.38 $ 0.31 $ 0.70 $ 0.50 ============ ============ ============ ============ Diluted earnings per share $ 0.36 $ 0.30 $ 0.66 $ 0.49 ============ ============ ============ ============
8 9 In addition to the purchase prices disclosed below, certain of the acquisition agreements include provisions for the payment of additional consideration which is contingent upon the achievement of certain performance measures of the acquired company, typically during the twelve months immediately following the transaction. Although the contingent consideration could be significant to the accompanying financial statements, the amounts are not currently determinable and, accordingly, have no been reflected in the Company's financial statements. The obligations for this contingent consideration, which will be payable in a combination of cash and the Company's common stock ("Common Stock"), will be recorded in the Company's financial statements when they become fixed and determinable. The aggregate consideration of acquisitions during the six months ended June 30, 1998, which includes consideration paid for companies acquired in the current period, as well as contingent consideration paid to the former owners of companies acquired in previous periods consisted of $99.6 million in cash and 1.6 million shares of Common Stock. 5. EARNINGS PER COMMON SHARE: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which established new standards for computing and presenting earnings per share information. Basic earnings per share is determined by dividing net income by the weighted average common shares outstanding during each period. Diluted earnings per share reflects the potential dilution that could occur assuming exercise of all outstanding stock options. A reconciliation of net income and weighted average shares used in computing basic and diluted earnings per share is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 -------------- --------------- ------------ ------------- BASIC EARNINGS PER SHARE: Net income applicable to common shares $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054 ============== =============== ============ ============= Weighted average common shares outstanding 20,585,628 14,585,684 20,275,185 14,178,351 ============== =============== ============ ============= Basic earnings per share of common stock $ 0.34 $ 0.25 $ 0.64 $ 0.41 ============== =============== ============ ============= Basic earnings per share of common stock excluding merger costs $ 0.37 $ 0.25 $ 0.68 $ 0.41 ============== =============== ============ ============= DILUTED EARNINGS PER SHARE: Net income applicable to common shares $ 7,029,933 $ 3,610,095 $ 13,059,280 $ 5,809,054 ============== =============== ============ ============= Weighted average common shares outstanding 20,585,628 14,585,684 20,275,185 14,178,351 Dilutive effect of stock options 1,043,611 339,543 949,189 218,168 -------------- --------------- ------------ ------------- Weighted average common shares including dilutive effect of stock options 21,629,239 14,925,227 21,224,374 14,396,519 ============== =============== ============ ============= Diluted earnings per share of common stock $ 0.33 $ 0.24 $ 0.62 $ 0.40 ============== =============== ============ ============= Diluted earnings per share of common stock excluding merger costs $ 0.36 $ 0.24 $ 0.65 $ 0.40 ============== =============== ============ =============
9 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The information below discusses the results of operations for the three and six months ended June 30, 1998 as compared to the results of operations for the three and six months ended June 30, 1997. The financial information provided below has been rounded in order to simplify its presentation. However, the percentages provided below are calculated using the detailed financial information contained in the applicable financial statements, the notes thereto and the other financial data included elsewhere in this Form 10-Q. This filing contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current plans and expectations of the Company and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include, among others, risks associated with acquisitions, fluctuations in operating results because of acquisitions and variations in stock prices, changes in government regulations, competition, risks of operations and growth of the newly acquired businesses. RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 Revenues. Revenues increased $75.6 million, or 76.2%, to $174.9 million for the three months ended June 30, 1998 compared to $99.3 million for the three months ended June 30, 1997. Revenues increased $160.2 million, or 96.6%, to $325.9 million for the six months ended June 30, 1998 compared to $165.7 million for the six months ended June 30, 1997. These increases are attributable to the continued growth of the Company's existing operations and results from the 1998 Acquisitions which accounted for approximately $32.1 million of the increase for the three months ended June 30, 1998 and $44.1 million of the increase for the six months ended June 30, 1998. Cost of Services. Cost of services increased $53.4 million, or 69.3%, to $130.3 million for the three months ended June 30, 1998 compared to $77.0 million for the three months ended June 30, 1997. Cost of services increased $115.4 million, or 89.6%, to $244.1 million for the six months ended June 30, 1998 compared to $128.7 million for the six months ended June 30, 1997. These increases were primarily attributable to an increase in staffing payroll and related benefit costs associated with increased revenues and a change in the Company's business mix toward the Professional/IT division which has higher payroll rates. Also accounting for the increase were the results from the 1998 Acquisitions, which accounted for approximately $22.1 million of the increase for the three months ended June 30, 1998 and $30.3 million of the increase for the six months ended June 30, 1998. Gross Profit. Gross profit increased $22.3 million, or 99.7%, to $44.6 million for the three months ended June 30, 1998 compared to $22.3 million for the three months ended June 30, 1997. Gross profit increased $44.8 million, or 121.2%, to $81.7 million for the six months ended June 30, 1998 compared to $37.0 million for the six months ended June 30, 1997. The increase in gross profit is primarily attributable to the Company's increased revenues from internal growth and the Company's acquisitions. Gross margin increased to 25.5% for the three months ended June 30, 1998 compared to 22.5% for the three months ended June 30, 1997 and to 25.1% for the six months ended June 30, 1998 compared to 22.3% for the six months ended June 30, 1997. The increases in gross margin are primarily a result of a larger portion of the Company's revenue base being directly related to the Professional/IT division, which provides higher profit margins than the Commercial division. Operating Expenses. SG&A increased $14.2 million, or 96.6%, to $28.8 million for the three months ended June 30, 1998 compared to $14.7 million for the three months ended June 30, 1997. SG&A increased $27.7 million, or 110.6%, to $52.8 million for the six months ended June 30, 1998 compared to $25.0 million for the six months ended June 30, 1997. These increases in part were attributable to the results from the 1998 Acquisitions, which accounted for approximately $4.5 million of the increase for the three months ended June 30, 1998 and $6.2 million of the increase for the six months ended June 30, 1998. Also accounting for the increase were nonrecurring merger costs associated with several of the 10 11 Company's 1998 Acquisitions, increased costs associated with a larger revenue base, and costs associated with the development of corporate infrastructure. SG&A as a percentage of revenues increased to 16.5% for the three months ended June 30, 1998 compared to 14.8% for the three months ended June 30, 1997. SG&A as a percentage of revenues increased to 16.2% for the six months ended June 30, 1998 compared to 15.1% for the six months ended June 30, 1997. The increases in SG&A as a percentage of revenue are related to costs associated with the Company's efforts to increase the Professional/IT division to become a larger percentage of the overall business, nonrecurring merger costs and the development of the corporate infrastructure. Depreciation and amortization expense increased $1.6 million, or 147.9%, to $2.7 million for the three months ended June 30, 1998 compared to $1.1 million for the three months ended June 30, 1997. Depreciation and amortization expense increased $3.3 million, or 183.1%, to $5.0 million for the six months ended June 30, 1998 compared to $1.8 million for the six months ended June 30, 1997. These increases are primarily attributable to amortization of goodwill associated with the Company's acquisitions. Operating Income. Operating income increased $6.5 million, or 98.8%, to $13.1 million for the three months ended June 30, 1998 compared to $6.6 million for the three months ended June 30, 1997. Operating income increased $13.8 million, or 136.4%, to $24.0 million for the six months ended June 30, 1998 compared to $10.1 million for the six months ended June 30, 1997. The Company's operating margin increased to 7.5% for the three months ended June 30, 1998 compared to 6.6% for the three months ended June 30, 1997. The Company's operating margin increased to 7.4% for the six months ended June 30, 1998 compared to 6.1% for the six months ended June 30, 1997. Excluding the nonrecurring merger costs associated with several of the 1998 Acquisitions, the Company's operating income increased $7.6 million, or 115.8%, to $14.2 million for the three months ended June 30, 1998 and increased $14.9 million, or 147.5%, to $25.1 million for the six months ended June 30, 1998. Operating margin, exclusive of these merger costs, was 8.1% for the three months ended June 30, 1998 and 7.7% for the six months ended June 30, 1998. Interest Expense. Interest expense was $1.1 million and $1.8 million for the three and six months ended June 30, 1998, respectively, as compared to $493,000 and $543,000 for the three and six months ended June 30, 1997, respectively. These increases in interest expense are primarily related to borrowings on the Credit Facility (as defined below) used to fund the cash portion of acquisition consideration. Earnings before interest, taxes, depreciation and amortization. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased to $15.8 million and $29.0 million for the three and six months ended June 30, 1998, respectively, as compared to $7.7 million and $11.9 million for the three and six months ended June 30, 1997, respectively. EBITDA as a percentage of revenue increased to 9.0% and 8.9% for the three and six months ended June 30, 1998, respectively, as compared to 7.7% and 7.2% for the three and six months ended June 30, 1997. Exclusive of nonrecurring merger costs, EBITDA was $16.9 million and $30.1 million for the three and six months ended June 30, 1998, respectively. EBITDA margin excluding nonrecurring merger costs was 9.7% and 9.2% for the three and six months ended June 30, 1998, respectively. Net Income. Net income increased $3.4 million, or 94.7%, to $7.0 million for the three months ended June 30, 1998 compared to $3.6 million for the three months ended June 30, 1997. Net income increased $7.3 million, or 124.8%, to $13.1 million for the six months ended June 30, 1998 compared to $5.8 million for the six months ended June 30, 1997. Excluding the nonrecurring merger costs associated with several of the 1998 Acquisitions, the Company's net income increased $4.1 million, or 113.0%, to $7.7 million for the three months ended June 30, 1998 and increased $7.9 million, or 136.2%, to $13.7 million for the six months ended June 30, 1998 as a result of the factors described above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary source of funds is from operations, proceeds of Common Stock offerings and borrowings under the Credit Facility (as defined below). The Company's principal uses of cash are to fund acquisitions, working capital and capital expenditures. The Company generally pays its temporary associates and consultants weekly for their services, while receiving payments from customers 30 to 60 days from the date of the invoice. As new offices are established or acquired, or as existing offices are expanded, the Company has increasing requirements for cash resources to fund growing operations. 11 12 In March 1998, the Company amended and restated its credit facility with the members of its bank group to increase the borrowing availability from $100.0 million to $175.0 million (the "Credit Facility"). The Credit Facility matures on April 1, 2003. Interest on any borrowings is computed at the Company's option of either LIBOR or the bank group's prime rate and incrementally adjusted based on the Company's operating leverage ratios. As a result of the recent amendment to the Credit Facility, there is no distinction between a revolving credit line for operations and an acquisition facility, such that borrowings, whether for operations or for acquisitions, may be made up to $175.0 million. For the three month period ended March 31, 1997, the Company paid a quarterly commitment fee equal to 0.25% per annum of the total Credit Facility ($50.0 million at that time). From March 31, 1997 to June 30, 1998, the quarterly commitment fee was determined by multiplying the unused portion of the Credit Facility by a percentage which varied from 0.25% to 0.375% per annum based on the Company's operating leverage ratio. Subsequent to March 31, 1998, the quarterly commitment fee is determined by multiplying the unused portion of the Credit Facility by a percentage which varies from 0.1875% to 0.25% per annum based on the Company's operating leverage ratios. The Credit Facility is secured by all of the assets of the Company and a pledge of 100% of the stock of all of the Company's subsidiaries. During the three and six months ended June 30, 1998, the Company had net borrowings of approximately $62.6 million and $100.6 million, respectively, on the Credit Facility which were used: (i) to pay the cash consideration for several of the Company's acquisitions; (ii) to fund the additional cash consideration for several of the Company's 1997 acquisitions; and (iii) for general corporate purposes. The Company has received a commitment letter from the bank group to increase the Credit Facility up to $250.0 million, along with reduced coverage ratios, more favorable interest rates and removal of certain of the Company's assets as collateral. The Company believes that this amendment will be finalized before September 30, 1998. As of August 11, 1998, $105.2 million was outstanding on the Credit Facility. The Company is obligated under various acquisition agreements to pay additional consideration, which will be paid in a combination of cash and Common Stock, to certain former stockholders of acquired companies. Management believes that neither the total amount of these contingent payments nor the specific combination of cash and Common Stock consideration can be currently determined. Management believes that its cash flows from operations, the Credit Facility and its ability to issue equity or debt securities will provide sufficient liquidity and capital resources to satisfy these obligations. Net cash provided by operating activities was $1.6 million and $1.1 million for the three months ended June 30, 1998 and 1997, respectively, and $7.7 million and $175,000 for the six months ended June 30, 1998 and 1997, respectively. The net cash provided by operating activities for the periods presented was primarily attributable to net income and changes in operating assets and liabilities. Net cash used in investing activities was $65.4 million and $43.4 million for the three months ended June 30, 1998 and 1997, respectively, and $104.4 million and $52.9 million for the six months ended June 30, 1998 and 1997, respectively. Net cash used in investing activities for all periods presented was primarily related to the Company's acquisitions. Net cash provided by financing activities was $62.9 million, and $41.2 million for the three months ended June 30, 1998 and 1997, respectively, and $100.8 million and $41.5 million for the six months ended June 30, 1998 and 1997, respectively. Cash provided by financing activities for all periods presented was primarily attributable to the proceeds from the debt issued in conjunction with the Company's acquisitions. As a result of the foregoing, combined cash and cash equivalents decreased $871,000 for the three months ended June 30, 1998, increased $4.1 million for the six months ended June 30, 1998, decreased $1.1 million for the three months ended June 30, 1997, and decreased $11.2 million for the six months ended June 30, 1997, respectively. 12 13 Management believes that its cash flows from operations, borrowings available under the Credit Facility, offerings of debt or equity securities and the use of Common Stock as partial consideration for acquisitions will provide sufficient liquidity or acquisition currency to execute the Company's acquisition and internal growth plans through the expiration of the Credit Facility. Should the Company accelerate its acquisition program, the Company may need to seek additional financing through the public or private sale of equity or debt securities. There can be no assurance that the Company could secure such financing if and when it is needed or on terms the Company deems acceptable. Management plans to periodically reassess the adequacy of the Company's liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, acquisition plans and offerings of debt or equity securities, in order to ensure the Credit Facility is adequate to meet the Company's needs on a short-term and long-term basis. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. As part of its operating strategy, the Company is implementing one primary front office software package (Caldwell-Spartin) in a majority of its Commercial offices and one primary search and retrieval software package (EZ Access) in a majority of its Professional/IT offices. In addition, the Company has selected and implemented the PeopleSoft system for its back office, administrative and accounting systems. All of these software systems have the ability to process transactions with dates for the Year 2000 and beyond at no incremental cost and, accordingly, the Company believes that Year 2000 costs with respect to these software systems are not expected to have a material impact on the Company's financial condition or results of operations. As to software systems and applications utilized by entities acquired or to be acquired by the Company, the Company anticipates that upgrades and/or conversions may be required to ensure that these systems and applications are Year 2000 compliant. As to these software systems and applications, the Company believes that any such upgrades and/or conversions will be timely made and are not expected to have a material impact on the Company's financial condition or results of operations. PART II ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. The Company at times does have routine litigation incidental to its business. In the opinion of the Company's management, such proceedings should not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. The Company maintains insurance in such amounts and with such coverage and deductibles as management believes are reasonable. ITEM 2. CHANGES IN SECURITIES In connection with the acquisition of DPSC, the Company issued 176,366 shares of Common Stock to the stockholders of DPSC in April 1998. In connection with the acquisition of Tempway, the Company issued 169,342 shares of Common Stock to the stockholders of Tempway in April 1998. In connection with the acquisition of Tribase, the Company issued 575,132 shares of Common Stock to the stockholders of Tribase in May 1998. In connection with the acquisition of the assets of Progressive, the Company issued 211,496 shares of Common Stock to Progressive in June 1998. In connection with the acquisition of KSI, the Company issued 28,312 shares of Common Stock to KnowledgeSoft, Inc., of which KSI was an operating division, in June 1998. In connection with the acquisition of the assets of Matrix, the Company issued 21,814 shares of Common Stock to Matrix in June 1998. In connection with contingent consideration payments regarding the Flexible and Structured Logic acquisitions which were consummated in 1997, the Company issued 5,733 and 154,064 shares of Common Stock, respectively, to the entities that sold assets to the Company in each of these acquisitions. Each of these issuances described above was effected without registration of the relevant securities under the Securities Act in reliance upon the exemption provided by Section 4(2) of the Securities Act for transactions not involving a public offering. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its Annual Meeting of Stockholders on May 8, 1998 (the "Meeting"). For purposes of voting for the election of Directors, the amendment to the Company's Certificate of Incorporation and the approval and ratification of the Amended and Restated 1996 Stock Option Plan, as well as such other business as may have properly come before the Meeting, there were 19,273,632 shares of outstanding Common Stock entitled to vote at the Meeting. Of those outstanding shares, 16,942,919 were represented either in person or by proxy at the Meeting. The stockholders voted on and approved the matters described below, with the voting results therein noted at the Meeting: 13 14
Election Matter 1. - Election of Directors --------------------------------------------------------------------- Authority Name For Withheld ---------------- ---------- --------- Jerry T. Brewer 16,509,716 433,203 Clete T. Brewer 16,509,716 433,203 W. David Bartholomew 16,509,716 433,203 Steven E. Schulte 16,509,716 433,203 John H. Maxwell, Jr. 16,509,566 433,353 Janice Blethen 16,507,781 435,138 William T. Gregory 16,509,716 433,203 William J. Lynch 16,509,716 433,203 R. Clayton McWhorter 16,509,516 433,403 Charles A. Sanders, M.D. 16,509,516 433,403 Election Matter 2. - Adoption of Amendment to the Company's Certificate of Incorporation, as amended, to Increase the Company's Authorized Common Stock and Preferred Stock -------------------------------------------------- Shares Voted For 10,501,564 Shares Voted Against 4,729,484 Abstentions 17,547 Broker Non-Votes 1,694,324 -------------------------------------------------- Election Matter 3. - Approval and Ratification of the Amended and Restated 1996 Stock Option Plan -------------------------------------------------- Shares Voted For 16,559,998 Shares Voted Against 353,801 Abstentions 29,120
No other matters to be voted upon were brought before the Meeting. ITEM 5. OTHER INFORMATION The SEC requires a registrant to provide stockholders notice of deadlines for timely submission of certain types of stockholder proposals that stockholders wish to present for a vote at a registrant's annual meeting. These deadlines are set based on certain SEC rules as they relate to the registrant's annual meeting date and relevant provisions of its charter and by-laws. Set forth below are the deadlines applicable to Company's stockholders. The Company's Board of Directors has not yet acted to set a 1999 Annual Meeting date, thus the following dates are based on an assumed Annual Meeting date of May 8, 1999 and assumed proxy statement mailing date of March 25, 1999 for the Company's 1999 Annual Meeting. Stockholder proposals submitted outside the process of Rule 14a-8 under the Securities Exchange Act of 1934, as amended, must be received by February 8, 1999, or they will be considered untimely. In the event a stockholder does not timely notify the Company concerning stockholder proposals, the Company will have the right to exercise its discretionary authority (through the right conferred upon its proxies) to vote against such stockholder proposal. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.1 Statement re: computation of per share earnings, reference is made to Note 5 of the StaffMark, Inc. Consolidated Financial Statements contained in this Form 10-Q. 27.1 Financial Data Schedule for the three months ended June 30, 1998, submitted to the SEC in electronic format. (b) Reports on Form 8-K 1. Report on Form 8-K filed with the SEC on June 19, 1998 to report the acquisition of Progressive Resources, Inc. on June 5, 1998. 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: August 12, 1998 /s/ CLETE T. BREWER ------------------- Clete T. Brewer Chief Executive Officer and President Date: August 12, 1998 /s/ TERRY C. BELLORA -------------------- Terry C. Bellora Chief Financial Officer 15 16 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 -- Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 APR-01-1998 JUN-30-1998 4,410 0 83,385 2,299 0 91,808 21,466 7,109 412,191 34,084 0 0 0 208 227,056 412,191 174,913 174,913 130,328 31,472 50 0 1,148 11,915 4,885 7,030 0 0 0 7,030 0.34 0.33
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