-----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, VL8MeYufAcKZD/2AkXnvFZuPGveNuMuLRGUemvCDTtBCcxp9I9G4T9J0gV+fiyir O2V/4b++mpvs0GGBgyS+dQ== 0000950134-96-003336.txt : 19960705 0000950134-96-003336.hdr.sgml : 19960705 ACCESSION NUMBER: 0000950134-96-003336 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19960703 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAFFMARK INC CENTRAL INDEX KEY: 0001017968 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07513 FILM NUMBER: 96590816 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 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- STAFFMARK, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction 7363 71-0788538 of incorporation or (Primary Standard Industrial (I.R.S. employer organization) Classification Code Number) identification no.)
302 EAST MILLSAP ROAD, FAYETTEVILLE, ARKANSAS 72703 (501) 973-6000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- CLETE T. BREWER PRESIDENT AND CHIEF EXECUTIVE OFFICER STAFFMARK, INC. 302 EAST MILLSAP ROAD FAYETTEVILLE, ARKANSAS 72703 (501) 973-6000 (501) 973-6019 (FAX) (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies of all correspondence to: C. DOUGLAS BUFORD, JR., ESQ. WRIGHT, LINDSEY & JENNINGS 200 WEST CAPITOL, SUITE 2200 LITTLE ROCK, ARKANSAS 72201 (501) 371-0808 (501) 376-9442 (FAX) GLENN W. STURM, ESQ. NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. 400 COLONY SQUARE, SUITE 2200 1201 PEACHTREE STREET, N.E. ATLANTA, GEORGIA 30361 (404) 817-6000 (404) 817-6050 (FAX) --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) SHARE(2) PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------- Common stock, $.01 par value per share.......... 6,325,000 $12.00 $75,900,000 $26,172.41 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
(1) Includes 825,000 shares subject to the exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(a). --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 STAFFMARK, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
REGISTRATION STATEMENT ITEM AND CAPTION LOCATION IN PROSPECTUS - -------------------------------------------------- ------------------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.............................. Outside Front Cover Page; Inside Front and Outside Back Cover Pages; Cross Reference Sheet 2. Inside Front and Outside Back Cover Pages of Prospectus........................... Inside Front and Outside Back Cover Pages of Prospectus; Additional Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges...... Prospectus Summary; Risk Factors; The Company 4. Use of Proceeds........................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price........... Outside Front Cover Page; Risk Factors; Underwriting 6. Dilution.................................. Dilution 7. Selling Security Holders.................. Not Applicable 8. Plan of Distribution...................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered.............................. Description of Capital Stock; Dividend Policy 10. Interests of Named Experts and Counsel.... Legal Matters; Experts 11. Information with Respect to the Registrant.............................. Prospectus Summary; Risk Factors; The Company; Dividend Policy; Capitalization; Selected Combined Founding Companies' Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Stockholders; Shares Eligible for Future Sale; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................. Not Applicable
3 *************************************************************************** * * * Information contained herein is subject to completion or amendment. A * * registration statement relating to these securities has been filed * * with the Securities and Exchange Commission. These securities may not * * be sold nor may offers to buy be accepted prior to the time the * * registration statement becomes effective. This prospectus shall not * * constitute an offer to sell or the solicitation of an offer to buy * * nor shall there be any sale of these securities in any State in which * * such offer, solicitation or sale would be unlawful prior to * * registration or qualification under the securities laws of any such * * State. * * * *************************************************************************** SUBJECT TO COMPLETION, DATED JULY 3, 1996 PROSPECTUS 5,500,000 SHARES [STAFFMARK LOGO] COMMON STOCK The 5,500,000 shares of Common Stock offered hereby are being sold by StaffMark, Inc. (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $10.00 and $12.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Application has been made for the Common Stock to be approved for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol "STAF." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------ PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ------------------------------------------------------------------------------------------------ Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------ Total(3).......................... $ $ $ - ------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $2,500,000. (3) The Company has granted the Underwriters an over-allotment option to purchase up to 825,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discount will be $ and the total Proceeds to Company will be $ . See "Underwriting." ------------------------------ The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that certificates for the shares of Common Stock will be available for delivery on or about , 1996. ------------------------------ J.C. Bradford & Co. Stephens Inc. , 1996 4 [INSIDE FRONT PAGE OF PROSPECTUS] [MAP] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. Following consummation of the Offering, the Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants. 5 PROSPECTUS SUMMARY Simultaneously with and as a condition to the closing of this Offering, StaffMark, Inc. will acquire, in separate merger transactions (the "Mergers") in exchange for cash and shares of its Common Stock, all of the common stock of six staffing service businesses (each a "Founding Company" and collectively, the "Founding Companies"). Unless otherwise indicated, all references herein to the "Company" include the Founding Companies, and references herein to "StaffMark" shall mean StaffMark, Inc. prior to the consummation of the Mergers. The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements and related notes appearing elsewhere in this Prospectus. Unless otherwise indicated, all share, per share and financial information set forth herein: (i) has been adjusted to give effect to the Mergers; (ii) assumes an initial public offering price of $11.00 per share, the midpoint of the range set forth on the cover page of this Prospectus; (iii) has been adjusted to reflect a 1,355-for-one stock split in the form of a stock dividend prior to the Offering; and (iv) assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY StaffMark was founded in March 1996 to create a leading provider of diversified staffing services to businesses, professional and service organizations, governmental agencies and healthcare providers, primarily in growth markets in the southeastern and southwestern United States. StaffMark has entered into agreements to acquire, simultaneously with the closing of this Offering, the six Founding Companies, which have on average operated for over 15 years. The Company will provide a wide variety of staffing services through 91 branch offices located in Arkansas, Colorado, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee and Virginia. The Company's senior management will be comprised primarily of stockholders of the Founding Companies. Currently, the six Founding Companies provide more than 10,000 employees to over 2,500 clients during a typical week. Since 1993, the Founding Companies have expanded by acquiring four staffing businesses with 17 offices and by opening an additional 32 branch offices. The Company's business is organized into three divisions: Commercial, Professional, and Specialty Medical. The Commercial division provides clerical and light industrial staffing services, and generated approximately 86.4% and 84.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Professional division provides technical, professional and information technology staffing services and generated approximately 5.3% and 7.6% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Specialty Medical division provides healthcare and medical staffing services, such as physical and occupational therapists, speech pathologists and clinical trials support services, and generated approximately 8.3% and 7.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. According to Staffing Industry Report, an industry publication, technical, professional and healthcare staffing are among the fastest growing sectors of the staffing industry. The Company believes that these specialized services offer a greater opportunity for growth and profitability than commercial staffing services alone. The temporary staffing industry has grown rapidly in recent years as competitive pressures have caused businesses to focus on reducing costs, including converting fixed labor costs to variable costs. The use of temporary employees also enables companies to improve flexibility in employee hiring and scheduling and allows them to focus on their core business functions. According to the National Association of Temporary and Staffing Services ("NATSS"), the U.S. market for temporary staffing services has grown since 1991 at a compound annual rate of approximately 17.7%, from approximately $20.4 billion in revenue in 1991 to approximately $39.2 billion in 1995. The Company believes the temporary staffing industry is highly fragmented but is experiencing increasing consolidation largely in response to increased competition and the need to offer a full range of services to regional and national accounts. 3 6 The Company will seek to combine a decentralized, entrepreneurial operating structure, which promotes decision-making, accountability and local name recognition at the branch level, with strong corporate management, information systems and marketing support. Following the consummation of the Offering, the Company intends to centralize certain administrative functions, reduce or eliminate redundant functions and facilities and implement the best practices of the Founding Companies on a Company-wide basis. The Company's objective is to become a premier provider of quality personnel staffing services to clients in selected markets throughout the United States. The Company seeks to accomplish this objective by undertaking the following growth strategy: Pursuing Strategic Acquisitions. The Company seeks acquisitions of profitable, well-managed staffing companies that will expand the geographic scope of its operations, increase the revenues of its Professional and Specialty Medical divisions, or offer services that may be cross-sold to the Company's existing client base. The Company has acquired four staffing businesses over the past three years and currently has two acquisitions pending. Growing Internally. The Company intends to increase the productivity and profitability of existing operations by expanding and enhancing services and by increasing penetration in existing geographic markets through "spinning-off" new branches from existing branches. During fiscal 1995 and the first quarter of 1996, the Company opened 19 spin-off branches. In addition, the Company may open new branch offices by following existing clients into new geographic areas. Increasing Vendor-On-Premises Relationships. The Company currently has 16 vendor-on-premises ("VOP") partnering relationships, as compared to nine at December 31, 1995. VOP relationships represented 8.9% and 16.1% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. Under these programs, the Company assumes administrative responsibility for coordinating all temporary personnel services throughout a client's location or organization, including skills testing and training. The VOP program provides the Company with an opportunity to establish long-term client relationships, which results in a more stable source of revenue. Cross-Selling Professional Services. The Company currently provides commercial staffing services in the majority of its offices and plans to introduce its professional services to certain branches that currently do not offer such services. The Company believes there are substantial growth opportunities that may be realized from the introduction of its broad range of existing services throughout its network of branch offices. Expanding Specialty Medical Services. The Company believes that revenue and profitability can be enhanced by providing specialty medical services in additional markets. The Specialty Medical division generally enjoys higher gross margins than the Commercial division because it offers specialized expertise. The Company intends to expand its Specialty Medical division through acquisitions and internal development. THE OFFERING Common Stock offered by the Company..... 5,500,000 shares Common Stock to be outstanding after the Offering................................ 12,473,249 shares(1) Use of proceeds......................... To repay indebtedness, to pay the cash portion of the purchase price for the Founding Companies and for general corporate purposes, including acquisitions. Proposed Nasdaq National Market symbol.................................. STAF - --------------- (1) Includes (i) 1,355,000 shares issued by StaffMark prior to the Offering, and (ii) 5,618,249 shares of Common Stock to be issued to the stockholders of the Founding Companies in connection with the Mergers, but excludes up to 935,494 shares of Common Stock subject to options to be issued under the Company's 1996 Stock Option Plan. See "Management -- 1996 Stock Option Plan." 4 7 SUMMARY COMBINED FOUNDING COMPANIES' FINANCIAL AND OPERATING DATA StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. The historical financial statements of each of the Founding Companies have been combined for all periods presented at historical cost, as if these companies had always been members of the same operating group. However, during the periods presented, the Founding Companies were not under common control or management. Therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. Additionally, the Founding Companies' results of operations reflect two tax structures, S Corporations and C Corporations. Accordingly, line items which are not meaningful on a combined basis due to the combination of companies with different tax structures, such as provision for income taxes and net income, have been omitted. See "Selected Combined Founding Companies' Financial and Operating Data."
THREE MONTHS YEAR ENDED DECEMBER 31,(1) ENDED MARCH 31, ------------------------------------------------- ----------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) STATEMENT OF INCOME DATA: Revenues: Commercial................................ $36,734 $58,086 $75,288 $102,465 $126,684 $ 26,384 $34,667 Professional.............................. 1,920 6,870 7,216 7,664 7,761 1,940 3,110 Specialty Medical......................... 3,033 5,707 8,717 11,027 12,242 3,142 3,148 ------- ------- ------- -------- -------- -------- ------- Total................................. 41,687 70,663 91,221 121,156 146,687 31,466 40,925 Gross profit................................ 9,004 14,818 19,104 24,044 29,584 6,082 8,475 Operating income............................ $ 1,270 $ 2,546 $ 3,231 $ 4,235 $ 4,358 $ 829 $ 1,109 PRO FORMA(2): Revenues(3)......................................................................... $171,463 $42,204 Operating income(4)................................................................. 7,603 1,350 Net income(4)(5).................................................................... 3,106 477 Net income per share................................................................ $0.37 $0.06 Weighted average shares outstanding(6).............................................. 8,420 8,420 SELECTED OPERATING DATA (AT END OF PERIOD): Branch offices: Commercial................................................... 41 45 65 76 Professional................................................. 2 3 4 6 Specialty Medical............................................ 4 4 5 5 ------- -------- -------- ------- Total.................................................... 47 52 74 87 ======= ======== ======== =======
AS OF MARCH 31, 1996 ---------------------------------- PRO FORMA AS ACTUAL (2)(7) ADJUSTED(8) -------- --------- ----------- BALANCE SHEET DATA: Working capital..................................................................... $ 4,579 $(16,422) $18,359 Total assets........................................................................ 43,684 43,779 53,433 Long-term debt, including current maturities........................................ 19,987 24,631 -- Shareholders' equity (deficit)...................................................... 8,943 (12,355) 41,235
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) See the Unaudited Pro Forma Combined Financial Statements of the Company for pro forma financial information relating to fiscal year 1995 and the three months ended March 31, 1996. (3) Adjusted to reflect the acquisitions of E.P. Enterprises Corporation d/b/a Caldwell Services, Inc. ("Caldwell"), On Call Employment Services, Inc. ("On Call") and Strategic Sourcing, Inc. ("SSI"). (4) Adjusted to reflect the acquisitions of Caldwell, On Call and SSI and reductions in salaries to certain owners of the Founding Companies which have been agreed to in connection with the Mergers (the "Compensation Differential"). (5) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S Corporations prior to the consummation of the Mergers and the tax impact of the Compensation Differential in each period. (6) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares to be issued to the stockholders of the Founding Companies in connection with the Mergers; and (iii) 1,447,046 shares to be issued in connection with the Offering to pay the cash portion of the consideration for the Founding Companies but excludes up to 935,494 shares of Common Stock subject to options to be issued under the Company's 1996 Stock Option Plan. (7) Gives effect to: (i) the combination of the Founding Companies with StaffMark as if such combination had occurred on March 31, 1996; (ii) a liability for the cash consideration of $15,917,510 to be paid to the stockholders of the Founding Companies in connection with the Mergers; (iii) the transfer by the Founding Companies of certain assets to their stockholders in connection with the Mergers; (iv) the additional cash to be borrowed to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Accounts; and (v) the acquisition of SSI whose stockholders have signed a definitive agreement to be purchased by First Choice, one of the Founding Companies. (8) Adjusted to reflect the sale of 5,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 8 SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA The following table presents summary data for each of the individual Founding Companies for the three most recent years as well as the most recent interim period and comparative period of the prior year.
PERIODS ENDED YEAR ENDED DECEMBER 31,(1) MARCH 31,(2) ----------------------------------- -------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------ ------- (IN THOUSANDS) BREWER: Revenues.................................................. $12,313 $27,894 $43,874 $7,490 $13,866 Cost of services.......................................... 10,063 22,906 35,115 6,281 10,953 ------- ------- ------- ------ ------- Gross profit.............................................. 2,250 4,988 8,759 1,209 2,913 Operating expenses........................................ 1,744 3,739 6,394 924 2,300 ------- ------- ------- ------ ------- Operating income.......................................... 506 1,249 2,365 285 613 Interest expense.......................................... 54 92 801 22 425 Net income................................................ 478 1,177 1,587 277 199 Total assets.............................................. 2,917 4,054 21,752 4,079 26,656 Total debt................................................ 1,232 949 16,295 613 20,258 Shareholders' equity...................................... 1,110 2,110 2,786 2,024 3,287 PROSTAFF: Revenues.................................................. $27,245 $30,608 $34,330 $7,535 $ 8,586 Cost of services.......................................... 22,858 25,456 28,234 6,200 6,977 ------- ------- ------- ------ ------- Gross profit.............................................. 4,387 5,152 6,096 1,335 1,609 Operating expenses........................................ 3,756 4,359 5,559 1,164 1,607 ------- ------- ------- ------ ------- Operating income.......................................... 631 793 537 171 2 Interest expense.......................................... 87 29 20 5 8 Net income................................................ 399 522 446 77 4 MAXWELL: Revenues.................................................. $16,324 $21,226 $23,093 $5,835 $ 6,149 Cost of services.......................................... 11,253 16,004 17,748 4,523 4,745 ------- ------- ------- ------ ------- Gross profit.............................................. 5,071 5,222 5,345 1,312 1,404 Operating expenses........................................ 3,658 3,928 4,433 1,033 1,199 ------- ------- ------- ------ ------- Operating income.......................................... 1,413 1,294 912 279 205 Interest expense.......................................... 28 34 -- -- 1 Net income................................................ 1,296 1,263 920 286 255 HRA: Revenues.................................................. $13,333 $16,453 $18,306 $8,440 $10,645 Cost of services.......................................... 10,985 13,367 14,939 6,876 8,629 ------- ------- ------- ------ ------- Gross profit.............................................. 2,348 3,086 3,367 1,564 2,016 Operating expenses........................................ 2,141 2,427 3,504 1,534 1,910 ------- ------- ------- ------ ------- Operating income (loss)................................... 207 659 (137) 30 106 Interest expense.......................................... 84 101 107 33 53 Net income (loss)......................................... 85 353 (147) 4 (11) FIRST CHOICE: Revenues.................................................. $10,808 $13,007 $13,703 $3,228 $ 3,524 Cost of services.......................................... 8,825 10,573 11,149 2,621 2,868 ------- ------- ------- ------ ------- Gross profit.............................................. 1,983 2,434 2,554 607 656 Operating expenses........................................ 1,397 2,519 2,292 520 562 ------- ------- ------- ------ ------- Operating income (loss)................................... 586 (85) 262 87 94 Interest expense.......................................... -- 26 19 6 7 Net income................................................ 351 59 243 80 86 BLETHEN: Revenues.................................................. $11,198 $11,967 $13,380 $3,182 $ 3,497 Cost of services.......................................... 8,132 8,806 9,918 2,355 2,629 ------- ------- ------- ------ ------- Gross profit.............................................. 3,066 3,161 3,462 827 868 Operating expenses........................................ 3,178 2,837 3,043 716 728 ------- ------- ------- ------ ------- Operating income (loss)................................... (112) 324 419 111 140 Interest expense.......................................... 135 137 141 28 34 Net income (loss)......................................... (91) 141 208 59 50
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) Amounts for HRA are reported for the six months ended March 31, 1996. 6 9 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of Common Stock offered hereby. ABSENCE OF COMBINED OPERATING HISTORY. StaffMark was founded in March 1996 but has conducted no operations and generated no revenues to date. StaffMark has entered into agreements to acquire the Founding Companies simultaneously with the closing of this Offering. The Founding Companies have been operating as separate independent entities, and there can be no assurance that the Company will be able to successfully operate the Company, integrate the Founding Companies businesses, achieve any cost savings as a result of the Mergers or institute the necessary systems and procedures to successfully manage the combined enterprise on a profitable basis. The Company may experience delays, complications and expenses in implementing, integrating and operating such systems, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The management group on a combined basis has been assembled only recently and there can be no assurance that the management group will be able to oversee the combined entity and effectively implement the Company's operating, growth, acquisition or business strategies. The combined historical financial results of the Founding Companies cover periods when the Founding Companies were not under common control or management and, therefore, may not be indicative of the Company's future financial or operating results. The mergers of the Founding Companies involve the assumption of legal liabilities and amortization of certain acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. The inability of the Company to successfully integrate or operate the Founding Companies would have a material adverse effect on the Company's business, financial condition and results of operations and would make it unlikely that the Company's acquisition program will be successful. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management" and "Certain Transactions -- Organization of the Company." EFFECT OF FLUCTUATIONS IN THE GENERAL ECONOMY. Demand for the Company's staffing services is significantly affected by the general level of economic activity and unemployment in the United States. When economic activity increases, temporary employees are often added before full-time employees are hired. However, as economic activity slows, many companies reduce their utilization of temporary employees prior to undertaking layoffs of full-time employees. In addition, the Company may experience more competitive pricing pressure during periods of economic downturn. Therefore, any significant economic downturn could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS RELATED TO THE COMPANY'S ACQUISITION STRATEGY. One of the Company's primary business strategies is to increase its revenues and expand the markets it serves through the acquisition of additional staffing service businesses. Competition for acquisitions in the staffing industry has increased significantly in recent years and, as a result, there may be fewer acquisition candidates available to the Company, and the price of acquisitions may be higher. There can be no assurance that the Company will be able to identify, acquire or profitably manage additional businesses or successfully integrate acquired businesses, if any, into the Company without substantial costs, delays or other operational or financial problems. Further, acquisitions involve a number of special risks, including possible adverse effects on the Company's operating results, diversion of management's attention, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or legal liabilities, and realization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, there can be no assurance that the Founding Companies or other staffing service businesses acquired in the future will achieve anticipated revenues and earnings. To the extent that the Company is unable to acquire additional staffing businesses or integrate such businesses successfully, its ability to expand its operations and increase its revenues to the degree desired would be reduced significantly. The inability to acquire additional staffing businesses could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Operating Strategy" and "-- Growth Strategy." 7 10 ABILITY TO CONTINUE GROWTH. Certain of the Founding Companies have experienced significant growth in the past, principally through acquisitions, growth of existing offices and the opening of new offices. There can be no assurance that the Company will be able to expand its market presence in its current locations, successfully enter other markets through acquisitions or the opening of new offices or integrate future acquired businesses, if any, into the Company without substantial costs, delays or other operational or financial problems. There also can be no assurance that future acquisitions or recently completed acquisitions will not have an adverse effect on the Company's operating results, particularly in the fiscal quarters immediately following the consummation of such transactions. The ability of the Company to continue its growth will depend on a number of factors, including the availability of working capital to support such growth, existing and emerging competition and the Company's ability to maintain profitability while facing pricing pressures. The Company must also manage costs in a changing regulatory environment, adapt its infrastructure and systems to accommodate growth, and recruit and train additional qualified personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Combined" and "Business -- Operating Strategy" and "-- Growth Strategy." RISKS RELATED TO ACQUISITION FINANCING. The Company currently intends to finance future acquisitions by using cash and shares of the Company's Common Stock for all or a substantial portion of the consideration to be paid. In the event that the Common Stock does not maintain a sufficient market value, or potential acquisition candidates are unwilling to accept the Company's Common Stock as part of the consideration for their businesses, the Company may be required to utilize its cash resources, if available, in order to initiate and maintain its acquisition program. Immediately following this Offering, the Company will have limited cash resources to pursue acquisitions. If the Company does not have sufficient cash resources to pursue acquisitions, its growth could be limited unless it is able to obtain additional capital through debt or equity financing. There can be no assurance that the Company will be able to obtain such financing if and when it is needed or that, if available, such financing can be obtained on terms the Company deems acceptable. The inability to acquire such financing, if needed, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Combined" and "Business -- Growth Strategy." COMPETITIVE MARKET. The temporary staffing industry is highly competitive, with limited barriers to entry. The Company competes for employees and clients in national, regional and local markets with full-service and specialized temporary staffing services. A significant number of competitors have greater marketing, financial and other resources and more established operations than the Company. The Company expects that the level of competition will remain high in the future, which could limit the Company's ability to maintain or increase its market share or maintain or increase gross margins, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- The Staffing Services Industry" and "-- Competition." DEPENDENCE ON AVAILABILITY OF QUALIFIED TEMPORARY PERSONNEL. The Company depends on its ability to attract, train and retain personnel who possess the skills and experience necessary to meet the staffing requirements of its clients. Competition for individuals with proven skills in certain areas, particularly medical and technical, is intense. The Company competes in several markets in which unemployment is relatively low thereby increasing competition for employees. The Company is also adversely affected by certain special events such as the 1996 Summer Olympic Games in Atlanta, which have further reduced the number of qualified temporary candidates available for the Company's Atlanta branch offices. The Company must continually evaluate, train and upgrade its base of available personnel to keep pace with clients' needs. There can be no assurance that qualified personnel will continue to be available to the Company in sufficient numbers and on terms of employment acceptable to the Company. The inability to attract and retain qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Operations -- Employees/Personnel." INCREASED EMPLOYEE COSTS. The Company is required to pay unemployment insurance premiums and workers' compensation for its temporary employees. Unemployment insurance premiums may increase as a result of, among other things, increased levels of unemployment and the lengthening periods for which 8 11 unemployment benefits are available. Workers' compensation costs may increase as a result of changes in the Company's experience rating or applicable laws. The Company's workers' compensation insurance coverage provides for a $250,000 deductible per occurrence. The Company's workers' compensation insurance premiums are subject to retroactive increases based upon audits of the Company's employee classification practices and other data provided to the insurance carrier. The Company has retained the services of an independent third-party administrator and an independent actuary to assist the Company in establishing appropriate reserves for the uninsured portion of claims (up to the deductible amount), but such reserves are only estimates of future payments relating to claims and are based upon limited prior experience. Although management believes its recorded reserve is adequate, there can be no assurance that the Company's actual future workers' compensation obligations will not exceed the amount of its workers' compensation reserve. The Company may incur costs related to workers' compensation claims at a higher rate due to such causes as higher than anticipated losses from known claims or an increase in the number and severity of new claims. See "Business -- Operations -- Workers' Compensation Program." RISK OF GOVERNMENT REGULATIONS AND LEGISLATIVE PROPOSALS. The Company's costs could increase if there are any material changes in government regulations. Recent federal and certain state legislative proposals have included provisions extending health insurance benefits to employees who do not presently receive such benefits. Due to the wide variety of national and state proposals currently under consideration, the impact of such proposals cannot be predicted. There can be no assurance that the Company will be able to increase the fees charged to its clients in a timely manner and sufficient amount to cover increased costs related to any new benefits that may be extended to temporary employees. It is not possible to predict whether other legislation or regulations affecting the Company's operations will be proposed or enacted at the federal or state level. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Operations -- Employees/Personnel." REGULATION OF INTERNATIONAL RECRUITING. The Company currently recruits physical and occupational therapists internationally for domestic placement. The entry of these employees into the United States is regulated by the U.S. Department of Labor and U.S. Department of Justice -- Immigration and Naturalization Services. The regulations governing the hiring of foreign nationals are complex and change often. If either of these authorities or any other regulatory or judicial body should determine that the Company is not in compliance with the regulations, the Company could be subject to fines and/or suspension of this part of the Company's business. Further, regulations could change in a manner which would limit the Company's ability to employ foreign nationals. Any of the foregoing could have a material adverse effect on the Company's business, financial condition, and results of operation. INDUSTRY RISKS. Providers of temporary staffing services generally place their employees in the workplace of other businesses. An attendant risk of such activity includes possible claims of discrimination and harassment, employment of illegal aliens and other similar claims. Management has adopted and implemented policies and guidelines to reduce the Company's exposure to these risks. However, a failure of any Company employee to follow these policies and guidelines may result in negative publicity, injunctive relief and the assessment against the Company of damages or fines. Moreover, in certain circumstances, the Company may be held responsible for the actions at a workplace of persons not under the direct control of the Company. Temporary staffing providers are also affected by fluctuations in the business of their clients. Interruptions in the business of its clients can adversely affect the Company's business. For example, inclement weather or natural disasters, which may require clients to close or reduce their hours of operation, could adversely affect the Company's business, financial condition and results of operations. RELIANCE ON KEY PERSONNEL. The Company is highly dependent on its management. The Company believes that its success will depend to a significant extent upon the efforts and abilities of the key executives of the Founding Companies. Furthermore, the Company will likely be dependent on the senior management of companies that may be acquired in the future. If any of these individuals are unable to continue in their position with the Company, or if the Company is unable to attract and retain other skilled employees, the 9 12 Company's business, financial condition and results of operation could be adversely affected. See "Management." CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS. Following the completion of this Offering, officers and directors of the Company, and entities affiliated with them, will beneficially own approximately 40.4% of the then outstanding shares of Common Stock (37.9%, if the Underwriters' over-allotment option is exercised in full) and are likely to exercise substantial control over the Company's affairs. These stockholders acting together would likely be able to elect a sufficient number of directors to control the Board of Directors of the Company and to approve or disapprove any matter submitted to a vote of stockholders. See "Principal Stockholders." POTENTIAL LIABILITY AND INSURANCE; LEGAL PROCEEDINGS. The provision of professional services, specialty medical and clinical trials services entails an inherent risk of professional malpractice and other similar claims. The Company expects to maintain insurance coverage that it believes will be adequate both as to risks and amounts. The Company believes that such insurance will extend to professional liability claims that may be asserted against employees of the Company. In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits, including discrimination and harassment and other similar claims, which could have a material adverse effect on the Company's business, financial condition and results of operations. POTENTIAL EFFECT OF SHARES FOR FUTURE SALE ON PRICE OF COMMON STOCK. The 5,500,000 shares being sold in this Offering will be freely tradeable unless acquired by affiliates of the Company. The market price of the Common Stock of the Company could be adversely affected by the sale of substantial amounts of Common Stock of the Company in the public market following this Offering. Simultaneously with the closing of this Offering, the stockholders of the Founding Companies will receive, in the aggregate, 5,618,249 shares of Common Stock as a portion of the consideration for their businesses. These shares are not being offered by this Prospectus; however, the stockholders who will receive these shares also have certain registration rights with respect to such shares. Certain other stockholders of StaffMark will hold, in the aggregate, an additional 1,355,000 shares of Common Stock. See "Certain Transactions -- Organization of the Company." None of these 6,973,249 shares were acquired in transactions registered under the Securities Act and, accordingly, such shares may not be sold except in transactions registered under the Securities Act or pursuant to an exemption from registration. The Company, all of the stockholders of the Founding Companies and the executive officers and directors of the Company have agreed not to offer or sell any shares of Common Stock of the Company for a period of 180 days (the "Lockup Period") after the date hereof without the prior written consent of J.C. Bradford & Co. and Stephens Inc., as representatives of the Underwriters (the "Representatives"), except that the Company may issue shares of Common Stock in connection with acquisitions or upon the exercise of options granted under the Company's 1996 Stock Option Plan. After the Lockup Period, all of such shares may be sold in accordance with Rule 144 promulgated under the Securities Act, subject to the volume, holding period and other limitations of Rule 144. See "Underwriting." However, the stockholders of the Founding Companies and StaffMark have agreed with the Company that they will not sell the 6,973,249 shares of Common Stock issued to them for a period of two years after the closing of this Offering. The Company intends to issue under its 1996 Stock Option Plan (the "Plan") options to purchase up to an aggregate of 935,494 shares of Common Stock. The sale of Common Stock underlying such options will be subject to the expiration of the Lockup Period. Substantially all of the options will vest over a period of five years (40% two years after the date of grant and 20% each year thereafter). The Company intends to register the shares issuable upon exercise of options granted under the Plan and, upon such registration, such shares will be eligible for resale in the public market. See "Management -- 1996 Stock Option Plan." The Company plans to register up to an additional 4,000,000 shares of its Common Stock with the Securities and Exchange Commission (the "Commission") under the Securities Act as soon as practicable after completion of this Offering for use by the Company as all or a portion of the consideration to be paid in 10 13 conjunction with future acquisitions. These shares may be freely tradeable after their issuance, unless the sale of such shares is restricted. See "Shares Eligible for Future Sale." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no public market for the Common Stock. The Company has filed application for the Common Stock to be approved for quotation on the Nasdaq National Market; however, there can be no assurance that, following this Offering, a regular trading market for the Common Stock will develop or be sustained. The initial public offering price has been determined by negotiation among the Company and the Representatives and may bear no relationship to the market price of the Common Stock after this Offering. See "Underwriting." The market price of the Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. Factors such as actual or anticipated operating results, growth rates, changes in estimates by analysts, market conditions in the industry, announcements by competitors, regulatory actions and general economic conditions will vary from period to period. As a result of the foregoing, the Company's operating results and prospects from time to time may be below the expectations of public market analysts and investors. Any such event would likely result in a material adverse effect on the price of the Common Stock. DIVIDEND POLICY; RESTRICTIONS ON PAYMENT. The Company anticipates that for the foreseeable future its earnings will be retained for the operation and expansion of its business and that it will not pay cash dividends. In addition, the Company anticipates that its proposed credit facility will limit the payment of cash dividends without the lender's consent. See "Dividend Policy." SUBSTANTIAL PROCEEDS OF OFFERING PAYABLE TO AFFILIATES. Approximately $15.9 million of the net proceeds of this Offering will be used to pay the cash portion of the purchase price for the common stock of the Founding Companies. Approximately $10.4 million of such amount, representing 19.4% of the net proceeds, will be paid to stockholders of the Founding Companies who will become executive officers, directors or greater than 5% stockholders of the Company. In addition, approximately $27.9 million, representing approximately 51.9% of the net proceeds from the Offering, will be used to repay indebtedness assumed by the Company in the acquisition of the Founding Companies. Approximately $8.4 million of such indebtedness has been guaranteed by stockholders of the Founding Companies. See "Use of Proceeds" and "Certain Transactions." IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of the shares of Common Stock offered hereby will experience immediate dilution in the net tangible book value of their shares of $9.28 per share. In the event the Company issues additional Common Stock in the future, including shares which may be issued in connection with future acquisitions, purchasers of Common Stock in this Offering may experience further dilution in the net tangible book value per share of the Common Stock of the Company. See "Dilution." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Board of Directors of the Company is empowered to issue preferred stock in one or more series without stockholder action. The existence of this "blank-check" preferred stock provision could render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. Certain provisions of the Delaware General Corporation Law may also discourage takeover attempts that have not been approved by the Board of Directors. See "Management -- Directors and Executive Officers" and "Description of Capital Stock." 11 14 THE COMPANY StaffMark, a Delaware corporation, was founded in March 1996 to create a leading provider of diversified staffing services to businesses, professional and service organizations, governmental agencies, and healthcare providers, primarily in growth markets located in the southeastern and southwestern United States. Although it has conducted no operations to date, StaffMark has entered into agreements to acquire, simultaneously with and as a condition to the consummation of the Offering, the following established staffing businesses and their affiliates: (i) Brewer Personnel Services, Inc. ("Brewer"); (ii) Prostaff Personnel, Inc. and its related entities ("Prostaff"); (iii) Maxwell Staffing, Inc. and its related entities ("Maxwell"); (iv) HRA, Inc. ("HRA"); (v) First Choice Staffing, Inc. ("First Choice"); and (vi) Blethen Temporaries, Inc. and its related entities ("Blethen"). Each of the Founding Companies will become a wholly-owned subsidiary of the Company. For a description of the transactions pursuant to which these businesses will be acquired, see "Certain Transactions -- Organization of the Company." The Company's business is organized into three divisions: Commercial, Professional and Specialty Medical. The Commercial division provides clerical and light industrial staffing services. The Professional division provides technical, professional and information technology staffing services. The Specialty Medical division provides healthcare and medical staffing services. The Company's senior management will be comprised primarily of stockholders of the Founding Companies. Clete T. Brewer, President and Chief Executive Officer of Brewer, will serve as President, Chief Executive Officer and a director of the Company. Ted Feldman, President and Chief Executive Officer of HRA, will become Chief Operating Officer of the Company. W. David Bartholomew, Secretary/Treasurer of HRA, will become Executive Vice President -- Southeastern Operations and a director of the Company. Donald A. Marr, Jr., Vice President of Operations of Brewer, will become Executive Vice President -- Southwestern Operations of the Company. Together, Messrs. Bartholomew and Marr will directly manage the Company's Commercial and Professional divisions. Steven E. Schulte, President and Chief Executive Officer of Prostaff, will become Executive Vice President -- Administration and a director of the Company. The Specialty Medical division of the Company will be managed directly by John H. Maxwell, Jr. and Janice Blethen. Mr. Maxwell, President of Maxwell, will become the Executive Vice President -- Medical Services and a director of the Company. Ms. Blethen, the President and Chief Executive Officer of Blethen, will become the Executive Vice President -- Clinical Trials Support Services and a director of the Company. See "Management." Certain information regarding the Founding Companies, including pending acquisitions, is set forth below:
YEAR FISCAL 1995 BRANCHES AS OF COMPANY FOUNDED REVENUE JUNE 1, 1996 STATES SERVICES PROVIDED - ---------------- ------- -------------- -------------- ------------ ----------------------------- (IN THOUSANDS) Brewer.......... 1988 $ 43,874 27 AR, CO, GA, Commercial/Professional TN, VA Prostaff........ 1973 34,330 25 AR Commercial/Professional Maxwell......... 1972 23,093 9 OK Commercial/Professional/ Specialty Medical HRA............. 1991 18,306 15 TN Commercial/Professional First Choice.... 1986 13,703 8 SC, NC Commercial/Professional Blethen......... 1975 13,380 7 NC Commercial/Professional/ Specialty Medical
12 15 The aggregate consideration to be paid by StaffMark in the Mergers is approximately $77.7 million, consisting of approximately $15.9 million in cash and 5,618,249 shares of Common Stock. The following table sets forth the consideration being paid for each Founding Company:
COMMON STOCK ------------------------------- CASH SHARES VALUE OF SHARES(1) TOTAL ------- --------- ------------------ ------- (DOLLARS IN THOUSANDS) Brewer.......................................... $ 2,950 1,935,000 $ 21,285 $24,235 Prostaff........................................ 4,500 1,050,000 11,550 16,050 Maxwell......................................... 2,280 912,000 10,032 12,312 HRA............................................. 2,348 615,175 6,767 9,115 First Choice.................................... 2,075 622,500 6,848 8,923 Blethen......................................... 1,764 483,574 5,319 7,083 ------- --------- -------- ------- Total................................. $15,917 5,618,249 $ 61,801 $77,718 ======= ========= ======== =======
- --------------- (1) Represents the aggregate value of the shares of Common Stock issued as consideration, based upon an assumed initial public offering price of $11.00 per share. In addition, immediately prior to the Mergers, certain of the Founding Companies will make distributions to their stockholders of approximately $3.9 million, representing S Corporation earnings previously taxed to their stockholders. Prior to the Mergers, certain Founding Companies also will distribute to their stockholders approximately $349,000 in net book value of assets. See "Certain Transactions." The Company maintains its principal executive offices at 302 East Millsap Road, Fayetteville, Arkansas, 72703. Its telephone number is (501) 973-6000. 13 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the 5,500,000 shares of Common Stock offered hereby are estimated to be approximately $53.8 million ($62.2 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and other offering expenses (estimated to be approximately $2.5 million), all of which are payable by the Company. Of this amount, $15.9 million will be used to pay the cash portion of the purchase price for the Founding Companies, of which approximately $10.4 million, representing 19.4% of the net proceeds of this Offering, will be paid to stockholders of the Founding Companies who will become officers, directors, key employees or holders of more than 5% of the Common Stock of the Company. In addition, approximately $27.9 million of the net proceeds will be used to repay indebtedness assumed by the Company in the Mergers, approximately $8.4 of which is guaranteed by stockholders of the Founding Companies. See "Certain Transactions." The indebtedness to be repaid bears interest at annual rates ranging from 5.5% to 20.9%, with a weighted average interest rate of approximately 8.9% for the three months ended March 31, 1996. Such indebtedness, if not repaid, would otherwise mature at various dates through 2003. The remaining net proceeds of approximately $9.9 million will be used for working capital and for general corporate purposes, which are expected to include future acquisitions. The Company currently has no agreements with respect to any future acquisitions other than the two pending acquisitions discussed herein. Pending such uses, the Company plans to invest the net proceeds in short-term, interest-bearing, investment grade securities. The Company has received a proposal from a major lending institution for a credit facility of approximately $50.0 million to be used for working capital and other general corporate purposes, including future acquisitions. There can be no assurance the Company will enter into an agreement for this credit facility. See "Risk Factors -- Risks Related to Acquisition Financing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Combined." DIVIDEND POLICY The Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future because it intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes, including future acquisitions. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Company's Board of Directors deems relevant. In the event the Company is successful in obtaining one or more lines of credit, it is likely that any such facility will include restrictions on the ability of the Company to pay dividends without the consent of the lender. 14 17 DILUTION The pro forma deficit in net tangible book value of the Company at March 31, 1996 was ($32,395,431) or ($4.65) per share after giving effect to the Mergers. The deficit in pro forma net tangible book value per share represents the amount by which the Company's pro forma total liabilities exceeds the Company's pro forma net tangible assets divided by the number of shares of Common Stock outstanding after giving effect to the Mergers. After giving effect to the sale of the 5,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses, the pro forma net tangible book value of the Company at March 31, 1996 would have been $21,481,463 or $1.72 per share, representing an immediate increase in net tangible book value of $6.37 per share to existing stockholders and an immediate dilution of $9.28 per share to the new investors purchasing the shares in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price........................... $11.00 Pro forma deficit in net tangible book value before Offering................................................... $(4.65) Increase attributable to the sale of shares offered hereby.... 6.37 ------ Pro forma net tangible book value after Offering................ 1.72 ------ Dilution in net tangible book value to new investors............ $ 9.28 ======
The following table sets forth, on a pro forma basis to give effect to the Mergers as of March 31, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and the new investors after giving effect to the transactions described under "Certain Transactions -- Organization of the Company."
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE ---------------------- ------------------------ PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- --------- Existing stockholders................. 6,973,249 55.9% $(12,354,840) (25.7)% $ (1.77) New investors......................... 5,500,000 44.1 60,500,000 125.7 11.00 ---------- ----- ------------ ----- Total....................... 12,473,249 100.0% $ 48,145,160 100.0% ========== ===== ============ =====
- --------------- (1) Total consideration paid by existing stockholders represents the combined stockholders' equity of the Founding Companies before this Offering, adjusted to reflect: (i) the cash portion of the consideration payable to the stockholders of the Founding Companies in connection with the Mergers; (ii) the transfer of selected assets to certain stockholders of the Founding Companies in connection with the Mergers; (iii) the distribution of certain of the Founding Companies' S Corporation Accumulated Adjustment Accounts; and (iv) a liability for deferred income taxes. See "Use of Proceeds" and "Capitalization." 15 18 CAPITALIZATION The following table sets forth the short-term borrowings and current portion of long-term debt and capitalization at March 31, 1996 (i) of StaffMark and the combined Founding Companies; (ii) of the Company on a pro forma basis to give effect to the Mergers; and (iii) of the Company on a pro forma as adjusted basis, to give effect to both the Mergers and this Offering, and the application of the estimated net proceeds from this Offering. See "Selected Combined Founding Companies' Financial and Operating Data" and "Use of Proceeds." This table should be read in conjunction with the Unaudited Pro Forma Combined Financial Statements of the Company and the related notes thereto included elsewhere in this Prospectus.
AS OF MARCH 31, 1996 --------------------------------------- ACTUAL(1) PRO FORMA AS ADJUSTED --------- --------- ----------- (IN THOUSANDS EXCEPT SHARE DATA) Short-term borrowings and current portion of long-term debt...................................................... $ 4,415 $ 8,519 $ -- ======= ========= ======= Long-term debt, excluding current portion(2)................ $18,395 $ 18,935 $ -- ------- --------- ------- Stockholders' equity: Preferred Stock, $.01 par value, 1,000,000 shares authorized; none issued or outstanding............................. -- -- -- Common Stock, $.01 par value, 26,000,000 shares authorized; 6,973,249 shares issued and outstanding, pro forma; and 12,473,249 shares issued and outstanding, as adjusted(3)............................ 47 70 125 Additional paid-in capital................................ 506 483 41,365 Subscriptions receivable.................................. (80) (80) (80) Retained earnings......................................... 8,470 (12,828) (175) ------- --------- ------- Total stockholders' equity........................ 8,943 (12,355) 41,235 ------- --------- ------- Total capitalization......................... $27,338 $ 6,580 $41,235 ======= ========= =======
- --------------- (1) Combines the respective accounts of StaffMark and the combined Founding Companies as reflected in the Unaudited Pro Forma Combined Balance Sheet at March 31, 1996. (2) For a description of the Company's long-term debt, see Note 7 to the Founding Companies' Combined Financial Statements. (3) Excludes up to 935,494 shares of Common Stock subject to options to be issued under the Company's 1996 Stock Option Plan. See "Management -- 1996 Stock Option Plan." 16 19 SELECTED COMBINED FOUNDING COMPANIES' FINANCIAL AND OPERATING DATA StaffMark will acquire, simultaneously with the closing of this Offering, the Founding Companies. The historical financial statements of each of the Founding Companies have been combined for all periods presented at historical cost, as if these companies had always been members of the same operating group. However, during the periods presented, the Founding Companies were not under common control or management. Therefore, the data presented may not be comparable to or indicative of post-combination results to be achieved by the Company. Additionally, the Founding Companies' results of operations reflect two tax structures, S Corporations and C Corporations. Accordingly, line items which are not meaningful on a combined basis due to the combination of companies with different tax structures, such as provision for income taxes and net income, have been omitted. The following selected combined financial and operating data of the Founding Companies as of December 31, 1994 and 1995, and for each of the three years in the period ended December 31, 1995, have been derived from the Combined Founding Companies' Financial Statements, which have been audited by Arthur Andersen LLP and appear elsewhere in this Prospectus. The selected combined financial and operating data for the Founding Companies as of December 31, 1991, 1992 and 1993, and for the years ended December 31, 1991 and 1992, and for the interim periods presented have been derived from unaudited financial statements which have been prepared on the same basis as the audited financial statements and, in the opinion of management of the Founding Companies, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such data. The Selected Combined Founding Companies' Financial and Operating Data should be read in conjunction with the Combined Founding Companies' Financial Statements, the Unaudited Pro Forma Combined Financial Statements of the Company, the individual historical financial statements of each of the Founding Companies, the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 20 SELECTED COMBINED FOUNDING COMPANIES' FINANCIAL AND OPERATING DATA
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,(1) MARCH 31, ----------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- -------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA) STATEMENT OF INCOME DATA: Revenues: Commercial................................... $36,734 $58,086 $75,288 $102,465 $126,684 $26,384 $34,667 Professional................................. 1,920 6,870 7,216 7,664 7,761 1,940 3,110 Specialty Medical............................ 3,033 5,707 8,717 11,027 12,242 3,142 3,148 ------- ------- ------- -------- -------- ------- ------- Total...................................... 41,687 70,663 91,221 121,156 146,687 31,466 40,925 Cost of services............................... 32,683 55,845 72,117 97,112 117,103 25,384 32,450 ------- ------- ------- -------- -------- ------- ------- Gross profit................................... 9,004 14,818 19,104 24,044 29,584 6,082 8,475 Operating expenses: Selling, general and administrative.......... 7,514 11,940 15,358 19,067 24,069 5,061 6,939 Depreciation and amortization................ 220 332 515 742 1,157 192 427 ------- ------- ------- -------- -------- ------- ------- Operating income............................... $ 1,270 $ 2,546 $ 3,231 $ 4,235 $ 4,358 $ 829 $ 1,109 PRO FORMA(2): Revenues(3)................................................................................ $171,463 $42,204 Operating income(4)........................................................................ 7,603 1,350 Net income(4)(5)........................................................................... 3,106 477 Net income per share....................................................................... $0.37 $0.06 Weighted average shares(6)................................................................. 8,420 8,420 SELECTED OPERATING DATA (AT END OF PERIOD): Branch offices: Commercial........................................................ 41 45 65 76 Professional...................................................... 2 3 4 6 Specialty Medical................................................. 4 4 5 5 ------- -------- -------- ------- Total......................................................... 47 52 74 87 ======= ======== ======== ======= BALANCE SHEET DATA (AT END OF PERIOD): Working capital................................ $ 2,433 $ 2,159 $ 3,188 $ 4,992 $ 5,324 $ 4,579 Total assets................................... 5,930 10,460 15,088 18,120 37,827 43,684 Long-term debt, including current maturities... 1,655 1,927 2,371 862 16,438 19,987 Shareholders' equity........................... 2,095 3,089 5,141 7,624 8,616 8,943
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) See the Unaudited Pro Forma Combined Financial Statements of the Company for pro forma financial information relating to fiscal year 1995 and the three months ended March 31, 1996. (3) Adjusted to reflect the acquisitions of Caldwell, On Call and SSI. (4) Adjusted to reflect the acquisitions of Caldwell, On Call and SSI and the Compensation Differential. (5) Gives effect to certain tax adjustments related to the taxation of certain Founding Companies as S Corporations prior to the consummation of the Mergers and the tax impact of the Compensation Differential in each period. (6) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares to be issued to the stockholders of the Founding Companies in connection with the Mergers; and (iii) 1,447,046 shares to be issued in connection with the Offering to pay the cash portion of the consideration for the Founding Companies but excludes up to 935,494 shares of Common Stock subject to options to be issued under the Company's 1996 Stock Option Plan. 18 21 SELECTED INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA The following table presents selected data for each of the individual Founding Companies for the three most recent years as well as the most recent interim period and comparative period of the prior year.
PERIODS ENDED YEAR ENDED DECEMBER 31,(1) MARCH 31,(2) --------------------------------- ------------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------ ------- (IN THOUSANDS) BREWER: Revenues............................................ $12,313 $27,894 $43,874 $7,490 $13,866 Cost of services.................................... 10,063 22,906 35,115 6,281 10,953 ------- ------- ------- ------ ------- Gross profit........................................ 2,250 4,988 8,759 1,209 2,913 Operating expenses.................................. 1,744 3,739 6,394 924 2,300 ------- ------- ------- ------ ------- Operating income.................................... 506 1,249 2,365 285 613 Interest expense.................................... 54 92 801 22 425 Net income.......................................... 478 1,177 1,587 277 199 Total assets........................................ 2,917 4,054 21,752 4,079 26,656 Total debt.......................................... 1,232 949 16,295 613 20,258 Shareholders' equity................................ 1,110 2,110 2,786 2,024 3,287 PROSTAFF: Revenues............................................ $27,245 $30,608 $34,330 $7,535 $ 8,586 Cost of services.................................... 22,858 25,456 28,234 6,200 6,977 ------- ------- ------- ------ ------- Gross profit........................................ 4,387 5,152 6,096 1,335 1,609 Operating expenses.................................. 3,756 4,359 5,559 1,164 1,607 ------- ------- ------- ------ ------- Operating income.................................... 631 793 537 171 2 Interest expense.................................... 87 29 20 5 8 Net income.......................................... 399 522 446 77 4 MAXWELL: Revenues............................................ $16,324 $21,226 $23,093 $5,835 $ 6,149 Cost of services.................................... 11,253 16,004 17,748 4,523 4,745 ------- ------- ------- ------ ------- Gross profit........................................ 5,071 5,222 5,345 1,312 1,404 Operating expenses.................................. 3,658 3,928 4,433 1,033 1,199 ------- ------- ------- ------ ------- Operating income.................................... 1,413 1,294 912 279 205 Interest expense.................................... 28 34 -- -- 1 Net income.......................................... 1,296 1,263 920 286 255 HRA: Revenues............................................ $13,333 $16,453 $18,306 $8,440 $10,645 Cost of services.................................... 10,985 13,367 14,939 6,876 8,629 ------- ------- ------- ------ ------- Gross profit........................................ 2,348 3,086 3,367 1,564 2,016 Operating expenses.................................. 2,141 2,427 3,504 1,534 1,910 ------- ------- ------- ------ ------- Operating income (loss)............................. 207 659 (137) 30 106 Interest expense.................................... 84 101 107 33 53 Net income (loss)................................... 85 353 (147) 4 (11) FIRST CHOICE: Revenues............................................ $10,808 $13,007 $13,703 $3,228 $ 3,524 Cost of services.................................... 8,825 10,573 11,149 2,621 2,868 ------- ------- ------- ------ ------- Gross profit........................................ 1,983 2,434 2,554 607 656 Operating expenses.................................. 1,397 2,519 2,292 520 562 ------- ------- ------- ------ ------- Operating income (loss)............................. 586 (85) 262 87 94 Interest expense.................................... -- 26 19 6 7 Net income.......................................... 351 59 243 80 86 BLETHEN: Revenues............................................ $11,198 $11,967 $13,380 $3,182 $ 3,497 Cost of services.................................... 8,132 8,806 9,918 2,355 2,629 ------- ------- ------- ------ ------- Gross profit........................................ 3,066 3,161 3,462 827 868 Operating expenses.................................. 3,178 2,837 3,043 716 728 ------- ------- ------- ------ ------- Operating income (loss)............................. (112) 324 419 111 140 Interest expense.................................... 135 137 141 28 34 Net income (loss)................................... (91) 141 208 59 50
- --------------- (1) Amounts for HRA are reported for the fiscal years ended September 30. (2) Amounts for HRA are reported for the six months ended March 31, 1996. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Founding Companies' Combined Financial Statements and related notes thereto and "Selected Combined Founding Companies' Financial and Operating Data" appearing elsewhere in this Prospectus. INTRODUCTION 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 increases or decreases 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. Certain of the Founding Companies have made, or are in the process of making, acquisitions of other personnel service businesses whose financial results are either completely excluded or only partially included (i.e., presentation of financial results of a company from the date of an acquisition accounted for as a purchase) in the Founding Companies' individual financial statements included herein. The financial results of these companies, had they been included in the historical financial statements, would have had a significant impact on the Company's financial results. Accordingly, pro forma financial information has been provided elsewhere in this Prospectus for the year ended December 31, 1995 and the first quarter ended March 31, 1996, reflecting the financial results of the Founding Companies and the companies which either have been acquired, or are expected to be acquired, before the date of the Mergers. 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 Mergers. The differential between the previous compensation and benefits of these individuals and the compensation they have agreed to receive subsequent to the Mergers is referred to as "Compensation Differential." This Compensation Differential and the related income tax effects have been reflected as pro forma adjustments in the accompanying pro forma financial information provided elsewhere in this Prospectus. The Company has preliminarily 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 quantify these savings prior to completion of the Mergers. 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 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 Prospectus. RESULTS OF OPERATIONS -- COMBINED The combined results discussed below occurred when the Founding Companies were not under common control or management and may not be comparable to, or indicative of, future performance. See "Risk Factors -- Absence of Combined Operating History." 20 23 The following table sets forth the percentage of revenues represented by certain line items in the combined Founding Company financial statements for the indicated periods:
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- ----------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Revenues: Commercial...................................... 82.5% 84.6% 86.4% 83.8% 84.7% Professional.................................... 7.9 6.3 5.3 6.2 7.6 Specialty medical............................... 9.6 9.1 8.3 10.0 7.7 ----- ----- ----- ----- ----- 100.0 100.0 100.0 100.0 100.0 Cost of services.................................. 79.1 80.2 79.8 80.7 79.3 ----- ----- ----- ----- ----- Gross profit margin............................... 20.9 19.8 20.2 19.3 20.7 Operating expenses: Selling, general and administrative............. 16.8 15.7 16.4 16.1 17.0 Depreciation and amortization................... 0.6 0.6 0.8 0.6 1.0 ----- ----- ----- ----- ----- Operating income.................................. 3.5% 3.5% 3.0% 2.6% 2.7% ===== ===== ===== ===== =====
COMBINED RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $9.5 million, or 30.1%, to $40.9 million for the first quarter of 1996 compared to $31.5 million for the first quarter of 1995. This increase was largely attributable to: (i) an increase in Brewer's revenues of $6.4 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 $1.1 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 $1.1 million, primarily attributable to the opening of several new branches. Also contributing to the increase in revenues was an increase in Maxwell's, Blethen's and First Choice's revenues of $315,000, $315,000 and $296,000, respectively. Cost of Services. Cost of services increased $7.1 million, or 27.8%, to $32.4 million for the first quarter of 1996 compared to $25.4 million for the first quarter of 1995. This increase was primarily attributable to: (i) an increase in Brewer's cost of services of $4.7 million, largely due to the acquisitions of Caldwell and On Call; (ii) an increase in Prostaff's cost of services of $777,000, 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 cost of services of $871,000, primarily attributable to the opening of several new branches. Also contributing to the increase in cost of services was an increase in Maxwell's, Blethen's and First Choice's cost of services of $222,000, $275,000 and $247,000, respectively. Gross Profit. Gross profit increased $2.4 million, or 39.4%, to $8.5 million in the first quarter of 1996 compared to $6.1 million in the first quarter of 1995. Gross margin increased to 20.7% during the first quarter of 1996 compared to 19.3% during the first quarter of 1995. This increase in gross margin was primarily due to the acquisition of Caldwell, as well as an increase in Brewer's gross margin, exclusive of acquisitions. Operating Expenses. Selling, general and administrative expenses ("SG&A") increased $1.9 million, or 37.1%, to $6.9 million for the first quarter of 1996 compared to $5.1 million for the first quarter of 1995. This increase was primarily attributable to the opening of several new branches by many of the Founding Companies, as well as an increase in Brewer's SG&A of $1.2 million, primarily attributable to the acquisitions of Caldwell and On Call. SG&A as a percentage of revenues increased to 17.0% in the first quarter of 1996 compared to 16.1% for the first quarter of 1995. Depreciation and amortization expense increased $235,000, or 122.4%, to $427,000 for the first quarter of 1996 compared to $192,000 for the first quarter of 1995. This increase was primarily attributable to an increase in Brewer's depreciation and amortization of $198,000, largely due to increased amortization of intangibles, which resulted from the acquisitions of Caldwell and On Call. 21 24 Operating Income. Operating income increased $280,000, or 33.8%, to $1.1 million for the first quarter of 1996 compared to $829,000 for the first quarter of 1995. Operating income as a percentage of revenues increased to 2.7% for the first quarter of 1996 compared to 2.6% for the first quarter of 1995. COMBINED RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $25.5 million, or 21.1%, to $146.7 million for 1995 compared to $121.2 million for 1994. This increase was largely due to: (i) an increase in Brewer's revenues of $16.0 million, primarily attributable to the acquisition of Caldwell in July 1995; (ii) an increase in Prostaff's revenues of $3.7 million, primarily due to the addition of new significant clients and the opening of several new branches; and (iii) an increase in Maxwell's revenues of $1.9 million, primarily attributable to a significant client contract. Also contributing to the increase in revenues was an increase in HRA's, Blethen's and First Choice's revenues of $1.8 million, $1.4 million and $696,000, respectively. Cost of Services. Cost of services increased $20.0 million, or 20.6%, to $117.1 million for 1995 compared to $97.1 million for 1994. This increase was primarily attributable to: (i) an increase in Brewer's cost of services of $12.2 million, largely due to the Caldwell acquisition; (ii) an increase in Prostaff's cost of services of $2.8 million, primarily due to the addition of significant clients and the opening of several new branches; and (iii) an increase in Maxwell's cost of services of $1.7 million, primarily due to a significant client contract. Also contributing to the increase in cost of services was an increase in HRA's, Blethen's and First Choice's cost of services of $1.6 million, $1.1 million and $576,000, respectively. Gross Profit. Gross profit increased $5.5 million, or 23.0%, to $29.6 million in 1995 compared to $24.0 million in 1994. Gross margin increased to 20.2% for 1995 compared to 19.8% for 1994. This increase in gross margin was largely the result of the acquisition of Caldwell by Brewer. Operating Expenses. SG&A increased $5.0 million, or 26.2%, to $24.1 million for 1995 compared to $19.0 million for 1994. This increase was primarily attributable to: (i) an increase in Brewer's SG&A of $2.3 million, largely related to the acquisition of Caldwell; (ii) an increase in Prostaff's SG&A of $1.2 million, primarily due to increased compensation associated with the opening of several new branches; and (iii) an increase in HRA's SG&A of $1.0 million, primarily attributable to costs associated with the opening of several new branches. SG&A as a percentage of revenues increased to 16.4% in 1995 compared to 15.7% in 1994. Depreciation and amortization expense increased $415,000, or 56.0%, to $1.2 million for 1995 compared to $742,000 for 1994. This increase was primarily attributable to increased amortization of intangibles by Brewer, resulting from the acquisition of Caldwell in 1995. Operating Income. Operating income increased $123,000, or 2.9%, to $4.4 million for 1995 compared to $4.2 million for 1994. Operating income as a percentage of revenues decreased to 3.0% for 1995 compared to 3.5% for 1994. COMBINED RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $29.9 million, or 32.8%, to $121.2 million for 1994 compared to $91.2 million for 1993. The increase is primarily attributable to: (i) an increase in Brewer's revenue of $15.6 million, largely due to the acquisition of Aaron Temporary Services, Inc. ("Aaron") in November 1993; (ii) an increase in Prostaff's revenues of $3.4 million, primarily due to the opening of new branches; and (iii) an increase in Maxwell's revenues of $4.9 million, primarily attributable to the addition of a significant customer. Also contributing to the increase in revenues was an increase in HRA's, First Choice's and Blethen's revenues of $3.1 million, $2.2 million and $769,000, respectively. Cost of Services. Cost of services increased $25.0 million, or 34.6%, to $97.1 million in 1994 compared to $72.1 million in 1993. This increase was attributable to: (i) an increase in Brewer's cost of services of $12.8 million, primarily due to the acquisition of Aaron; (ii) an increase in Prostaff's cost of services of $2.6 million, primarily due to the opening of new branches; and (iii) an increase in Maxwell's cost of services of $4.8 million, primarily due to the addition of a significant client in 1994. Also contributing to the increase in 22 25 cost of services was an increase in HRA's, First Choice's and Blethen's cost of services of $2.4 million, $1.7 million and $674,000, respectively. Gross Profit. Gross profit increased $4.9 million, or 25.9%, to $24.0 million in 1994 compared to $19.1 million in 1993. Gross margin decreased to 19.8% in 1994 compared to 20.9% in 1993 primarily due to a decrease in Maxwell's gross margin, which resulted from lower margin contracts negotiated with two significant customers and increased competition. Operating Expenses. SG&A increased $3.7 million, or 24.2%, to $19.1 million for 1994 compared to $15.4 million for 1993. This increase was primarily attributable to an increase in Brewer's SG&A of $1.9 million, related to the acquisition of Aaron during November 1993. SG&A as a percentage of revenues decreased to 15.7% in 1994 compared to 16.8% in 1993. Depreciation and amortization expense increased $227,000, or 44.0%, to $742,000 for 1994 compared to $515,000 for 1993. This increase was primarily attributable to significant capital expenditures by many of the Founding Companies during 1993 and 1994. Operating Income. Operating income increased $1.0 million, or 31.1%, to $4.2 million for 1994 compared to $3.2 million for 1993. Operating income as a percentage of revenues remained unchanged at 3.5% in 1994 and 1993. LIQUIDITY AND CAPITAL RESOURCES -- COMBINED Net cash provided by combined operating activities was $1.6 million, $2.8 million, $4.7 million and $287,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. The net cash provided by combined operating activities for the periods presented was primarily attributable to net income and changes in operating assets and liabilities. Net cash provided by (used in) combined investing activities was $69,000, ($1.1) million, ($13.0) million and ($3.6) million for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash provided by combined investing activities in 1993 resulted from the sale of investments by Brewer and Prostaff totaling approximately $1.4 million, which was substantially offset by cash used for capital expenditures and the acquisition of Aaron by Brewer. Cash used in combined investing activities in 1994 was primarily for significant capital expenditures by several of the Founding Companies. Cash used in combined investing activities for 1995 was primarily related to the acquisition of Caldwell by Brewer for cash totaling $11.5 million. Cash used in combined investing activities in the first quarter of 1996 was largely for the acquisition of On Call by Brewer for cash totaling $3.0 million. Net cash provided by (used in) combined financing activities was ($1.3) million, ($1.6) million, $8.7 million and $3.4 million for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash used in combined financing activities in 1993 and 1994 consisted of dividends paid to owners of the individual Founding Companies, partially offset by proceeds from issuances of long-term debt obligations, net of repayments. Cash provided by financing activities in 1995 and the first quarter of 1996 was primarily attributable to the proceeds from debt issued by Brewer in conjunction with the acquisitions of Caldwell and On Call, respectively, partially offset by dividends paid to the owners of the individual Founding Companies. As a result of the foregoing, combined cash and cash equivalents increased $404,000, $82,000, $524,000 and $81,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. As of March 31, 1996, the Company had total borrowings outstanding of $2.8 million on various line of credit facilities. In addition, the Company had total long-term debt outstanding, including current maturities, of approximately $20.5 million as of March 31, 1996. The Company plans to repay all indebtedness with proceeds from the Offering. Certain of the Founding Companies will make cash distributions to their stockholders, prior to or coincident with the Mergers, which represent the companies' estimated S Corporation Accumulated Adjustment Accounts totaling $3.9 million, as follows: (i) Prostaff, $752,000; (ii) Maxwell, $2.5 million; (iii) Blethen, $138,000; and (iv) First Choice, $504,000. These distributions will be funded with additional debt, which the Company plans to repay with proceeds from the Offering. See "Certain Transactions." 23 26 The net proceeds from the Offering, after deducting (i) underwriting discounts, (ii) offering expenses, (iii) the cash portion of the consideration being paid for the Founding Companies; and (iv) the repayment of all debt obligations, are expected to total approximately $9.9 million. The Company plans to use these net proceeds for working capital and general corporate purposes, including future acquisitions. Pending such uses, the Company plans to invest the net proceeds in short-term, interest bearing, investment grade securities. The Company has received a proposal from a major lending institution for a credit facility of approximately $50.0 million to be used for working capital and other general corporate purposes, including future acquisitions. The Company also plans to register up to an additional 4,000,000 shares of its Common Stock as soon as practicable after completion of this Offering for use by the Company as consideration to be paid in conjunction with future acquisitions. While there can be no assurance, management of the Company believes that the funds provided by operations, amounts available under its various line of credit facilities and current amounts of cash and cash equivalents on hand will be sufficient to meet the Company's presently anticipated needs for working capital and capital expenditures for at least the next twelve months. RESULTS OF OPERATIONS -- BREWER BREWER RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $6.4 million, or 85.1%, to $13.9 million for the first quarter of 1996 compared to $7.5 million for the first quarter of 1995. This increase was primarily attributable to the acquisition of Caldwell in July 1995, and the acquisition of On Call in February 1996. The acquisitions of Caldwell and On Call accounted for $4.8 million and $2.5 million, respectively, of the increase in revenues, which was partially offset by a decrease in Brewer's revenues, exclusive of acquisitions, of approximately $900,000. Cost of Services. Cost of services increased $4.7 million, or 74.4%, to $11.0 million for the first quarter of 1996 compared to $6.3 million for the first quarter of 1995. This increase was primarily attributable to the Caldwell and On Call acquisitions, which accounted for $3.7 million and $2.1 million, respectively, of the increase, which was partially offset by a decrease in Brewer's cost of services, exclusive of acquisitions, of approximately $1.1 million. Gross Profit. Gross profit increased $1.7 million, or 140.9%, to $2.9 million in the first quarter of 1996 compared to $1.2 million in the first quarter of 1995. This increase was primarily attributable to the acquisitions of Caldwell and On Call. Gross margin increased to 21.0% during the first quarter of 1996 compared to 16.1% during the first quarter of 1995. This increase was primarily attributable to the acquisition of Caldwell, as well as an increase in Brewer's gross margin, exclusive of acquisitions. Operating Expenses. SG&A increased $1.2 million, or 137.7%, to $2.0 million for the first quarter of 1996 compared to $856,000 for the first quarter of 1995. This increase was primarily attributable to the acquisitions of Caldwell and On Call, which accounted for $520,000 and $241,000 of the increase, respectively. This increase 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. SG&A as a percentage of revenues increased to 14.7% for the first quarter of 1996 compared to 11.4% for the first quarter of 1995. Depreciation and amortization expense increased $198,000, or 293.2%, to $265,000 for the first quarter of 1996 compared to $67,000 for the first quarter of 1995. This increase was primarily attributable to increased amortization of intangibles resulting from the acquisitions of Caldwell and On Call, which were accounted for using the purchase accounting method. 24 27 Operating Income. Operating income increased $327,000, or 114.7%, to $613,000 for the first quarter of 1996 compared to $286,000 for the first quarter of 1995. Operating income as a percentage of revenues increased to 4.4% for the first quarter of 1996 compared to 3.8% for the first quarter of 1995. Interest Expense. Interest expense increased $403,000 to $425,000 in the first quarter of 1996 compared to $22,000 in the first quarter of 1995. This increase was primarily attributable to debt incurred to finance the acquisitions of Caldwell and On Call. Net Income. Net income decreased $78,000, or 28.1%, to $199,000 for the first quarter of 1996 compared to $277,000 for the first quarter of 1995. Net income as a percentage of revenues decreased to 1.4% for the first quarter of 1996 compared to 3.7% for the first quarter of 1995. BREWER RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $16.0 million, or 57.3%, to $43.9 million for 1995 compared to $27.9 million for 1994. This increase was primarily attributable to the acquisition of Caldwell in July 1995, which accounted for $11.7 million of the increase in revenues. Cost of Services. Cost of services increased $12.2 million, or 53.3%, to $35.1 million for 1995 compared to $22.9 million for 1994. This increase was primarily related to the Caldwell acquisition, which accounted for $9.4 million of the increase. Gross Profit. Gross profit increased $3.8 million, or 75.6%, to $8.8 million in 1995 compared to $5.0 million in 1994. Gross margin increased to 20.0% for 1995 compared to 17.9% for 1994. These increases were primarily attributable to the impact of the acquisition of Caldwell and the improvement in gross margins for the branches acquired from Aaron in November 1993. Operating Expenses. SG&A increased $2.3 million, or 66.6%, to $5.8 million for 1995 compared to $3.5 million for 1994. This increase was primarily attributable to the acquisition of Caldwell. SG&A as a percentage of revenues increased to 13.2% in 1995 compared to 12.5% in 1994. Depreciation and amortization expense increased $334,000, or 130.5%, to $590,000 for 1995 compared to $256,000 for 1994. This increase was primarily attributable to increased amortization of intangibles resulting from the acquisition of Caldwell. Operating Income. Operating income increased $1.1 million, or 89.3%, to $2.4 million for 1995 compared to $1.2 million for 1994. Operating income as a percentage of revenues increased to 5.4% for 1995 compared to 4.5% for 1994. Interest Expense. Interest expense increased $709,000 to $801,000 in 1995 compared to $92,000 in 1994. This increase was primarily attributable to higher interest costs on debt incurred to finance the acquisition of Caldwell. Net Income. Net income increased $410,000, or 34.8%, to $1.6 million for 1995 compared to $1.2 million for 1994. Net income as a percentage of revenues decreased to 3.6% in 1995 compared to 4.2% in 1994. BREWER RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $15.6 million, or 126.5%, to $27.9 million for 1994 compared to $12.3 million for 1993. This increase was primarily attributable to the acquisition of Aaron, which accounted for $13.0 million of the increase. Cost of Services. Cost of services increased $12.8 million, or 127.6%, to $22.9 million in 1994 from $10.1 million in 1993. This increase was primarily due to the acquisition of Aaron, which accounted for $11.2 million of the increase. Gross Profit. Gross profit increased $2.7 million, or 121.6%, to $5.0 million in 1994 compared to $2.3 million in 1993. This increase was primarily attributable to the acquisition of Aaron. Gross margin decreased slightly to 17.9% in 1994 compared to 18.3% in 1993 because Aaron had historically lower gross margins than Brewer. 25 28 Operating Expenses. SG&A increased $1.9 million, or 114.6%, to $3.5 million for 1994 compared to $1.6 million for 1993. This increase was primarily attributable to the acquisition of Aaron, which accounted for $1.6 million of the increase. SG&A as a percentage of revenues decreased to 12.5% in 1994 compared to 13.2% in 1993. Depreciation and amortization expense increased $135,000, or 110.8%, to $256,000 for 1994 compared to $121,000 for 1993. This increase was primarily attributable to increased amortization of intangibles resulting from the acquisition of Aaron. Operating Income. Operating income increased $743,000, or 146.6%, to $1.2 million for 1994 compared to $506,000 for 1993. Operating income as a percentage of revenues increased to 4.5% in 1994 compared to 4.1% in 1993. Interest Expense. Interest expense increased $38,000 to $92,000 in 1994 compared to $54,000 in 1993. This increase was primarily attributable to debt incurred to finance the acquisition of Aaron. Net Income. Net income increased $699,000, or 146.4%, to $1.2 million for 1994 compared to $478,000 for 1993. Net income as a percentage of revenues increased to 4.2% in 1994 from 3.9% in 1993. LIQUIDITY AND CAPITAL RESOURCES -- BREWER Net cash provided by (used in) operating activities was ($382,000), $894,000, $1.6 million and ($692,000) for 1993, 1994, 1995 and the first quarter of 1996, respectively. The net cash provided by (used in) operating activities for the periods presented was primarily attributable to net income and changes in operating assets and liabilities. Cash provided by (used in) investing activities was $442,000, ($345,000), ($12.0) million and ($3.2) million for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash provided by investing activities in 1993 was primarily attributable to proceeds from the release of an investment which had been restricted as a condition of Brewer's self-insurance program, and was partially offset by the acquisition of Aaron and routine capital expenditures. Cash used in investing activities for 1994 was primarily attributable to routine capital expenditures. Cash used in investing activities in 1995 and the first quarter of 1996 was primarily attributable to the acquisitions of Caldwell and On Call, respectively. Cash provided by (used in) financing activities was ($179,000), ($512,000), $10.6 million and $3.9 million for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash used in financing activities in 1993 was primarily for cash dividends paid to Brewer's stockholders. Cash used in financing activities in 1994 was primarily attributable to debt repayments and was also influenced by cash dividends paid to Brewer's stockholders. Cash provided by financing activities for 1995 and the first quarter of 1996 was primarily attributable to the proceeds from debt issued in conjunction with the acquisitions of Caldwell and On Call, respectively. As a result of the foregoing, cash and cash equivalents decreased $119,000 in 1993 and increased $37,000, $211,000 and $9,000 in 1994, 1995 and the first quarter of 1996, respectively. Brewer's primary sources of funds are from operations and the issuance of debt under its term loan and line of credit arrangements. Brewer's principal uses of cash are for acquisitions, working capital purposes and capital expenditures. As of March 31, 1996, Brewer had total debt outstanding of approximately $20.3 million. While there can be no assurance, management of Brewer believes that the funds provided by operations, amounts available under its line of credit facility and amounts of cash and cash equivalents on hand will be sufficient to meet its presently anticipated needs for working capital and capital expenditures for at least the next twelve months. 26 29 RESULTS OF OPERATIONS -- PROSTAFF PROSTAFF RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $1.1 million, or 14.0%, to $8.6 million in the first quarter of 1996 compared to $7.5 million in the first quarter of 1995. The increase in Prostaff's revenues was primarily attributable to the opening of several new branches during 1995 and the first quarter of 1996 and a significant increase in business conducted with its largest client. Cost of Services. Cost of services increased $777,000, or 12.5%, to $7.0 million in the first quarter of 1996 compared to $6.2 million in the first quarter of 1995. Gross Profit. Gross profit increased $275,000, or 20.6%, to $1.6 million in the first quarter of 1996 compared to $1.3 million in the first quarter of 1995. Gross margin increased to 18.8% in the first quarter of 1996 compared to 17.7% in the first quarter of 1995, primarily attributable to a decrease in the Arkansas state unemployment tax rate. Operating Expenses. Operating expenses increased $444,000, or 38.1%, to $1.6 million in the first quarter of 1996 compared to $1.2 million in the first quarter of 1995. This increase was primarily attributable to consulting fees paid in conjunction with Prostaff's efforts to become certified pursuant to International Standards Organization 9000 (ISO 9000) quality system requirements and the start-up costs of several new branches. Operating expenses as a percentage of revenues increased to 18.7% in the first quarter of 1996 compared to 15.4% in the first quarter of 1995. Operating Income. Operating income decreased $169,000, or 98.6%, to $2,000 in the first quarter of 1996 compared to $171,000 in the first quarter of 1995. Operating income as a percentage of revenues decreased to 0.03% in the first quarter of 1996, compared to 2.3% in the first quarter of 1995. Net Income. Net income decreased $73,000, or 94.7%, to $4,000 in the first quarter of 1996 compared to $77,000 in the first quarter of 1995. Net income as a percentage of revenues decreased to 0.05% in the first quarter of 1996 compared to 1.0% in the first quarter of 1995. PROSTAFF RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $3.7 million, or 12.2%, to $34.3 million in 1995 compared to $30.6 million in 1994. The increase was primarily attributable to the addition of new significant clients, as well as the opening of several branches in 1995. Cost of Services. Cost of services increased $2.8 million, or 10.9%, to $28.2 million in 1995 compared to $25.5 million in 1994. Gross Profit. Gross profit increased $944,000, or 18.3%, to $6.1 million in 1995 compared to $5.2 million in 1994. Gross margin increased to 17.8% in 1995 compared to 16.8% in 1994. This increase in gross margin was attributable to slightly improved rates charged to clients and a decrease in the Arkansas state unemployment tax rate. Operating Expenses. Operating expenses increased $1.2 million, or 27.5%, to $5.6 million in 1995 compared to $4.4 million in 1994. This increase was attributable to increased compensation relating to the opening of several new branches and expansion of the corporate headquarters. Operating expenses as a percentage of revenues increased to 16.2% in 1995 compared to 14.2% in 1994. Operating Income. Operating income decreased $256,000, or 32.3%, to $537,000 in 1995 compared to $793,000 in 1994. Operating income as a percentage of revenues decreased to 1.6% in 1995 compared to 2.6% in 1994. Net Income. Net income decreased $76,000, or 14.5%, to $446,000 in 1995 compared to $522,000 in 1994. Net income as a percentage of revenues decreased to 1.3% in 1995 compared to 1.7% in 1994. 27 30 PROSTAFF RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $3.4 million, or 12.3%, to $30.6 million in 1994 compared to $27.2 million in 1993. The increase was primarily attributable to the opening of several new branches during 1994. Cost of Services. Cost of services increased $2.6 million, or 11.4%, to $25.5 million in 1994 compared to $22.9 million in 1993. Gross Profit. Gross profit increased $766,000, or 17.5%, to $5.2 million in 1994 compared to $4.4 million in 1993. Gross margin increased slightly to 16.8% in 1994 compared to 16.1% in 1993. The overall increase in gross margin was primarily the result of a slight increase in rates charged to clients and a decrease in the Arkansas state unemployment tax rate. Operating Expenses. Operating expenses increased $603,000, or 16.1%, to $4.4 million in 1994 compared to $3.8 million in 1993. Operating expenses as a percentage of revenues increased slightly to 14.2% in 1994 compared to 13.8% in 1993. Operating Income. Operating income increased $162,000, or 25.7%, to $793,000 in 1994 compared to $631,000 in 1993. Operating income as a percentage of revenues increased slightly to 2.6% in 1994 compared to 2.3% in 1993. Net Income. Net income increased $123,000, or 30.8%, to $522,000 in 1994 compared to $399,000 in 1993. Net income as a percentage of revenues increased to 1.7% in 1994 compared to 1.5% in 1993. LIQUIDITY AND CAPITAL RESOURCES -- PROSTAFF Net cash provided by (used in) operating activities was $181,000, $740,000, $834,000 and ($20,000) for 1993, 1994, 1995 and the first quarter of 1996, respectively. The net cash provided by (used in) operating activities for each period presented resulted primarily from changes in operating assets and liabilities and net income. Cash provided by (used in) investing activities was $195,000, ($293,000), ($362,000) and ($145,000) for 1993, 1994, 1995 and the first quarter of 1996. Cash used in investing activities for 1995 was primarily for capital expenditures associated with the opening of several new branches. Cash provided by (used in) financing activities was ($390,000), ($261,000), ($512,000) and $140,000 for 1993, 1994, 1995 and the first quarter of 1996. The cash used in financing activities in 1995 was the result of additional net payments on the line of credit. As a result of the foregoing, cash and cash equivalents decreased $15,000 in 1993, increased $186,000 in 1994 and decreased $40,000 and $25,000 in 1995 and the first quarter of 1996, respectively. As of March 31, 1996, Prostaff had total debt, including line of credit and current maturities of long-term debt of $366,000. Prostaff currently has three revolving credit facilities, with funds available under these facilities totaling approximately $1.8 million at March 31, 1996. While there can be no assurance, management of Prostaff believes that funds provided by operations, amounts available under its line of credit facilities and the current amount of cash and cash equivalents on hand will be sufficient to meet its presently anticipated needs for working capital and capital expenditures for at least the next twelve months. RESULTS OF OPERATIONS -- MAXWELL MAXWELL RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $315,000, or 5.4%, to $6.1 million for the first quarter of 1996 compared to $5.8 million for the first quarter of 1995. This increase was primarily attributable to a significant client contract, which started in July 1995, and the acquisition of Sumner Ray Technical Resources, Inc. ("Sumner Ray") in February 1996. This increase was partially offset by a decrease in the staffing needs of another 28 31 significant client and government shutdowns in December 1995 and January 1996, which caused delays in the issuance of H1-B Visas to foreign-trained therapists and delays in the therapists' arrival to the U.S. Cost of Services. Cost of services increased $222,000, or 4.9%, to $4.7 million for the first quarter of 1996 compared to $4.5 million for the first quarter of 1995. Gross Profit. Gross profit increased $92,000, or 7.0%, to $1.4 million in the first quarter of 1996 compared to $1.3 million for the first quarter of 1995. Gross margin remained relatively stable at 22.8% and 22.5% for the first quarter of 1996 and 1995, respectively. Operating Expenses. Operating expenses increased $166,000, or 16.1%, to $1.2 million for the first quarter of 1996 compared to $1.0 million for the first quarter of 1995. Operating expenses as a percentage of revenues increased to 19.5% in the first quarter of 1996 compared to 17.7% in the first quarter of 1995. Operating Income. Operating income decreased $74,000, or 26.5%, to $205,000 for the first quarter of 1996 compared to $279,000 for the first quarter of 1995. Operating income as a percentage of revenues decreased to 3.3% for the first quarter of 1996 compared to 4.9% for the first quarter of 1995. Net Income. Net income decreased $31,000, or 10.8%, to $255,000 for the first quarter of 1996 compared to $286,000 for the first quarter of 1995. Net income as a percentage of revenues decreased to 4.2% for the first quarter of 1996 compared to 4.9% for the first quarter of 1995. MAXWELL RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $1.9 million, or 8.8%, to $23.1 million for 1995 compared to $21.2 million for 1994. This increase was primarily attributable to a significant client contract, which started in July 1995, and an increase in the average number of foreign-trained therapists working. Cost of Services. Cost of services increased $1.7 million, or 10.9%, to $17.7 million for 1995 compared to $16.0 million for 1994. Gross Profit. Gross profit increased $122,000, or 2.3%, to $5.3 million in 1995 compared to $5.2 million in 1994. Gross margin decreased to 23.1% for 1995 compared to 24.6% for 1994. This decrease resulted primarily from increased competition and a high volume, lower margin contract with one significant client. Operating Expenses. Operating expenses increased $505,000, or 12.9%, to $4.4 million for 1995 compared to $3.9 million for 1994. This increase was partially attributable to the write-off of $165,000 in accounts receivable related to one client. Operating expenses as a percentage of revenues increased to 19.2% in 1995 compared to 18.5% in 1994. Operating Income. Operating income decreased $383,000, or 29.6%, to $912,000 for 1995 compared to $1.3 million for 1994. Operating income as a percentage of revenues decreased to 3.9% for 1995 compared to 6.1% for 1994. Net Income. Net income decreased $344,000, or 27.2%, to $920,000 for 1995 compared to $1.3 million for 1994. Net income as a percentage of revenues decreased to 4.0% in 1995 compared to 6.0% in 1994. MAXWELL RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $4.9 million, or 30.0%, to $21.2 million for 1994 compared to $16.3 million for 1993. This increase was primarily attributable to the addition of a significant client in 1994, which accounted for increased revenues of $2.5 million, and an increase in business conducted with certain other clients. Cost of Services. Cost of services increased $4.8 million, or 42.2%, to $16.0 million in 1994 compared to $11.3 million in 1993. This increase was also primarily attributable to the addition of a significant client in 1994. Gross Profit. Gross profit increased $152,000, or 3.0%, to $5.2 million in 1994 compared to $5.1 million in 1993. Gross margin decreased to 24.6% in 1994 compared to 31.1% in 1993. This decrease was a result of 29 32 lower margin contracts negotiated with two of the Company's significant clients as well as increased workers' compensation costs and increased competition. Operating Expenses. Operating expenses increased $270,000, or 7.4%, to $3.9 million for 1994 compared to $3.7 million for 1993. Operating expenses as a percentage of revenues decreased to 18.5% for 1994 compared to 22.4% for 1993. Operating Income. Operating income remained fairly constant at $1.3 million in 1994 compared to $1.4 million in 1993. Operating income as a percentage of revenues decreased to 6.1% in 1994 compared to 8.7% in 1993. Net Income. Net income was $1.3 million for both 1994 and 1993. Net income as a percentage of revenues decreased to 6.0% in 1994 compared to 7.9% in 1993. LIQUIDITY AND CAPITAL RESOURCES -- MAXWELL Net cash provided by operating activities was $1.4 million, $719,000, $1.9 million and $621,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. Net cash provided by operating activities for each period presented resulted primarily from changes in operating assets and liabilities and net income. Cash used in investing activities was $264,000, $225,000, $174,000 and $208,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash used in investing activities was primarily for additions of property and equipment and purchases of investments. Cash used in financing activities was $860,000, $1.0 million, $1.2 million and $408,000 for 1993, 1994, 1995 and the first quarter of 1996. Cash used in financing activities in each year was primarily for dividends paid to stockholders. Subsequent to March 31, 1996, Maxwell entered into a debt agreement for a $1.75 million term loan. Accrued interest is due and payable monthly beginning June 1, 1996 at a rate of 8.25%. The outstanding principal balance plus unpaid accrued interest is due November 1, 1996. The proceeds of the loan were used to fund cash dividends paid to Maxwell's stockholders. While there can be no assurance, management of Maxwell believes that funds provided by operations, amounts provided under the debt agreement discussed above, and current amounts of cash and cash equivalents will be sufficient to meet its presently anticipated needs for working capital and capital expenditures for at least the next twelve months. RESULTS OF OPERATIONS -- HRA HRA RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 1995 Revenues. Revenues increased $2.2 million, or 26.1%, to $10.6 million for the six months ended March 31, 1996 compared to $8.4 million for the six months ended March 31, 1995. This increase was primarily attributable to the opening of new branches. Cost of Services. Cost of services increased $1.8 million, or 25.5%, to $8.6 million for the six months ended March 31, 1996 compared to $6.9 million for the six months ended March 31, 1995. This increase was primarily attributable to the opening of new branches as well as increased workers' compensation costs. Gross Profit. Gross profit increased $453,000, or 28.9%, to $2.0 million for the six months ended March 31, 1996 compared to $1.6 million for the six months ended March 31, 1995. Gross margin increased to 18.9% for the six months ended March 31, 1996 compared to 18.5% for the six months ended March 31, 1995. Operating Expenses. Operating expenses increased $376,000, or 24.6%, to $1.9 million for the six months ended March 31, 1996 compared to $1.5 million for the six months ended March 31, 1995. This increase was primarily due to increased overhead associated with the opening of new branches. In addition, HRA expensed a severance arrangement of approximately $136,000 during the six months ended March 31, 1996. Operating 30 33 expenses as a percentage of revenues decreased to 17.9% for the six months ended March 31, 1996 compared to 18.2% for the six months ended March 31, 1995. Operating Income. Operating income increased $76,000, or 251.4%, to $106,000 for the six months ended March 31, 1996 compared to $30,000 for the six months ended March 31, 1995. Operating income as a percentage of revenues increased to 1.0% for the six months ended March 31, 1996 compared to 0.4% for the six months ended March 31, 1995. Other Expenses, Net. Other expenses increased $99,000 to $90,000 for the six months ended March 31, 1996 compared to $9,000 of income for the six months ended March 31, 1995. The change was principally related to a $90,000 payment by HRA, on behalf of two existing stockholders, to settle an outstanding option agreement to purchase 30% of HRA. Net Income (Loss). Net income decreased $15,000 from $4,000 for the six months ended March 31, 1995 to a net loss of $11,000 for the six months ended March 31, 1996. HRA RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $1.8 million, or 11.3%, to $18.3 million in 1995 compared to $16.5 million in 1994. This increase was attributable to the opening of new branches. Cost of Services. Cost of services increased $1.6 million, or 11.8%, to $14.9 million in 1995 compared to $13.4 million in 1994. This increase was primarily attributable to the opening of new branches and an increase in workers' compensation costs. Gross Profit. Gross profit increased $281,000, or 9.1%, to $3.4 million in 1995 compared to $3.1 million in 1994. Gross margin decreased to 18.4% in 1995 compared to 18.8% in 1994. Operating Expenses. Operating expenses increased $1.1 million, or 44.4%, to $3.5 million in 1995 compared to $2.4 million in 1994. This increase was partially attributable to the overhead costs associated with the opening of new branches. Operating expenses as a percentage of revenues increased to 19.1% in 1995 compared to 14.8% in 1994. Operating Income (Loss). Operating income decreased $796,000 to an operating loss of $137,000 in 1995 compared to operating income of $659,000 in 1994. Net Income (Loss). Net income decreased $500,000 to a net loss of $147,000 in 1995 compared to net income of $353,000 in 1994. Net income as a percentage of revenues decreased to (0.8)% in 1995 compared to 2.1% in 1994. HRA RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $3.1 million, or 23.4%, to $16.5 million in 1994 compared to $13.3 million in 1993. This increase was primarily attributable to an increase in business conducted with new and existing clients. Cost of Services. Cost of services increased $2.4 million, or 21.7%, to $13.4 million in 1994 compared to $11.0 million in 1993. This increase was primarily attributable to the increase in revenues and rising workers' compensation and temporary employee vacation costs. Gross Profit. Gross profit increased $738,000, or 31.4%, to $3.1 million in 1994 compared to $2.3 million in 1993. Gross margin increased to 18.8% in 1994 compared to 17.6% in 1993. Operating Expenses. Operating expenses increased $286,000, or 13.3%, to $2.4 million in 1994 compared to $2.1 million in 1993. Operating expenses as a percentage of revenues decreased to 14.8% in 1994 compared to 16.1% in 1993. Operating Income. Operating income increased $452,000, or 219.0%, to $659,000 in 1994 compared to $207,000 in 1993. Operating income as a percentage of revenues increased to 4.0% in 1994 compared to 1.5% in 1993. 31 34 Net Income. Net income increased $268,000 to $353,000 in 1994 compared to $85,000 in 1993. Net income as a percentage of revenues increased to 2.1% in 1994 compared to 0.6% in 1993. LIQUIDITY AND CAPITAL RESOURCES -- HRA Net cash provided by operating activities was $101,000, $98,000, $89,000 and $93,000 for 1993, 1994, 1995 and the six months ended March 31, 1996, respectively. The net cash provided by operating activities for each of the periods presented was primarily due to changes in operating assets and liabilities and net income (loss). Net cash used in investing activities was $41,000, $40,000, $152,000 and $49,000 for 1993, 1994, 1995 and the six months ended March 31, 1996, respectively. Cash used in investing activities in each of the periods presented was primarily for additions and replacements of office and computer equipment and software. Net cash provided by (used in) financing activities was $328,000, $128,000, ($156,000) and ($97,000) for 1993, 1994, 1995 and the six months ended March 31, 1996, respectively. Cash used in financing activities during 1995 consisted primarily of net payments on the receivable financing agreement and repayment of borrowings from a stockholder. As a result of the foregoing, cash and cash equivalents increased $388,000 and $186,000 in 1993 and 1994, respectively, and decreased $219,000 and $53,000 in 1995 and the six months ended March 31, 1996, respectively. HRA is obligated under certain compensation and non-compete arrangements to make payments to a former consultant, former stockholder and other third parties over the next ten years. HRA anticipates that cash generated by operations and borrowings available under its line of credit will be sufficient to meet these requirements. While there can be no assurance, management of HRA believes that funds provided by operations, amounts available under its revolving line of credit facility and the current amount of cash and cash equivalents on hand will be sufficient to meet its presently anticipated needs for working capital, capital expenditures and acquisitions for at least the next twelve months. RESULTS OF OPERATIONS -- FIRST CHOICE FIRST CHOICE RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $296,000, or 9.2%, to $3.5 million in the first quarter of 1996 compared to $3.2 million in the first quarter of 1995. Cost of Services. Cost of services increased $247,000, or 9.4%, to $2.9 million in the first quarter of 1996 compared to $2.6 million in the first quarter of 1995. Gross Profit. Gross profit increased $49,000, or 8.1%, to $656,000 in the first quarter of 1996 compared to $607,000 in the first quarter of 1995. Gross margin decreased slightly to 18.6% in the first quarter of 1996 compared to 18.8% in the first quarter of 1995. Operating Expenses. Operating expenses increased $42,000, or 8.1%, to $562,000 in the first quarter of 1996 compared to $520,000 in the first quarter of 1995. Operating expenses as a percentage of revenues decreased slightly to 16.0% in the first quarter of 1996 compared to 16.1% in the first quarter of 1995. Operating Income. Operating income increased $6,000, or 7.7%, to $93,000 in the first quarter of 1996 compared to $87,000 in the first quarter of 1995. Operating income as a percentage of revenues was 2.7% in both the first quarter of 1996 and the first quarter of 1995. Net Income. Net income increased $6,000, or 7.5%, to $86,000 in the first quarter of 1996 compared to $80,000 in the first quarter of 1995. Net income as a percentage of revenues remained steady, however, at 2.4% in the first quarter of 1996 compared to 2.5% in the first quarter of 1995. 32 35 FIRST CHOICE RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $696,000, or 5.4%, to $13.7 million in 1995 compared to $13.0 million in 1994. Cost of Services. Cost of services increased $576,000, or 5.4%, to $11.1 million in 1995 compared to $10.6 million in 1994. Gross Profit. Gross profit increased $120,000, or 4.9%, to $2.6 million in 1995 compared to $2.4 million in 1994. Gross margin remained steady, however, at 18.6% in 1995 compared to 18.7% in 1994. Operating Expenses. Operating expenses decreased $228,000, or 9.0%, to $2.3 million in 1995 compared to $2.5 million in 1994. This decrease was primarily attributable to a $680,000 decrease in compensation to First Choice's president and majority shareholder. This decrease was partially offset by increases in administrative salaries, recruiting, testing and rent expense in 1995. Operating expenses as a percentage of revenues decreased to 16.7% in 1995 compared to 19.4% in 1994. Operating Income (Loss). Operating income increased $348,000 to $263,000 in 1995 compared to an operating loss of $85,000 in 1994. Net Income. Net income increased $184,000 to $243,000 in 1995 compared to $59,000 in 1994. Net income as a percentage of revenues increased to 1.8% in 1995 compared to 0.5% in 1994. FIRST CHOICE RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $2.2 million, or 20.3%, to $13.0 million in 1994 compared to $10.8 million in 1993. Cost of Services. Cost of services increased $1.7 million, or 19.8%, to $10.6 million in 1994 compared to $8.8 million in 1993. Gross Profit. Gross profit increased $451,000, or 22.7%, to $2.4 million in 1994 compared to $2.0 million in 1993. Gross margin increased to 18.7% in 1994 compared to 18.3% in 1993. Operating Expenses. Operating expenses increased $1.1 million, or 80.4%, to $2.5 million in 1994 compared to $1.4 million in 1993. This increase was primarily attributable to a $657,000 increase in compensation to First Choice's president and majority shareholder. Operating expenses as a percentage of revenues increased to 19.4% in 1994 compared to 12.9% in 1993. Operating Income (Loss). First Choice generated an operating loss of $85,000 in 1994 compared to operating income generated in 1993 of $586,000. Net Income. Net income decreased $292,000 to $59,000 in 1994 compared to $351,000 in 1993. Net income as a percentage of revenues decreased to 0.5% in 1994 compared to 3.2% in 1993. LIQUIDITY AND CAPITAL RESOURCES -- FIRST CHOICE Net cash provided by (used in) operating activities was $208,000, $46,000, $108,000 and ($138,000) for 1993, 1994, 1995 and the first quarter of 1996, respectively. Net cash provided by (used in) operating activities for each period presented resulted primarily from changes in operating assets and liabilities and net income. Net cash used in investing activities was $54,000, $120,000, $164,000 and $40,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash used in investing activities for each period presented was primarily for additions to property and equipment. Net cash provided by (used in) financing activities was ($182,000), $241,000, $130,000 and ($50,000) for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash provided by (used in) financing activities consisted primarily of proceeds from the issuance of short-term debt obligations and a note payable to a shareholder and principal payments on such instruments. 33 36 As a result of the foregoing, cash and cash equivalents decreased $27,000 in 1993, increased $166,000 in 1994, increased $74,000 in 1995, and decreased $228,000 for the first quarter of 1996. As of March 31, 1996, First Choice had total debt of $330,000. While there can be no assurance, management of First Choice believes that cash flows provided by operations, amounts available under its revolving line of credit facility and current amounts of cash and cash equivalents on hand will be sufficient to meet its liquidity requirements for at least the next twelve months. RESULTS OF OPERATIONS -- BLETHEN BLETHEN RESULTS FOR THE FIRST QUARTER OF 1996 COMPARED TO THE FIRST QUARTER OF 1995 Revenues. Revenues increased $315,000, or 9.9%, to $3.5 million in the first quarter of 1996 compared to $3.2 million in the first quarter of 1995. Cost of Services. Cost of services increased $275,000, or 11.7%, to $2.6 million in the first quarter of 1996 compared to $2.4 million in the first quarter of 1995. Gross Profit. Gross profit increased $40,000, or 4.9%, to $867,000 in the first quarter of 1996 compared to $827,000 in the first quarter of 1995. Gross margin decreased to 24.8% during the first quarter of 1996 compared to 26.0% during the first quarter of 1995. Operating Expenses. Operating expenses increased $12,000, or 1.6%, to $728,000 in the first quarter of 1996 compared to $716,000 in the first quarter of 1995. Operating expenses as a percentage of revenues decreased to 20.8% in the first quarter of 1996 compared to 22.5% in the first quarter of 1995. Operating Income. Operating income increased $29,000, or 25.8%, to $140,000 in the first quarter of 1996 compared to $111,000 in the first quarter of 1995. Operating income as a percentage of revenues increased to 4.0% in the first quarter of 1996 compared to 3.5% in the first quarter of 1995. Net Income. Net income decreased 15.0%, to $50,000, or 1.4% of revenues in the first quarter of 1996 compared to $59,000, or 1.9% of revenues in the first quarter of 1995. BLETHEN RESULTS FOR 1995 COMPARED TO 1994 Revenues. Revenues increased $1.4 million, or 11.8%, to $13.4 million in 1995 compared to $12.0 million in 1994. Cost of Services. Cost of services increased $1.1 million, or 12.6%, to $9.9 million in 1995 compared to $8.8 million in 1994. Gross Profit. Gross profit increased $302,000, or 9.6%, to $3.5 million in 1995 compared to $3.2 million in 1994. Gross margin decreased to 25.9% during 1995 compared to 26.4% during 1994. Operating Expenses. Operating expenses increased $207,000, or 7.3%, to $3.0 million in 1995 compared to $2.8 million in 1994. Operating expenses as a percentage of revenues decreased to 22.7% in 1995 compared to 23.7% in 1994. Operating Income. Operating income increased $95,000, or 29.3%, to $419,000 in 1995 compared to $324,000 in 1994. Operating income as a percentage of revenues increased to 3.1% during 1995 compared to 2.7% during 1994. Net Income. Net income increased 48.2% to $208,000, or 1.6% of revenues in 1995 compared to $141,000, or 1.2% of revenues in 1994. BLETHEN RESULTS FOR 1994 COMPARED TO 1993 Revenues. Revenues increased $769,000, or 6.9%, to $12.0 million in 1994 compared to $11.2 million in 1993. 34 37 Cost of Services. Cost of services increased $674,000, or 8.3%, to $8.8 million in 1994 compared to $8.1 million in 1993. Gross Profit. Gross profit increased $95,000, or 3.1%, to $3.2 million in 1994 compared to $3.1 million in 1993. Gross margin decreased to 26.4% during 1994 compared to 27.4% during 1993. Operating Expenses. Operating expenses decreased $341,000, or 10.7%, to $2.8 million in 1994 compared to $3.2 million in 1993. Operating expenses as a percentage of revenues decreased to 23.7% in 1994 compared to 28.4% in 1993. Operating Income (Loss). Operating income increased $436,000 to $324,000 in 1994 compared to a loss of $112,000 in 1993. Net Income (Loss). Net income increased $232,000 to $141,000 in 1994 compared to a loss of $91,000 in 1993. LIQUIDITY AND CAPITAL RESOURCES -- BLETHEN Net cash provided by operating activities was $67,000, $218,000, $100,000 and $155,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. Net cash provided by operating activities for all periods presented was primarily due to changes in operating assets and liabilities and net income (loss). Net cash used in investing activities was $130,000, $72,000, $25,000 and $15,000 for 1993, 1994, 1995 and the first quarter of 1996, respectively. Cash used in investing activities for all periods presented was solely for capital expenditures, primarily related to the opening of new branches. Net cash used in financing activities was $129,000, $61,000 and $143,000 for 1994, 1995 and the first quarter of 1996. Cash used in financing activities during the first quarter of 1996 consisted of net payments on the lines of credit and increases in amounts due from shareholders. As a result of the foregoing, cash and cash equivalents decreased $64,000 in 1993, increased $17,000 in 1994, increased $13,000 in 1995 and decreased $3,000 in the first quarter of 1996. As of March 31, 1996, Blethen had total debt of $1.1 million. While there can be no assurance, management of Blethen believes that the funds provided by operations, amounts available under bank credit agreements and amounts of cash and cash equivalents on hand will be sufficient to meet its presently anticipated needs for working capital and capital expenditures for at least the next twelve months. 35 38 BUSINESS StaffMark was founded in March 1996 to create a leading provider of diversified staffing services to businesses, professional and service organizations, governmental agencies and healthcare providers, primarily in growth markets in the southeastern and southwestern United States. StaffMark has entered into agreements to acquire, simultaneously with the closing of this Offering, the six Founding Companies, which have on average operated for over 15 years. The Company will provide a wide variety of staffing services through 91 branch offices located in Arkansas, Colorado, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee and Virginia. The Company's senior management will be comprised primarily of stockholders of the Founding Companies. Currently, the six Founding Companies provide more than 10,000 employees to over 2,500 clients during a typical week. Since 1993, the Founding Companies have expanded by acquiring four staffing businesses with 17 offices and by opening an additional 32 branch offices. The Company's business is organized into three divisions: Commercial, Professional, and Specialty Medical. The Commercial division provides clerical and light industrial staffing services, and generated approximately 86.4% and 84.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Professional division provides technical, professional and information technology staffing services and generated approximately 5.3% and 7.6% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Specialty Medical division provides healthcare and medical staffing services, such as physical and occupational therapists, speech pathologists and clinical trials support services, and generated approximately 8.3% and 7.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. According to Staffing Industry Report, an industry publication, technical, professional and healthcare staffing are among the fastest growing sectors of the staffing industry. The Company believes that these specialized services offer a greater opportunity for growth and profitability than commercial staffing services alone. The Company's immediate goal is to expand throughout the regions it currently serves, and ultimately to expand nationally to meet the broad geographic needs of regional and national companies seeking to centralize purchasing decisions for temporary staffing needs. The Company plans to achieve these goals through acquisitions and internal growth. OPERATING STRATEGY Provide a Decentralized Entrepreneurial Environment. The Company believes an entrepreneurial business environment that rewards performance tends to attract and retain self-motivated, achievement-oriented individuals. Each of the Company's branches will operate as a separate profit center with local management having primary profit and loss responsibility. Each branch office will be given latitude in many fundamental operational functions, including hiring, pricing, training, sales, and marketing. This will permit each branch manager to be flexible and responsive to the specific needs of local clientele. In addition, the Company intends to establish profit-based compensation at the regional and local levels and to implement a stock option program to further motivate employees through ownership in the Company. See "Management -- 1996 Stock Option Plan." Capitalize on Strong Reputation and Local Name Recognition. The Company intends to continue to build on the Founding Companies' strong reputations and client familiarity with their local names. The Company believes that its local presence, accessible management and sophisticated support services position it as a provider of choice of staffing services in the markets it serves. The Company believes that it is one of the leading providers of staffing services in most of its markets. 36 39 Capitalize on New Corporate Structure. The Company intends to take advantage of its new corporate structure by: Increasing Operating Efficiencies. The Company believes that it can achieve economies of scale by combining a number of general and administrative functions at the corporate level and by reducing or eliminating redundant functions and facilities of the Founding Companies. The Founding Companies have made substantial investments in technology and systems, which will facilitate the integration of the operational, financial and administrative functions of their respective businesses. Currently, four of the six Founding Companies employ versions of the Caldwell-Spartin computer system, and the Company plans to add the other two companies to the system within six months of the completion of this Offering. The Company will benefit from further economies of scale through common regional management and the spreading of recruiting, training, advertising, administrative and branch office costs over a larger number of temporary employees and clients. Centralizing Control Functions. The Company will support its branch office network by providing risk management, payroll, billing and collection, purchasing, cash management, internal audit, human resources and other administrative support services. This centralization will provide senior management with a significant source of control and the ability to monitor the key operating areas of the Company at the branch level. Adopting the Best Practices of Founding Companies. Management of the Company routinely evaluates the operating policies and procedures of each of the Founding Companies and will implement Company-wide the practices that best serve the needs of the Company. For example, three of the Founding Companies employ an incentive compensation system for their branch offices which encourages cost savings at the branch level by rewarding branch office profitability. Management intends to implement this compensation system throughout the Company. Offer a Diversified Range of Services. The Company provides virtually all commercial staffing services, including secretarial, clerical, word processing, light industrial and electronic assembly. In addition to commercial staffing services, the Company provides professional and specialty medical staffing services in certain markets by providing personnel such as computer operators, programmers, engineers, physical and occupational therapists, and clinical trial support employees. The Professional and Specialty Medical divisions, which management believes offer substantial growth opportunities, tend to generate higher gross margins than the Commercial division. The Company also offers permanent placement services in several of its branches and believes that the relatively higher margins and cross-selling opportunities associated with permanent placement make it a profitable complement to its other staffing services. Offer Customized Client Services. The Company seeks to satisfy the needs of its clients by providing customized services such as on-site management and permanent placement services. The flexibility of the Company's decentralized organization will allow it to tailor its operations to meet local client requirements. For example, clients may be provided with customized billings, utilization reports, and safety awareness and training programs. The Company believes that the quality of the Founding Companies' services has enabled them to establish and maintain long-term relationships with clients by understanding the clients' businesses, responding promptly to client requests, proactively assessing clients' staffing needs, and continually monitoring job performance and client satisfaction. Certain of the Founding Companies maintain quality assurance programs that include such procedures as: (i) a 30 minute response time on status of pending orders; (ii) customized reporting and invoicing for clients; and (iii) customized Caldwell-Spartin call-back reports and other personalized daily reports to ensure a timely response to the daily needs of its clients and temporary employees. Attract and Retain Qualified Management and Personnel. The Company believes that experienced management and branch office personnel with strong ties to and knowledge of the local community are integral to establishing long-term relationships at the local level. The Company believes that its decentralized structure, which grants regional and local management significant autonomy, will result in the attraction and retention of experienced, entrepreneurial managers. 37 40 GROWTH STRATEGY Pursuing Strategic Acquisitions. The Company seeks acquisitions of profitable, well-managed staffing companies that will expand the geographic scope of its operations, increase the revenues of its Professional and Specialty Medical divisions, or offer services that may be cross-sold to the Company's existing client base. The Company has acquired four staffing businesses over the past three years and currently has two acquisitions pending as outlined below:
ACQUISITION ACQUIRED SERVICES ACQUIRED ACQUIRING COMPANY DATE COMPANY LOCATION OFFERED BRANCHES REVENUES(1) - --------------------------- ----------- ----------------- -------- ----------- -------- -------------- (IN THOUSANDS) Brewer..................... 11/93 Aaron Temporaries AR Commercial 7 $ 10,000 Brewer..................... 7/95 Caldwell GA Commercial 5 17,000 Brewer..................... 2/96 On Call CO Commercial/ 4 12,000 Professional Maxwell.................... 2/96 Sumner-Ray OK Professional 1 1,400 First Choice(2)............ 7/96 Strategic Sourcing NC Professional 1 1,200 HRA(2)..................... 7/96 Dorothy Johnson TN Professional 1 1,000 Career Consultants
- --------------- (1) Represents approximate revenues for fiscal year prior to acquisition. (2) Acquisition pending. Immediately following the consummation of the Offering, the Company intends to pursue a strategic acquisition program. The Company will evaluate acquisitions using numerous criteria, including profitability of operations, management strength, market location, market share, staffing services offered, and the quality of service. Certain of the Company's executive officers and directors hold leadership positions in national and regional staffing trade associations, and as a result have developed personal relationships with the owners of numerous independent staffing companies. The Company believes that it will have a strategic advantage in completing acquisitions based on (i) these personal relationships, (ii) the successful assimilation of previous acquisitions, (iii) its decentralized entrepreneurial environment and (iv) its greater visibility and resources as a public company. As consideration for future acquisitions, the Company intends to use various combinations of equity, debt or cash. The Company initially plans to register up to an additional 4,000,000 shares of its Common Stock as soon as practicable after completion of the Offering for use in future acquisitions. The Company has also received a proposal from a major lending institution to provide the Company with a line of credit of $50.0 million, some or all of which could be used in connection with future acquisitions. Growing Internally. A key element of the Company's growth strategy is to increase the productivity and profitability of existing operations by expanding and enhancing services and by increasing penetration in existing geographic markets. Spinning-off new branch offices from existing branches is a primary method of expansion in the Company's existing markets. Spin-offs usually occur in metropolitan areas where a branch has grown too large to efficiently manage the number of temporary staffing hours generated. The branch splits into two offices which allows the new branch to open with an existing client base and provides the Company with geographical expansion at low marginal cost. During fiscal 1995 and the first quarter of 1996, the Company opened 19 spin-off branches. In addition, the Company may open new branch offices by following existing clients into new geographic areas. Increasing Vendor-on-Premises Relationships. The Company currently has 16 VOP partnering relationships, as compared to nine at December 31, 1995. VOP relationships represented 8.9% and 16.1% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. Under these programs, the Company assumes administrative responsibility for coordinating all temporary personnel services throughout a client's location or organization, including skills testing and 38 41 training. While these partnering relationships tend to have lower gross margins than traditional temporary staffing services, the higher volumes and comparatively lower operating expenses associated with these relationships result in attractive operating profits for the Company. The Company seeks to expand its VOP program to comprehensive outsourcing arrangements, in which the Company staffs and manages an entire department or function on a turn-key basis. The VOP program provides the Company with an opportunity to establish long-term client relationships, which result in a more stable source of revenue, while providing clients with a dedicated on-site account manager who can more effectively meet the client's changing staffing needs with high quality and consistent service. Cross-Selling Professional Services. The Company currently provides commercial staffing services in the majority of its offices and plans to introduce its professional services to certain branches that currently do not offer such services. The Company believes there are substantial growth opportunities through the introduction of its broad range of existing services throughout its network of branch offices. Expanding Specialty Medical Services. The Company believes that revenue and profitability can be enhanced by providing specialty medical services in additional markets. The Company's specialty medical services personnel currently include physical and occupational therapists, speech pathologists, and clinical trials support services such as clinical monitoring, project management, data management, programming, statistical analysis, regulatory affairs, medical writing and training. The Specialty Medical division generally enjoys higher gross margins than the Commercial division because it offers specialized expertise. The Company intends to expand its Specialty Medical division through acquisitions and internal development. THE STAFFING SERVICES INDUSTRY The temporary staffing industry has grown rapidly in recent years as competitive pressures have caused businesses to focus on reducing costs, including converting fixed labor costs to variable costs. The use of temporary employees also enables companies to improve flexibility in employee hiring and scheduling and allows them to focus on their core business functions. According to NATSS, the U.S. market for temporary services grew at a compound average annual growth rate of approximately 17.7%, from approximately $20.4 billion in revenue in 1991 to approximately $39.2 billion in 1995. Studies show that more than 90% of all U.S. businesses use temporary staffing services, and that temporary staffing personnel now account for approximately 2% of the total U.S. workforce. The use of temporary personnel has become widely accepted as a valuable tool for managing personnel costs, supplementing permanent workforces and meeting specialized or fluctuating employment requirements. Vacations, illnesses, resignations, seasonal increases in work volume, marketing promotions and month-end requirements have historically created demand for temporary staffing. More recently, the growing cost and difficulty of hiring, laying off and terminating full-time workers has also encouraged greater use of temporary workers. In addition, entrants into the labor force increasingly look to temporary assignments as a way to build experience, make contacts, and receive training and valuable exposure to a variety of work settings, as well as a means to gain full-time employment. Organizations have also begun using flexible staffing to reduce administrative overhead by strategically outsourcing operations that are not part of their core business functions, such as recruiting, training and benefit administration. By utilizing temporary employees, businesses are able to avoid the management and administrative costs incurred if full-time personnel are employed. An ancillary benefit, particularly for smaller businesses, is that use of temporary employees shifts certain employment costs and risks (e.g., workers' compensation and unemployment insurance) to the temporary personnel provider, which can spread the costs and risks over a much larger pool of employees. Businesses are also utilizing staffing services to selectively hire and add to their full-time staff. This concept, typically referred to as "temp-to-perm," provides the client with an opportunity to evaluate skills and proficiency prior to extending full-time employment offers. NATSS estimates that approximately 40% of temporary employees are ultimately offered full-time employment by clients. 39 42 THE COMPANY'S STAFFING SERVICES The Company's staffing services are provided through three divisions: Commercial Division. The Company's Commercial division, which accounted for approximately 86.4% and 84.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively, provides personnel to clients with traditional clerical and light industrial needs. The Company's clerical services personnel include secretarial, clerical and word processing personnel, receptionist/switchboard operators, typists, data entry operators, cashiers, client service representatives, medical/legal transcriptionists, file clerks, and other miscellaneous office personnel. Light industrial services personnel include warehouse workers, maintenance workers, assemblers, quality control clerks, order pullers, food service workers, production workers, shipping/receiving clerks, janitors, packagers, inventory clerks, textile manufacturers, and machinists. Professional Division. The Company's Professional division provides personnel for technical, information technology, legal and accounting services and accounted for 5.3% and 7.6% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Company provides technical services personnel such as drafters, designers and engineers in the mechanical and electrical engineering and computer science fields. Information technology services include systems planning and design, project management, software applications development, systems and network implementation, systems integration and higher-level contract programming services, facilities management, systems maintenance, "help-desk" assistance and education and training. The Company also provides accounting personnel, paralegals and other legal assistants, and sales and marketing professionals. Specialty Medical Division. The Company's Specialty Medical division accounted for 8.3% and 7.7% of the Company's revenues for the year ended December 31, 1995 and the three months ended March 31, 1996, respectively. The Company offers specialty medical staffing services to meet the growing demand for physical and occupational therapists in the U.S. healthcare market. The Company recruits, both domestically and internationally, trained physical therapists, occupational therapists and speech pathologists to work in a variety of healthcare settings in more than 15 states. The Company also provides complete physical therapy management and staffing services to out-patient clinics as well as rural and suburban acute care hospitals. The Company targets hospitals in the 80-250 bed range with at least one orthopedic surgeon on staff, minimal competition in the area, and moderate to heavy surrounding industry. The Company offers clinical trials support personnel to meet the demands of the pharmaceutical, biotechnology, medical device and medical research data industries. The Company provides contract personnel with a wide variety of expertise in the clinical research field, including clinical monitoring, project management, data management, programming, statistical analysis, regulatory affairs, medical review and writing and training. The Company maintains a national database of qualified contract professionals and is able to source potential candidates for its clients on a nationwide basis. OPERATIONS Branch Offices. The Company offers its services through 91 branch offices in Arkansas, Colorado, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee and Virginia. The following table shows the Company's branch offices, including pending acquisitions, as of the dates indicated:
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 1, 1993 1994 1995 1996 ------------ ------------ ------------ ------------- Commercial.................... 41 45 65 78 Professional.................. 2 3 4 8 Specialty Medical............. 4 4 5 5 --- --- --- --- Total branch offices........ 47 52 74 91 === === === ===
40 43 Branch managers will operate their offices with a significant degree of autonomy and accountability and will receive bonuses based on the profitability of the branch. This compensation system is designed to motivate the managers to maximize the growth and profitability of their offices. Other branch personnel, including account coordinators, will also receive bonuses directly related to the growth and profitability of their branch. Branch managers will report to regional managers or subsidiary presidents. Operating within the guidelines set by the Company, the branch managers will be responsible for pursuing new business opportunities and focusing on sales and marketing, account development, and employee recruitment and retention. Sales and Marketing. StaffMark's services are marketed through its network of offices whose branch managers, supported by the Company's marketing staff, make regular personal sales visits to clients and prospects. The Company emphasizes long-term personal relationships with clients which are developed through regular assessment of client requirements and constant monitoring of temporary staff performance. New clients are obtained through client referrals, telemarketing and advertising in a variety of local and regional media, including television, radio, direct mail, Yellow Pages, newspapers, magazines and trade publications. The Company will continue to sponsor job fairs and other community events. The Company's officers and senior management also participate in national and regional trade associations, local chambers of commerce and other civic associations. Recruiting. One of the Company's most successful recruiting tools is referrals by its temporary staffing employees. The Company finds that referrals from its existing labor force provide the highest quality and largest number of new temporary employees and, in certain markets, the Company pays a referral fee to employees for recruiting a new temporary employee. The Company employs full-time regional recruiters who regularly monitor the skills and availability of their region's temporary employees to ensure a base of qualified employees to meet client demands. These recruiters also visit schools, clubs, and professional associations and present career development programs to various organizations. In addition, the Company obtains applicants from advertising on radio, television, in the Yellow Pages and through other print media. Employees/Personnel. Currently, the six Founding Companies provide over 10,000 employees to more than 2,500 clients during a typical week. As of March 31, 1996, the Company employed approximately 500 full-time employees. None of the Company's employees, including its staffing employees, are represented by a collective bargaining agreement. The Company believes its employee relations are good. Hourly wages for the Company's staffing employees are determined according to market conditions. The Company pays mandated costs of employment, including the employer's share of social security taxes (FICA), federal and state unemployment taxes, unemployment compensation insurance, general payroll expenses and workers' compensation insurance. The Company offers access to various insurance programs and benefits to its staffing employees. Assessment, Training and Quality Control. The Company uses a comprehensive system to assess, select and train its employees in order to provide quality assurance for its temporary personnel operations. Applicants are given a range of tests, applicable to the position(s) they seek. Clerical and office-support applicants receive state-of-the-art tests in computer skills, word processing, typing, data entry, accounting, and other business applications. These sophisticated tests cover the latest software, and thoroughly and objectively evaluate each individuals' skills and experience. The Company feels it is imperative to customize testing and training to match the specific office environment in which the individual will be placed. In the technical arena, specific programming tests are also given to assess the expertise of the candidate seeking placement. Such testing measures proficiency in programming languages, electromechanical skills, autocad, schematics and other technical applications. Industrial electronic assembly applicants are tested to determine basic competency, industrial aptitude, hand and finger dexterity, soldering, mathematics, ability to read a blue print, and measurement calculations. Management recognizes that certain clients have specialized staffing requirements that can only be fulfilled with customized training. The Company provides training programs for specific staffing requirements, such as electronic or mechanical assembly or the use of specialized software applications. Computerized tutorials are generally available for temporary employees seeking to upgrade their typing, data entry, office 41 44 automation or word processing skills, and classes on topics such as spreadsheets and software applications are conducted periodically in branch offices. The Company stresses specialization, training and empowerment of employees to ensure that clients receive the highest quality service for the most cost-effective price. The Company currently operates a career training center where temporary employees as well as the general public can enroll in career advancement classes. This center helps to increase the number of trained and qualified applicants eligible for placement with the Company's clients. Management Information Systems. The operating system software utilized by the Company is the Caldwell-Spartin system which management believes is currently one of the leading applications software systems in the staffing industry. This system permits access to a shared database at the branch level, allowing the branch office to fill client orders, communicate with clients regarding invoices and screen candidates for the most suitable job opportunity. As of the date of this Offering, four of the six Founding Companies utilize versions of the Caldwell-Spartin system. The Company anticipates the other Founding Companies will be brought on-line with this system within six months of the completion of the Offering. The Company believes that the Caldwell-Spartin system, once implemented throughout the Founding Companies and connected to all branch offices, can readily be expanded to meet increased demands without significant additional capital expenditures. Workers' Compensation Program. The Company intends to maintain workers' compensation insurance for all claims in excess of a retention level of $250,000 per occurrence. The Company's risk management team will take a proactive approach to safety and risk control. The team will work diligently to train the Company's full-time staff to better screen, test and orient the Company's temporary employees to a more safety-conscious environment. The team will also perform periodic safety inspections at client locations to help determine potential risk for employee injury and to assist clients in making the workplace safer through customized safety program development, implementation and evaluation. Company policies prohibit staffing of high risk activities such as working on unprotected elevated platforms or the handling of hazardous materials. The risk management team will evaluate new clients and will have the authority to decline service if the work environment is perceived to be unsafe or potentially hazardous. An independent actuary provides advice on overall workers' compensation costs and performs an actuarial valuation regarding the adequacy of the accruals. The Company believes such accruals are reasonable. Currently, three of the Founding Companies are self-insured in the states of Arkansas, Georgia and Oklahoma. One Founding Company participates in a large retention program and another participates in a group captive program. The remaining company participates in the voluntary insurance market. The Founding Companies and any acquired operations will be integrated into the Company's program at such time as, in management's judgment, is most cost effective. COMPETITION The staffing industry is highly competitive and highly fragmented, consisting of more than 7,000 firms. There are limited barriers to entry and new competitors frequently enter the market. The Company also faces intense competition from large international, national, regional and local companies. Principal competitors in the Company's markets are generally national temporary personnel companies with substantially greater financial and marketing resources than those of the Company. The Company competes for qualified temporary staffing employees and for clients who require the services of such employees. The principal competitive factors in attracting and retaining qualified temporary staffing employees are competitive salaries and benefits, quality and frequency of assignments and responsiveness to employee needs. The Company believes that many persons who seek temporary employment are also seeking regular employment and that the availability of assignments which may lead to regular employment is an important factor in its ability to attract qualified temporary staffing employees. The principal competitive factors in obtaining clients are a strong sales and marketing program, the timely availability of qualified temporary staffing employees, the ability to match client requirements with 42 45 available temporary staffing employees, competitive pricing of services and satisfying work production requirements. The Company believes its long-term client relationships and strong emphasis on providing service and value to its clients and temporary staffing employees are important competitive advantages. The Company also competes for acquisition candidates. The Company believes that further industry consolidation will continue during the next few years. However, there is likely to be significant competition which could lead to higher prices being paid for such businesses. The Company believes that it will have a strategic advantage in completing acquisitions as a result of (i) management's personal relationships with existing staffing companies, (ii) the successful assimilation of previous acquisitions, (iii) its decentralized entrepreneurial environment and (iv) its greater visibility and resources as a public company. See "-- Growth Strategy." However, no assurance can be given that the Company's acquisition program will be successful or that the Company will be able to compete effectively in its markets. FACILITIES The Company owns no real property. It leases its corporate headquarters as well as space for all of its branch offices. The Company believes that its facilities are adequate for its needs and does not anticipate inordinate difficulty in replacing such facilities or opening additional facilities, if needed. The Company's headquarters is located at 302 East Millsap Road, Fayetteville, Arkansas 72703. The premises are leased from a related party for a term ending on January 1, 2001, with three options to renew for five additional years each. A substantial number of other facilities are also leased from related parties. The Company believes that the lease terms are at least as favorable as could be obtained from any unrelated third party. See "Certain Transactions." REGULATION The Company's operations are not generally subject to state or local licensing requirements or other regulations specifically governing the provision of commercial and professional staffing services. There can be no assurance, however, that states in which the Company operates or may in the future operate will not adopt such licensing or other regulations affecting the Company. State mandated workers' compensation and unemployment insurance premiums have increased in recent years and have directly increased the Company's cost of services. In addition, the extent and type of health insurance benefits that employers are required to provide employees have been the subject of intense scrutiny and debate in recent years at both the national and state level. Proposals have been made to mandate that employers provide health insurance benefits to staffing employees, and some states could impose sales taxes, or raises sales tax rates, on staffing services. Further increases in such premiums or rates, or the introduction of new regulatory provisions, could substantially raise the costs associated with hiring and employing staffing employees. See "Risk Factors -- Increased Employee Costs" and "-- Risk of Government Regulations and Legislative Proposals." The Company currently recruits physical and occupational therapists internationally for domestic placement. The entry of these employees into the United States is regulated by the U.S. Department of Labor and U.S. Department of Justice -- Immigration and Naturalization Services. The regulations governing the hiring of foreign nationals are complex and change often. If either of these authorities or any other regulatory or judicial body should determine that the Company is not in compliance with the regulations, the Company could be subject to fines and/or suspension of this part of the Company's business. Further, regulations could change in a manner which would limit the Company's ability to employ foreign nationals. Any of the foregoing could have a material adverse effect on the Company's business, financial condition, and results of operation. INTELLECTUAL PROPERTY The Company has applied for Federal Service Mark registration of "StaffMark" and the associated Company logo with the U.S. Patent and Trademark Office. No assurance can be given that any such 43 46 registration will be granted or that, if granted, such registration will be effective to prevent others from: (i) using the mark concurrently; or (ii) challenging the Company's use of the service mark in certain locations. The Company owns and licenses several other state and federal trademarks used by the Founding Companies. The Company believes that it has all rights to trademarks and trade names necessary for the conduct of its business. LEGAL AND ADMINISTRATIVE PROCEEDINGS On July 13, 1995, Liberty Mutual Insurance Company ("Liberty") filed a complaint against HRA in the Chancery Court of Davidson County, Tennessee, Case No. 95-2160 II (III) alleging that HRA failed to pay certain insurance premiums due and owing to Liberty for its provision of worker's compensation insurance to HRA in fiscal years 1993 and 1994, and a portion of fiscal year 1995. A judgment was rendered against the Company for approximately $718,000, which was inclusive of the disputed amounts plus accrued interest. The Company filed an appeal to this judgment and is negotiating settlement. HRA reserved for these disputed amounts in the fiscal years in which the claims were raised. Accordingly, management anticipates that the ultimate resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company. In the ordinary course of its business, the Company is periodically threatened with or named as a defendant in various lawsuits, including discrimination and harassment and other similar claims. The Company maintains insurance in such amounts and with such coverage and deductibles as management believes are reasonable. 44 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information concerning each of the directors, executive officers and persons who will become directors or executive officers of the Company following consummation of this Offering:
NAME AGE POSITION ------------------------------------- --- ------------------------------------- Jerry T. Brewer(1)................... 55 Chairman of the Board Clete T. Brewer(1)................... 31 Chief Executive Officer and President; Director Ted Feldman.......................... 43 Chief Operating Officer Robert H. Janes III.................. 29 Executive Vice President -- Finance, Mergers and Acquisitions W. David Bartholomew................. 39 Executive Vice President -- Southeastern Operations; Director Donald A. Marr, Jr. ................. 32 Executive Vice President -- Southwestern Operations Steven E. Schulte.................... 33 Executive Vice President -- Administration; Director John H. Maxwell, Jr.................. 53 Executive Vice President -- Medical Services; Director Janice Blethen....................... 52 Executive Vice President -- Clinical Trials Support Services; Director William T. Gregory................... 54 General Manager -- Carolina Region; Director Mary Sue Maxwell..................... 53 General Manager -- Oklahoma Region William J. Lynch..................... 53 Director
- --------------- (1) Jerry T. Brewer is the father of Clete T. Brewer. Jerry T. Brewer co-founded StaffMark in March 1996 and has served since then as its Chairman of the Board. Mr. Brewer also co-founded Brewer in July 1988, and currently serves as its Chairman of the Board. From July 1988 to April 1995, Mr. Brewer served as President and Chief Executive Officer of Brewer. Clete T. Brewer co-founded StaffMark in March 1996 and has served since then as its President and Chief Executive Officer and a director. Mr. Brewer also co-founded Brewer in July 1988, and has served since April 1995 as President, Chief Executive Officer and a Director of Brewer. From July 1988 to April 1995, Mr. Brewer served as Vice President and a Director of Brewer. Ted Feldman will become Chief Operating Officer of the Company upon consummation of this Offering. Mr. Feldman founded HRA in 1991 and since its inception has served as its President and Chief Executive Officer. He will continue to serve in that capacity after the consummation of this Offering. From 1979 until 1992, Mr. Feldman served as President of Nashville Trunk & Bag Co. Robert H. Janes III co-founded StaffMark in March 1996 and will become Executive Vice President -- Finance, Mergers and Acquisitions upon consummation of this Offering. Mr. Janes has served as Vice President of Finance of Brewer since April 1995. From 1988 to 1990 and 1992 to 1995, he was employed in the corporate finance department of Stephens Inc., an investment banking firm and one of the Representatives. In 1992, Mr. Janes obtained an MBA from The Wharton School. W. David Bartholomew will become a director and Executive Vice President -- Southeastern Operations of the Company upon consummation of this Offering and will oversee the Company's Commercial and Professional divisions in that region. Mr. Bartholomew has served as Secretary/Treasurer of HRA since 1993 45 48 and will continue to serve in that capacity after the consummation of this Offering. From 1991 through 1993, Mr. Bartholomew was President of Cobble Personnel of Nashville. Donald A. Marr, Jr. will become Executive Vice President -- Southwestern Operations of the Company upon consummation of this Offering and will oversee the Company's Commercial and Professional divisions in that region. He has been employed by Brewer since 1990 and has served as Brewer's Vice President of Operations since 1994 and will continue to serve in that capacity after the consummation of this Offering. Steven E. Schulte will become a director and Executive Vice President -- Administration of the Company upon consummation of this Offering. He has been employed by Prostaff since August 1987, and has served as Prostaff's President and Chief Executive Officer since June 1992 and will continue to serve in that capacity after the consummation of this Offering. John H. Maxwell, Jr. will become a director and Executive Vice President -- Medical Services of the Company upon the consummation of this Offering. Mr. Maxwell has served as the Chief Executive Officer of Maxwell since 1973 and will continue to serve in that capacity after the consummation of this Offering. He is a Certified Personnel Consultant and a Certified International Personnel Consultant. Janice Blethen will become a director and Executive Vice President -- Clinical Trials Support Services of the Company upon the consummation of this Offering. Ms. Blethen has served as Chief Executive Officer of Blethen since its inception in 1975. Ms. Blethen is a Certified Personnel Consultant. William T. Gregory will become a director and General Manager -- Carolina Region of the Company upon the consummation of this Offering. Mr. Gregory has served as President of First Choice since 1985 and will continue to serve in that capacity after the consummation of this Offering. Mr. Gregory is a Certified Personnel Consultant. Mary Sue Maxwell will become General Manager -- Oklahoma Region of the Company upon consummation of this Offering. Ms. Maxwell has served as President of Maxwell Staffing, Inc. since 1983 and will continue to serve in that capacity after the consummation of this Offering. William J. Lynch will become a director of the Company upon the consummation of this Offering. Mr. Lynch is a Managing Director of Capstone Partners, LLC, a special situations venture capital firm. From October 1989 to March 1996, Mr. Lynch was a partner of the law firm of Morgan, Lewis & Bockius LLP. Mr. Lynch also serves as a director of Sanifill, Inc., a publicly traded environmental services company and Coach USA, Inc., a publicly traded motorcoach services company. The number of directors on the Board of Directors is currently fixed at eight. Directors of the Company are elected at the annual meeting of stockholders. Officers of the Company are appointed at the first meeting of the Board of Directors after each annual meeting of stockholders. Directors and executive officers of the Company are elected to serve until they resign or are removed or are otherwise disqualified to serve, or until their successors are elected and qualified. The Company expects that the Board of Directors will establish an Audit Committee, a Compensation Committee, and an Executive Committee. The members of each committee are expected to be determined at the first meeting of the Board of Directors following the closing of the Offering, however, the members of the Audit and Compensation Committees will consist solely of outside directors. DIRECTOR COMPENSATION Directors who are employees of the Company do not receive additional compensation for serving as directors. Each director who is not an employee of the Company will receive a fee of $2,000 for attendance at each Board of Directors meeting and $500 for each committee meeting (unless held on the same day as a Board of Directors meeting). Each non-employee Director who has agreed to serve as such prior to the consummation of this Offering has also been granted nonqualified stock options to purchase 10,000 shares of Common Stock at an exercise price equal to the initial public offering price per share in this Offering, exercisable in three equal installments on the date of grant and the next two anniversaries thereof. Non-employee directors will, beginning with the first annual meeting of the Company's stockholders, receive annual 46 49 grants of non-qualified stock options to purchase 2,000 shares of Common Stock. See "Management -- 1996 Stock Option Plan." All directors of the Company are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof, or for other expenses incurred in their capacity as Directors. EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS; COVENANTS NOT TO COMPETE StaffMark was incorporated in March 1996, and did not conduct any operations prior to that time. The Company anticipates that during fiscal 1996 its Chief Executive Officer and the four other most highly compensated officers, and their annualized base salaries for 1996, will be: Clete T. Brewer -- $150,000, Ted Feldman -- $145,000, W. David Bartholomew -- $125,000, Steven E. Schulte -- $125,000, and Robert H. Janes III -- $100,000 (collectively, the "named executive officers"). Each named executive officer will enter into an employment agreement with the Company or a subsidiary thereof, commencing on the date of the closing of this Offering. Pursuant to such employment agreements, each such officer will be eligible for additional year-end bonus compensation to be determined pursuant to an incentive bonus plan to be established by the Company. Each employment agreement will be for a term of five years, and unless terminated or not renewed by the Company or not renewed by the employee, the term will continue thereafter on a year-to-year basis on the same terms and conditions existing at the time of renewal. Each of the employment agreements provides that, in the event of a termination of employment by the Company, except for specific instances of "cause" as defined in the employment agreement, such employee shall be entitled to receive from the Company such employee's then current salary for a period no longer than two years after this Offering. Each employment agreement contains a covenant not to compete with the Company for a period of two years immediately following the termination of his employment. 1996 STOCK OPTION PLAN The Company was incorporated in March 1996 and did not conduct any operations prior to that time. Accordingly, no stock options were granted to, or exercised by or held by any executive officers in fiscal 1995. In June 1996, the Board of Directors and the Company's stockholders approved the Company's 1996 Stock Option Plan (the "Plan"). The purpose of the Plan is to provide directors, officers, key employees and consultants with additional incentives by increasing their ownership interests in the Company. Directors, officers and other key employees of the Company and its subsidiaries are eligible to participate in the Plan. In addition, awards may be granted to consultants providing valuable services to the Company. Awards under the Plan are granted by the Compensation Committee of the Board of Directors and may include incentive stock options ("ISOs"), and/or non-qualified stock options ("NQSO's"). The Compensation Committee of the Board of Directors, which will administer the Plan, is required to consist of two or more directors who qualify as disinterested persons within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Compensation Committee generally has discretion to determine the terms of an option grant, including the number of option shares, option price, term, vesting schedule, the post-termination exercise period, and whether the grant will be an ISO or NQSO. Notwithstanding this discretion: (i) the number of shares subject to options granted to any individual in any calendar year may not exceed 500,000 shares; (ii) the option price per share of Common Stock may not be less than 100% of the fair market value of such share at the time of grant or 110% of the fair market value of such shares if the option is intended to be an ISO and is granted to a stockholder owning more than 10% of the combined voting power of all class of the Company stock or of its' parent or subsidiary on the date of the grant of the option; and (iii) the term of any option may not exceed 10 years or five years if the option is intended to be an ISO and is granted to a stockholder owning more than 10% of the total combined voting power of all classes of stock on the date of the grant of the option. In addition, unless otherwise specified by the Compensation Committee, all outstanding options vest upon a "change in control" of the Company (as defined in the Plan), and all options will terminate three months following any termination of employment. The Plan also provides for automatic option grants to directors who are not otherwise employed by the Company or its subsidiaries. Upon commencement of service (or upon agreeing to serve in the case of the 47 50 initial non-employee directors), a non-employee director will receive an NQSO option to purchase 10,000 shares of Common Stock, and continuing non-employee directors will receive annual options to purchase 2,000 shares of Common Stock. Options granted to non-employee directors become exercisable one-third on the date of grant and one-third on each of the next two anniversaries of the date of grant. Non-employee directors' options have a term of five years from the date of grant. The maximum number of shares of Common Stock that may be subject to outstanding options, determined immediately after the grant of any option, is the greater of 1,500,000 or 12% of the aggregate number of shares of the Company's Common Stock outstanding, provided, however, that options to purchase no more than 1,500,000 shares of Common Stock may be granted as ISOs as of the preceding January 1, less, in each case, the number of shares subject to previously outstanding awards under the Plan. Shares of Common Stock which are attributable to awards which have expired, terminated or been cancelled or forfeited during any calendar year are available for issuance or use in connection with future awards during such calendar year. The Plan will remain in effect until terminated by the Board of Directors. No ISO may be granted more than 10 years after the adoption of the Plan by the Board or approval of the Plan by the stockholders, whichever is earlier. The Plan may be amended by the Board of Directors without the consent of the stockholders of the Company, except that any amendment, although effective when made, will be subject to stockholder approval within one year after approval by the Board of Directors if required by any Federal or state law or regulation or by the rules of any stock exchange or automated quotation system on which the Common Stock may then be listed or quoted. The Omnibus Budget Reconciliation Act of 1993 added Section 162(m) to the Internal Revenue Code, which generally disallows a public company's tax deduction for compensation to the chief executive officer and the four other most highly compensated executive officers in excess of $1 million in any tax year beginning on or after January 1, 1994. Compensation that qualifies as "performance-based compensation" is excluded from the $1 million deductibility cap, and therefore remains fully deductible by the company that pays it. The Company intends that options granted with an exercise price at least equal to 100% of fair market value of the underlying stock at the date of grant will qualify as such "performance-based compensation," although other awards under the Plan may not so qualify. Until final regulations are adopted and other guidance made available by the Internal Revenue Service, there can be no assurance that any awards under the Plan will qualify as "performance-based compensation" that is fully deductible by the Company under Section 162(m). The Company plans to issue options to purchase a total of up to 919,097 shares of the Company Stock upon completion of this Offering at the initial public offering price. In addition and in accordance with the Mergers, options to purchase shares of Brewer previously granted to employees of On Call will be converted into options to purchase 16,397 shares of StaffMark at $2.13 per share. Options to be issued, other than those granted to non-employee directors, will generally be exercisable as to 40% of the underlying shares two years from the date of grant and as to an additional 20% on each of the next three anniversaries of the date of option grant. No options were granted during fiscal year 1995. OFFICER AND DIRECTOR LIABILITY Pursuant to the Company's Certificate of Incorporation and under Delaware law, directors of the Company are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law, or any transaction in which a director has derived improper personal benefit. As permitted by Delaware law, the Company will enter into an indemnification agreement with its directors, pursuant to which the Company will agree to pay certain expenses, including attorney's fees, judgments, fines and amounts paid in settlement incurred by such directors in connection with certain actions, suits or proceedings. These agreements require directors to repay the amount of any expenses advanced if it shall be determined that they shall not have been entitled to indemnification. The Company intends to maintain liability insurance for the benefit of its directors and officers. 48 51 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock of the Company, after giving effect to the Mergers and this Offering, by (i) each person known to the Company to be the beneficial owner of 5% or more of the outstanding shares of Common Stock, (ii) each director and person who will become a director upon consummation of the Offering; (iii) each named executive officer, and (iv) all executive officers and directors as a group. All persons listed have an address c/o the Company's principal executive offices and have sole voting and investment power with respect to their shares unless otherwise indicated.
SHARES BENEFICIALLY OWNED AFTER THE OFFERING ---------------------- NAME NUMBER PERCENT - ----------------------------------------------------------------------- --------- ------- Jerry T. Brewer(1)..................................................... 722,944 5.8% Clete T. Brewer(2)..................................................... 1,200,042 9.6 Ted Feldman............................................................ 302,611 2.4 Robert H. Janes III.................................................... 184,957 1.5 W. David Bartholomew(3)................................................ 282,437 2.3 Donald A. Marr, Jr..................................................... 117,010 1.0 Steven E. Schulte(4)................................................... 455,925 3.6 John H. Maxwell, Jr.(5)................................................ 719,623 5.8 Mary Sue Maxwell(6).................................................... 719,623 5.8 Janice Blethen(7)...................................................... 476,478 3.8 William T. Gregory..................................................... 435,750 3.5 William J. Lynch(8).................................................... 136,042 1.1 All directors and executive officers as a group (12 persons)........... 5,033,819 40.4
- --------------- (1) Includes 225,000 shares held by Mr. Brewer's spouse, as to which Mr. Brewer disclaims beneficial ownership. (2) Includes 66,044 shares held by the Clete Brewer Irrevocable Trust for which Mr. Brewer is the trustee, and includes 66,044 shares held by a trust for the benefit of Mr. Brewer's spouse, for which Mr. Brewer is trustee. (3) These shares are held by Bartfund I Limited Partnership, of which Mr. Bartholomew is the general partner. (4) Includes 437,025 shares held by the Steven E. Schulte Revocable Trust for which Mr. Schulte is a trustee. (5) Includes 354,402 shares held by the John H. Maxwell, Jr. Revocable Living Trust, of which Mr. Maxwell is the trustee, and includes 365,221 shares held by a trust for the benefit of Mr. Maxwell's spouse, as to which Mr. Maxwell disclaims beneficial ownership. (6) Includes 365,221 shares held by the Mary Sue Maxwell Revocable Living Trust, of which Ms. Maxwell is the trustee, and includes 354,402 shares held by a trust for the benefit of Ms. Maxwell's spouse, as to which Ms. Maxwell disclaims beneficial ownership. (7) Includes 71,905 shares held by Blethen Family Investments Limited Partnership, the general partner of which is a corporation controlled by Ms. Blethen. (8) Includes 136,042 shares held by Capstone Partners LLC, of which Mr. Lynch is a manager. 49 52 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of 26,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), and 1,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). After giving effect to the Mergers, but prior to the consummation of this Offering, the Company will have outstanding 6,973,249 shares of Common Stock and no shares of Preferred Stock. Upon completion of this Offering, the Company will have outstanding 12,473,249 shares of Common Stock (13,298,249 if the Underwriters' over-allotment option is exercised in full) and no shares of Preferred Stock. Prior to the Mergers and as of March 31, 1996, there were 10 record holders of Common Stock. COMMON STOCK The holders of Common Stock are entitled to one vote for each share on all matters voted upon by stockholders, including the election of directors. Subject to the rights of any then outstanding shares of Preferred Stock, the holders of the Common Stock are entitled to such dividends as may be declared in the discretion of the Board of Directors out of funds legally available therefore. See "Dividend Policy." Holders of Common Stock are entitled to share ratably in the net assets of the Company upon liquidation after payment or provision for all liabilities and any preferential liquidation rights of any Preferred Stock then outstanding. The holders of Common Stock have no preemptive rights to purchase shares of stock of the Company. Shares of Common Stock are not subject to any redemption provisions and are not convertible into any other securities of the Company. All outstanding shares of Common Stock are, and the shares of Common Stock to be issued pursuant to this Offering will be upon payment therefor, fully paid and non-assessable. PREFERRED STOCK The Preferred Stock may be issued from time to time by the Board of Directors as shares of one or more classes or series. Subject to the provisions of the Company's Certificate of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares and to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of Preferred Stock of any class or series. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. STATUTORY BUSINESS COMBINATION PROVISION The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or an affiliate, or associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested 50 53 stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the Board of Directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes such person an interested stockholder (excluding shares owned by persons who are both officers and directors of the corporation, and shares held by certain employee stock ownership plans); or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66 2/3% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined as any person who is: (i) the owner of 15% or more of the outstanding voting stock of the corporation; or (ii) an affiliate or associate of the corporation and who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. A corporation may, at its option, exclude itself from the coverage of Section 203 by amending its certificate of incorporation or bylaws, through action of its stockholders, to exempt itself from coverage, provided that such bylaw or certificate of incorporation amendment shall not become effective until 12 months after the date it is adopted. The Company has not adopted such an amendment to its Certificate of Incorporation or Bylaws. LIMITATION ON DIRECTORS' LIABILITIES Pursuant to the Company's Certificate of Incorporation and under Delaware law, Directors of the Company are not liable to the Company or its stockholders for monetary damages for breach of fiduciary duty, except for liability in connection with a breach of duty of loyalty, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, for dividend payments or stock repurchases illegal under Delaware law or any transaction in which a Director has derived an improper personal benefit. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Boatmen's Trust Company of St. Louis. 51 54 CERTAIN TRANSACTIONS ORGANIZATION OF THE COMPANY In connection with the formation of the Company, the Company issued 1,000 shares of Common Stock at $.01 per share and subsequently declared a stock dividend of 1,355 shares of Common Stock for each share of Common Stock outstanding. The shares were issued to various members of management including: Jerry T. Brewer -- 179,944 shares; Clete T. Brewer -- 457,042 shares; Chad J. Brewer -- 252,978 shares; Donald A. Marr, Jr. -- 34,010 shares; Robert H. Janes III -- 184,957 shares; and Janice Blethen -- 25,068 shares. The Company also issued 136,042 shares to Capstone Partners, LLC, a Delaware Limited Liability Company, of which William J. Lynch is a member. Simultaneously with the closing of this Offering, StaffMark will acquire by merger all of the issued and outstanding stock of the six Founding Companies, at which time each Founding Company will become a wholly-owned subsidiary of the Company. The aggregate consideration to be paid by StaffMark in the mergers is approximately $77.7 million, consisting of approximately $15.9 million in cash and 5,618,249 shares of Common Stock. In addition, immediately prior to the Mergers certain of the Founding Companies will make distributions of approximately $3.9 million, representing S Corporation earnings previously taxed to their respective stockholders. Also, prior to the Mergers, certain of the Founding Companies will distribute to their respective stockholders approximately $349,000 in net book value of assets. The consummation of each Merger is subject to customary conditions. These conditions include, among others, the continuing accuracy on the closing date of the Mergers of the representations and warranties of the Founding Companies and the principal stockholders thereof and of StaffMark, the performance by each of the parties of all covenants included in the agreements relating to the Mergers and the nonexistence of a material adverse change in the results of operations, financial condition or business of each Founding Company. There can be no assurance that the conditions of the Mergers will be satisfied or waived or that the acquisition agreements will not be terminated prior to consummation. If any of the Mergers is terminated for any reason, the Company likely will not consummate this Offering on the terms described herein. The following table sets forth the consideration being paid for each Founding Company:
COMMON STOCK ------------------------------- CASH SHARES VALUE OF SHARES(1) TOTAL ------- --------- ------------------ ------- (DOLLARS IN THOUSANDS) Brewer.......................................... $ 2,950 1,935,000 $ 21,285 $24,235 Prostaff........................................ 4,500 1,050,000 11,550 16,050 Maxwell......................................... 2,280 912,000 10,032 12,312 HRA............................................. 2,348 615,175 6,767 9,115 First Choice.................................... 2,075 622,500 6,848 8,923 Blethen......................................... 1,764 483,574 5,319 7,083 ------- --------- -------- ------- Total...................................... $15,917 5,618,249 $ 61,801 $77,718 ======= ========= ======== =======
- --------------- (1) Represents the aggregate value of the shares of Common Stock issued as consideration, based upon an assumed initial public offering price of $11.00 per share. 52 55 In connection with the Mergers, and as consideration for their interests in the Founding Companies, certain officers, directors, key employees and holders of more than 5% of the outstanding shares of the Company will receive cash and shares of Common Stock of the Company as follows:
FOUNDING COMPANY CONSIDERATION ------------------------------- SHARES OF NAME CASH COMMON STOCK -------------------------------------------------- ------------- ------------ (IN THOUSANDS) Jerry T. Brewer................................... $ 1,376 318,000 Clete T. Brewer................................... -- 743,000 Ted Feldman....................................... 1,009 302,611 W. David Bartholomew.............................. 1,210 282,437 Donald A. Marr, Jr. .............................. -- 83,000 Steven E. Schulte................................. 1,954 455,925 John H. Maxwell, Jr. ............................. 886 354,402 Mary Sue Maxwell.................................. 913 365,221 Janice Blethen.................................... 1,626 451,410 William T. Gregory................................ 1,453 435,750 -------- --------- Total................................... $ 10,427 3,791,756 ======== =========
Pursuant to the agreements to be entered into in connection with the Mergers, all of the stockholders of the Founding Companies have agreed not to compete with the Company for five years, unless reduced by applicable state law, commencing on the date of consummation of this Offering. Certain of the Founding Companies have incurred indebtedness which has been personally guaranteed by its stockholders or by entities controlled by its stockholders. The Company has agreed to repay approximately $27.9 million of indebtedness of the Founding Companies with certain of the net proceeds of this Offering, of which approximately $8.4 million will directly or indirectly benefit persons who will become officers, directors or greater than 5% stockholders of the Company as follows: Clete T. Brewer -- approximately $6.1 million; Janice Blethen -- approximately $857,000; Steven E. Schulte -- approximately $312,000; Ted Feldman -- approximately $580,000; and W. David Bartholomew -- approximately $580,000. In each case, such person was either a direct obligor or a guarantor of such indebtedness. See "Use of Proceeds." LEASES OF FACILITIES In connection with the acquisition of Brewer, the Company will assume a lease by Brewer of property in Fayetteville, Arkansas that is owned by Brewer Investments, an Arkansas limited partnership whose partners are Jerry T. Brewer and Kay Brewer. Jerry T. Brewer is Clete T. Brewer's father and Kay Brewer is Clete T. Brewer's mother and each is an officer, director and principal stockholder of Brewer. Lease payments to Brewer Investments were $60,000 in each of 1993, 1994 and 1995. In January 1996, Brewer Investments began leasing a larger building to Brewer and the total lease payments to Brewer Investments for the three months ended March 31, 1996 were $52,000. The annual rent for the building is $208,000 and the lease extends for five years. The building leased during previous years is no longer being leased to Brewer. Brewer is responsible for all real estate taxes, insurance and maintenance. In connection with the acquisition of Prostaff, the Company will assume leases by Prostaff of property in Little Rock, Arkansas used by Prostaff in its operations that are owned by an Arkansas limited liability company, one of whose members is Steven E. Schulte, an officer, director and principal stockholder of Prostaff. The aggregate rental expenses for this property was approximately $61,000, $73,761 and $114,180 for fiscal years 1993, 1994 and 1995, respectively, and approximately $22,125 for the three months ended March 31, 1996. The annual rent is $88,500 and Prostaff is responsible for all real estate taxes, insurance and maintenance. 53 56 Prior to the Mergers, Maxwell distributed real estate owned by it to John H. Maxwell, Jr. and Mary Sue Maxwell, with an aggregate carrying value of $207,000. Such real estate will be leased to the Company at an annual rent of $100,000. The lease has a three year term and a two year renewal option. The Company believes that the rent payments to be made for leased facilities with related parties will be on terms that are as favorable to the Company as those that could be obtained from unaffiliated third parties. CERTAIN LOANS In February 1996, Brewer advanced Donald A. Marr, Jr. the principal amount of $80,000 due on February 14, 1999 pursuant to a promissory note that accrues interest at six percent per annum. At March 31, 1996, Mr. Marr was indebted to Brewer in the full principal amount of the note. Blethen has made advances to Janice Blethen which totaled $231,328 as of March 31, 1996. Such amount is expected to be repaid prior to the consummation of the Mergers. First Choice has an unsecured demand note payable to William T. Gregory in the principal amount of $180,000 as of December 31, 1995 with interest payable semiannually at 8% per annum. Such note was reduced by $70,000 in fiscal 1995. OTHER TRANSACTIONS In December 1995, a note receivable from Brewer Investments in the amount of approximately $345,000 was distributed pro-rata to the individual shareholders of Brewer, including approximately $72,000 to Jerry T. Brewer and approximately $117,000 to Clete T. Brewer. In November 1995, Ted Feldman and Bartfund I Limited Partnership, an affiliate of W. David Bartholomew, purchased the common stock of a former shareholder of HRA for $150,000, each issuing to him a promissory note in the amount of $75,000. HRA guaranteed payment of Mr. Feldman's and Bartfund I Limited Partnership's promissory notes to the former shareholder. Such amounts are expected to be repaid prior to the consummation of the Mergers. In addition, HRA agreed to pay the former shareholder a $30,000 bonus for fiscal 1995; $150,000 as a severance arrangement to be paid in monthly installments of $5,690 through November 15, 1996; $5,647 through November 15, 1997, and $1,163 through November 15, 1998; and $236,518 as a non-compete agreement payable monthly through November 15, 2003. In November 1995, Mr. Feldman and Mr. Bartholomew purchased an option held by certain parties to acquire 30% of the common stock of HRA for $250,000. In conjunction with this transaction, HRA advanced to each of Mr. Feldman and Mr. Bartholomew the sum of $125,000. Such amounts are expected to be repaid prior to the consummation of the Mergers. In addition, HRA entered into a Settlement Agreement and Release with the holders of the option which released all claims against HRA for the sum of $90,000. COMPANY POLICY Following the closing of this Offering, all transactions with the Company's stockholders, officers and directors or their affiliates, if any, will be subject to the approval of a majority of the independent and disinterested outside directors and will be conducted on terms no less favorable than could be obtained from unaffiliated third parties. 54 57 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering and the consummation of the Mergers, the Company will have outstanding 12,473,249 shares of Common Stock. The 5,500,000 shares sold in this Offering (plus any additional shares sold upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction unless purchased by affiliates of the Company. None of the remaining 6,973,249 outstanding shares of Common Stock (collectively, the "Restricted Shares") have been registered under the Securities Act, which means that they may be resold publicly only upon registration under the Securities Act or in compliance with an exemption from the registration requirements of the Securities Act, including the exemption provided by Rule 144 thereunder. In general, under Rule 144 as currently in effect, if two years have elapsed since the later of the date of the acquisition of restricted shares of Common Stock from the Company or any affiliate of the Company, the acquiror or subsequent holder thereof may sell, within any three-month period commencing 90 days after the date of this Prospectus, a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission (the "Commission"). Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If three years have elapsed since the later of the date of acquisition of restricted shares of Common Stock from the Company or from any affiliate of the Company and the acquiror or subsequent holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares under Rule 144(k) without regard to the limitations described above. The Company, all of the former stockholders of the Founding Companies and the executive officers and directors of the Company have agreed that they will not offer or sell any shares of Common Stock of the Company for a period of 180 days after the date hereof without the prior written consent of the Representatives of the Underwriters, except that the Company may issue shares of Common Stock in connection with acquisitions or upon the exercise of options granted under the Company's 1996 Stock Option Plan. See "Underwriting." In addition, the stockholders of the Founding Companies and StaffMark, who own in the aggregate 6,973,249 shares of Common Stock, have agreed with the Company that they will not sell such shares for a period of two years after the closing of this Offering. However, such stockholders have the right, in the event the Company proposes to register under the Securities Act any Common Stock for its own account or for the account of others, subject to certain exceptions, to require the Company to include their shares in the registration, subject to the right of any managing underwriter of the offering to exclude some or all of the shares for marketing reasons. In addition, the stockholders of the Founding Companies have certain limited rights to require the Company to register shares held by them after the second anniversary of the closing of this Offering. The Company intends to issue under its 1996 Stock Option Plan options to purchase up to an aggregate of 935,494 shares of Common Stock. The sale of Common Stock underlying such options will be subject to the expiration of the Lockup Period. Substantially all of the options will vest over a period of five years (40% two years after the date of grant and 20% each year thereafter). The Company intends to register the shares issuable upon exercise of options granted under the Plan and, upon such registration, such shares will be eligible for resale in the public market. As soon as practical after the closing of this Offering, the Company intends to register up to 4,000,000 shares of its Common Stock under the Securities Act for use by the Company in connection with future acquisitions. These shares will generally be freely tradeable after their issuance, unless the sale thereof is contractually restricted. Prior to this Offering, there has been no public market for the Common Stock, and no prediction can be made as to the effect, if any, that the sale of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and the ability of the Company to raise equity capital in the future. 55 58 UNDERWRITING Pursuant to the Underwriting Agreement, and subject to the terms and conditions thereof, the Underwriters named below, acting through J.C. Bradford & Co. and Stephens Inc., as representatives of the several underwriters (the "Representatives"), have severally agreed to purchase from the Company the number of shares of Common Stock set forth below opposite their names:
UNDERWRITER NUMBER OF SHARES -------------------------------------------------------------- ---------------- J.C. Bradford & Co............................................ Stephens Inc. ................................................ ---------- Total....................................................... 5,500,000 ==========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all shares of Common Stock offered hereby, if any of such shares are purchased. The Company has been advised by the Representatives that the Underwriters propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the public offering price and concessions may be changed. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Offering of the shares of Common Stock is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any offer for the purchase of shares. The Company has granted the Underwriters an option, exercisable not later than 30 days from the date of this Prospectus, to purchase up to 825,000 additional shares of Common Stock to cover over-allotments, if any. To the extent that the Underwriters exercise such option, each of them will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the table above bears to the total number of shares in such table, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the 5,500,000 shares of Common Stock offered hereby. If purchased, the Underwriters will sell these additional shares on the same terms as those on which the 5,500,000 shares are being offered. Prior to the Offering, there has been no public market for the Common Stock. The offering price has been determined by negotiation among the Company and the Representatives. In determining such price, consideration was given to, among other things, the financial and operating history and trends of the Company, the experience of its management, the position of the Company in its industry, the Company's prospects and the Company's financial results. In addition, consideration was given to the status of the securities markets, market conditions for new offerings of securities and the prices of similar securities of comparable companies. The Company, its executive officers and directors and all of its stockholders, have agreed with the Representatives not to offer, sell or otherwise dispose of any shares of Common Stock, any securities exercisable for or convertible into Common Stock or any options to acquire Common Stock owned by them prior to the expiration of 180 days from the date of this Prospectus, without the prior written consent of the Representatives, except that the Company may issue shares in connection with acquisitions or upon the 56 59 exercise of stock options granted or to be granted under the Company's stock option plans. See "Shares Eligible for Future Sale." In addition, the stockholders of the Founding Companies and StaffMark, who own in the aggregate 6,973,249 shares of Common Stock, have agreed with the Company that they will not sell such shares for a period of two years after the closing of this Offering. However, such stockholders have the right, in the event the Company proposes to register under the Securities Act any Common Stock for its own account or for the account of others, subject to certain exceptions, to require the Company to include their shares in the registration, subject to the right of any managing underwriter of the offering to exclude some or all of the shares for marketing reasons. In addition, the stockholders of the Founding Companies have certain limited rights to require the Company to register shares held by them after the second anniversary of the closing of this Offering. The Underwriting Agreement provides that the Company will indemnify the Underwriters and controlling persons, if any, against certain civil liabilities, including liabilities under the Securities Act, or will contribute to payments that the Underwriters or any such controlling persons may be required to make in respect thereof. LEGAL MATTERS The validity of the shares of Common Stock offered hereby is being passed upon for the Company by Wright, Lindsey & Jennings, Little Rock, Arkansas. Counsel for the Underwriters is Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. EXPERTS The audited financial statements included elsewhere in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving such reports. ADDITIONAL INFORMATION The Company has filed with the Commission, a Registration Statement on Form S-1 under the Securities Act, with respect to the Common Stock offered hereby. The Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement (and the exhibits and schedules thereto), certain portions of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is made to such Registration Statement and the exhibits and schedules filed as part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to such exhibit. As a result of this offering, the Company will be subject to the informational requirements of the Exchange Act and, in accordance therewith, will file reports and other information with the Commission. A copy of the Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal offices, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, upon payment of prescribed fees. 57 60 INDEX TO FINANCIAL STATEMENTS
PAGE ----- STAFFMARK, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS: Introduction to Unaudited Pro Forma Combined Financial Statements.................. F-3 Unaudited Pro Forma Combined Balance Sheet......................................... F-4 Notes to Unaudited Pro Forma Combined Balance Sheet................................ F-6 Unaudited Pro Forma Combined Statement of Income for the Three Months Ended March 31, 1996........................................................................ F-7 Notes to Unaudited Pro Forma Combined Statement of Income for the Three Months Ended March 31, 1996.................................................................. F-8 Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1995............................................................................ F-9 Notes to Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31, 1995............................................................... F-10 HISTORICAL FINANCIAL STATEMENTS OF FOUNDING COMPANIES: STAFFMARK, INC. Report of Independent Public Accountants........................................... F-11 Balance Sheet...................................................................... F-12 Notes to Balance Sheet............................................................. F-13 THE COMBINED FOUNDING COMPANIES Report of Independent Public Accountants........................................... F-14 Combined Balance Sheets............................................................ F-15 Combined Statements of Income...................................................... F-16 Combined Statements of Shareholders' Equity........................................ F-17 Combined Statements of Cash Flows.................................................. F-18 Notes to Combined Financial Statements............................................. F-20 BREWER PERSONNEL SERVICES, INC. Report of Independent Public Accountants........................................... F-37 Balance Sheets..................................................................... F-38 Statements of Income............................................................... F-39 Statements of Shareholders' Equity................................................. F-40 Statements of Cash Flows........................................................... F-41 Notes to Financial Statements...................................................... F-43 THE PROSTAFF COMPANIES Report of Independent Public Accountants........................................... F-53 Combined Balance Sheets............................................................ F-54 Combined Statements of Income...................................................... F-55 Combined Statements of Shareholders' Equity........................................ F-56 Combined Statements of Cash Flows.................................................. F-57 Notes to Combined Financial Statements............................................. F-59 THE MAXWELL COMPANIES Report of Independent Public Accountants........................................... F-65 Combined Balance Sheets............................................................ F-66 Combined Statements of Income...................................................... F-67 Combined Statements of Shareholders' Equity........................................ F-68 Combined Statements of Cash Flows.................................................. F-69 Notes to Combined Financial Statements............................................. F-71
F-1 61
PAGE ----- HRA, INC. Report of Independent Public Accountants........................................... F-78 Balance Sheets..................................................................... F-79 Statements of Income (Loss)........................................................ F-80 Statements of Shareholders' Equity................................................. F-81 Statements of Cash Flows........................................................... F-82 Notes to Financial Statements...................................................... F-84 FIRST CHOICE STAFFING, INC. Report of Independent Public Accountants........................................... F-92 Balance Sheets..................................................................... F-93 Statements of Income............................................................... F-94 Statements of Shareholders' Equity................................................. F-95 Statements of Cash Flows........................................................... F-96 Notes to Financial Statements...................................................... F-97 THE BLETHEN GROUP Report of Independent Public Accountants........................................... F-103 Combined Balance Sheets............................................................ F-104 Combined Statements of Income (Loss)............................................... F-105 Combined Statements of Shareholders' Equity........................................ F-106 Combined Statements of Cash Flows.................................................. F-107 Notes to Combined Financial Statements............................................. F-108 HISTORICAL FINANCIAL STATEMENTS OF ACQUIRED COMPANIES: E.P. ENTERPRISES CORPORATION Report of Independent Public Accountants........................................... F-116 Balance Sheets..................................................................... F-117 Statements of Income............................................................... F-118 Statements of Shareholders' Equity (Deficit)....................................... F-119 Statements of Cash Flows........................................................... F-120 Notes to Financial Statements...................................................... F-121 ON CALL EMPLOYMENT SERVICES, INC. Report of Independent Public Accountants........................................... F-125 Balance Sheets..................................................................... F-126 Statements of Income............................................................... F-127 Statements of Shareholders' Equity (Deficit)....................................... F-128 Statements of Cash Flows........................................................... F-129 Notes to Financial Statements...................................................... F-130 STRATEGIC SOURCING, INC. Report of Independent Public Accountants........................................... F-133 Balance Sheets..................................................................... F-134 Statements of Income (Loss)........................................................ F-135 Statements of Shareholders' Equity (Deficit)....................................... F-136 Statements of Cash Flows........................................................... F-137 Notes to Financial Statements...................................................... F-138
F-2 62 STAFFMARK, INC. INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS These pro forma combined financial statements should be read in conjunction with other information contained elsewhere in this Prospectus under the heading "Selected Combined Founding Companies' Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the historical combined financial statements of the Founding Companies, StaffMark's financial statements and the individual Founding Company financial statements. See "Index to Financial Statements." The following unaudited pro forma combined financial statements of StaffMark present the Founding Companies with StaffMark and give effect to the following pro forma adjustments: (i) the effect of the acquisitions of Caldwell, On Call and SSI; (ii) the adjustment to compensation expense for the difference between the historical compensation paid to certain shareholders and the employment contract compensation ("Compensation Differential"); (iii) the incremental provision for income taxes attributable to the income of S Corporations, net of the income tax benefits related to the Compensation Differential; (iv) the liability for the cash consideration to be paid to the shareholders of the Founding Companies; (v) the transfer of selected assets to the shareholders of certain of the Founding Companies; (vi) the additional cash to be borrowed from banks to pay S Corporation Accumulated Adjustment Account balances; (vii) the issuance of 5,618,249 shares of Common Stock to shareholders of the Founding Companies in connection with the Mergers; (viii) the issuance of 1,355,000 shares by StaffMark prior to the Offering; and (ix) 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 currently held in S Corporations. In addition, the "As Adjusted" combined balance sheet of StaffMark includes post merger adjustments for the sale of 5,500,000 shares of Common Stock and the application of the estimated net proceeds. No pro forma statement of income adjustment is necessary to give effect to the transfer of selected assets to the Founding Companies' shareholders as the assets to be distributed had substantially no effect on net income. StaffMark, through wholly-owned subsidiaries, will merge, simultaneously with and as a condition to the closing of the Offering, with Brewer, Prostaff, Maxwell, HRA, First Choice and Blethen. The Mergers have been accounted for in accordance with generally accepted accounting principles as a combination of the Founding Companies at historical cost because: (i) the Founding Companies' shareholders are transferring assets to StaffMark in exchange for Common Stock simultaneously with StaffMark'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 shareholders of each of the Founding Companies may be considered promoters; and (iv) no former shareholder group of any of the Founding Companies will obtain a majority of the outstanding voting shares of the Company. Accordingly, 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 Company has performed a preliminary analysis of the savings that it expects to realize as a result of: (i) consolidating certain general and administrative functions, including workers' compensation programs; (ii) the reduction in interest payments related to the repayment of outstanding Founding Company debt; (iii) its ability to borrow at lower interest rates than the Founding Companies; (iv) the interest earned on the net proceeds of the Offering remaining after payment of the expenses of the Offering, the cash portion of the consideration paid for the Founding Companies and the repayment of outstanding Founding Company debt; and (v) efficiencies in other general and administrative areas. The Company has not and cannot quantify these savings until completion of the combination of the Founding Companies. It is anticipated that these savings will be partially offset by the costs of being a public company. However, these costs, like the savings that they offset, cannot be quantified accurately. Accordingly, neither the anticipated savings nor the anticipated costs have been included in the accompanying pro forma financial information of StaffMark. 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 on those dates or to project the Company's financial position or results of operations for any future period. See "Risk Factors" included elsewhere herein. F-3 63 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 (IN THOUSANDS) ASSETS
ACQUISITION RELATED ADJUSTMENTS COMBINED ------------------------------------ PRO FORMA STAFFMARK, FOUNDING PRO FORMA TOTAL MERGER INC. COMPANIES SSI(A) ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA ---------- --------- ------ ----------- ----------- ----------- --------- CURRENT ASSETS: Cash and cash equivalents............... $ -- $ 1,985 $ 15 $ (15)(b) $ -- $ 3,894(e) $ 1,985 (3,894)(f) Restricted cash and certificates of deposit............................... -- 222 -- -- -- -- 222 Accounts receivable, net of allowance for doubtful accounts................. -- 16,665 131 (131)(b) -- -- 16,665 Prepaid expenses and other.............. -- 1,259 -- -- -- -- 1,259 Income taxes receivable................. -- -- -- -- -- -- -- Deferred income taxes................... -- 228 -- -- -- (228)(i) -- Investments............................. -- 155 -- -- -- -- 155 Advances to shareholders................ -- 250 -- -- -- -- 250 ---- ------- ---- ----- ----- ------- ------- Total current assets.............. -- 20,764 146 (146) -- (228) 20,536 PROPERTY AND EQUIPMENT, net............... -- 3,175 21 -- 21 (308)(g) 2,888 INTANGIBLE ASSETS, net.................... -- 19,312 -- 729(c) 729 -- 20,041 OTHER ASSETS: Advances to shareholders................ -- 231 -- -- -- -- 231 Deferred income taxes................... -- 78 -- -- -- (78)(i) -- Cash surrender value of officers' life insurance............................. -- 41 -- -- -- (41)(g) -- Other................................... -- 83 5 (5)(b) -- -- 83 ---- ------- ---- ----- ----- ------- ------- Total other assets................ -- 433 5 (5) -- (119) 314 ---- ------- ---- ----- ----- ------- ------- $ -- $43,684 $172 $ 578 $ 750 $ (655) $43,779 ==== ======= ==== ===== ===== ======= ======= POST MERGER ADJUSTMENTS AS ADJUSTED ---------- ----------- CURRENT ASSETS: Cash and cash equivalents............... $ 53,765(l) $11,906 (27,927)(m) (15,917)(o) Restricted cash and certificates of deposit............................... 222 Accounts receivable, net of allowance for doubtful accounts................. -- 16,665 Prepaid expenses and other.............. -- 1,259 Income taxes receivable................. 20(n) 20 Deferred income taxes................... -- -- Investments............................. -- 155 Advances to shareholders................ -- 250 --------- ------- Total current assets.............. 9,941 30,477 PROPERTY AND EQUIPMENT, net............... -- 2,888 INTANGIBLE ASSETS, net.................... (287)(n) 19,754 OTHER ASSETS: Advances to shareholders................ -- 231 Deferred income taxes................... -- -- Cash surrender value of officers' life insurance............................. -- -- Other................................... -- 83 --------- ------- Total other assets................ -- 314 --------- ------- $ 9,654 $53,433 ========= =======
The accompanying notes are an integral part of this balance sheet. F-4 64 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 (IN THOUSANDS) LIABILITIES AND SHAREHOLDERS' EQUITY
ACQUISITION RELATED ADJUSTMENTS COMBINED ------------------------------------ PRO FORMA STAFFMARK, FOUNDING PRO FORMA TOTAL MERGER INC. COMPANIES SSI(A) ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS PRO FORMA ---------- --------- ------ ----------- ----------- ----------- --------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities........................... $ -- $ 1,531 $ 31 $ (31)(b) $ -- $ -- $ 1,531 Outstanding checks...................... -- 857 -- -- -- -- 857 Payroll and related liabilities......... -- 4,751 5 (5)(b) -- -- 4,751 Reserve for workers' compensation claims................................ -- 4,210 -- -- -- -- 4,210 Short-term borrowings................... -- 2,823 -- -- -- -- 2,823 Current maturities of notes payable to a shareholder........................... -- 312 6 (6)(b) -- -- 312 Current maturities of debt.............. -- 1,592 -- 210(d) 210 3,894(e) 5,696 Income taxes payable.................... -- 92 -- -- -- -- 92 Deferred income taxes................... -- -- -- -- -- 752(i) 752 Accrued dividends....................... -- 17 -- -- -- -- 17 Pro forma distribution to Founding Companies' shareholders............... -- -- -- -- -- 15,917(h) 15,917 ---- ------- ---- ----- ----- ------- ------- Total current liabilities......... -- 16,185 42 168 210 20,563 36,958 LONG-TERM DEBT, less current maturities... -- 18,395 -- 540(d) 540 -- 18,935 NOTES PAYABLE TO A SHAREHOLDER............................. -- 161 63 (63)(b) -- -- 161 DEFERRED INCOME TAXES..................... -- -- -- -- -- 80(i) 80 ---- ------- ---- ----- ----- ------- ------- Total liabilities................. -- 34,741 105 645 750 20,643 56,134 SHAREHOLDERS' EQUITY: Common stock............................ -- 47 3 (3)(b) -- (47)(j) 70 70(k) Paid-in capital......................... -- 506 -- -- -- 47(j) 483 (70)(k) Subscriptions receivable................ -- (80) -- -- -- -- (80) Retained earnings....................... -- 8,470 64 (64)(b) -- (3,894)(f) (12,828) (349)(g) (15,917)(h) (1,138)(i) ---- ------- ---- ----- ----- ------- ------- Total shareholders' equity........ -- 8,943 67 (67) -- (21,298) (12,355) ---- ------- ---- ----- ----- ------- ------- $ -- $43,684 $172 $ 578 $ 750 $ (655) $43,779 ==== ======= ==== ===== ===== ======= ======= POST MERGER ADJUSTMENTS AS ADJUSTED ----------- ----------- CURRENT LIABILITIES: Accounts payable and other accrued liabilities........................... $ -- $ 1,531 Outstanding checks...................... -- 857 Payroll and related liabilities......... -- 4,751 Reserve for workers' compensation claims................................ -- 4,210 Short-term borrowings................... (2,823)(m) -- Current maturities of notes payable to a shareholder........................... (312)(m) -- Current maturities of debt.............. (5,696)(m) -- Income taxes payable.................... (92)(n) -- Deferred income taxes................... -- 752 Accrued dividends....................... -- 17 Pro forma distribution to Founding Companies' shareholders............... (15,917)(o) -- --------- ------- Total current liabilities......... (24,840) 12,118 LONG-TERM DEBT, less current maturities... (18,935)(m) -- NOTES PAYABLE TO A SHAREHOLDER............................. (161)(m) -- DEFERRED INCOME TAXES..................... -- 80 --------- ------- Total liabilities................. (43,936) 12,198 SHAREHOLDERS' EQUITY: Common stock............................ 55(l) 125 -- Paid-in capital......................... 53,710(l) 41,365 (12,828)(p) Subscriptions receivable................ -- (80) Retained earnings....................... 12,828(p) (175) (175)(n) --------- ------- Total shareholders' equity........ 53,590 41,235 --------- ------- $ 9,654 $53,433 ========= =======
The accompanying notes are an integral part of this balance sheet. F-5 65 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 (a) Records the unaudited balance sheet of SSI, whose shareholders have signed a definitive agreement to be purchased by First Choice. (b) Records the adjustment to remove assets and liabilities not assumed by First Choice in conjunction with the anticipated acquisition of SSI. (c) Records an estimate of the intangible assets to be recorded by First Choice in conjunction with the anticipated acquisition of SSI. (d) Records the debt to be incurred by First Choice in conjunction with the anticipated acquisition of SSI. (e) Records cash borrowed from banks to fund the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Account balances. (f) Records the distribution of certain Founding Companies' S Corporation Accumulated Adjustment Account balances. (g) Records the dividend of certain automobiles, cash surrender value of life insurance policies, facilities and equipment to certain shareholders of the Founding Companies. (h) Records the liability for the cash consideration to be paid to the shareholders of the Founding Companies in connection with the Mergers. (i) Records the adjustment to the recorded deferred income tax balances attributable to the temporary differences between the financial reporting and income tax basis of assets and liabilities currently held in S Corporations. (j) Records the elimination of the Founding Companies' Common Stock as additional paid-in capital. (k) Records the issuance of (i) 1,355,000 shares issued by StaffMark prior to the Offering, and (ii) 5,618,249 shares to be issued to the shareholders of the Founding Companies in connection with the Mergers. (l) Records the proceeds from the issuance of 5,500,000 shares of Common Stock at an assumed initial public offering price of $11.00 per share, net of estimated offering costs. Offering costs primarily consist of underwriting discounts and commissions, accounting fees, legal fees and printing expenses. (m) Records the repayment of all debt obligations with proceeds from the Offering. (n) Records the elimination of capitalized deferred financing costs, net of the applicable income tax benefit. (o) Records the distribution of the cash portion of consideration due to the Founding Companies' shareholders in connection with the Mergers. (p) Records the elimination of the retained earnings of the Founding Companies. F-6 66 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 (IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION RELATED ADJUSTMENTS ----------------------------------------- ON CALL FOR THE PERIOD FROM COMBINED JANUARY 1, 1996 TO STAFFMARK, FOUNDING FEBRUARY 2, PRO FORMA INC. COMPANIES 1996(A) SSI(B) ADJUSTMENTS ---------- ---------- ------------------ ------ ----------- SERVICE REVENUES......................................... $ -- $ 40,925 $1,127 $152 $ -- COST OF SERVICES......................................... -- 32,450 945 75 -- -------- -------- ------ ---- ----- Gross profit..................................... -- 8,475 182 77 -- OPERATING EXPENSES: Selling, general and administrative.................... -- 6,939 116 82 -- Depreciation and amortization.......................... -- 427 3 1 16(c) 9(d) -------- -------- ------ ---- ----- Operating income................................. -- 1,109 63 (6) (25) -------- -------- ------ ---- ----- OTHER INCOME (EXPENSE): Interest expense....................................... -- (504) -- -- (27)(e) (14)(f) Other, net............................................. -- 70 5 -- -- -------- -------- ------ ---- ----- INCOME BEFORE INCOME TAXES............................... -- 675 68 (6) (66) INCOME TAX PROVISION..................................... -- 63 -- -- -- -------- -------- ------ ---- ----- Net income (loss)................................ $ -- $ 612 $ 68 $ (6) $ (66) ======== ======== ====== ==== ===== PRO FORMA NET INCOME PER COMMON SHARE.................... WEIGHTED AVERAGE SHARES OUTSTANDING...................... PRO FORMA TOTAL MERGER ADJUSTMENTS ADJUSTMENTS PRO FORMA ----------- ----------- --------- SERVICE REVENUES......................................... $ 1,279 $ -- $42,204 COST OF SERVICES......................................... 1,020 -- 33,470 ------- ----- ------- Gross profit..................................... 259 -- 8,734 OPERATING EXPENSES: Selling, general and administrative.................... 198 (209)(g) 6,928 Depreciation and amortization.......................... 29 -- 456 ------- ----- ------- Operating income................................. 32 209 1,350 ------- ----- ------- OTHER INCOME (EXPENSE): Interest expense....................................... (41) -- (545) Other, net............................................. 5 -- 75 ------- ----- ------- INCOME BEFORE INCOME TAXES............................... (4) 209 880 INCOME TAX PROVISION..................................... -- 340(h) 403 ------- ----- ------- Net income (loss)................................ $ (4) $(131) $ 477 ======= ===== ======= PRO FORMA NET INCOME PER COMMON SHARE.................... $ 0.06 ======= WEIGHTED AVERAGE SHARES OUTSTANDING...................... 8,420(i) =======
The accompanying notes are an integral part of this statement. F-7 67 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 (a) Records the audited financial results of On Call, which was purchased by Brewer on February 2, 1996, for the period from January 1, 1996 through the date of acquisition. (b) Records the unaudited first quarter financial results of SSI, whose shareholders have signed a definitive agreement to be purchased by First Choice. (c) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisition of On Call for the period from January 1, 1996 through the date of acquisition. (d) Adjustment to reflect the amortization expense relating to the intangible assets to be recorded in conjunction with the anticipated acquisition of SSI. (e) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of On Call for the period from January 1, 1996 through the date of acquisition. (f) Adjustment to reflect the increase in interest expense relating to debt to be incurred in conjunction with the anticipated acquisition of SSI. (g) Adjusts compensation to the level the owners have agreed to receive from the Founding Companies subsequent to the Mergers as follows: Brewer........................................... $ (4,479) Prostaff......................................... (163,081) Maxwell.......................................... (40,652) HRA.............................................. 30,566 First Choice..................................... 741 Blethen.......................................... (32,608) --------- $(209,513) =========
(h) Records the incremental provision to reflect federal and state income taxes as if the Founding Companies had been C Corporations. This adjustment records income tax expense at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. (i) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares to be issued to the shareholders of the Founding Companies in connection with the Mergers; and (iii) 1,447,046 shares to be issued at an assumed initial public offering price of $11.00 per share in connection with the Offering to pay the cash portion of the consideration for the Founding Companies but excludes up to 935,494 shares of Common Stock subject to options to be issued under the 1996 Stock Option Plan. F-8 68 STAFFMARK, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS EXCEPT PER SHARE DATA)
ACQUISITION RELATED ADJUSTMENTS ------------------------------------------------------- CALDWELL FOR COMBINED THE PERIOD FROM STAFFMARK, FOUNDING JANUARY 1, 1995 PRO FORMA INC. COMPANIES TO JULY 10, 1995(A) ON CALL(B) SSI(C) ADJUSTMENTS ---------- --------- ------------------- ---------- ------ ----------- SERVICE REVENUES................................ $ -- $146,687 $11,035 $ 12,498 $1,243 $ -- COST OF SERVICES................................ -- 117,103 8,752 10,203 612 -- -------- -------- ------- -------- ----- ------- Gross profit............................ -- 29,584 2,283 2,295 631 -- OPERATING EXPENSES: Selling, general and administrative........... -- 24,069 1,331 1,305 414 -- Depreciation and amortization................. -- 1,157 17 25 5 293 (d) 186 (e) 37 (f) -------- -------- ------- -------- ----- ------- Operating income........................ -- 4,358 935 965 212 (516) -------- -------- ------- -------- ----- ------- OTHER INCOME (EXPENSE): Interest expense.............................. -- (1,089) (15) -- -- (816)(g) (302)(h) (56)(i) Other, net.................................... -- 82 34 43 1 -- -------- -------- ------- -------- ----- ------- INCOME BEFORE INCOME TAXES...................... -- 3,351 954 1,008 213 (1,690) INCOME TAX PROVISION............................ -- 94 -- -- -- -- -------- -------- ------- -------- ----- ------- Net income.............................. $ -- $ 3,257 $ 954 $ 1,008 $ 213 $(1,690) ======== ======== ======= ======== ===== ======= PRO FORMA NET INCOME PER COMMON SHARE........... WEIGHTED AVERAGE SHARES OUTSTANDING............. PRO FORMA TOTAL MERGER ADJUSTMENTS ADJUSTMENTS PRO FORMA ----------- ----------- --------- SERVICE REVENUES................................ $24,776 $ -- $171,463 COST OF SERVICES................................ 19,567 -- 136,670 ------- ------- -------- Gross profit............................ 5,209 -- 34,793 OPERATING EXPENSES: Selling, general and administrative........... 3,050 (1,649)(j) 25,470 Depreciation and amortization................. 563 -- 1,720 ------- ------- -------- Operating income........................ 1,596 1,649 7,603 ------- ------- -------- OTHER INCOME (EXPENSE): Interest expense.............................. (1,189) -- (2,278) Other, net.................................... 78 -- 160 ------- ------- -------- INCOME BEFORE INCOME TAXES...................... 485 1,649 5,485 INCOME TAX PROVISION............................ -- 2,285(k) 2,379 ------- ------- -------- Net income.............................. $ 485 $ (636) $ 3,106 ======= ======= ======== PRO FORMA NET INCOME PER COMMON SHARE........... $ 0.37 ======== WEIGHTED AVERAGE SHARES OUTSTANDING............. 8,420 (l) ========
The accompanying notes are an integral part of this statement. F-9 69 STAFFMARK, INC. NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (a) Records the audited financial results of Caldwell, which was purchased by Brewer on July 10, 1995, for the period from January 1, 1995 through the date of acquisition. (b) Records the 1995 audited financial results of On Call, which was purchased by Brewer on February 2, 1996. (c) Records the 1995 audited financial results of SSI, whose shareholders have signed a definitive agreement to be purchased by First Choice. (d) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisition of Caldwell for the period from January 1, 1995 through the date of acquisition. (e) Adjustment to reflect the amortization expense relating to the intangible assets recorded in conjunction with the acquisition of On Call. (f) Adjustment to reflect the amortization expense relating to the intangible assets to be recorded in conjunction with the anticipated acquisition of SSI. (g) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of Caldwell for the period from January 1, 1995 through the date of acquisition. (h) Adjustment to reflect the increase in interest expense relating to debt incurred in conjunction with the acquisition of On Call. (i) Adjustment to reflect the increase in interest expense relating to debt to be incurred in conjunction with the anticipated acquisition of SSI. (j) Adjusts compensation to the level the owners have agreed to receive from the Founding Companies subsequent to the Mergers as follows: Brewer.......................................... $ (250,016) Prostaff........................................ (800,000) Maxwell......................................... (165,000) HRA............................................. (73,767) First Choice.................................... (220,586) Blethen......................................... (139,902) ----------- $(1,649,271) ===========
(k) Records the incremental provision to reflect federal and state income taxes as if the Founding Companies had been C Corporations. This adjustment records income tax expense at an effective combined tax rate of 39%, adjusted for nondeductible goodwill amortization. (l) Includes: (i) 1,355,000 shares issued by StaffMark prior to the Offering; (ii) 5,618,249 shares to be issued to the shareholders of the Founding Companies in connection with the Mergers; and (iii) 1,447,046 shares to be issued at an assumed initial public offering price of $11.00 per share in connection with the Offering to pay the cash portion of the consideration for the Founding Companies but excludes up to 935,494 shares of Common Stock subject to options to be issued under the 1996 Stock Option Plan. F-10 70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To StaffMark, Inc.: We have audited the accompanying balance sheet of StaffMark, Inc. (a Delaware corporation, originally One Source Staffing, Inc.) as of March 31, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement 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 balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. 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 balance sheet referred to above presents fairly, in all material respects, the financial position of StaffMark, Inc. as of March 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, June 14, 1996. F-11 71 STAFFMARK, INC. BALANCE SHEET MARCH 31, 1996 SHAREHOLDERS' EQUITY: Common stock, $.01 par value; authorized shares of 26,000,000; shares issued and outstanding of 1,000........................... $ 10 Subscriptions receivable............................................ (10) ---- Total shareholders' equity.................................. $ -- ====
F-12 72 STAFFMARK, INC. NOTES TO BALANCE SHEET 1. BUSINESS AND ORGANIZATION: StaffMark, Inc. ("StaffMark" or the "Company," a Delaware corporation) 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. The Company intends to acquire six local and regional temporary staffing companies (the "Founding Companies"), complete an initial public offering ("IPO") of its common stock and, subsequent to the IPO, continue to acquire, through merger or purchase, similar companies to expand the Company's national and regional operations. As of March 31, 1996, the Company had not conducted any operations and all activities to date were related to the acquisition and the IPO which have been funded by the Founding Companies. Accordingly, statements of operations, changes in shareholders' equity and cash flows would not provide meaningful information and have been omitted. There is no assurance that the pending acquisitions discussed above will be completed and that StaffMark will be able to generate future operating revenue. StaffMark is dependent upon the IPO to fund the pending acquisitions and future operations. 2. SHAREHOLDERS' EQUITY: In conjunction with the organization and initial capitalization of StaffMark, the Company issued 1,000 shares of common stock in exchange for notes receivable totaling $10 which has been reflected as subscriptions receivable and classified as contra equity in the accompanying balance sheet. 3. SUBSEQUENT EVENTS: Subsequent to March 31, 1996, the Company has incurred significant costs, including professional fees and travel, associated with the acquisition of the Founding Companies and the IPO. The Company anticipates that these costs will approximate $2.5 million. In April 1996, the Founding Companies advanced approximately $375,000 to the Company to help fund offering related costs. 4. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, StaffMark signed definitive agreements to acquire by merger the Founding Companies to be effective with the IPO. The companies to be acquired are Brewer Personnel Services, Inc., The Maxwell Companies, The Prostaff Companies, HRA, Inc., The Blethen Group and First Choice Staffing, Inc. The aggregate consideration that will be paid by StaffMark to acquire the Founding Companies is approximately $77.7 million consisting of a combination of cash and common stock. In June 1996, the Company's Board of Directors declared a 1,355-for-one stock split. In July 1996, StaffMark filed a Registration Statement on Form S-1 for the sale of its common stock. See "Risk Factors" included elsewhere herein. F-13 73 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To StaffMark, Inc.: We have audited the accompanying combined balance sheets of the companies identified in Note 1 to the combined financial statements (the "Founding Companies") as of December 31, 1995 and 1994, and the related combined statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Founding Companies as of December 31, 1995 and 1994, and the results of their combined operations and their combined cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, May 24, 1996. F-14 74 THE FOUNDING COMPANIES COMBINED BALANCE SHEETS
DECEMBER 31, -------------------------- MARCH 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents........................... $ 1,756,311 $ 2,279,990 $ 1,984,754 Restricted cash and certificates of deposit......... 290,481 253,171 222,367 Accounts receivable, net of allowance for doubtful accounts of $171,019, $377,675 and $385,007, respectively..................................... 12,046,250 14,877,756 16,665,525 Prepaid expenses and other.......................... 475,369 967,127 1,258,721 Deferred income taxes............................... 193,201 171,000 227,600 Investments......................................... 209,505 428,508 155,154 Advances to shareholders............................ -- -- 250,000 ----------- ----------- ----------- Total current assets........................ 14,971,117 18,977,552 20,764,121 PROPERTY AND EQUIPMENT, net........................... 2,267,357 2,832,410 3,174,951 INTANGIBLE ASSETS, net................................ 282,215 15,592,615 19,311,582 OTHER ASSETS: Advances to shareholders............................ 449,900 194,163 231,328 Deferred income taxes............................... 45,915 85,760 77,960 Cash surrender value of officers' life insurance.... 34,670 41,280 41,280 Other............................................... 69,087 103,225 82,646 ----------- ----------- ----------- Total other assets.......................... 599,572 424,428 433,214 ----------- ----------- ----------- $18,120,261 $37,827,005 $43,683,868 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and other accrued liabilities...... $ 918,878 $ 1,523,703 $ 1,530,833 Outstanding checks.................................. 244,104 418,397 857,291 Payroll and related liabilities..................... 3,314,563 4,177,816 4,750,497 Reserve for workers' compensation claims............ 1,614,494 4,000,801 4,210,141 Short-term borrowings............................... 2,507,475 2,003,016 2,823,391 Current maturities of long-term debt................ 394,273 1,048,357 1,591,569 Current maturities of notes payable to related parties.......................................... 488,603 272,813 312,051 Income taxes payable................................ 298,883 57,458 92,257 Accrued dividends................................... 197,500 151,000 16,927 ----------- ----------- ----------- Total current liabilities................... 9,978,773 13,653,361 16,184,957 LONG-TERM DEBT, less current maturities............... 468,098 15,390,019 18,394,362 NOTES PAYABLE TO RELATED PARTIES, less current maturities.......................................... 49,037 167,271 161,271 COMMITMENTS AND CONTINGENCIES (Notes 12 through 16) SHAREHOLDERS' EQUITY: Common stock (Note 11).............................. 86,423 46,100 47,100 Paid-in capital..................................... 8,940 106,999 506,148 Unrealized holding gain on investments.............. -- 43,296 -- Subscriptions receivable............................ -- -- (80,000) Retained earnings................................... 7,528,990 8,419,959 8,470,030 ----------- ----------- ----------- Total shareholders' equity.................. 7,624,353 8,616,354 8,943,278 ----------- ----------- ----------- $18,120,261 $37,827,005 $43,683,868 =========== =========== ===========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-15 75 THE FOUNDING COMPANIES COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED FISCAL YEARS -------------------------- ------------------------------------------- MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 ----------- ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES........... $91,220,809 $121,155,557 $146,687,368 $31,466,084 $40,924,744 COST OF SERVICES........... 72,116,476 97,111,845 117,103,666 25,384,520 32,449,442 ----------- ------------ ------------ ----------- ----------- Gross profit..... 19,104,333 24,043,712 29,583,702 6,081,564 8,475,302 OPERATING EXPENSES: Selling, general and administrative........ 15,358,183 19,067,229 24,068,992 5,060,608 6,939,223 Depreciation and amortization.......... 514,870 741,597 1,156,685 192,034 427,146 ----------- ------------ ------------ ----------- ----------- Operating income......... 3,231,280 4,234,886 4,358,025 828,922 1,108,933 ----------- ------------ ------------ ----------- ----------- OTHER INCOME (EXPENSE): Interest expense......... (388,198) (419,055) (1,088,676) (37,589) (503,724) Other, net............... 19,497 55,088 81,446 30,981 70,292 ----------- ------------ ------------ ----------- ----------- INCOME BEFORE INCOME TAXES.................... 2,862,579 3,870,919 3,350,795 822,314 675,501 PROVISION FOR INCOME TAXES.................... 345,516 355,696 93,556 94,716 63,215 ----------- ------------ ------------ ----------- ----------- Net income....... $ 2,517,063 $ 3,515,223 $ 3,257,239 $ 727,598 $ 612,286 =========== ============ ============ =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-16 76 THE FOUNDING COMPANIES COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
NET COMMON PAID-IN SUBSCRIPTION UNREALIZED RETAINED STOCK CAPITAL RECEIVABLE HOLDING GAIN EARNINGS TOTAL ------- -------- ------------ ------------ ----------- ----------- BALANCE, December 31, 1992........... $71,943 $ 32,265 $ -- $ -- $ 3,795,515 $ 3,899,723 Net income......................... -- -- -- -- 2,517,063 2,517,063 Contributions...................... 2,524 -- -- -- -- 2,524 Dividends.......................... -- -- -- -- (1,278,676) (1,278,676) ------- -------- ---------- -------- ----------- ----------- BALANCE, December 31, 1993........... 74,467 32,265 -- -- 5,033,902 5,140,634 Net income......................... -- -- -- -- 3,515,223 3,515,223 Shares issued (500 and 290 issued by Maxwell and HRA, respectively)................... 12,100 -- -- -- -- 12,100 Repurchase and retirement of common stock by Blethen................ (144) (23,325) -- -- (1,531) (25,000) Dividends.......................... -- -- -- -- (1,018,604) (1,018,604) ------- -------- ---------- -------- ----------- ----------- BALANCE, December 31, 1994........... 86,423 8,940 -- -- 7,528,990 7,624,353 Net income......................... -- -- -- -- 3,257,239 3,257,239 Change in par value of Brewer shares from no par to $.01 per share........................... (40,423) 40,423 -- -- -- -- Shares issued by Prostaff.......... 100 -- -- -- -- 100 Contributions...................... -- 57,636 -- -- -- 57,636 Dividends.......................... -- -- -- -- (2,366,270) (2,366,270) Net unrealized holding gain........ -- -- -- 43,296 -- 43,296 ------- -------- ---------- -------- ----------- ----------- BALANCE, December 31, 1995........... 46,100 106,999 -- 43,296 8,419,959 8,616,354 Net loss of HRA for the three months ended December 31, 1995 (Unaudited) (Note 2)............ -- -- -- -- (27,772) (27,772) Net income for the three months ended March 31, 1996 (Unaudited)..................... -- -- -- -- 612,286 612,286 Shares issued by Maxwell (Unaudited)..................... 1,000 -- -- -- -- 1,000 Shares issued by Brewer in conjunction with purchase of On Call (Unaudited)................ -- 319,149 -- -- -- 319,149 Exercise of Brewer stock options (Unaudited)..................... -- 80,000 (80,000) -- -- -- Dividends (Unaudited).............. -- -- -- (43,296) (534,443) (577,739) ------- -------- ---------- -------- ----------- ----------- BALANCE, March 31, 1996 (Unaudited)........................ $47,100 $506,148 $ (80,000) $ -- $ 8,470,030 $ 8,943,278 ======= ======== ========== ======== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-17 77 THE FOUNDING COMPANIES COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FISCAL YEARS -------------------------- ------------------------------------------ MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 2,517,063 $ 3,515,223 $ 3,257,239 $ 727,598 $ 612,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 514,870 741,597 1,156,685 192,034 427,146 Provision for bad debts............... 156,723 154,959 437,731 50,771 41,141 Deferred income taxes................. (181,009) 10,933 (17,644) 73,016 (14,550) Net loss (gain) on investments........ 102,536 12,500 (2,146) -- -- Change in operating accounts, net of effects of acquisitions: Accounts receivable................. (2,846,006) (2,805,949) (1,313,247) (5,709) (1,617,647) Prepaid expenses and other.......... (159,724) (44,452) (474,478) (312,368) (126,146) Other assets........................ (124,673) (19,345) (34,919) (6,120) 2,600 Accounts payable and other accrued liabilities...................... 93,859 (175,929) 180,742 49,032 (252,571) Outstanding checks.................. 68,552 175,552 (425,111) (39,198) 605,655 Payroll and related liabilities..... 848,518 574,744 110,371 1,366,449 595,705 Reserve for workers' compensation claims........................... 557,069 596,083 2,101,307 646,200 (40,909) Income taxes payable................ 57,033 49,779 (241,425) (34,874) 53,914 ----------- ----------- ----------- ---------- ----------- Net cash provided by operating activities..................... 1,604,811 2,785,695 4,735,105 2,706,831 286,624 ----------- ----------- ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of businesses.................. (200,000) -- (11,530,000) -- (3,168,000) Purchases of investments................. (109,144) (13,750) (271,680) (161,871) -- Sales of investments..................... -- -- 98,119 -- -- Capital expenditures..................... (925,674) (991,560) (1,223,950) (254,496) (462,398) Changes in restricted cash and certificates of deposit............... 1,284,046 (72,499) 37,310 (33,067) 30,804 Other, net............................... 20,000 20,467 (64,610) -- -- ----------- ----------- ----------- ---------- ----------- Net cash provided by (used in) investing activities........... 69,228 (1,057,342) (12,954,811) (449,434) (3,599,594) ----------- ----------- ----------- ---------- -----------
The accompanying notes to combined financial statements are an integral part of these statements. F-18 78 THE FOUNDING COMPANIES COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
THREE MONTHS ENDED FISCAL YEARS -------------------------- ----------------------------------------- MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock.................. $ -- $ 12,100 $ 100 $ -- $ 1,000 Proceeds from issuance of long-term debt................................... 388,612 1,660,231 13,366,512 -- 4,251,706 Payments on long-term debt................ (219,554) (2,438,852) (2,106,440) (389,190) (342,294) Change in due from/to related parties, net.................................... (612,667) 159,138 (146,483) (57,949) 2,073 Proceeds from (payments on) short-term borrowings, net........................ 237,735 (46,489) (88,527) (855,178) (23,819) Cash dividends............................ (1,059,723) (987,078) (2,067,663) (442,055) (438,458) Deferred financing costs.................. -- -- (271,750) -- (56,250) Other, net................................ (4,775) (5,749) 57,636 -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities............ (1,270,372) (1,646,699) 8,743,385 (1,744,372) 3,393,958 ----------- ----------- ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS... 403,667 81,654 523,679 513,025 80,988 CASH AND CASH EQUIVALENTS, beginning of period....................... 1,270,990 1,674,657 1,756,311 1,359,624 1,903,766 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period............................. $ 1,674,657 $ 1,756,311 $ 2,279,990 $ 1,872,649 $ 1,984,754 =========== =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid............................. $ 326,492 $ 434,794 $ 715,668 $ 68,306 $ 677,627 =========== =========== =========== =========== =========== Income taxes paid......................... $ 453,500 $ 300,333 $ 363,981 $ 222,782 $ 51,009 =========== =========== =========== =========== =========== Non-cash transactions: Notes payable issued to purchase businesses........................... $ 299,010 $ -- $ 3,100,000 $ -- $ 149,180 =========== =========== =========== =========== =========== Distribution of notes receivable to shareholders......................... $ -- $ -- $ 345,107 $ -- $ -- =========== =========== =========== =========== =========== Transfer of investments to shareholders......................... $ -- $ -- $ -- $ -- $ 273,354 =========== =========== =========== =========== =========== Issuance of subscription receivable in conjunction with the exercise of stock options........................ $ -- $ -- $ -- $ -- $ 80,000 =========== =========== =========== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-19 79 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: In March 1996, StaffMark, Inc. ("StaffMark") was founded to create a national company to provide temporary staffing services. Concurrent with the initial public offering of its common stock (the "Offering"), wholly-owned subsidiaries of StaffMark will merge (the "Mergers") with the following six companies (each a "Founding Company" and collectively, the "Founding Companies"): Brewer Personnel Services, Inc. ("Brewer"), The Prostaff Companies ("Prostaff"), The Maxwell Companies ("Maxwell"), Human Resources, Inc. ("HRA"), First Choice Staffing, Inc. ("First Choice") and The Blethen Group ("Blethen"). The Mergers will be effected by StaffMark through issuance of its common stock and cash. The Founding Companies operate offices in eight states located in the Southeastern and Southwestern regions of the United States and provide temporary staffing in the commercial, professional and specialty medical staffing service lines. The Founding Companies extend trade credit to customers representing a variety of industries. There are no individual customers that account for more than ten percent of service revenues of the Founding Companies in any of the fiscal years or unaudited periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation -- The accompanying combined financial statements and related notes represent the combined financial position, results of combined operations and combined cash flows of the Founding Companies without giving effect to the Mergers and the Offering. The assets and liabilities of the Founding Companies are reflected at their historical amounts. The Founding Companies were not under common control or management during any of the periods presented. Fiscal Periods -- The fiscal years of several of the Founding Companies end on the Sunday closest to December 31. The fiscal years 1995, 1994 and 1993 each included 52 weeks. The fiscal years of HRA end on September 30. For purposes of preparing the accompanying combined financial statements for fiscal years 1995, 1994 and 1993, the financial statements of this company have been combined with the December 31 financial statements of the other Founding Companies. The unaudited interim periods include operating results for the three months ended March 31, 1996 and 1995 for each of the Founding Companies. For purposes of presenting the unaudited statement of shareholders' equity for the three months ended March 31, 1996, the net loss for HRA for the three months ended December 31, 1995, is included as an adjustment to reconcile shareholders' equity to March 31, 1996. Interim Financial Statements -- The accompanying combined interim financial statements and related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited financial statements for the three years in the period ended December 31, 1995, and include all adjustments of a normal, recurring nature which, in the opinion of management, are necessary to present fairly the combined financial position of the Founding Companies and results of their combined operations and their combined cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. F-20 80 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying combined financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. However, actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Founding Companies consider cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Founding Companies maintain allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying combined financial statements. Included in accounts receivable in the accompanying combined balance sheets are unbilled amounts of approximately $1,345,000, $1,685,000 and $2,823,000 (unaudited) at December 31, 1994, December 31, 1995 and March 31, 1996, respectively. Restricted Cash and Certificates of Deposit -- Restricted cash and certificates of deposit represent funds required to be maintained on behalf of certain of the Founding Companies' self-insured health benefit plans and state-administered workers' compensation insurance commissions. The use of these assets is either restricted to the payment of health benefits of participating employees or required as collateral on letters of credit provided to state insurance commissions. Investments -- The Founding Companies have adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in debt securities and marketable equity securities be designated as trading, held-to-maturity or available-for-sale. At December 31, 1994 and 1995, marketable debt and equity securities have been categorized as available-for-sale and are stated at fair value in the accompanying combined balance sheets. Unrealized gains on available-for-sale securities are recorded as adjustments to shareholders' equity. Realized gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment................................................. 3-7 years Computer equipment and software.................................. 3-5 years Building and improvements........................................ 7-32 years Vehicles......................................................... 5 years Leasehold improvements........................................... 3-15 years
F-21 81 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the related cost and accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Intangible Assets -- Intangible assets primarily consist of goodwill, which is amortized using the straight-line method over periods ranging from 15 to 30 years. Deferred financing costs are amortized over the life of the respective debt obligation using a method which approximates the interest method. Intangibles associated with non-compete agreements are amortized using the straight-line method over the life of the respective agreements. Income Taxes -- For the Founding Companies that are C Corporations for income tax reporting purposes, income taxes are provided based upon the provisions of SFAS No. 109, "Accounting for Income Taxes," which requires recognition of deferred income taxes under the liability method. Certain of the Founding Companies are S Corporations for income tax reporting purposes. Accordingly, the accompanying combined financial statements include no provision for federal income taxes related to the income of these companies as such taxes are liabilities of the individual shareholders. These companies' S Corporation status will terminate with the effective date of the Mergers. Workers' Compensation -- Several of the Founding Companies self-insure certain risks related to workers' compensation claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Founding Companies engage the services of a third party actuary to assist with the development of these cost estimates. Financial Instruments -- The Founding Companies' financial instruments include cash and cash equivalents, restricted cash and certificates of deposit, investments, advances to shareholders, notes receivable from related parties, cash surrender value of officers' life insurance and debt. Excluding investments, which are carried at fair market value as discussed in Note 6, management believes that these financial instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for these instruments are reasonable estimates of fair value. Stock Based Compensation -- During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation," which encourages all companies to recognize compensation expense based on the fair value, at grant date, of instruments issued pursuant to stock based compensation plans. Under the provision of SFAS No. 123, the fair value of the instruments granted, which is measured pursuant to the provisions of the statement, is to be recognized as compensation expense on a straight-line basis over the vesting period of the instrument. However, the statement also allows companies to continue to measure compensation costs for these instruments using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Companies electing to account for stock-based compensation plans pursuant to the provisions of APB 25 must make pro forma disclosures of net income as if the fair value method defined in SFAS No. 123 had been applied. The Founding Companies have elected to F-22 82 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) account for its stock options under the provisions of APB 25 and has included the disclosures required by SFAS No. 123 in Note 11. Impairment of Long-Lived Assets -- In the event that facts and circumstances indicate that the cost of intangible or other long-lived assets may be impaired, an evaluation of recoverability would be performed pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. 3. BUSINESS COMBINATIONS: Aaron Temporary Services, Inc. -- On November 22, 1993, Brewer acquired certain assets of Aaron Temporary Services, Inc. ("Aaron"). Aaron was engaged in providing temporary personnel services in Central and Northeast Arkansas. The total purchase price of $527,600 was comprised of a cash payment of $200,000 and the issuance of a note with payments, including interest, totaling $327,600. The acquisition has been accounted for as a purchase, and the results of Aaron have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired. The tangible assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs being recorded as intangible assets. Caldwell Services, Inc. -- On July 10, 1995, Brewer acquired the stock of E.P. Enterprises Corporation, d.b.a. Caldwell Services, Inc. ("Caldwell"). Caldwell is engaged in providing temporary personnel services through seven staffing offices located in Georgia. The acquisition has been accounted for as a purchase, and the results of Caldwell have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets and liabilities acquired. Total consideration paid for Caldwell was approximately $17.3 million. The purchase price included cash of $11.5 million, a note to the seller of $3.1 million and the assumption of certain liabilities of Caldwell. The assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs of approximately $15.3 million being recorded as goodwill. On Call Employment Services, Inc. (Unaudited) -- On February 2, 1996, Brewer acquired the stock of On Call Employment Services, Inc. ("On Call"). On Call is engaged in providing temporary personnel services through four staffing offices in Colorado. The acquisition has been accounted for as a purchase, and the results of On Call have been included in the accompanying combined financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets and liabilities acquired. Total consideration paid for On Call was approximately $3.8 million which was comprised of cash totaling $3.0 million, including $360,000 associated with a non-compete agreement, 10 shares of Brewer's common stock valued at approximately $320,000 and the assumption of liabilities totaling approximately $480,000. The assets acquired have been recorded at historical, depreciated cost, which approximated fair F-23 83 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) value as of the acquisition date, with the remaining acquisition costs of approximately $3.1 million being recorded as goodwill. Sumner-Ray Technical Resources, Inc. (Unaudited) -- On February 23, 1996, Maxwell acquired substantially all of the assets of Sumner-Ray Technical Resources, Inc. ("Sumner-Ray"), which is engaged in providing temporary and permanent placement of professional and technical personnel in the engineering, drafting and manufacturing fields. The acquisition did not have a material impact on the combined financial position or results of operations of the Founding Companies and, therefore, is not reflected in the pro forma results of operations shown below. The unaudited combined results of operations on a pro forma basis as though Aaron, Caldwell and On Call had been acquired as of the beginning of 1993 are as follows:
THREE MONTHS ENDED FISCAL YEAR ------------------------- ------------------------------------------ MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues..................... $132,211,996 $148,807,505 $170,219,807 $38,707,586 $42,051,835 ============ ============ ============ =========== =========== Net income................... $ 3,739,735 $ 3,277,888 $ 3,621,657 $ 842,159 $ 636,636 ============ ============ ============ =========== ===========
4. INTANGIBLE ASSETS: Intangible assets consisted of the following:
DECEMBER 31, MARCH 31, ------------------------ 1996 1994 1995 ----------- -------- ----------- (UNAUDITED) Goodwill....................................... $ 25,000 $15,356,334 $18,731,611 Deferred financing costs....................... -- 271,750 328,000 Non-compete agreements......................... 299,010 340,010 839,647 Other.......................................... 75,000 140,262 140,262 -------- ----------- ----------- 399,010 16,108,356 20,039,520 Less accumulated amortization........ 116,795 515,741 727,938 -------- ----------- ----------- $282,215 $15,592,615 $19,311,582 ======== =========== ===========
Amortization expense related to intangible assets for fiscal years 1993, 1994 and 1995 totaled approximately $53,000, $106,000 and $395,000, respectively. Unaudited amortization expense for the three months ended March 31, 1995 and 1996 totaled approximately $30,000 and $204,000, respectively. F-24 84 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT: Components of property and equipment are as follows:
DECEMBER 31, MARCH 31, ------------------------- 1996 1994 1995 ----------- ---------- ---------- (UNAUDITED) Office equipment................................ $1,479,614 $1,884,367 $2,211,150 Computer equipment and software................. 1,736,847 2,463,017 2,641,889 Buildings and improvements...................... 483,136 502,130 518,401 Vehicles........................................ 382,102 389,761 393,394 Leasehold improvements.......................... 261,521 379,175 428,607 Land............................................ 13,000 13,000 13,000 ---------- ---------- ---------- 4,356,220 5,631,450 6,206,441 Less accumulated depreciation and amortization........................ 2,088,863 2,799,040 3,031,490 ---------- ---------- ---------- $2,267,357 $2,832,410 $3,174,951 ========== ========== ==========
Depreciation and amortization expense related to property and equipment for fiscal years 1993, 1994 and 1995 totaled approximately $462,000, $635,000 and $762,000, respectively. Unaudited depreciation and amortization expense for the three months ended March 31, 1995 and 1996 totaled approximately $162,000 and $223,000, respectively. 6. INVESTMENTS: The carrying value and market value of available-for-sale investment securities were as follows:
GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- December 31, 1994: Equity securities......................... $ 180,826 $ -- $ -- $180,826 United States government obligations...... 28,679 -- -- 28,679 --------- -------- --------- -------- $ 209,505 $ -- $ -- $209,505 ========= ======== ========= ======== December 31, 1995: Equity securities......................... $ 201,379 $ 38,551 $ -- $239,930 United States government obligations...... 28,679 4,745 -- 33,424 --------- -------- --------- -------- $ 230,058 $ 43,296 $ -- $273,354 ========= ======== ========= ========
The United States government obligations held as of December 31, 1994 and 1995 represent one issue which matures in 2003. Losses totaling $102,536 and $12,500 in 1993 and 1994, respectively, were recognized related to one security whose impairment of value was deemed to be other than temporary. These amounts are reflected in other expense, in the accompanying combined statements of income. There were no sales of securities during 1994. Proceeds from the sale of available-for-sale securities totaled $98,119 for the year ended December 31, 1995, including realization of a gross gain of $2,146. All available-for-sale securities were distributed to the shareholders in March 1996. Included in investments in the accompanying combined balance sheets are certificates of deposit with maturities between three and twelve months of $155,154 at December 31, 1995 and March 31, 1996. F-25 85 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT: Short-term borrowings consisted of the following:
DECEMBER 31, ------------------------- MARCH 31, 1994 1995 1996 ---------- ----------- ----------- (UNAUDITED) Brewer -- Line of credit with Boatmen's National Bank of St. Louis ("Boatmen's"). Maximum borrowings equal the lesser of $6 million ($5 million at December 31, 1995) or 85% of Brewer's eligible accounts receivable balance reduced by the letters of credit issued as security for Brewer's workers' compensation obligations. Interest payable monthly at a variable rate which averaged 9.83% during the three months ended March 31, 1996 and 10.23% during the year ended December 31, 1995. Principal due on June 29, 1998. Secured by the assets and common stock of Brewer and partially guaranteed by certain shareholders of Brewer. $ -- $ 309,068 $ 1,060,774 Line of credit with Boatmen's, interest payable quarterly at prime, 8.00% as of January 1, 1995 and averaging 6.80% for the year then ended. Secured by accounts receivable of Brewer and guaranteed by certain shareholders of Brewer. 725,000 -- -- Prostaff -- Line of credit with Boatmen's. Maximum borrowings equal the lesser of $1.5 million or 80% of Prostaff's eligible accounts receivable. Interest accrues at a variable rate which averaged 8.88% during the three months ended March 31, 1996 and 7.75% during the year ended December 31, 1994. The balance is due upon demand and is secured by the accounts receivable of Prostaff and guaranteed by the shareholders of Prostaff. 417,000 -- 152,000
F-26 86 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 -------- ----------- ----------- (UNAUDITED) HRA -- "Purchases of Accounts" agreement with SouthTrust Bank ("SouthTrust") by which SouthTrust agreed to purchase up to $750,000 of HRA's accounts receivable on a revolving basis. The agreement gave HRA the option to repurchase these receivables at any time and gave SouthTrust full recourse for any accounts receivable which were not collected, as well as required HRA to meet certain restrictive covenants. Service charge payable quarterly which equaled 1.50% of the face amount of each account financed by SouthTrust. $ 600,830 $ 502,512 $ -- Revolving line of credit with SouthTrust. Maximum borrowings equal to 80% of HRA's eligible accounts receivable, as defined, not to exceed aggregate borrowings of $1.5 million. Interest is payable monthly on outstanding borrowings at SouthTrust's base rate plus 1.25% (weighted average rate of 9.23% during the six months ended March 31, 1996). The agreement expires on November 20, 1996. Secured by the accounts receivable of HRA and guaranteed by the shareholders of HRA. -- -- 580,000 First Choice -- Revolving line of credit with NationsBank. Maximum borrowings equal to the lesser of $400,000 or 80% of First Choice's eligible accounts receivable, as defined. Interest is payable monthly at prime which averaged 8.33% during the three months ended March 31, 1996 and 8.66% during 1995. Principal due May 31, 1996. Secured by the accounts receivable of First Choice. -- 200,000 150,000 Blethen -- Revolving lines of credit with Lighthouse Financial Corp. Maximum aggregate borrowings equal to the lesser of $1.55 million or 85% of the applicable Blethen companies' eligible accounts receivable, as defined. Interest payable monthly at a variable rate which averaged 10.84% during the three months ended March 31, 1996 and 11.33% during 1995. The lines of credit are renewed annually and are currently due April 6, 1997. Secured by certain assets of Blethen and guaranteed by Blethen's majority shareholder. 764,645 971,436 856,617 Other short-term borrowings -- 20,000 24,000 ---------- ----------- ----------- $2,507,475 $ 2,003,016 $ 2,823,391 ========== =========== ===========
F-27 87 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 -------- ----------- ----------- (UNAUDITED) Long-term debt consisted of the following: Brewer -- Term loan note with Boatmen's. Interest payable monthly at a variable rate which averaged 8.9% during the three months ended March 31, 1996 and 9.56% during the year ended December 31, 1995. Principal due in quarterly installments beginning October 1, 1995 through maturity on June 30, 2001. Secured by the assets and common stock of Brewer and partially guaranteed by certain shareholders of Brewer. $ -- $12,750,000 $16,000,000 Note payable to the previous owner of Caldwell, interest at 8.00%, payable quarterly. Principal to be paid in equal annual installments beginning June 30, 1998 through June 30, 2001 or in full upon a change in control of Brewer. Secured by a lien on the assets of Brewer and guaranteed by certain shareholders of Brewer. -- 3,100,000 3,100,000 Note payable to the previous owner of Aaron, imputed interest of 6.00%, payable in monthly installments of $9,100. Secured by the personal assets of the shareholders of Brewer. 197,235 97,332 71,341 Prostaff -- Term note payable to Boatmen's in the original amount of $290,237, due in monthly installments of $6,079, including interest at 5.5% through August 31, 1998. Secured by certain equipment of Prostaff and guaranteed by the shareholders of Prostaff. 231,806 176,331 160,431 Maxwell -- Promissory note payable to the previous owner of Sumner-Ray, due in annual installments of $84,000, including interest payable at 8.00%. Secured by a lien and security interest in certain assets of Maxwell. -- -- 149,180 HRA -- Deferred compensation arrangements with various consultants and/or employees of HRA. Due in weekly and monthly installments, imputed interest of approximately 8.75%. Maturities ranging from 1996 to 2003. 195,722 171,031 391,896
F-28 88 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 -------- ----------- ----------- (UNAUDITED) Blethen -- Obligations under capital leases related to certain office equipment of Blethen, including interest which averaged 20.90% during the three months ended March 31, 1996 and 21.50% and 24.10% during the years ended December 31, 1995 and 1994. $ 150,160 $ 69,623 $ 55,885 Other long-term debt 87,448 74,059 57,198 ---------- ----------- ----------- 862,371 16,438,376 19,985,931 Less current maturities 394,273 1,048,357 1,591,569 ---------- ----------- ----------- $ 468,098 $15,390,019 $18,394,362 ========== =========== ===========
Certain obligations of the Founding Companies contain warranties and covenants. At March 31, 1996, Blethen was not in compliance with certain of these warranties and covenants relating to obligations totaling approximately $857,000. Blethen requested and received a waiver from the lender for all events of noncompliance and default. As of December 31, 1995, annual maturities of long-term debt subsequent to December 31, 1995 are as follows: 1996............................................ $ 1,048,357 1997............................................ 1,595,272 1998............................................ 3,236,349 1999............................................ 3,252,487 2000............................................ 3,905,911 Thereafter...................................... 3,400,000 ----------- $16,438,376 ===========
8. INCOME TAXES: The income tax provision (benefit) consisted of the following:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------------- ---------------------------------- MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 --------- -------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) Current: Federal................... $ 441,636 $329,332 $ 176,056 $ 114,207 $ 62,940 State..................... 84,888 34,584 18,100 4,209 14,825 --------- -------- --------- --------- --------- 526,524 363,916 194,156 118,416 77,765 Deferred: Federal................... (149,201) (11,257) (90,230) (21,320) (13,090) State..................... (31,807) 3,037 (10,370) (2,380) (1,460) --------- -------- --------- --------- --------- (181,008) (8,220) (100,600) (23,700) (14,550) --------- -------- --------- --------- --------- $ 345,516 $355,696 $ 93,556 $ 94,716 $ 63,215 ========= ======== ========= ========= =========
Deferred income taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued vacation and workers' F-29 89 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) compensation reserves. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax basis of existing assets and liabilities. The components of deferred income tax assets and liabilities for the applicable C Corporations are as follows:
DECEMBER 31, ---------------------- MARCH 31, 1994 1995 1996 --------- -------- ----------- (UNAUDITED) Deferred income tax assets: Vacation and workers' compensation reserves.... $ 192,972 $167,000 $ 121,500 Compensation agreements........................ 76,600 65,000 159,300 Net operating losses........................... 78,000 42,000 42,000 Other.......................................... 16,429 8,760 8,760 --------- -------- --------- Total deferred income tax assets....... 364,001 282,760 331,560 Deferred income tax liabilities: Depreciation................................... (87,885) (26,000) (26,000) Change in income tax accounting method......... (37,000) -- -- --------- -------- --------- Total deferred income tax liabilities.......................... (124,885) (26,000) (26,000) --------- -------- --------- $ 239,116 $256,760 $ 305,560 ========= ======== =========
The components of net deferred income tax assets as stated in the accompanying combined balance sheets are as follows:
DECEMBER 31, --------------------- MARCH 31, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Current........................................... $193,201 $171,000 $ 227,600 Long-term......................................... 45,915 85,760 77,960 -------- -------- --------- $239,116 $256,760 $ 305,560 ======== ======== =========
A valuation allowance for the deferred tax assets has not been recorded in the accompanying combined financial statements because management believes that all deferred tax assets are more likely than not to be recovered. In assessing the realizability of deferred income tax assets, management has considered scheduled reversals of the deferred income tax liabilities, income taxes paid in available carryback periods and projected future taxable income. F-30 90 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The differences in income taxes determined by applying the federal statutory tax rate of 34% to income before income taxes and the amounts recorded result from the following:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, -------------------------- -------------------------------------- MARCH 31, MARCH 31, 1993 1994 1995 1995 1996 --------- ---------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Tax at statutory rate............. $ 973,277 $1,316,113 $ 1,139,270 $ 279,587 $ 229,670 Add (deduct): State income taxes, net of federal tax benefit........ 53,206 70,358 17,666 7,022 6,060 Effect of S Corporation income..................... (644,809) (981,972) (1,057,329) (192,316) (172,190) General business credits..... (44,609) (77,185) -- -- -- Other, net................... 8,451 28,382 (6,051) 423 (325) --------- ---------- ----------- --------- -------- $ 345,516 $ 355,696 $ 93,556 $ 94,716 $ 63,215 ========= ========== =========== ========= ========
The Founding Companies have net operating loss and general business credit carryforwards, which expire at various periods from 1996 through 2008. 9. WORKERS' COMPENSATION: Certain of the Founding Companies are self-insured for certain workers' compensation claims and are regulated by various state-administered workers' compensation insurance commissions. These Founding Companies have purchased insurance for medical claims which exceed certain thresholds and maintain letters of credit to cover any potential unpaid claims. At December 31, 1995, these letters of credit totaled $2,450,000. Workers' compensation expense for fiscal years 1993, 1994 and 1995 totaled approximately $2,594,000, $3,440,000 and $4,978,000, respectively. Unaudited workers' compensation expense for the three months ended March 31, 1995 and 1996 totaled approximately $1,055,000 and $984,000, respectively. 10. EMPLOYEE BENEFIT PLANS: Certain of the Founding Companies maintain employee benefit plans, some of which allow eligible employees to defer a portion of their income through contributions to the plans. Under provisions of the plans, certain of the Founding Companies match a percentage of the employee contributions, up to a maximum as specified in the individual plan, and may contribute additional amounts at the discretion of management. Contributions by the Founding Companies to the various plans were approximately $250,000, $190,000 and $62,000 in fiscal years 1993, 1994 and 1995, respectively. Unaudited contributions to the various plans were approximately $4,500 and $22,000 for the three months ended March 31, 1995 and 1996, respectively. F-31 91 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 11. COMMON STOCK AND STOCK OPTIONS: The common stock authorized, issued and outstanding of the Founding Companies consisted of the following:
DECEMBER 31, ------------------- MARCH 31, 1994 1995 1996 ------- ------- --------- (UNAUDITED) Brewer -- Common stock, no par value in 1994 and $.01 par value in 1995 and 1996; 1,000 shares authorized in 1994 and 10,000 in 1995 and 1996; 117.5 shares issued and outstanding in 1994 and 1995 and 132.5 in 1996....... $40,424 $ 1 $ 1 Prostaff -- Common stock, par values of $.20 in 1994 and par values ranging from $.20 to $1.00 in 1995 and 1996; 200,000 shares authorized in 1994 and 201,000 in 1995 and 1996; 55,000 shares issued and outstanding in 1994 and 55,100 in 1995 and 1996..................... 11,000 11,100 11,100 Maxwell -- Common stock, $1.00 par value in 1994, 1995 and 1996; 110,000 shares authorized in 1994 and 1995 and 160,000 in 1996; 4,000 shares issued and outstanding in 1994 and 1995 and 5,000 in 1996................... 4,000 4,000 5,000 HRA -- Common stock, no par value, 1,000 shares authorized, 790 shares issued and outstanding in 1994, 1995 and 1996................................................. 12,600 12,600 12,600 First Choice -- Common stock, $1.00 par value, 100,000 shares authorized, 10,000 shares issued and outstanding in 1994, 1995 and 1996................................................. 10,000 10,000 10,000 Blethen -- Common stock, $1.00 par value, 600,000 shares authorized, 8,399 shares issued and outstanding in 1994, 1995 and 1996................................................. 8,399 8,399 8,399 ------- ------- ------- $86,423 $46,100 $47,100 ======= ======= =======
Brewer has granted stock options to certain key employees. These options were granted at fair value as determined by management, are exercisable in installments and expire from June 30, 1999 to July 11, 2000. In March 1996, a key employee of Brewer exercised his stock options and received five shares of Brewer's common stock. In payment for this exercise, Brewer executed a note receivable from this employee for $80,000, which represented the entire exercise price of these options. F-32 92 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A summary of Brewer's stock option activity follows:
WEIGHTED AVERAGE SHARES UNDER PRICE PER OPTION SHARE ------------ ---------------- Outstanding, December 31, 1993........................... -- $ -- Granted................................................ 5.0 16,000 ----- ------------ Outstanding, December 31, 1994........................... 5.0 16,000 Granted................................................ 7.5 30,666 ----- ------------ Outstanding, December 31, 1995........................... 12.5 24,800 Granted (Unaudited).................................... 1.0 35,000 Exercised (Unaudited).................................. (5.0) (16,000) ----- ------------ Outstanding, March 31, 1996 (Unaudited).................. 8.5 $ 31,176 ======== ============ Exercisable, December 31, 1995........................... 5.0 $ 16,000 ======== ============ Exercisable, March 31, 1996 (Unaudited).................. -- $ -- ======== ============
As discussed in Note 2, Brewer has elected to account for stock options under the provisions of APB 25. Accordingly, pursuant to the requirements of SFAS 123, Brewer has determined the value of all options granted during 1995 and the unaudited three month period ended March 31, 1996 using the minimum value method, as discussed in SFAS 123, and based on the following weighted average assumptions used for grants:
THREE MONTHS FISCAL ENDED 1995 MARCH 31, 1996 ---------- -------------- Risk-free interest rate..................................... 6.5% 5.6% Expected dividend yield..................................... 0% 0% Expected life............................................... 2.5 years 2.0 years
Options were assumed to be exercised upon vesting for the purpose of this valuation. Using these assumptions, the fair value of the stock options granted in 1995 and the unaudited three months ended March 31, 1996 was approximately $36,000 and $4,000, respectively. The fair value of these stock options was not material to the combined results of operations of the Founding Companies and, accordingly, the pro forma disclosures required by SFAS 123 have been omitted. 12. RELATED PARTY TRANSACTIONS: Brewer -- In June 1995, Brewer entered into an agreement to merge its activities with Chad J. Brewer, Incorporated (a Virginia corporation, "Chad Brewer"), which was owned by a related party. Brewer issued 17.5 shares of common stock in exchange for all outstanding shares of Chad Brewer. This merger has been accounted for as a pooling-of-interests. Accordingly, the accompanying combined financial statements have been prepared as if the merger had occurred at the beginning of fiscal year 1993. Prior to the merger, Brewer maintained a license agreement which entitled Chad Brewer to do business in the state of Virginia as Brewer Personnel Services and to use certain information of Brewer. In addition, Brewer provided payroll administration, data processing and accounts receivable financing services to Chad Brewer. Brewer rents office space from Brewer Investments, a partnership owned by certain shareholders. The rent expense related to these transactions was $60,000 for fiscal years 1993, 1994 and 1995. In January 1996, Brewer moved its corporate offices into a new building, which is also owned by Brewer Investments. Future F-33 93 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) minimum lease payments related to this lease approximate $1,127,000 which have been included in the table in Note 14. In December 1995, a note receivable from Brewer Investments in the amount of $345,107 was distributed to Brewer's shareholders. Prostaff -- Prostaff leases the office facilities of its headquarters from a limited liability corporation ("LLC") owned by the shareholders of Prostaff. For the fiscal years 1993, 1994 and 1995, rent paid to the LLC totaled $61,100, $73,761 and $114,180, respectively. Unaudited rent expense paid to the LLC was $22,125 for the three months ended March 31, 1995 and 1996. Maxwell -- Maxwell rents a duplex from certain shareholders which houses foreign-trained physical and occupational therapists. Rent expense related to the duplex amounted to $16,800 for each of the years ended December 31, 1993, 1994 and 1995. Unaudited rent expense totaled $4,200 for the three months ended March 31, 1995 and 1996. These rent payments are not subject to a formal agreement and, therefore, have not been considered in the disclosure included in Note 14. HRA -- Included in general and administrative expenses are advisor and/or director fees paid or payable to the shareholders of HRA totaling $120,000, $69,000 and $94,000 for fiscal years 1993, 1994 and 1995, respectively. No such fees were accruable for the three months ended March 31, 1995 or 1996. As of September 30, 1994 and 1995, HRA had a note payable to a shareholder of HRA for $155,295 and $122,000, respectively. The note was due on demand with interest payable at 8.75% and was secured by HRA's unpledged accounts receivable. In connection with the purchase of this shareholder's common stock in HRA by two remaining shareholders, this note was amended whereby, beginning in December 1995, interest will be payable monthly at 9.75%. The amended note is unsecured and requires principal payments beginning in December 1997. At March 1996, HRA owed $116,000 (unaudited) pursuant to this amended note agreement. First Choice -- As of December 31, 1994 and 1995 and March 31, 1996, First Choice maintained an unsecured note payable to the majority shareholder for $250,000, $180,000 and $180,000 (unaudited), respectively. The note is due on demand with interest payable at 8.00%. Blethen -- Blethen leases offices and a vehicle from the majority shareholder through informal agreements at a monthly cost of $600 each. In March 1996, the office lease payments were increased to $1,200 per month. Market rental rates may differ from these rental payments. Blethen also frequently borrows from the majority shareholder. Due from shareholders primarily represents advances to the majority shareholder. Rental expense under the above agreements totaled approximately $14,000 for fiscal years 1993, 1994 and 1995, respectively, and approximately $3,600 and $4,200 for the unaudited three months ended April 2, 1995 and March 31, 1996, respectively. F-34 94 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Blethen rents an office facility from a shareholder under a month-to-month agreement. Rent expense related to these facilities was $17,500, $19,000 and $24,000 during the fiscal years 1993, 1994 and 1995, respectively, and $6,000 during the unaudited three months ended April 2, 1995 and March 31, 1996. As of December 31, 1994 and 1995 and March 31, 1996, Blethen had advances to shareholders of $185,236, $194,163 and $231,328 (unaudited), respectively. 13. COMMITMENTS AND CONTINGENCIES: Certain of the Founding Companies have employment agreements with certain executive officers, management personnel and former owners of businesses acquired by the Founding Companies that provide for annual salaries, cost-of-living adjustments, additional compensation in the form of performance based bonuses and, for certain employees, options to purchase shares of common stock. Certain agreements include a covenant against competition with the respective Founding Companies, which extends for a period of time after termination. These agreements generally continue until terminated by the employee or the Founding Company. HRA is involved in a lawsuit with its former workers' compensation insurance carrier in which HRA is disputing the amount of insurance premiums owed in fiscal 1993 and 1994 and a portion of fiscal 1995. A judgment has been rendered against HRA for approximately $718,000, which is inclusive of the disputed payments plus accrued interest. HRA has filed an appeal of this judgment and is negotiating a settlement. HRA provided reserves for these disputed amounts in the years in which they arose. Accordingly, management believes that the ultimate resolution of this matter will not have a materially adverse affect on the combined financial position or results of operations of the Founding Companies. The Founding Companies are subject to certain other claims and lawsuits arising in the normal course of business, primarily relating to workers' compensation and other employee related matters. The Founding Companies maintain various insurance coverages in order to minimize the financial risk associated with certain of these claims. The Founding Companies have provided for certain of these actions in the accompanying combined financial statements and, in the opinion of management of the Founding Companies, any uninsured losses resulting from the ultimate resolution of these matters will not be material to the Founding Companies' combined financial position or results of their combined operations. 14. NONCANCELABLE OPERATING LEASES: Certain of the Founding Companies lease office space under noncancelable operating leases. As discussed in Note 12, certain of these facilities are leased from a related party. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at December 31, 1995, are as follows: 1996............................................. $1,382,041 1997............................................. 1,039,435 1998............................................. 839,839 1999............................................. 634,311 2000............................................. 472,734 Thereafter....................................... 78,000 ---------- $4,446,360 ==========
Rent expense totaled approximately $636,000, $870,000 and $1,123,000 for fiscal years 1993, 1994 and 1995, respectively. Unaudited rent expense was $229,000 and $388,000 for the three months ended March 31, 1995 and March 31, 1996, respectively. F-35 95 THE FOUNDING COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 15. SUBSEQUENT EVENTS: In conjunction with the shareholder transaction referred to in Note 12 and other matters, HRA advanced $250,000 to two of its shareholders. In April 1996, HRA settled a dispute with a professional firm that had previously represented HRA in certain actions related to workers' compensation insurance and received cash of approximately $245,000. On May 17, 1996, Maxwell entered into a debt agreement with a bank which provided for a $1.75 million term loan. The loan is secured by Maxwell's accounts receivable. Accrued interest is due and payable monthly at a rate of 8.25%. The outstanding principal balance plus unpaid accrued interest is due November 1, 1996. 16. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, StaffMark entered into a definitive agreement to acquire the individual Founding Companies. In connection with the Mergers, the Founding Companies will dividend certain assets to their shareholders, consisting of automobiles, cash surrender value of officers' life insurance, land and buildings, with an aggregate carrying value of approximately $349,000 as of March 31, 1996. In addition, the Founding Companies plan to make distributions of cash of approximately $3,894,000 prior to the Mergers, which represent the S Corporation Accumulated Adjustment Accounts of certain of the Founding Companies. Had these transactions been recorded at March 31, 1996, the effect on the accompanying combined balance sheet would be a decrease in total assets and shareholders' equity of approximately $4,243,000. Concurrent with the Mergers, certain of the Founding Companies will enter into agreements with their shareholders to lease land and buildings used in the operations of the Founding Companies for negotiated amounts and terms. Furthermore, certain of the shareholders will enter into employment agreements with StaffMark which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant against competition following termination of such persons' employment. F-36 96 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Brewer Personnel Services, Inc.: We have audited the accompanying balance sheets of Brewer Personnel Services, Inc. (the "Company"), as of January 1, 1995 and December 31, 1995, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 audits. We conducted our audits 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 audits provide 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 Brewer Personnel Services, Inc. as of January 1, 1995 and December 31, 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, May 24, 1996. F-37 97 BREWER PERSONNEL SERVICES, INC. BALANCE SHEETS
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................ $ 108,066 $ 319,159 $ 328,558 Accounts receivable, net of allowance for doubtful accounts of $34,308, $214,187 and $205,174, respectively...................................... 2,703,493 4,798,476 6,072,332 Prepaid expenses and other........................... 191,838 253,143 374,524 ---------- ------------ ----------- Total current assets......................... 3,003,397 5,370,778 6,775,414 PROPERTY AND EQUIPMENT, net............................ 486,510 796,930 1,003,601 INTANGIBLE ASSETS, net................................. 282,215 15,555,459 18,844,004 OTHER ASSETS: Related party notes receivable....................... 264,664 -- -- Other................................................ 17,262 29,192 32,960 ---------- ------------ ----------- Total other assets........................... 281,926 29,192 32,960 ---------- ------------ ----------- $4,054,048 $ 21,752,359 $26,655,979 ========== ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable..................................... $ 179,063 $ 272,329 $ 347,224 Outstanding checks................................... 135,020 226,307 408,346 Payroll and related liabilities...................... 538,468 1,020,973 1,322,864 Reserve for workers' compensation claims............. 130,991 775,801 722,282 Line of credit....................................... 725,000 309,068 1,060,774 Current maturities of long-term debt................. 126,584 882,487 1,321,035 Accrued interest and other........................... 11,565 375,777 309,410 ---------- ------------ ----------- Total current liabilities.................... 1,846,691 3,862,742 5,491,935 LONG-TERM DEBT, less current maturities................ 97,154 15,103,831 17,876,637 COMMITMENTS AND CONTINGENCIES (Notes 9 through 13) SHAREHOLDERS' EQUITY: Common stock, no par value in 1994 and $.01 par value in 1995 and 1996; authorized shares of 1,000 in 1994, and 10,000 in 1995 and 1996; shares issued and outstanding of 117.5 in 1994 and 1995 and 132.5 in 1996..................................... 40,424 1 1 Paid-in capital...................................... -- 98,059 497,208 Subscription receivable.............................. -- -- (80,000) Retained earnings.................................... 2,069,779 2,687,726 2,870,198 ---------- ------------ ----------- Total shareholders' equity................... 2,110,203 2,785,786 3,287,407 ---------- ------------ ----------- $4,054,048 $ 21,752,359 $26,655,979 ========== ============ ===========
The accompanying notes to financial statements are an integral part of these balance sheets. F-38 98 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF INCOME
THREE MONTHS ENDED FISCAL YEARS ------------------------- ----------------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES............. $12,313,300 $27,894,455 $43,874,246 $7,489,757 $13,866,251 COST OF SERVICES............. 10,062,704 22,906,230 35,115,355 6,280,674 10,953,381 ----------- ----------- ----------- ---------- ----------- Gross profit....... 2,250,596 4,988,225 8,758,891 1,209,083 2,912,870 OPERATING EXPENSES: Selling, general and administrative.......... 1,622,737 3,483,070 5,804,348 856,257 2,035,310 Depreciation and amortization............ 121,395 255,895 590,066 67,284 264,584 ----------- ----------- ----------- ---------- ----------- Operating income... 506,464 1,249,260 2,364,477 285,542 612,976 OTHER INCOME (EXPENSE): Interest expense........... (54,005) (92,132) (800,704) (21,801) (424,893) Interest and other income.................. 25,150 19,653 22,765 13,578 11,389 ----------- ----------- ----------- ---------- ----------- Net income......... $ 477,609 $ 1,176,781 $ 1,586,538 $ 277,319 $ 199,472 =========== =========== =========== ========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-39 99 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------ PAID-IN SUBSCRIPTION RETAINED SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS TOTAL ------ -------- -------- ------------ ---------- ---------- BALANCE, January 3, 1993................... 117.5 $ 37,900 $ -- $ -- $ 807,985 $ 845,885 Net income............................... -- -- -- -- 477,609 477,609 Contribution............................. -- 2,524 -- -- -- 2,524 Dividends................................ -- -- -- -- (216,325) (216,325) ----- -------- -------- -------- ---------- ---------- BALANCE, January 2, 1994................... 117.5 40,424 -- -- 1,069,269 1,109,693 Net income............................... -- -- -- -- 1,176,781 1,176,781 Dividends................................ -- -- -- -- (176,271) (176,271) ----- -------- -------- -------- ---------- ---------- BALANCE, January 1, 1995................... 117.5 40,424 -- -- 2,069,779 2,110,203 Change in the par value of shares of common stock from no par to $.01 per share................................. -- (40,423) 40,423 -- -- -- Net income............................... -- -- -- -- 1,586,538 1,586,538 Contribution............................. -- -- 57,636 -- -- 57,636 Dividends................................ -- -- -- -- (968,591) (968,591) ----- -------- -------- -------- ---------- ---------- BALANCE, December 31, 1995................. 117.5 1 98,059 -- 2,687,726 2,785,786 Net income (Unaudited)................... -- -- -- -- 199,472 199,472 Dividends (Unaudited).................... -- -- -- -- (17,000) (17,000) Exercise of stock options (Unaudited).... 5.0 -- 80,000 (80,000) -- -- Shares issued in conjunction with purchase of On Call (Unaudited)....... 10.0 -- 319,149 -- -- 319,149 ----- -------- -------- -------- ---------- ---------- BALANCE, March 31, 1996 (Unaudited)........ 132.5 $ 1 $497,208 $(80,000) $2,870,198 $3,287,407 ===== ======== ======== ======== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-40 100 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FISCAL YEARS ------------------------ -------------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ---------- ---------- ------------ ---------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................ $ 477,609 $1,176,781 $ 1,586,538 $ 277,319 $ 199,472 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......... 121,395 255,895 590,066 67,284 264,584 Provision for bad debts................ 6,664 24,058 169,879 3,270 111 Net (gain) loss on sales of property and equipment........................ (672) (5,066) 4,095 -- -- Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable.................. (870,585) (963,971) (334,940) (89,684) (1,014,175) Prepaid expenses and other........... (86,090) (49,960) (44,025) 23,126 (96,381) Other assets......................... -- (16,152) (6,101) (4,555) (2,099) Accounts payable..................... (252,876) 88,208 21,210 (72,772) (24,368) Outstanding checks................... 68,552 66,468 (508,117) 69,886 182,039 Payroll and related liabilities...... 131,887 241,001 (270,377) 352,805 83,862 Reserve for workers' compensation claims............................ 54,600 76,391 359,810 85,652 (53,519) Accrued interest and other........... (32,727) (112) 37,185 11,589 (231,471) ---------- ---------- ----------- ---------- ---------- Net cash provided by (used in) operating activities............ (382,243) 893,541 1,605,223 723,920 (691,945) ---------- ---------- ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Aaron...................... (200,000) -- -- -- -- Acquisition of Caldwell................... -- -- (11,500,000) -- -- Acquisition of On Call.................... -- -- -- -- (3,000,000) Capital expenditures...................... (130,665) (253,373) (414,569) (21,765) (188,466) Proceeds from release of restricted investments............................ 750,000 -- -- -- -- Acquisition of training licenses and rights................................. -- -- (65,262) -- -- Proceeds from the sales of property and equipment.............................. 10,000 19,067 16,652 -- -- Advances of notes receivable.............. (35,129) (220,445) (40,000) (31,894) -- Receipts on notes receivable.............. 48,116 110,000 -- -- -- ---------- ---------- ----------- ---------- ---------- Net cash provided by (used in) investing activities............ 442,322 (344,751) (12,003,179) (53,659) (3,188,466) ---------- ---------- ----------- ---------- ----------
The accompanying notes to financial statements are an integral part of these statements. F-41 101 BREWER PERSONNEL SERVICES, INC. STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED FISCAL YEARS ------------------------- ------------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ---------- ---------- ----------- ---------- ------------ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt............. $ 85,524 $1,584,500 $13,366,512 $ -- $ 4,251,706 Payments on debt........................... (103,805) (1,920,296) (1,919,865) (335,482) (288,646) Cash dividends............................. (163,346) (176,271) (623,484) (363,999) (17,000) Contributions from shareholder............. 2,524 -- 57,636 -- -- Deferred financing costs................... -- -- (271,750) -- (56,250) ---------- ---------- ----------- ---------- ------------ Net cash (used in) provided by financing activities............. (179,103) (512,067) 10,609,049 (699,481) 3,889,810 ---------- ---------- ----------- ---------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (119,024) 36,723 211,093 (29,220) 9,399 CASH AND CASH EQUIVALENTS, beginning of period..................................... 190,367 71,343 108,066 108,066 319,159 ---------- ---------- ----------- ---------- ------------ CASH AND CASH EQUIVALENTS, end of period..... $ 71,343 $ 108,066 $ 319,159 $ 78,846 $ 328,558 ========== ========== =========== ========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.............................. $ 51,529 $ 107,222 $ 427,456 $ 11,115 $ 608,594 ========== ========== =========== ========== ============ Non-cash transactions: Notes payable issued in conjunction with acquisitions.......................... $ 299,010 $ -- $ 3,100,000 $ -- $ -- ========== ========== =========== ========== ============ Distribution of notes receivable to shareholders.......................... $ -- $ -- $ 345,107 $ -- $ -- ========== ========== =========== ========== ============ Issuance of subscription receivable in conjunction with the exercise of stock options............................... $ -- $ -- $ -- $ -- $ 80,000 ========== ========== =========== ========== ============
The accompanying notes to financial statements are an integral part of these statements. F-42 102 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- Brewer Personnel Services, Inc. (the "Company") 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 March 31, 1996, operated staffing offices in Arkansas, Georgia, Colorado, Virginia and Tennessee. In June 1995, the Company opened the Brewer Career Center, which provides training services to temporary personnel. In conjunction with opening the facility, the Company acquired certain training licenses and rights from Career Blazers Training Services, Inc. Fiscal Periods -- The Company's fiscal period ends on the Sunday closest to month end. The fiscal years 1993, 1994 and 1995 each included 52 weeks. The unaudited interim periods included in the accompanying financial statements each included 13 weeks. Interim Financial Statements -- The accompanying interim financial statements and related disclosures have not been audited by independent accountants. However, they have peen prepared in conformity with the accounting principles stated in the audited financial statements for the three years in the period ended December 31, 1995, and include all adjustments of a normal, recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in preparing the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. However, actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $277,351, $541,906 and $1,121,175 (unaudited) at January 1, 1995, December 31, 1995 and March 31, 1996, respectively. F-43 103 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment.................................................... 5 years Computer equipment.................................................. 5 years Vehicles............................................................ 5 years Computer software................................................... 3 years Leasehold improvements.............................................. 3 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Intangible Assets -- Intangible assets primarily consist of goodwill, which is amortized using the straight-line method over periods of 15 to 30 years. Deferred financing costs are amortized over the life of the respective debt obligation using a method which approximates the interest method. Intangibles associated with noncompete agreements are amortized using the straight-line method over the life of the respective agreements. The Company regularly evaluates whether events and circumstances have occurred which may indicate the carrying amount of goodwill or other intangible assets may warrant revision or may not be recoverable. When factors indicate that certain intangible assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related assets over their remaining life in measuring whether the assets are recoverable. As of January 1, 1995, December 31, 1995 and March 31, 1996, management considered the Company's intangible assets to be fully recoverable. Workers' Compensation -- The Company self-insures certain risks related to workers' compensation claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Company engages the services of a third party actuary to assist with the development of these cost estimates. Accounting for Stock Options -- During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which encourages all companies to recognize compensation expense based on the fair value, at grant date, of instruments issued pursuant to stock based compensation plans. SFAS 123 requires the fair value of the instruments granted, which is measured pursuant to the provisions of the statement, be recognized as compensation expense on a straight-line basis over the vesting period of the instrument. However, the statement also allows companies to continue to measure compensation costs for these instruments using the method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Companies electing to account for stock based compensation plans pursuant to the provisions of APB 25 must make pro forma disclosures of net income as if the fair value method defined in SFAS 123 had been applied. The Company has elected to account for its stock options under the provisions of APB 25 and has included the disclosures required by SFAS 123 in Note 8. F-44 104 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments -- The Company's financial instruments include cash and cash equivalents, related party notes receivable and its debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for these instruments are reasonable estimates of fair value. 2. BUSINESS COMBINATIONS: Aaron Temporary Services, Inc. -- On November 22, 1993, the Company acquired certain assets of Aaron Temporary Services, Inc. ("Aaron"). Aaron was engaged in providing temporary personnel services in central and northeast Arkansas. The total purchase price of $527,600 was comprised of a cash payment of $200,000 and the issuance of a note with payments, including interest, totaling $327,600. The acquisition has been accounted for as a purchase, and the results of Aaron have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets acquired. The assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs of $25,000 being recorded as goodwill. Caldwell Services, Inc. -- On July 10, 1995, the Company acquired the stock of E.P. Enterprises Corporation, d.b.a. Caldwell Services, Inc. ("Caldwell"). Caldwell is engaged in providing temporary personnel services through five staffing offices located in Georgia. The acquisition has been accounted for as a purchase, and the results of Caldwell have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets and liabilities acquired. Total consideration paid for Caldwell was approximately $17.3 million. The purchase price included cash of $11.5 million, a note to the seller of $3.1 million and the assumption of certain liabilities of Caldwell. The assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs of approximately $15.3 million being recorded as goodwill. On Call Employment Services, Inc. (Unaudited) -- On February 2, 1996, the Company acquired the stock of On Call Employment Services, Inc. ("On Call"). On Call is engaged in providing temporary personnel services through four staffing offices in Colorado. The acquisition has been accounted for as a purchase, and the results of On Call have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair market value of the assets and liabilities acquired. Total consideration paid for On Call was approximately $3.8 million which was comprised of cash totaling $3 million, including $360,000 associated with a noncompete agreement, 10 shares of the Company's common stock valued at approximately $320,000 and the assumption of liabilities totaling approximately $480,000. The assets acquired have been recorded at historical, depreciated cost, which approximated fair value as of the acquisition date, with the remaining acquisition costs of approximately $3.1 million being recorded as goodwill. F-45 105 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The unaudited consolidated revenues and net income on a pro forma basis as though Aaron, Caldwell and On Call had been acquired as of the beginning of the Company's 1993 fiscal year are as follows:
FISCAL YEAR FIRST QUARTER --------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues................ $53,304,487 $55,546,403 $67,406,685 $14,731,259 $14,993,342 =========== =========== =========== =========== =========== Net income.............. $ 1,700,281 $ 939,446 $ 2,091,956 $ 321,380 $ 223,822 =========== =========== =========== =========== ===========
Chad J. Brewer, Incorporated -- In June 1995, the Company entered into an agreement to merge its activities with Chad J. Brewer, Incorporated (a Virginia corporation, "Chad Brewer"), which was owned by a related party. The Company issued 17.5 shares of common stock in exchange for all outstanding shares of Chad Brewer. This merger has been accounted for as a pooling-of-interests. Accordingly, the accompanying financial statements have been prepared as if the merger had occurred at the beginning of fiscal year 1993. Prior to the merger, the Company maintained a license agreement which entitled Chad Brewer to do business in the state of Virginia as Brewer Personnel Services and to use certain information of the Company. In addition, the Company provided payroll administration, data processing and accounts receivable financing services to Chad Brewer. 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Office equipment.................................. $ 243,153 $ 419,606 $ 620,919 Computer equipment................................ 382,068 687,097 736,008 Vehicles.......................................... 167,678 133,722 133,722 Computer software................................. 44,880 62,653 79,426 Leasehold improvements............................ -- 31,483 37,376 --------- ----------- ----------- 837,779 1,334,561 1,607,451 Less accumulated depreciation and amortization................................. 351,269 537,631 603,850 --------- ----------- ----------- $ 486,510 $ 796,930 $ 1,003,601 ========= =========== ===========
Depreciation and amortization expense related to property and equipment for fiscal years 1993, 1994 and 1995 totaled $68,159, $149,558 and $198,859, respectively. Unaudited depreciation and amortization expense for the three months ended April 2, 1995 and March 31, 1996 totaled $38,318 and $66,795, respectively. F-46 106 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. INTANGIBLE ASSETS: Intangible assets consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Goodwill...................................... $ 25,000 $ 15,356,334 $18,429,368 Deferred financing costs...................... -- 271,750 328,000 Noncompete agreements......................... 299,010 299,010 659,010 Other......................................... 75,000 140,262 140,262 --------- ------------ ----------- 399,010 16,067,356 19,556,640 Less accumulated amortization............ 116,795 511,897 712,636 --------- ------------ ----------- $ 282,215 $ 15,555,459 $18,844,004 ========= ============ ===========
Amortization expense related to intangible assets totaled $53,236, $106,337 and $391,207 for fiscal years 1993, 1994 and 1995, respectively. Unaudited amortization expense related to intangible assets totaled $28,966 and $197,789 for the three months ended April 2, 1995 and March 31, 1996, respectively. 5. DEBT: Line of credit balances consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Line of credit with Boatmen's National Bank of St. Louis ("Boatmen's"). Maximum borrowings equal the lesser of $6 million or 85% of the Company's eligible accounts receivable balance reduced by the letters of credit issued as security for the Company's workers' compensation obligations. Interest payable monthly at a variable rate which ranged from 9.75% to 10.25% and averaged 9.83% during the three months ended March 31, 1996 and 10.23% during the year ended December 31, 1995. Principal due on June 29, 1998. Secured by the assets and common stock of the Company and partially guaranteed by certain shareholders........................ $ -- $ 309,068 $ 1,060,774 Line of credit, interest payable quarterly at prime, 8.0% as of January 1, 1995 and averaging 6.8% for the year then ended. Secured by accounts receivable and guaranteed by certain shareholders................................ 725,000 -- -- --------- ------------ ----------- $ 725,000 $ 309,068 $ 1,060,774 ========= ============ ===========
F-47 107 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Long-term debt consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Term loan note with Boatmen's. Interest payable monthly at a variable rate which ranged from 8.75% to 10.50% and averaged 8.97% during the three months ended March 31, 1996 and 9.56% during the year ended December 31, 1995. Principal due in quarterly installments beginning October 1, 1995 through maturity on June 30, 2001. Secured by the assets and common stock of the Company and partially guaranteed by certain shareholders........................ $ -- $ 12,750,000 $16,000,000 Note payable to the previous owner of Caldwell, interest at 8%, payable quarterly. Principal to be paid in equal annual installments beginning June 30, 1998 through June 30, 2001 or in full upon a change in control of the Company. Secured by a lien on the assets of the Company and guaranteed by certain shareholders........................ -- 3,100,000 3,100,000 Note payable to the previous owner of Aaron, imputed interest of 6%, payable in monthly installments of $9,100. Secured by the personal assets of the shareholders......... 197,235 97,332 71,341 Other notes payable, maturing through 1997 with interest ranging from 6.00% to 6.99%. Secured by certain assets of the Company.... 26,503 38,986 26,331 --------- ------------ ----------- 223,738 15,986,318 19,197,672 Less current maturities.................. 126,584 882,487 1,321,035 --------- ------------ ----------- $ 97,154 $ 15,103,831 $17,876,637 ========= =========== ===========
The term loan note and line of credit with Boatmen's were entered into in conjunction with the purchase of Caldwell. Interest on these facilities is computed, at the Company's option, at either the LIBOR rate plus incremental increases related to the Company's operating leverage, as defined in the agreement, or the prime lending rate plus incremental increases related to the Company's operating leverage. In September 1995, the Company signed a rate cap transaction agreement with Boatmen's to freeze the LIBOR rate component of the interest rate on a portion of the term loan note at 8.50% effective September 30, 1995 through September 30, 1998. Under the terms of the credit agreement with Boatmen's, the Company is required, among other restrictions, to maintain certain financial ratios. In conjunction with the purchase of On Call, the Company amended its term loan note and line of credit. Under the terms of the amendment, the term loan note and the maximum borrowings under the line of credit were increased to $16 million and $6 million, respectively. F-48 108 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Annual maturities of long-term debt subsequent to December 31, 1995 are as follows: 1996.......................................... $ 882,487 1997.......................................... 1,444,763 1998.......................................... 3,146,568 1999.......................................... 3,212,500 2000.......................................... 3,900,000 Thereafter.................................... 3,400,000 ----------- $15,986,318 ===========
6. INCOME TAXES: The Company operates as an S Corporation for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements as such taxes are liabilities of the individual shareholders. The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 7. WORKERS' COMPENSATION: The Company is self-insured for certain workers' compensation claims and is regulated by the Workers' Compensation Insurance Commissions in the states of Arkansas and Georgia. The Company had purchased insurance during 1993 and 1994 for medical claims which exceed $25,000 and other claims which exceed $350,000. During 1995 the company purchased insurance which covers claims which exceed $50,000. The Company maintains letters of credit with a bank to cover any potential unpaid claims. At December 31, 1995, these letters of credit were $750,000 and $500,000 for Arkansas and Georgia, respectively. In January 1996, the letter of credit for Arkansas was reduced to $600,000. Workers' compensation expense totaled $405,927, $738,663 and $1,317,579 for fiscal years 1993, 1994 and 1995, respectively. Unaudited workers' compensation expense totaled $266,485 and $304,342 for the three months ended April 2, 1995 and March 31, 1996, respectively. 8. COMMON STOCK AND STOCK OPTIONS: On May 30, 1995, the Company amended and restated its Articles of Incorporation to increase the number of authorized shares of common stock from 1,000 to 10,000 and to change the par value of the shares of common stock from no par to $.01 per share. The Company has granted stock options to certain key employees. These options were granted at fair value as determined by management, are exercisable in installments and expire from June 30, 1999 to February 26, 2001. The employment agreement for a certain executive granted an option to receive three additional shares of the Company's common stock upon the employee's anniversary date of April 17, 1996. F-49 109 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity follows:
SHARES UNDER WEIGHTED AVERAGE OPTION PRICE PER SHARE ------------ ---------------- Outstanding, January 3, 1993............................ -- $ -- Outstanding, January 2, 1994............................ -- -- Granted............................................... 5.0 16,000 ----- -------- Outstanding, January 1, 1995............................ 5.0 16,000 Granted............................................... 7.5 30,666 ----- -------- Outstanding, December 31, 1995.......................... 12.5 24,800 Granted (Unaudited)................................... 1.0 35,000 Exercised (Unaudited)................................. (5.0) (16,000) ----- -------- Outstanding, March 31, 1996 (Unaudited)................. 8.5 $ 31,176 ===== ======== Exercisable, December 31, 1995.......................... 5.0 $ 16,000 ===== ======== Exercisable, March 31, 1996 (Unaudited)................. -- $ -- ===== ========
In March 1996, a key employee exercised his stock options and received five shares of the Company's common stock. In payment for this exercise, the Company executed a note receivable from this employee for $80,000, which represented the entire exercise price of these options. This note has been reflected as a subscription receivable and is classified as contra equity in the accompanying financial statements. As discussed in Note 1, the Company has elected to account for its stock options under the provisions of APB 25. Accordingly, pursuant to the requirements of SFAS 123, the following disclosures are presented to reflect the Company's pro forma net income for the year ended December 31, 1995 and for the unaudited three month period ended March 31, 1996 as if the fair value method of accounting prescribed by SFAS 123 had been used. In preparing these disclosures, the Company has determined the value of all options granted during 1995 and the unaudited three month period ended March 31, 1996 using the minimum value method, as discussed in SFAS 123, and based on the following weighted average assumptions used for grants:
THREE MONTHS FISCAL ENDED 1995 MARCH 31, 1996 ---------- -------------- (UNAUDITED) Risk-free interest rate...................................... 6.5% 5.6% Expected dividend yield...................................... 0% 0% Expected life................................................ 2.5 years 2.0 years
Options were assumed to be exercised upon vesting for the purpose of this valuation. Using these assumptions, the fair value of the stock options granted in 1995 and the unaudited three months ended March 31, 1996 was approximately $36,000 and $4,000, respectively. Had compensation expense been determined consistent with SFAS 123, utilizing the assumptions above and the straight-line amortization method over the vesting period, the Company's net income would have been reduced to the following pro forma amounts:
THREE MONTHS FISCAL ENDED 1995 MARCH 31, 1996 ---------- -------------- (UNAUDITED) Net income, as reported................................... $1,586,538 $199,472 ========== ======== Pro forma net income...................................... $1,578,367 $195,991 ========== ========
F-50 110 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. RELATED PARTY TRANSACTIONS: The Company rents office space from Brewer Investments, a partnership owned by certain shareholders. The rent expense related to these transactions was $60,000 for fiscal years 1993, 1994 and 1995. In January 1996, the Company moved its corporate offices into a new building, which is also owned by Brewer Investments. Unaudited rent expense related to these leases was approximately $15,000 and $52,000 for the three months ended April 2, 1995 and March 31, 1996, respectively. Future minimum lease payments related to this lease as of December 31, 1995 approximate $1,127,000 which have been included in the table in Note 11. In December 1995, a note receivable from Brewer Investments in the amount of $345,107 was distributed to the individual shareholders of the Company. 10. COMMITMENTS: In conjunction with the acquisition of Aaron, the Company entered into an agreement to pay the former owner $12,000 per month for a five-year period beginning November 29, 1993, in exchange for consulting services. The expense associated with this agreement was $12,000 for fiscal year 1993, $144,000 for fiscal years 1994 and 1995 and $36,000 (unaudited) for the three months ended April 2, 1995 and March 31, 1996. The Company has employment agreements with certain executive officers and management personnel that provide for annual salaries, cost-of-living adjustments, additional compensation in the form of performance based bonuses and, for certain employees, options to purchase shares of the Company's common stock. Certain agreements include a covenant against competition with the Company, which extends for a period of time after termination. These agreements generally continue until terminated by the employee or the Company. The Company has historically paid dividends to its shareholders in amounts sufficient to cover their estimated tax payments attributable to the respective share of the Company's net income which will be included in their individual tax returns. The Company plans to continue this practice in the future as long as it maintains its S Corporation status. 11. NONCANCELABLE OPERATING LEASES: The Company leases office space under noncancelable operating leases. As discussed in Note 9, certain of these facilities are leased from a related party. Future minimum annual payments required during each of the next five years under operating leases that had an initial or remaining noncancelable lease term in excess of one year at December 31, 1995, are as follows: 1996............................................. $ 506,531 1997............................................. 449,915 1998............................................. 387,285 1999............................................. 383,237 2000............................................. 322,667 ---------- $2,049,635 ==========
Rent expense totaled $100,646, $168,956 and $275,460 for fiscal years 1993, 1994 and 1995, respectively. Unaudited rent expense totaled $46,346 and $151,458 for the three months ended April 2, 1995 and March 31, 1996, respectively. F-51 111 BREWER PERSONNEL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 12. CONTINGENCIES: The Company is a party to certain lawsuits primarily involving workers' compensation claims. Management believes, based in part on consultation from legal counsel, that the ultimate outcome of these matters will not have a materially adverse effect on the Company's financial position, liquidity or results of operations. In May 1996, the Company was notified by the Arkansas Department of Revenue of their plans to audit the Company's sales tax returns for the last three fiscal years. Although the final outcome of the audit can not be estimated, management is of the opinion that the ultimate resolution of this matter will not have a material adverse impact on the Company's operating results or financial condition. 13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, the owners of the Company entered into a definitive agreement to merge with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's initial public offering. Prior to or coincident with this proposed merger, the Company plans to dividend certain assets to the stockholders consisting of several automobiles, which had an aggregate carrying value of approximately $56,000 as of March 31, 1996. Had these transactions occurred as of March 31, 1996, the effect on the accompanying unaudited interim balance sheet would be a decrease in total assets and shareholders' equity of approximately $56,000. In conjunction with the proposed merger discussed above, certain of the owners will enter into employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete following termination of such person's employment. F-52 112 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Prostaff Companies: We have audited the accompanying combined balance sheets of the companies identified in Note 1 to the financial statements ("The Prostaff Companies"), as of December 31, 1994 and 1995, and the related combined statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 audits. We conducted our audits 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 audits provide 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 The Prostaff Companies as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, May 24, 1996. F-53 113 THE PROSTAFF COMPANIES COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 228,372 $ 188,145 $ 163,402 Certificates of deposit................................ 152,028 155,154 155,154 Accounts receivable, net of allowance for doubtful accounts of $10,000, $48,500 and $48,500, respectively........................................ 2,634,108 3,020,622 3,393,819 Deferred tax asset..................................... 154,601 -- -- Prepaid expenses and other............................. 86,337 135,673 122,465 ---------- ---------- ---------- Total current assets........................... 3,255,446 3,499,594 3,834,840 PROPERTY AND EQUIPMENT, net.............................. 640,552 756,983 843,934 OTHER ASSETS: Cash surrender value of officer's life insurance....... 34,670 41,280 41,280 Other.................................................. 3,675 4,730 4,880 ---------- ---------- ---------- Total other assets............................. 38,345 46,010 46,160 ---------- ---------- ---------- $3,934,343 $4,302,587 $4,724,934 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit......................................... $ 417,000 $ 20,000 $ 176,000 Current maturities of long-term debt................... 61,742 64,872 48,972 Note payable to shareholder............................ -- 30,000 30,000 Accounts payable and accrued liabilities............... 83,413 117,339 110,828 Outstanding checks..................................... 109,084 -- 251,321 Payroll and related liabilities........................ 703,263 1,129,777 1,162,161 Reserve for workers' compensation claims............... 439,444 635,290 636,230 Income taxes payable........................... 54,883 -- -- ---------- ---------- ---------- Total current liabilities...................... 1,868,829 1,997,278 2,415,512 LONG-TERM DEBT, less current maturities.................. 170,064 111,459 111,459 DEFERRED INCOME TAXES.................................... 57,885 -- -- COMMITMENTS AND CONTINGENCIES (Notes 6 through 9)........ SHAREHOLDERS' EQUITY: Common stock, (par values of $.20 to $1.00) authorized shares of 200,000 in 1994 and 201,000 in 1995 and at March 31, 1996, shares issued and outstanding of 55,000 in 1994, 55,100 in 1995 and at March 31, 1996................................................ 11,000 11,100 11,100 Retained earnings...................................... 1,826,565 2,182,750 2,186,863 ---------- ---------- ---------- Total shareholders' equity..................... 1,837,565 2,193,850 2,197,963 ---------- ---------- ---------- $3,934,343 $4,302,587 $4,724,934 ========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-54 114 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ----------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES................ $27,244,744 $30,607,744 $34,330,413 $7,534,577 $8,586,165 COST OF SERVICES................ 22,858,206 25,455,432 28,234,379 6,199,908 6,976,562 ----------- ----------- ----------- ---------- ---------- Gross profit.......... 4,386,538 5,152,312 6,096,034 1,334,669 1,609,603 OPERATING EXPENSES: Selling, general and administrative............. 3,640,825 4,184,021 5,338,844 1,115,577 1,549,108 Depreciation and amortization............... 114,796 174,998 220,433 47,864 58,113 ----------- ----------- ----------- ---------- ---------- Operating income...... 630,917 793,293 536,757 171,228 2,382 OTHER INCOME (EXPENSE): Interest expense.............. (87,181) (28,689) (20,393) (4,975) (8,351) Interest income and other..... 60,745 10,987 26,537 7,689 10,082 ----------- ----------- ----------- ---------- ---------- INCOME BEFORE PROVISION FOR INCOME TAXES.................. 604,481 775,591 542,901 173,942 4,113 PROVISION FOR INCOME TAXES...... 205,742 253,847 96,716 96,716 -- ----------- ----------- ----------- ---------- ---------- Net income............ $ 398,739 $ 521,744 $ 446,185 $ 77,226 $ 4,113 =========== =========== =========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-55 115 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ----------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------- ---------- ---------- BALANCE, December 31, 1992......................... 55,000 $11,000 $ 976,186 $ 987,186 Net income....................................... -- -- 398,739 398,739 Dividends........................................ -- -- (25,625) (25,625) ------ ------- ---------- ---------- BALANCE, December 31, 1993......................... 55,000 11,000 1,349,300 1,360,300 Net income....................................... -- -- 521,744 521,744 Dividends........................................ -- -- (44,479) (44,479) ------ ------- ---------- ---------- BALANCE, December 31, 1994......................... 55,000.. 11,000 1,826,565 1,837,565 Net income....................................... -- -- 446,185 446,185 Initial capitalization of Professional........... 100 100 -- 100 Dividends........................................ -- -- (90,000) (90,000) ------ ------- ---------- ---------- BALANCE, December 31, 1995......................... 55,100 11,100 2,182,750 2,193,850 Net income (Unaudited)........................... -- -- 4,113 4,113 ------ ------- ---------- ---------- BALANCE, March 31, 1996 (Unaudited)................ 55,100 $11,100 $2,186,863 $2,197,963 ====== ======= ========== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-56 116 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------ --------------------- 1993 1994 1995 1995 1996 -------- -------- -------- --------- --------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................... $398,739 $521,744 $446,185 $ 77,226 $ 4,113 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................... 114,796 174,998 220,433 47,864 58,113 Provision for deferred income taxes............. (35,138) (20,021) -- -- -- Write-off of net deferred tax assets............ -- -- 96,716 96,716 -- Provision for bad debts......................... 27,561 10,000 38,500 -- -- Loss on sale of property and equipment.......... -- 20,854 -- -- -- Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable........................... (637,401) (143,183) (403,041) (369,142) (373,197) Prepaid expenses and other.................... (38,493) (2,052) (49,336) (59,084) 13,208 Other assets.................................. 2,357 (8,979) (7,665) (1,055) (150) Accounts payable and accrued liabilities...... 21,229 (10,535) 33,926 20,390 (6,511) Outstanding checks............................ -- 109,084 (109,084) (109,084) 251,321 Payroll and related liabilities............... 193,651 5,365 426,514 673,346 32,384 Reserve for workers' compensation claims...... 148,385 101,480 195,846 40,806 940 Income taxes payable.......................... (15,039) (19,130) (54,883) (54,883) -- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities............................... 180,647 739,625 834,111 363,100 (19,779) -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of personnel service business.......... -- -- (30,000) -- -- Capital expenditures............................... (405,265) (293,936) (328,837) (105,985) (145,064) Proceeds from the sale of property and equipment... -- 1,400 -- -- -- Proceeds from release of restricted investment..... 600,000 -- 152,028 -- -- Purchase of certificates of deposit................ -- -- (155,154) -- -- -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities............................... 194,735 (292,536) (361,963) (105,985) (145,064) -------- -------- -------- -------- --------
The accompanying notes to combined financial statements are an integral part of these statements. F-57 117 THE PROSTAFF COMPANIES COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------- ------------------------- 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ------------ (Unaudited) (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) borrowings under line of credit... $(125,000) $(158,000) $(397,000) $(355,000) $156,000 Proceeds from note payable to shareholder........ -- -- 30,000 -- -- Payments on note payable to shareholder.......... (530,000) -- -- -- -- Proceeds from issuance of long-term debt......... 290,237 -- -- -- -- Payments on long-term debt....................... -- (58,431) (55,475) (15,163) (15,900) Proceeds from issuance of common stock........... -- -- 100 -- -- Dividends........................................ (25,625) (44,479) (90,000) -- -- --------- --------- --------- --------- -------- Net cash provided by (used in) financing activities............................. (390,388) (260,910) (512,375) (370,163) 140,100 --------- --------- --------- --------- -------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................................... (15,006) 186,179 (40,227) (113,048) (24,743) CASH AND CASH EQUIVALENTS, beginning of period..... 57,199 42,193 228,372 228,372 188,145 --------- --------- --------- --------- -------- CASH AND CASH EQUIVALENTS, end of period........... $ 42,193 $ 228,372 $ 188,145 $ 115,324 $163,402 ========= ========= ========= ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................... $ 84,708 $ 30,549 $ 21,006 $ 5,363 $ 5,325 ========= ========= ========= ========= ======== Income taxes paid................................ $ 242,989 $ 284,847 $ 54,883 $ 54,883 $ -- ========= ========= ========= ========= ========
The accompanying notes to combined financial statements are an integral part of these statements. F-58 118 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- The combined financial statements of The Prostaff Companies (the "Company") include the activities of Prostaff Personnel, Inc. ("Prostaff"), 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 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 in 1988. Prostaff's primary business purpose is to provide temporary personnel services. At March 31, 1996, Prostaff operated staffing offices in 22 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 cosmetics manufacturer in Little Rock, Arkansas which represents 100% of the revenue and accounts receivable of Excel. Revenues from this one customer represent 14%, 13% and 14% of combined service revenues for 1993, 1994 and 1995, respectively. 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 for $30,000. This acquisition was accounted for as a purchase. There was no goodwill recorded in connection with this acquisition. The combined financial statements of the Company include the results of operations of Professional from the inception date. Interim Financial Statements -- The accompanying interim financial statements and related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited financial statements for the three years in the period ended December 31, 1995, and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. F-59 119 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $343,681, $441,642 and $775,801 (unaudited) at December 31, 1994, 1995 and March 31, 1996, respectively. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment................................................. 5 years Computer equipment............................................... 5 years Vehicles......................................................... 5 years Computer software................................................ 5 years Leasehold improvements........................................... 10 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Workers' Compensation and Employee Health Benefits -- The Company self-insures certain risks related to workers' compensation and employee health benefit claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Company engages the services of a third party actuary to assist with the development of the workers' compensation cost estimates. Fair Value of Financial Instruments -- The Company's financial instruments include cash and cash equivalents, certificates of deposit, note payable to shareholder and its other debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for those instruments are reasonable estimates of fair value. Income Taxes -- Prior to 1995, the Company operated as a C Corporation for federal and state tax reporting purposes. Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this new statement, deferred income taxes are provided based on the estimated future tax effects of differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The adoption of SFAS 109 did not have a material effect on the Company's financial position or results of operations. Effective January 1, 1995, the Company elected to be taxed as an S Corporation for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements for the period subsequent to January 1, 1995 as such taxes are liabilities of the individual shareholders. Upon election of S Corporation status, the Company wrote off net deferred tax assets totaling $96,716 related to years prior to 1995, which is reflected as provision for income taxes in the accompanying combined statements of income. F-60 120 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ---------------------- MARCH 31, 1994 1995 1996 -------- ---------- ----------- (UNAUDITED) Office equipment.................................. $311,414 $ 412,661 $ 470,219 Computer equipment................................ 382,903 477,744 524,916 Vehicles.......................................... 107,900 136,859 140,492 Computer software................................. 113,884 165,635 172,604 Leasehold improvements............................ 83,593 136,949 166,155 -------- ---------- ----------- 999,694 1,329,848 1,474,386 Less accumulated depreciation and amortization................................. 359,142 572,865 630,452 -------- ---------- ----------- $640,552 $ 756,983 $ 843,934 ======== ========== ===========
3. DEBT: Long-term debt consisted of the following:
DECEMBER 31, -------------------- MARCH 31, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) Term note payable to Boatmen's National Bank in the original amount of $290,237 due in monthly installments of $6,079, including interest at 5.5% through August 31, 1998. Secured by certain equipment of Prostaff and guaranteed by shareholders...................................... $231,806 $176,331 $ 160,431 Less current maturities............................. 61,742 64,872 48,972 -------- -------- --------- $170,064 $111,459 $ 111,459 ======== ======== =========
Annual maturities of long-term debt for the years subsequent to December 31, 1995 are $64,872, $68,531 and $42,928 for 1996, 1997 and 1998, respectively. Line of credit balances consisted of the following:
DECEMBER 31, ------------------- MARCH 31, 1994 1995 1996 -------- ------- ----------- (UNAUDITED) Line of credit with Boatmen's Bank. Maximum borrowings equal the lesser of $1.5 million or 80% of Prostaff's eligible accounts receivable. Accrues interest at a variable rate (8.5% at December 31, 1994 and 8.75% at March 31, 1996) and is due upon demand. Secured by the accounts receivable of Prostaff and guaranteed by shareholders............ $417,000 $ -- $ 152,000 Line of credit with First Commercial Bank. Maximum borrowings of $50,000. Interest payable monthly at 9.5%. Due upon demand. Secured by the assets of Professional and guaranteed by shareholder......... -- 20,000 24,000 -------- ------- --------- $417,000 $20,000 $ 176,000 ======== ======= =========
F-61 121 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Excel also maintains a line of credit with Mercantile Bank which accrues interest at a variable rate and is due upon demand. Borrowings under the line are limited to $250,000, secured by the accounts receivable of Excel and are guaranteed by shareholders. There were no outstanding borrowings under this line of credit at December 31, 1994, 1995 or March 31, 1996. 4. NOTE PAYABLE TO SHAREHOLDER: In order to effect the acquisition made by Professional, as discussed in Note 1, Professional borrowed $30,000 from the sole shareholder and signed a promissory note dated October 30, 1995. Interest is paid monthly at the rate of 9.25%. The note is due on demand, or if no demand is made, on October 30, 1996. Total interest paid to the shareholder in 1995 was $246. During 1993, the Company repaid a $530,000 note payable to shareholder. Total interest paid to the shareholder in 1993 was $44,200. 5. INCOME TAXES: Provision (benefit) for income taxes consisted of the following components for the years ended December 31:
1993 1994 -------- -------- Current: Federal....................................................... $213,892 $243,184 State......................................................... 26,988 30,684 -------- -------- 240,880 273,868 -------- -------- Deferred: Federal....................................................... (31,201) (17,778) State......................................................... (3,937) (2,243) -------- -------- (35,138) (20,021) -------- -------- Total................................................. $205,742 $253,847 ======== ========
Provision for income taxes differs from amounts computed by applying the statutory tax rate to pretax income as a result of certain nondeductible expenses and the utilization of general business credits as follows:
1993 1994 -------- -------- Income taxes on pretax income at the statutory rate of 34%...... $205,523 $263,701 Increase (reduction) in tax resulting from: Nondeductible expenses........................................ 16,779 30,242 State income taxes, net of federal income tax benefit......... 28,049 37,089 Federal general business tax credits.......................... (44,609) (77,185) -------- -------- $205,742 $253,847 ======== ========
F-62 122 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between the financial and tax basis of assets and liabilities as measured by enacted tax laws. The temporary differences which gave rise to deferred tax assets and liabilities as of December 31, 1993 and 1994 were as follows:
1993 1994 -------- -------- Deferred tax assets: Allowance for doubtful accounts.............................. $ 16,465 $ 3,829 Reserve for workers' compensation claims..................... 112,099 150,772 -------- -------- Total deferred tax assets...................................... $128,564 $154,601 ======== ======== Deferred tax liabilities: Accelerated depreciation..................................... $ 51,869 $ 57,885 ======== ========
6. WORKERS' COMPENSATION: Prostaff is self-insured for certain workers' compensation claims and is regulated by the Arkansas Workers' Compensation Insurance Commission (the "Commission"). As a condition to authorization of the self-insurance program in 1991, the Commission required Prostaff to maintain a $750,000 deposit in a depository considered acceptable by the Commission. In 1993, the Commission altered the depository requirement and allowed Prostaff to provide the Commission a $750,000 letter of credit. The letter of credit is guaranteed by shareholders of the Company. As a condition to providing the letter of credit, the bank required Prostaff to maintain as security a $150,000 deposit with the bank. These restricted funds were in certificates of deposit with one year maturities and are reflected with accrued interest as certificates of deposit in the accompanying combined balance sheet at December 31, 1994. In 1995, the bank no longer required the security for the letter of credit. Accordingly, Prostaff reinvested these funds in 1995, and they are reflected as certificates of deposit at December 31, 1995. Prostaff has purchased insurance for individual claims which exceed $200,000 and for aggregate claims which exceed $2.0 million. Workers' compensation expense totaled $820,569, $728,281 and $765,893 for 1993, 1994 and 1995, respectively. Unaudited workers' compensation expense for the three months ended March 31, 1995 and 1996 was $184,763 and $129,684, respectively. Excel and Professional are fully insured for workers' compensation. 7. EMPLOYEE BENEFIT PLANS: The Company adopted a defined contribution benefit plan for its eligible permanent employees, as defined, effective June 1, 1995. This profit sharing plan, which operates pursuant to an Internal Revenue Code section 401(k) arrangement, allows eligible employees to contribute on a tax deferred basis up to 15% of their annual wages, as defined. The Company makes a matching contribution equal to 50% of the employees' contributions up to a maximum of 6% of the respective employees' annual wages. Total matching contributions made by the Company to the plan for the year ended December 31, 1995 were $12,448. On September 1, 1995, the Company established a cafeteria plan to offer health, dental, term life, accidental death and disability insurance to its permanent full-time employees. Employees may also obtain coverage for family members by making tax deferred contributions to the plan trust. The health insurance coverage portion of the plan is self-insured by the Company. Pursuant to this self-insurance program, the Company pays for the approved claims costs of eligible participants subject to certain individual and family deductibles and co-payments, as defined. The Company maintains insurance for annual claims per employee in excess of $10,000 and aggregate claims in excess of an amount equal to $75.80 multiplied by the number of personnel enrolled in the plan. Total claims expense for the year ended December 31, 1995 was $35,550. F-63 123 THE PROSTAFF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS: The Company has a consulting agreement with the former owner of a temporary personnel service business the Company acquired in March 1995 which provides for monthly minimum payments of $5,250 for 36 months through March 1998. The consulting agreement also includes a covenant against competition with the Company for a five-year period. The Company has an employment agreement with one member of management that provides for a monthly salary of $6,833 through March 1998 and additional compensation in the form of performance-based bonuses. The employment agreement also includes a covenant against competition with the Company, which extends through March 2000, or for two years after termination. Upon election of S Corporation status effective January 1, 1995, the Company pays dividends to its shareholders in amounts sufficient to cover their estimated tax payments attributable to the respective share of the Company's net income which will be included in their individual tax returns. The Company plans to continue this practice in the future as long as it retains its S Corporation status. 9. NONCANCELABLE OPERATING LEASES: The Company leases office space under noncancelable operating leases. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at December 31, 1995, are as follows: 1996.............................................. $323,397 1997.............................................. 264,480 1998.............................................. 216,665 1999.............................................. 106,499 2000.............................................. 63,424 -------- $974,465 ========
Rent expense totaled $147,835, $197,243 and $258,992 for fiscal years 1993, 1994 and 1995, respectively. Unaudited rent expense for the three months ended March 31, 1995 and 1996 was $56,700 and $80,269, respectively. The Company leases the office facilities of its headquarters from a limited liability corporation ("LLC") owned by the shareholders of the Company. For the fiscal years 1993, 1994 and 1995, rent paid to the LLC totaled $61,100, $73,761 and $114,180, respectively. Unaudited rent paid to the LLC was $22,125 for the three months ended March 31, 1995 and 1996. 10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, the shareholders of the Company entered into a definitive agreement to merge with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's anticipated initial public offering. Prior to or coincident with this proposed merger, the Company plans to dividend certain assets to the shareholders consisting of vehicles and the cash surrender value of an officer's life insurance policy, which had an unaudited aggregate carrying value of $86,273 as of March 31, 1996. In addition, the Company plans to make a cash distribution of approximately $751,775 prior to the proposed merger, which represents the Company's estimated S Corporation Accumulated Adjustment Account at March 31, 1996. Had these transactions occurred as of March 31, 1996, the effect on the accompanying unaudited balance sheet would be a decrease in total assets and shareholders' equity of approximately $838,048. In conjunction with the proposed merger discussed above, certain of the shareholders will enter into employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete following termination of such person's employment. F-64 124 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Maxwell Companies: We have audited the accompanying combined balance sheets of the companies identified in Note 1 to the financial statements ("The Maxwell Companies"), as of December 31, 1994 and 1995, and the related combined statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. 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 audits. We conducted our audits 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 audits provide 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 The Maxwell Companies as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Little Rock, Arkansas, May 24, 1996. F-65 125 THE MAXWELL COMPANIES COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 556,544 $1,041,373 $ 1,045,677 Restricted cash........................................ 138,453 253,171 222,367 Investments............................................ 209,505 273,354 -- Accounts receivable, net of allowance for doubtful accounts of $75,711, $63,988 and $80,333, respectively........................................ 2,810,176 2,536,603 2,535,787 Prepaid expenses and other............................. 96,669 24,628 25,256 ---------- ---------- ----------- Total current assets........................... 3,811,347 4,129,129 3,829,087 PROPERTY AND EQUIPMENT, net.............................. 480,594 499,792 510,667 INTANGIBLE ASSETS, net................................... -- -- 300,564 ---------- ---------- ----------- $4,291,941 $4,628,921 $ 4,640,318 ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable....................................... $ 167,991 $ 169,250 $ 170,178 Payroll and related liabilities........................ 653,772 570,444 836,735 Reserve for workers' compensation claims............... 476,000 1,153,000 1,153,000 Current maturities of long-term debt................... -- -- 71,618 Accrued dividends...................................... 197,500 151,000 16,927 Other accrued liabilities.............................. 20,728 25,462 46,757 ---------- ---------- ----------- Total current liabilities...................... 1,515,991 2,069,156 2,295,215 LONG-TERM DEBT, less current maturities.................. -- -- 77,562 COMMITMENTS AND CONTINGENCIES (Notes 8 through 13) SHAREHOLDERS' EQUITY: Common stock, $1.00 par value in 1994, 1995 and 1996; authorized shares of 110,000 in 1994 and 1995 and 160,000 in 1996; shares issued and outstanding of 4,000 in 1994 and 1995 and 5,000 in 1996............ 4,000 4,000 5,000 Unrealized holding gain................................ -- 43,296 -- Retained earnings...................................... 2,771,950 2,512,469 2,262,541 ---------- ---------- ----------- Total shareholders' equity..................... 2,775,950 2,559,765 2,267,541 ---------- ---------- ----------- $4,291,941 $4,628,921 $ 4,640,318 ========== ========== ===========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-66 126 THE MAXWELL COMPANIES COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES.............. $16,324,216 $21,225,866 $23,092,606 $ 5,835,140 $ 6,149,717 COST OF SERVICES.............. 11,253,565 16,003,387 17,748,020 4,522,824 4,745,235 ----------- ----------- ----------- ----------- ----------- Gross profit........ 5,070,651 5,222,479 5,344,586 1,312,316 1,404,482 OPERATING EXPENSES: Selling, general and administrative........... 3,582,427 3,820,565 4,296,703 998,892 1,153,490 Depreciation and amortization............. 75,368 107,601 136,135 34,034 45,779 ----------- ----------- ----------- ----------- ----------- Operating income.... 1,412,856 1,294,313 911,748 279,390 205,213 OTHER INCOME (EXPENSE): Interest income............. 14,767 21,645 43,213 6,856 33,083 Interest expense............ (27,678) (33,849) -- -- (995) Other, net.................. (104,397) (18,836) (35,396) -- 18,141 ----------- ----------- ----------- ----------- ----------- Net income.......... $ 1,295,548 $ 1,263,273 $ 919,565 $ 286,246 $ 255,442 =========== =========== =========== =========== ===========
The accompanying notes to combined financial statements are an integral part of these statements. F-67 127 THE MAXWELL COMPANIES COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
NET UNREALIZED HOLDING GAIN COMMON STOCK ON INVESTMENT ---------------- AVAILABLE FOR RETAINED SHARES AMOUNT SALE EARNINGS TOTAL ------ ------ -------------- ---------- ---------- BALANCE, December 31, 1992............. 3,500 $3,500 $ -- $1,890,892 $1,894,392 Net income........................... -- -- -- 1,295,548 1,295,548 Dividends declared................... -- -- -- (979,383) (979,383) ----- ------ -------- ---------- ---------- BALANCE, December 31, 1993............. 3,500 3,500 -- 2,207,057 2,210,557 Net income........................... -- -- -- 1,263,273 1,263,273 Issuance of stock.................... 500 500 -- -- 500 Dividends declared................... -- -- -- (698,380) (698,380) ----- ------ -------- ---------- ---------- BALANCE, December 31, 1994............. 4,000 4,000 -- 2,771,950 2,775,950 Net income........................... -- -- -- 919,565 919,565 Dividends declared................... -- -- -- (1,179,046) (1,179,046) Net unrealized holding gain on investments available for sale.... -- -- 43,296 -- 43,296 ----- ------ -------- ---------- ---------- BALANCE, December 31, 1995............. 4,000 4,000 43,296 2,512,469 2,559,765 Net income (Unaudited)............... -- -- -- 255,442 255,442 Issuance of stock (Unaudited)........ 1,000 1,000 -- -- 1,000 Dividends declared: Cash (Unaudited).................. -- -- -- (275,312) (275,312) Investments (Unaudited)........... -- -- (43,296) (230,058) (273,354) ----- ------ -------- ---------- ---------- BALANCE, March 31, 1996 (Unaudited).... 5,000 $5,000 $ -- $2,262,541 $2,267,541 ===== ====== ======== ========== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-68 128 THE MAXWELL COMPANIES COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------------------- ----------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- --------- ---------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................... $1,295,548 $ 1,263,273 $ 919,565 $ 286,246 $ 255,442 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ 75,368 107,601 136,135 34,034 45,779 Provision for bad debts... 77,690 100,615 223,216 47,501 40,541 Loss (gain) on investments............. 102,536 12,500 (2,146) -- -- Change in operating assets and liabilities, net of effects of acquisition: Restricted cash......... (65,954) (72,499) (114,718) (33,067) 30,804 Accounts receivable..... (777,846) (1,073,300) 50,357 23,250 (39,725) Prepaid expenses and other................ 26,124 (10,457) 72,041 32,386 (628) Accounts payable........ 40,808 (74,812) 1,259 (31,287) 928 Payroll and related liabilities.......... 525,769 33,483 (83,328) 137,401 266,291 Reserve for workers' compensation claims............... -- 476,000 677,000 131,047 -- Other accrued liabilities.......... 64,574 (43,846) 4,734 (13,008) 21,295 ---------- ----------- ----------- --------- ---------- Net cash provided by operating activities......... 1,364,617 718,558 1,884,115 614,503 620,727 ---------- ----------- ----------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Sumner-Ray Technical Resources, Inc....................... -- -- -- -- (168,000) Capital expenditures......... (155,150) (211,595) (155,333) (25,330) (40,038) Purchase of investments...... (109,144) (13,750) (116,526) (161,871) -- Sales of investments......... -- -- 98,119 -- -- ---------- ---------- ----------- --------- ---------- Net cash used in investing activities......... (264,294) (225,345) (173,740) (187,201) (208,038) ---------- ---------- ----------- --------- ----------
The accompanying notes to combined financial statements are an integral part of these statements. F-69 129 THE MAXWELL COMPANIES COMBINED STATEMENTS OF CASH FLOWS -- (CONTINUED)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ---------------------------------------- ---------------------- 1993 1994 1995 1995 1996 ---------- ----------- ----------- -------- ---------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends................ $ (813,409) $ (666,854) $(1,225,546) $(57,056) $ (409,385) Payments on long-term debt.... (46,297) (336,801) -- -- -- Issuance of stock............. -- 500 -- -- 1,000 ---------- ----------- ----------- -------- ---------- Net cash used in financing activities.......... (859,706) (1,003,155) (1,225,546) (57,056) (408,385) ---------- ----------- ----------- -------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 240,617 (509,942) 484,829 370,246 4,304 CASH AND CASH EQUIVALENTS, beginning of period........... 825,869 1,066,486 556,544 556,544 1,041,373 ---------- ----------- ----------- -------- ---------- CASH AND CASH EQUIVALENTS, end of period..................... $1,066,486 $ 556,544 $ 1,041,373 $926,790 $1,045,677 ========== =========== =========== ======== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................. $ 27,678 $ 23,950 $ -- $ -- $ -- ========== =========== =========== ======== ========== Non-cash transactions: Notes payable issued in conjunction with the purchase of Sumner-Ray Technical Resources, Inc...................... $ -- $ -- $ -- $ -- $ 149,180 ========== =========== =========== ======== ========== Transfer of investments to shareholders............. $ -- $ -- $ -- $ -- $ 273,354 ========== =========== =========== ======== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-70 130 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- The combined financial statements of The Maxwell Companies (the "Company") 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 have substantially common ownership. All significant intercompany transactions have been eliminated in the accompanying combined financial statements. 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 therapist services, is licensed to do business in 22 states. Square One, which was incorporated in 1991, provides contract management and physical and occupational therapist services to companies located in the midwestern and southwestern United States. Technical, which was incorporated in 1996, provides permanent and temporary technical personnel services to companies located primarily in Oklahoma. Interim Financial Statements -- The accompanying interim combined financial statements have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited combined financial statements for the three years in the period ended December 31, 1995, and include all adjustments of a normal, recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in preparing the accompanying combined financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. However, actual results may differ from the estimates and assumptions used in preparing the accompanying combined financial statements. Revenue Recognition -- Service revenues are recognized as income at the time services are provided. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Restricted Cash -- Restricted cash represents funds deposited in an account maintained on behalf of the Company's self-insured health benefits plan. The use of these assets is restricted to the payment of health benefits of the participating employees. F-71 131 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. Included in accounts receivable in the accompanying combined balance sheets are unbilled amounts of $392,068, $379,163 and $618,289 (unaudited) at December 31, 1994, December 31, 1995 and March 31, 1996, respectively. Investment Securities -- Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In accordance with this pronouncement, investment securities are to be classified as either trading, available-for-sale or held for investment. Trading securities are recorded at market value, and any gains or losses are recognized in the income statement. Securities available-for-sale are also recorded at market value; however, any unrealized gains or losses are recorded as an adjustment to shareholders' equity. Securities held for investment are recorded at amortized cost, adjusted for necessary valuation allowances. Upon adoption of SFAS No. 115 on January 1, 1994, the Company classified its investment securities as available-for-sale. The implementation of this pronouncement did not have a material impact to the financial statements. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized using a method which approximates the straight-line method. The estimated useful lives of the assets are as follows: Office equipment................................................. 5-7 years Computer equipment............................................... 5-7 years Vehicles......................................................... 5 years Building and improvements........................................ 7-32 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Intangible Assets -- Intangible assets consist primarily of goodwill recorded in conjunction with the acquisition of Sumner-Ray Technical Resources, Inc. ("Sumner-Ray"), as discussed in Note 2, which is being amortized using the straight-line method over 30 years. In the event facts and circumstances indicate that the carrying amount of this goodwill may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted net cash flows of the related assets over their remaining lives would be compared to the assets' carrying amounts in measuring whether the assets are recoverable. As of March 31, 1996, the Company's intangible assets were considered to be fully recoverable. Workers' Compensation and Health Benefits -- The Company self-insures certain risks related to workers' compensation and employee health benefits claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The F-72 132 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Company engaged the services of a third party actuary to assist with the development of the workers' compensation cost estimates as of December 31, 1994 and 1995. Fair Value of Financial Instruments -- The Company's financial instruments include cash and cash equivalents, restricted cash, investments and long-term debt. Excluding investments, which are carried at fair market value as discussed in Note 4, management believes that the Company's financial instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for these instruments are reasonable estimates of fair value. 2. BUSINESS COMBINATIONS (UNAUDITED): On February 23, 1996, the Company acquired certain assets of Sumner-Ray, which is engaged in providing temporary and permanent placement of professional and technical personnel in the engineering, drafting and manufacturing fields. The acquisition has been accounted for as a purchase and the results of Sumner-Ray have been included in the accompanying financial statements since the date of acquisition. The cost of the acquisition has been allocated on the basis of the estimated fair value of the assets and liabilities acquired. Total consideration paid for Sumner-Ray was $336,000. The purchase price included cash of $168,000 and a note to the seller for $168,000, which included an interest component at a stated rate of 8% per year. The note has been discounted using the prescribed rate, and the resulting principal amount of $149,180 is included in the accompanying combined balance sheets. The assets acquired have been recorded at their estimated fair value as of the acquisition date, with the remaining acquisition costs of approximately $300,000 being recorded as goodwill. The acquisition of Sumner-Ray did not have a significant impact on the Company's operating results. 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) Building and improvements........................ $ 483,136 $ 502,130 $ 518,401 Office equipment................................. 346,530 386,411 412,480 Computer equipment............................... 204,268 300,265 310,557 Vehicles......................................... 25,105 27,561 27,561 Land............................................. 13,000 13,000 13,000 ---------- ---------- ----------- 1,072,039 1,229,367 1,281,999 Less accumulated depreciation and amortization................................ 591,445 729,575 771,332 ---------- ---------- ----------- $ 480,594 $ 499,792 $ 510,667 ========== ========== ===========
Depreciation and amortization expense related to property and equipment for the years ended December 31, 1993, 1994 and 1995 totaled $75,368, $107,601 and $136,135, respectively. Unaudited depreciation and amortization expense for the three months ended March 31, 1995 and 1996 totaled $34,034 and $44,100, respectively. F-73 133 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVESTMENTS: The Company has classified all investments as available-for-sale. Accordingly these investments have been recorded at market value. The carrying value and market value of available-for-sale investment securities were as follows:
GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- -------- December 31, 1994: Equity securities........................ $ 180,826 $ -- $ -- $180,826 United States government obligations..... 28,679 -- -- 28,679 --------- -------- -------- -------- $ 209,505 $ -- $ -- $209,505 ========= ======== ======== ======== December 31, 1995: Equity securities........................ $ 201,379 $ 38,551 $ -- $239,930 United States government obligations..... 28,679 4,745 -- 33,424 --------- -------- -------- -------- $ 230,058 $ 43,296 $ -- $273,354 ========= ======== ======== ========
The United States government obligations held as of December 31, 1994 and 1995 represent only one issue which matures in 2003. Proceeds from the sale of securities totaled $98,119 for the year ended December 31, 1995, including the realization of a gross gain of $2,146. There were no sales of securities during 1994. Losses totaling $102,536 and $12,500 in 1993 and 1994, respectively, were recognized on one security whose impairment of value was deemed to be other than temporary. These amounts are reflected in other income (expense) in the accompanying combined statements of income. All investments were distributed to the shareholders in March 1996. The related unrealized holding gain was removed in connection with this dividend. 5. INTANGIBLE ASSETS (UNAUDITED): Intangible assets, net of amortization, at March 31, 1996 consisted primarily of the goodwill related to the acquisition of Sumner-Ray, as discussed in Note 2. Amortization expense related to intangible assets totaled $1,679 (unaudited) for the three months ended March 31, 1996. 6. LONG-TERM DEBT (UNAUDITED): Long-term debt as of March 31, 1996 consisted of a promissory note payable to the previous owner of Sumner-Ray which is due in annual installments of $84,000, including interest at approximately 8%, payable on February 23, 1997 and 1998. The obligation is secured by a lien and security interest in certain assets of the Company. Scheduled principal maturities of this obligation are $71,618 in 1997 and $77,562 in 1998. 7. INCOME TAXES: The Company operates as an S Corporation for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements as such taxes are liabilities of the individual shareholders. F-74 134 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 8. WORKERS' COMPENSATION: Effective July 1, 1994, the Company began self-insuring certain workers' compensation claims in the state of Oklahoma and is regulated by the Oklahoma Workers' Compensation Insurance Commission. The Company has purchased insurance for workers' compensation claims which exceed $250,000. The Company maintains a letter of credit with a bank to cover any potential unpaid claims. At March 31, 1996, this letter of credit was in the amount of $450,000 (unaudited). Workers' compensation expense totaled $485,151, $918,961 and $1,089,901 for the years ended December 31, 1993, 1994 and 1995, respectively. Unaudited workers' compensation expense totaled $199,670 and $132,324 for the three months ended March 31, 1995 and 1996, respectively. 9. EMPLOYEE BENEFIT PLANS: Prior to 1995, employees participated in a profit sharing plan to which the Company made discretionary contributions. In 1993 and 1994, the Company made contributions totaling $250,000 and $190,000, respectively. The Company elected not to make a contribution in 1995. Effective January 1, 1996, the Company added a defined contribution benefit plan to the existing profit sharing plan. This new plan, which operates pursuant to an Internal Revenue Code section 401(k) arrangement, allows employees to contribute on a tax deferred basis up to 10% of their annual wages. The Company makes a matching contribution equal to 50% of the employees' contributions up to a maximum of 3% of the respective employees' annual wages. The Company may also contribute additional amounts for profit sharing at its discretion. Total unaudited matching contributions to be made by the Company to the plan for the three months ended March 31, 1996 were $12,419. No discretionary contributions were made during the three months ended March 31, 1996. On January 1, 1993, the Company established a self-insured plan to offer health and dental insurance benefits to certain of its employees. Employees may also purchase coverage for family members. Pursuant to this plan, the Company pays for the approved claims costs of eligible participants subject to certain individual and family deductibles and co-payments, as defined. Both the Company and the participants make contributions to the plan based upon premiums which are established by a third party administrator and the Company's benefits committee. The Company maintained insurance for annual claims which exceeded $10,000, $15,000, $25,000 and $25,000 at December 31, 1993, 1994, 1995 and March 31, 1996, respectively. Expenses related to this plan for the years ended December 31, 1993, 1994 and 1995 were $190,357, $184,605 and $188,066, respectively. Unaudited expense related to this plan for the three months ended March 31, 1995 and 1996 were $42,247 and $85,913, respectively. 10. RELATED PARTY TRANSACTIONS: The Company rents a duplex from certain shareholders which houses foreign-trained physical and occupational therapists. Rent expense related to the duplex amounted to $16,800 for each of the years ended December 31, 1993, 1994 and 1995. Unaudited rent expense totaled $4,200 for the three months ended March 31, 1995 and 1996. These rent payments are not subject to a formal agreement and, therefore, have not been considered in the disclosure included in Note 12. 11. COMMITMENTS AND CONTINGENCIES: The Company has employment agreements with certain executive officers and management personnel that provide for annual salaries, cost-of-living adjustments and additional compensation in the form of performance based bonuses. Certain agreements include a covenant against competition with the Company, F-75 135 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) which extends for a period of time after termination. These agreements generally continue until terminated by the employee or the Company. One employment agreement provides for the purchase of up to 398 shares of Square One stock from the existing shareholders subject to the satisfaction of certain performance measures of Square One. As of March 31, 1996, Square One's performance had exceeded the threshold required for the employee to purchase 100 shares; however, this option had not been exercised. The Company pays dividends to its shareholders in amounts sufficient to cover their estimated tax payments attributable to the respective share of the Company's net income which will be included in their individual tax returns. The Company plans to continue this practice in the future as long as it maintains its S Corporation status. The Company is a party to certain lawsuits and claims primarily involving workers' compensation claims and other employee related matters. Management believes, based in part on consultation from legal counsel, that the ultimate outcome of these matters will not have a materially adverse effect on the Company's financial position, liquidity or results of operations. 12. NONCANCELABLE OPERATING LEASES: The Company leases equipment, vehicles and office space as well as apartments for certain foreign-trained therapists under noncancelable operating leases. Future minimum annual payments required during each of the next five years under operating leases that have noncancelable lease terms expiring subsequent to December 31, 1995, are as follows: 1996.............................................. $224,093 1997.............................................. 67,545 1998.............................................. 52,132 1999.............................................. 43,643 2000.............................................. 43,643 -------- $431,056 ========
Rent expense totaled $75,472, $123,099 and $134,231 for the years ended December 31, 1993, 1994 and 1995, respectively. Unaudited rent expense for the three months ended March 31, 1995 and 1996 was $32,524 and $36,839, respectively. 13. SIGNIFICANT CUSTOMERS: The following table summarizes the number and aggregate revenues earned from customers which individually account for 10% or more of the Company's combined service revenues.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------ ------------------------- 1993 1994 1995 1995 1996 ---------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Number of significant customers.................. 1 2 2 1 2 ========== ========== ========== ========== ========== Revenue from significant customers.................. $3,476,685 $5,941,354 $5,013,469 $1,006,038 $1,558,283 ========== ========== ========== ========== ========== Percent of combined revenues................... 21% 28% 22% 17% 25% ========== ========== ========== ========== ==========
F-76 136 THE MAXWELL COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSEQUENT EVENTS: On May 17, 1996, the Company entered into a debt agreement with State Bank & Trust, N.A. which provided for a $1.75 million term loan. The loan is secured by the Company's accounts receivable. Accrued interest is due and payable monthly beginning June 1, 1996 at a rate of 8.25%. The outstanding principal balance plus unpaid accrued interest is due November 1, 1996. The proceeds from this loan were used to partially fund the cash dividend discussed in Note 15. 15. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, the owners of the Company entered into a definitive agreement to merge with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's initial public offering. Prior to or coincident with this proposed merger, the Company plans to dividend certain assets to the shareholders consisting of the building in which the Company is headquartered, which had an aggregate carrying value of approximately $207,000 (unaudited) as of March 31, 1996. In addition, the Company plans to make a cash dividend of approximately $2.5 million prior to the proposed merger, which represents the Company's estimated S Corporation Accumulated Adjustment Account. Had these transactions occurred as of March 31, 1996, the effect on the accompanying unaudited interim combined balance sheet would have been a decrease in total assets and shareholder's equity of approximately $2.7 million (unaudited). StaffMark plans to lease the real property distributed, as discussed above, from the owners at a market lease rate. In conjunction with the proposed merger discussed above, the owners will enter into employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete following termination of such person's employment. F-77 137 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HRA, Inc.: We have audited the accompanying balance sheets of HRA, Inc. (the "Company"), a Tennessee corporation, as of September 30, 1994 and 1995, and the related statements of income (loss), shareholders' equity and cash flows for each of the three years ended September 30, 1995. 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 audits. We conducted our audits 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 audits provide 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 HRA, Inc. as of September 30, 1994 and 1995, and the results of its operations and its cash flows for each of the three years ended September 30, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Memphis, Tennessee, May 24, 1996. F-78 138 HRA, INC. BALANCE SHEETS
SEPTEMBER 30, ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 637,297 $ 418,229 $ 364,965 Accounts receivable, net of allowance for doubtful accounts of $26,000................................. 1,684,052 1,998,724 1,939,874 Advances to shareholders............................... -- -- 250,000 Prepaid expenses and other............................. 12,616 467,002 653,623 Income taxes receivable................................ -- 25,125 19,475 Deferred income taxes.................................. 33,100 160,000 216,600 ---------- ---------- ---------- Total current assets........................... 2,367,065 3,069,080 3,444,537 PROPERTY AND EQUIPMENT, net.............................. 70,261 144,179 160,852 INTANGIBLE ASSETS, net................................... -- 37,156 167,014 OTHER ASSETS: Deferred income taxes.................................. 79,700 65,000 57,200 Other.................................................. 400 21,071 1,423 ---------- ---------- ---------- Total other assets............................. 80,100 86,071 58,623 ---------- ---------- ---------- $2,517,426 $3,336,486 $3,831,026 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under accounts receivable financing agreement........................................... $ 600,830 $ 502,512 $ -- Line of credit......................................... -- -- 580,000 Current portion of deferred compensation arrangements........................................ 97,898 43,699 106,208 Outstanding checks..................................... -- 166,761 197,624 Accounts payable....................................... 118,906 193,096 185,774 Payroll and related liabilities........................ 493,033 621,317 557,352 Reserve for workers' compensation claims............... 475,712 1,390,351 1,653,970 Income taxes payable................................... 228,217 -- -- Accrued expenses....................................... 72,084 138,416 128,297 Note payable to a shareholder.......................... 155,295 -- -- ---------- ---------- ---------- Total current liabilities...................... 2,241,975 3,056,152 3,409,225 DEFERRED COMPENSATION ARRANGEMENTS, less current portion................................................ 97,824 127,332 285,688 NOTE PAYABLE TO A SHAREHOLDER............................ -- 122,000 116,000 COMMITMENTS AND CONTINGENCIES (Notes 10, 11 and 13) SHAREHOLDERS' EQUITY: Common stock, no par value, 1,000 shares authorized, 790 shares issued and outstanding................... 12,600 12,600 12,600 Retained earnings...................................... 165,027 18,402 7,513 ---------- ---------- ---------- Total shareholders equity...................... 177,627 31,002 20,113 ---------- ---------- ---------- $2,517,426 $3,336,486 $3,831,026 ========== ========== ==========
The accompanying notes are an integral part of these balance sheets. F-79 139 HRA, INC. STATEMENTS OF INCOME (LOSS)
SIX MONTHS ENDED FISCAL YEARS MARCH 31, ----------------------------------------- -------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES............. $13,333,022 $16,453,375 $18,306,542 $ 8,439,639 $10,645,025 COST OF SERVICES............. 10,985,142 13,367,561 14,939,279 6,876,078 8,628,915 ----------- ----------- ----------- ----------- ----------- Gross profit....... 2,347,880 3,085,814 3,367,263 1,563,561 2,016,110 OPERATING EXPENSES: Selling, general and administrative.......... 2,107,544 2,381,168 3,438,436 1,513,970 1,867,248 Depreciation and amortization............ 33,773 45,783 65,691 19,285 42,374 ----------- ----------- ----------- ----------- ----------- Operating income (loss)........... 206,563 658,863 (136,864) 30,306 106,488 OTHER INCOME (EXPENSE): Interest expense........... (84,448) (100,828) (107,364) (33,349) (52,735) Interest and other, net.... 6,192 16,466 13,443 9,036 (89,792) ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES............... 128,307 574,501 (230,785) 5,993 (36,039) PROVISION (BENEFIT) FOR INCOME TAXES............... 43,250 221,100 (84,160) 1,810 (25,150) ----------- ----------- ----------- ----------- ----------- Net income (loss)........... $ 85,057 $ 353,401 $ (146,625) $ 4,183 $ (10,889) =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-80 140 HRA, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK RETAINED ----------------- EARNINGS SHARES AMOUNT (DEFICIT) TOTAL ------ ------- --------- --------- BALANCE, September 30, 1992.......................... 500 $ 1,000 $(273,431) $(272,431) Net income......................................... -- -- 85,057 85,057 --- ------- --------- --------- BALANCE, September 30, 1993.......................... 500 1,000 (188,374) (187,374) Issuance of Common Stock........................... 290 11,600 -- 11,600 Net income......................................... -- -- 353,401 353,401 --- ------- --------- --------- BALANCE, September 30, 1994.......................... 790 12,600 165,027 177,627 Net loss........................................... -- -- (146,625) (146,625) --- ------- --------- --------- BALANCE, September 30, 1995.......................... 790 12,600 18,402 31,002 Net loss (Unaudited)............................... -- -- (10,889) (10,889) --- ------- --------- --------- BALANCE, March 31, 1996 (Unaudited).................. 790 $12,600 $ 7,513 $ 20,113 === ======= ========= =========
The accompanying notes are an integral part of these financial statements. F-81 141 HRA, INC. STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED FISCAL YEARS MARCH 31, --------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $ 85,057 $ 353,401 $(146,625) $ 4,183 $ (10,889) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................ 33,773 45,783 65,691 19,285 42,374 Provision for bad debts...................... 45,480 4,498 2,041 -- 492 Change in deferred income taxes.............. (5,700) (10,200) (112,200) (400) (48,800) Change in operating assets and liabilities: Accounts receivable........................ (231,286) (421,143) (316,713) 58,292 58,358 Income taxes receivable.................... -- -- (25,125) (3,073) 5,650 Prepaid expenses and other................. (15,147) 2,531 (454,386) (341,361) (186,621) Other assets............................... 9,583 17 (20,671) (1,533) 19,648 Outstanding checks......................... -- -- 166,761 -- 30,863 Accounts payable........................... (50,994) 51,940 49,190 53,155 (7,322) Payroll and related liabilities............ (117,269) (30,697) 128,284 40,147 (63,965) Reserve for workers' compensation claims... 285,837 (68,655) 914,639 571,812 263,619 Accrued expenses........................... 30,053 (21,755) 66,332 (93,135) (10,119) Income taxes payable....................... 31,508 192,487 (228,217) (228,217) -- --------- --------- --------- --------- --------- Net cash provided by operating activities.............................. 100,895 98,207 89,001 79,155 93,288 --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (50,834) (40,096) (135,765) (71,905) (49,268) Other........................................... 10,000 -- (16,000) -- -- --------- --------- --------- --------- --------- Net cash used in investing activities...... (40,834) (40,096) (151,765) (71,905) (49,268) --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-82 142 HRA, INC. STATEMENTS OF CASH FLOWS -- (CONTINUED)
SIX MONTHS ENDED FISCAL YEARS MARCH 31, --------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in deferred compensation arrangements................................. $ -- $ 21,559 $ -- $ -- $ 135,596 Payments on deferred compensation arrangements................................. (24,996) -- (24,691) -- (54,368) Net borrowings under an accounts receivable financing agreement.......................... 500,000 100,830 (98,318) (109,138) (502,512) Net borrowings under a revolving line of credit....................................... -- -- -- -- 580,000 Principal payments on note payable to a shareholder.................................. (140,154) -- (33,295) (18,000) (6,000) Advances to shareholders........................ -- -- -- -- (250,000) Proceeds from issuance of common stock.......... -- 11,600 -- -- -- Other........................................... (7,299) (5,749) -- -- -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities.............................. 327,551 128,240 (156,304) (127,138) (97,284) --------- --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 387,612 186,351 (219,068) (119,888) (53,264) CASH AND CASH EQUIVALENTS, beginning of period.... 63,334 450,946 637,297 637,297 418,229 --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period.......... $ 450,946 $ 637,297 $ 418,229 $ 517,409 $ 364,965 ========= ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................... $ 65,444 $ 77,737 $ 106,467 $ 33,349 $ 44,992 ========= ========= ========= ========= ========= Taxes paid...................................... $ 20,742 $ 41,813 $ 267,622 $ 144,974 $ 18,000 ========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During fiscal year 1995, the Company incurred a liability totaling $41,000 for the purchase of a consulting and noncompete agreement. During the six month period ended March 31, 1996, the Company recorded a deferred compensation arrangement liability for the purchase of a noncompete agreement with a former shareholder totaling $139,637. The accompanying notes are an integral part of these financial statements. F-83 143 HRA, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- HRA, Inc. (the "Company") was incorporated on November 20, 1991, in the state of Tennessee and provides temporary personnel services throughout central Tennessee. Headquartered in Nashville, Tennessee, the Company 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. The majority of the Company's sales are derived from customers within a 100-mile radius of Nashville, Tennessee. The Company extends trade credit to its customers which are represented by various industries. There are no individual customers that account for more than 10% of service revenues in any of the fiscal years or unaudited periods presented. Fiscal Periods -- The Company's fiscal year ends on September 30. The fiscal years 1993, 1994 and 1995 each included 52 weeks. The unaudited interim periods included in the accompanying financial statements each included 26 weeks. Interim Financial Statements -- The accompanying interim financial statements have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited financial statements for the three years in the period ended September 30, 1995, and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. At September 30, 1994 and 1995, the Company had set aside cash reserves of $60,083 and $50,251 as collateral on accounts receivable financed with recourse (Note 4). F-84 144 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses related to the realization of the amounts recorded in the accompanying balance sheets. Property and Equipment -- Property and equipment are recorded at cost and are depreciated on accelerated methods over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the economic lives or the terms of the lease. Estimates of useful lives by asset classification are as follows: Office equipment.................................................. 5-7 years Computer equipment................................................ 5 years Computer software................................................. 5 years Leasehold improvements............................................ 5 years
Expenditures for renewals and betterments are capitalized, while repairs and maintenance costs are expensed as incurred. Intangible Assets -- The Company amortizes its intangible assets over the lives of the respective arrangements (Note 3). The Company regularly evaluates whether events and circumstances have occurred which may indicate the carrying amount of intangible assets may warrant revision or may not be recoverable. When factors indicate that certain intangible assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related assets over their remaining lives in measuring whether the assets are recoverable. As of September 30, 1995 and March 31, 1996, the Company's intangible assets were considered fully recoverable. Self-Insurance Reserves -- During fiscal year 1995, the Company began self-insuring certain risks related to workers' compensation claims. Additionally, during each of the fiscal years ended September 30, and for the six months ended March 31, 1996, the Company was substantially self-insured for employee health care costs. The estimated costs of existing and future claims related to workers' compensation claims and employee health care are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Company engaged the services of a third party actuary to assist with the development of cost estimates for workers' compensation claims. Income Taxes -- Deferred income taxes are provided for the effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. The Company uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. Fair Value of Financial Instruments -- The Company's financial instruments principally represent cash and cash equivalents, a note payable to a shareholder and bank borrowing arrangements secured by accounts receivable. The carrying value of cash and cash equivalents approximates fair value due to its short-term nature. The carrying value of the note payable to F-85 145 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) shareholder and the Company's borrowing arrangements secured by accounts receivable approximate fair value based upon management's assessment of interest rates currently available to the Company. 2. PROPERTY AND EQUIPMENT: Components of property and equipment are as follows:
SEPTEMBER 30, ---------------------- MARCH 31, 1994 1995 1996 -------- --------- ----------- (UNAUDITED) Office equipment................................. $ 38,689 $ 65,237 $ 89,321 Computer equipment............................... 80,222 141,200 149,911 Computer software................................ 34,959 76,715 83,709 Leasehold improvements........................... 11,993 17,569 27,048 -------- --------- --------- 165,863 300,721 349,989 Less accumulated depreciation and amortization................................ 95,602 156,542 189,137 -------- --------- --------- $ 70,261 $ 144,179 $ 160,852 ======== ========= =========
Depreciation and amortization expense related to property and equipment totaled $33,773, $45,783 and $61,847 for the years ended September 30, 1993, 1994 and 1995, respectively. Unaudited depreciation and amortization expense related to property and equipment totaled $19,285 and $32,595 for the six months ended March 31, 1995 and 1996, respectively. 3. INTANGIBLE ASSETS: During fiscal year 1995, the Company entered into a Consulting and Noncompetition Agreement with an individual operating a temporary personnel agency in Lebanon, Tennessee. The agreement, as amended, called for an initial payment of $41,000 and contingent consideration up to $67,000, based upon certain performance events. Contingent consideration payments during fiscal year 1995 and the six months ended March 31, 1996 totaled approximately $1,700 and $2,500 (unaudited), respectively. The Company is amortizing this arrangement over the 48 month term of the agreement.
MARCH 31, 1995 1996 ------- ----------- (UNAUDITED) Consulting and noncompetition agreement....................... $41,000 $ 41,000 Noncompete agreement with a former shareholder (see Note 10)......................................................... -- 139,637 ------- --------- 41,000 180,637 Less accumulated amortization............................... 3,844 13,623 ------- --------- $37,156 $ 167,014 ======= =========
Amortization expense totaled $3,844 in fiscal year 1995 and $9,779 (unaudited) for the six months ended March 31, 1996. 4. BORROWINGS UNDER ACCOUNTS RECEIVABLE FINANCING ARRANGEMENT: During fiscal year 1994, the Company entered into a "Purchase of Accounts" agreement with SouthTrust Bank (the "Bank") whereby the Bank agreed to purchase up to $750,000 of the Company's trade accounts receivable on a revolving basis. The agreement gave the Company the option to repurchase these receivables from the Bank at any time and gave the Bank full recourse to the Company for any accounts receivable which F-86 146 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) were not collected. Accordingly, this arrangement has been reflected as a financing transaction in the accompanying financial statements. As of September 30, 1994 and 1995, the receivables financed pursuant to this agreement totaled $600,830 and $502,512, respectively. The agreement required the Company to pay a service charge equal to 1.50% of the face amount of each account financed by the Bank. Service charges were $9,132 and $7,538 for the fiscal years ended 1994 and 1995 and have been reflected in interest expense in the accompanying statements of income. In addition, the Company was required to maintain a cash reserve account at the Bank in an amount equal to at least 10% of the receivables financed and meet certain other restrictive covenants. 5. LINE OF CREDIT: In November 1995, the Company replaced its "Purchase of Accounts" bank agreement (Note 4) with a revolving line of credit with the same bank. Under the revolving line of credit, the Company may borrow an amount equal to 80% of its outstanding Eligible Accounts Receivable, as defined, not to exceed an aggregate borrowing of $1,500,000. Borrowings are collateralized by the Company's accounts receivable and are guaranteed by the Company's shareholders. Interest is payable monthly on outstanding borrowings at the Bank's base rate plus 1.25% (weighted average rate of 9.23% during the six months ended March 31, 1996). Unless renewed, the agreement expires on November 20, 1996. Under the terms of the line of credit agreement, the Company has certain dividend restrictions and is required, among other things, to maintain certain financial ratios. As of March 31, 1996, the Company had borrowed $580,000 (unaudited) under this line of credit and principally used the proceeds to repurchase previously sold accounts receivable. 6. NOTE PAYABLE TO A SHAREHOLDER: As of September 30, 1994 and 1995, the Company had a note payable to a former shareholder for $155,295 and $122,000, respectively. The note was due on demand and bore interest at 8.75%. The note was secured by the Company's accounts receivable not previously pledged. For the years ended September 30, 1993, 1994 and 1995, interest expense on this note totaled $22,860, $18,636 and $12,100, respectively. For the six months ended March 31, 1995 and 1996, interest expense on this note totaled $6,400 (unaudited) and $4,241 (unaudited), respectively. In connection with the purchase of this shareholder's common stock in the Company by two of the remaining shareholders (Notes 10 and 14), this note was amended whereby, beginning in December 1995, interest payments will be made monthly at a rate of 9.75%. The note is unsecured and requires principal payments beginning in December 1997. Annual maturities pursuant to this note for the years subsequent to fiscal year 1995 are as follows: 1996.............................................. $ 6,000 1997.............................................. -- 1998.............................................. 35,753 1999.............................................. 57,917 2000.............................................. 20,301 Thereafter........................................ 2,029 -------- $122,000 ========
As of March 31, 1996, the Company owed $116,000 (unaudited) pursuant to this amended note agreement. F-87 147 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. INCOME TAXES: Components of the provision for income taxes were as follows:
FISCAL YEAR SIX MONTHS ENDED MARCH 31, ------------------------------- -------------------------- 1993 1994 1995 1995 1996 ------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Current: Federal...................... $39,550 $194,600 $ 10,180 $ 1,550 $ 17,950 State........................ 9,400 36,700 4,100 660 5,700 Deferred....................... (5,700) (10,200) (98,440) (400) (48,800) ------- -------- -------- ------- --------- $43,250 $221,100 $(84,160) $ 1,810 $ (25,150) ======= ======== ======== ======= =========
A reconciliation of taxes at the statutory federal income tax rate to the Company's effective income tax rate for the years ended September 30 follows:
FISCAL YEAR SIX MONTHS ENDED MARCH 31, -------------------------------- -------------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) Taxes at statutory U.S. income tax rate.................... $ 43,624 $201,075 $(80,775) $ 2,098 $ (12,610) Increase (decrease) resulting from: Tax penalties............... 4,281 846 -- -- -- State income taxes, net of federal benefit.......... 6,204 23,855 2,666 428 3,705 Effect of graduated federal income tax rate.......... (13,112) (7,672) (9,933) (2,466) (17,995) Meals and entertainment and other.................... 2,253 2,996 3,882 1,750 1,750 -------- -------- -------- ------- --------- $ 43,250 $221,100 $(84,160) $ 1,810 $ (25,150) ======== ======== ======== ======= =========
Deferred income taxes result from differences in the timing of recognition of revenues and expenses for financial reporting and income tax purposes. The components of the Company's net deferred income tax assets are as follows:
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 1994 1995 1996 ------------- ------------- ----------- (UNAUDITED) Compensation agreements...................... $ 76,600 $ 65,000 $ 114,500 Vacation and workers' compensation reserves................................... 36,200 160,000 159,300 --------- --------- --------- $ 112,800 $ 225,000 $ 273,800 ========= ========= =========
The deferred income tax assets recorded in the accompanying balance sheets represent potential future income tax benefits. These future income tax benefits are expected to be realized through the reduction of income taxes otherwise payable when reversals of temporary differences occur between the financial reporting and income tax basis of the Company's assets and liabilities. F-88 148 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. WORKERS' COMPENSATION: During fiscal year 1995, the Company began self-insuring certain risks related to workers' compensation claims and is regulated by the Workers' Compensation Insurance Commission in the state of Tennessee. The Company has purchased insurance for claims which exceed $250,000 per employee. To satisfy unpaid claims, the Company deposits amounts with a third party administrator. At the Company's option it may withdraw its deposits upon notification to its third party administrator. Included in prepaids and other in the accompanying balance sheets are deposits to fund workers compensation claims totaling $451,617 and $612,590 (unaudited) as of September 30, 1995 and March 31, 1996, respectively. Workers' compensation expense totaled $527,077, $664,468 and $1,270,271 for each of the three fiscal years ended September 30, 1995. For the six months ended March 31, 1995 and 1996, workers' compensation expense totaled $541,060 (unaudited) and $627,928 (unaudited), respectively. 9. RELATED PARTY TRANSACTIONS: Included in general and administrative expenses are advisor and/or director fees paid or payable to the shareholders of the Company totaling $120,000, $69,000 and $94,000 for the years ended September 30, 1993, 1994 and 1995, respectively. No such fees were accruable for the six months ended March 31, 1995 and 1996. 10. COMMITMENTS AND CONTINGENCIES: The Company has deferred compensation arrangements with various consultants and/or employees of the Company, some of which are no longer providing services to the Company. In November 1991, the Company entered into an arrangement with a consultant for services rendered in connection with the formation of the Company. The arrangements called for weekly payments of $1,000 for 312 weeks. The Company expensed the discounted value of the obligation in fiscal year 1992 and reflected a deferred compensation liability at that time. In fiscal year 1994, the Company discontinued payments under this arrangement. In December 1994, the consultant and the Company entered into an arbitration agreement and the Company has resumed its payments under this agreement. On November 28, 1995, the Company entered into severance and noncompete agreements with a former shareholder in connection with the purchase of such shareholder's common stock in the Company by two of the remaining shareholders (Note 14). Pursuant to these agreements, the Company was to pay the former shareholder, beginning on December 15, 1995, as follows: - $30,000 as bonus for fiscal year 1995 to be paid in $2,500 monthly installments. - $150,000 as a severance arrangement to be paid in monthly installments of $5,690 through November 15, 1996, $5,647 through November 15, 1997 and $1,163 through November 15, 1998. - $236,518 as a noncompete agreement to be paid in graduating monthly payments through November 15, 2003. With respect to these arrangements, the Company expensed the bonus payment in fiscal year 1995. The discounted value of the severance agreement (8.75% discount rate) was expensed in the six months ended March 31, 1996, with a related liability established in the accompanying balance sheet. The discounted value of the noncompete agreement (8.75% discount rate) was recorded as an intangible asset (Note 3) and a related liability was established in the accompanying balance sheet. F-89 149 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the Company's obligations under these deferred compensation arrangements:
SEPTEMBER 30, SEPTEMBER 30, MARCH 31, 1994 1995 1996 ------------- ------------- ----------- (UNAUDITED) Consulting arrangement......................... $ 195,722 $ 171,031 $ 135,673 Severance agreement with a former shareholder.................................. -- -- 116,586 Noncompete agreement with a former shareholder.................................. -- -- 139,637 --------- --------- --------- 195,722 171,031 391,896 Less current portion...................... 97,898 43,699 106,208 --------- --------- --------- $ 97,824 $ 127,332 $ 285,688 ========= ========= =========
Annual maturities pursuant to the consulting arrangement for years subsequent to fiscal year 1995 are as follows: 1996............................................ $ 43,699 1997............................................ 49,241 1998............................................ 39,080 1999............................................ 33,100 2000............................................ 5,911 -------- $171,031 ========
11. NONCANCELABLE OPERATING LEASES: The Company leases office locations and certain equipment under noncancelable operating lease agreements expiring at various times through June 30, 1998. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at September 30, 1995, are as follows: 1996............................................ $142,625 1997............................................ 85,178 1998............................................ 10,617 -------- $238,420 ========
Rent expense totaled $156,224, $143,430 and $194,096 for fiscal years 1993, 1994 and 1995, respectively. For the six months ended March 31, 1995 and 1996, rent expense totaled $81,602 (unaudited) and $105,177 (unaudited), respectively. 12. SAVINGS AND RETIREMENT PLAN: During fiscal year 1995, the Company made available to all permanent employees with one year of service a savings and retirement plan. The plan, at the Company's option, may be terminated at any time and allows participants to defer a portion of their after tax salary and receive a matching employer contribution of up to 2% of the participants' annual salary based on years of service. Matching contributions are made in January of the following fiscal year for participants who remain employed by the Company. Matching contributions of approximately $8,000 were made during fiscal year 1995. The plan also allows the Company to contribute additional amounts at the discretion of management. Any such amounts contributed are to be allocated equally among all eligible participants. Management authorized discretionary contributions of $24,000 and $7,700 (unaudited) for fiscal year 1995 and the six months ended March 31, 1996, respectively. Contributions deposited into the plan are held by an unrelated third party and are registered in the name of the participants. 13. LITIGATION: The Company is involved in a lawsuit with its former workers compensation insurance carrier, in which the Company is disputing the amount of insurance premiums owed in fiscal years 1993 and 1994 and a portion F-90 150 HRA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of fiscal year 1995. Subsequent to September 30, 1995, a judgment was rendered against the Company for approximately $718,000, which is inclusive of the disputed payments plus accrued interest. The Company has filed an appeal of this judgment and is negotiating a settlement. The Company reserved for these disputed amounts in the fiscal years in which they arose. Accordingly, management anticipates that the ultimate resolution of this matter will not have a materially adverse affect on the financial position or results of operations of the Company. The Company is subject to other legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the aggregate liability, if any, with respect to these proceedings will not materially adversely affect the financial position or results of operations of the Company. 14. SUBSEQUENT EVENTS: Shareholder Transaction -- During November 1995, two of the Company's shareholders purchased the entire common stock interest in the Company (approximately 32%) from another shareholder. In conjunction with this transaction, the Company acted as guarantor on the notes payable issued by the acquiring shareholders for the stock in the amount of $150,000. Separately, the Company entered into a severance arrangement and noncompete agreement through November 2003 with this former shareholder (Note 10). Advances to Shareholders -- In conjunction with the shareholder transaction described above and other matters, the Company advanced $250,000 to two of its shareholders during November 1995. Other Matters -- In April 1996, the Company settled a dispute with a professional firm that had previously represented them in certain actions related to workers' compensation insurance and received cash of approximately $245,000. In November 1995, the Company settled a controversy concerning an option held by certain parties to acquire 30% of the common stock of the Company. Pursuant to the Settlement Agreement and Release, the rights under the option were transferred to two of the Company's existing shareholders for $90,000, which was paid by the Company. This payment was expensed in the six months ended March 31, 1996. 15. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): StaffMark Inc. -- In June 1996, the owners of the Company entered into a definitive agreement to merge with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's anticipated initial public offering. Prior to or coincident with this proposed merger, the Company's leased automobiles will be transferred to the respective shareholders. In conjunction with the proposed merger discussed above, the owners will enter into employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete following termination of such person's employment. Other -- In June 1996, the Company entered into a definitive agreement to purchase 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 approximates $850,000 and includes a payment for assets and a non-compete agreement with the principal shareholder of Career Consultants. The acquisition is expected to be consummated in July 1996, and will be accounted for as a purchase business combination. F-91 151 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To First Choice Staffing, Inc.: We have audited the accompanying balance sheets of First Choice Staffing, Inc. (a South Carolina corporation) as of December 31, 1994 and 1995, and the related statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1995. 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 audits. We conducted our audits 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 to 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 audits provide 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 First Choice Staffing, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, May 24, 1996. F-92 152 FIRST CHOICE STAFFING, INC. BALANCE SHEETS
FISCAL YEARS ------------------------ MARCH 31, 1994 1995 1996 ---------- ---------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 194,111 $ 268,440 $ 40,038 Accounts receivable, net............................... 1,078,340 1,145,532 1,255,886 Prepaid expenses and other............................. 71,100 72,171 73,662 ---------- ---------- ----------- Total current assets........................... 1,343,551 1,486,143 1,369,586 PROPERTY AND EQUIPMENT, net.............................. 196,110 327,240 359,474 OTHER ASSETS............................................. 36,000 36,000 36,000 ---------- ---------- ----------- $1,575,661 $1,849,383 $ 1,765,060 ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit......................................... $ -- $ 200,000 $ 150,000 Accounts payable....................................... 21,326 65,608 71,668 Accrued workers' compensation.......................... 92,347 46,359 44,659 Payroll and related benefits........................... 630,555 534,047 414,797 Other accrued expenses................................. 7,000 5,735 -- Note payable to shareholder............................ 250,000 180,000 180,000 ---------- ---------- ----------- Total current liabilities...................... 1,001,228 1,031,749 861,124 COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 8) SHAREHOLDERS' EQUITY: Common stock, $1 par value, 100,000 shares authorized, 10,000 shares issued and outstanding................ 10,000 10,000 10,000 Retained earnings...................................... 564,433 807,634 893,936 ---------- ---------- ----------- Total shareholders' equity..................... 574,433 817,634 903,936 ---------- ---------- ----------- $1,575,661 $1,849,383 $ 1,765,060 ========== ========== ===========
The accompanying notes to financial statements are an integral part of these balance sheets. F-93 153 FIRST CHOICE STAFFING, INC. STATEMENTS OF INCOME
THREE MONTHS ENDED FISCAL YEARS ------------------------ ----------------------------------------- MARCH 26, MARCH 31, 1993 1994 1995 1996, 1996 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES.............. $10,807,801 $13,007,484 $13,703,404 $3,227,701 $3,523,681 COST OF SERVICES.............. 8,825,086 10,573,111 11,149,085 2,620,573 2,867,964 ----------- ----------- ----------- ---------- ---------- Gross profit........ 1,982,715 2,434,373 2,554,319 607,128 655,717 OPERATING EXPENSES: Selling, general and administrative........... 1,361,834 2,485,029 2,258,780 511,788 554,041 Depreciation................ 34,570 34,357 32,923 8,589 8,231 ----------- ----------- ----------- ---------- ---------- Operating income (loss)............ 586,311 (85,013) 262,616 86,751 93,445 OTHER INCOME (EXPENSE): Interest expense............ (71) (26,109) (19,415) (6,285) (7,143) Other, net.................. (2,427) 2,256 -- -- -- ----------- ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES....................... 583,813 (108,866) 243,201 80,466 86,302 PROVISION (BENEFIT) FOR INCOME TAXES....................... 232,787 (168,251) -- -- -- ----------- ----------- ----------- ---------- ---------- Net income.......... $ 351,026 $ 59,385 $ 243,201 $ 80,466 $ 86,302 =========== =========== =========== ========== ==========
The accompanying notes to financial statements are an integral part of these statements. F-94 154 FIRST CHOICE STAFFING, INC. STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ------------------ RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------- -------- -------- BALANCE, December 31, 1992......................... 10,000 $10,000 $154,022 $164,022 Net income....................................... -- -- 351,026 351,026 ------ ------- -------- -------- BALANCE, December 31, 1993......................... 10,000 10,000 505,048 515,048 Net income....................................... -- -- 59,385 59,385 ------ ------- -------- -------- BALANCE, December 31, 1994......................... 10,000 10,000 564,433 574,433 Net income....................................... -- -- 243,201 243,201 ------ ------- -------- -------- BALANCE, December 31, 1995......................... 10,000 10,000 807,634 817,634 Net income (Unaudited)........................... -- -- 86,302 86,302 ------ ------- -------- -------- BALANCE, March 31, 1996 (Unaudited)................ 10,000 $10,000 $893,936 $903,936 ====== ======= ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-95 155 FIRST CHOICE STAFFING, INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED FISCAL YEARS ------------------------- --------------------------------- MARCH 26, MARCH 31, 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................................... $ 351,026 $ 59,385 $ 243,201 $ 80,466 $ 86,302 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation.................................... 34,570 34,357 32,923 8,589 8,231 Deferred income taxes........................... (3,908) 11,256 -- -- -- Change in operating assets and liabilities: Accounts receivable, net...................... (311,121) (149,482) (67,192) (38,291) (110,354) Prepaid expenses and other.................... (32,022) (15,485) (1,071) 54,100 (1,491) Other assets.................................. (158,104) -- -- -- -- Accounts payable.............................. 12,587 (2,923) 44,282 39,231 6,060 Accrued workers' compensation................. 68,247 10,867 (45,988) (26,107) (1,700) Payroll and related liabilities............... 189,670 259,929 (96,508) (105,438) (119,250) Accrued income taxes.......................... 54,275 (153,072) -- -- -- Other accrued expenses........................ 3,158 (9,256) (1,265) (7,000) (5,735) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities..................... 208,378 45,576 108,382 5,550 (137,937) --------- --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................... (53,582) (120,441) (164,053) (45,926) (40,465) --------- --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit....................... -- 100,000 375,000 -- -- Payments on line of credit......................... (191,038) (100,000) (175,000) -- (50,000) Proceeds from note payable to shareholder.......... 9,349 250,000 -- -- -- Payments on note payable to shareholder............ -- (9,349) (70,000) -- -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities..................... (181,689) 240,651 130,000 -- (50,000) --------- --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ (26,893) 165,786 74,329 (40,376) (228,402) CASH AND CASH EQUIVALENTS, beginning of period................................ 55,218 28,325 194,111 194,111 268,440 --------- --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period...................................... $ 28,325 $ 194,111 $ 268,440 $ 153,735 $ 40,038 ========= ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid...................................... $ 71 $ 26,109 $ 19,415 $ 6,285 $ 7,143 ========= ========= ========= ========= ========= Taxes paid (refunded).............................. $ 189,769 (26,393) $ -- $ -- $ -- ========= ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-96 156 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- First Choice Staffing, Inc. (the "Company"), 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 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, the Company changed its name to First Choice Staffing, Inc. Reorganization -- Prior to reorganization on April 1, 1994, the Company 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% shareholder of the other 50% shareholder's interest in the Company in 1990. Gregory Personnel had no operations and had assets consisting primarily of a noncompete agreement arising from the acquisition of the former 50% shareholder's interest in the Company. The noncompete agreement was amortized over three years. On April 1, 1994, Gregory Personnel was merged downstream with the Company, leaving the Company as the surviving entity. Basis of Presentation -- The accompanying financial statements include the accounts of Gregory Personnel for the period prior to the merger effective April 1, 1994. As a result of the change in control of the Company occurring in 1990, upon the acquisition of the former 50% shareholder's interest, the acquisition was accounted for as a purchase resulting in the recording of intangible assets as discussed above. Fiscal Periods -- For presentation purposes, the accompanying financial statements have been prepared by the Company on a calendar year basis. However, the Company's fiscal year actually ends on the last Sunday in December. The unaudited interim financial information as of March 31, 1996, and for the three-month periods ended March 26, 1995, and March 31, 1996, correspond to the Company's fiscal quarters which ended on the last Sunday in March. Interim Financial Statements -- The accompanying interim financial statements and related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited financial statements of the three years in the period ended December 31, 1995, and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided to the customer. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, F-97 157 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) revenues and expenses and disclosures of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. The Company has recorded an allowance for doubtful accounts of $25,000 at December 31, 1994, December 31, 1995 and March 31, 1996 (unaudited). Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $188,778, $172,834 and $291,548 (unaudited) at December 31, 1994, December 31, 1995 and March 31, 1996, respectively. Property and Equipment -- Property and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment.................................................... 7 years Computer equipment.................................................. 5 years Vehicles............................................................ 5 years Computer software................................................... 3 years Leasehold improvements.............................................. 7 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation are removed from the balance sheet and any resultant gain or loss is recorded. Other Assets -- Other assets consists of an investment in a captive workers' compensation insurance pool of which the Company is a member. The investment is accounted for by the Company under the cost method. Fair Value of Financial Instruments -- The Company's financial instruments include cash and cash equivalents, note payable to shareholder and its other debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics and, accordingly, that the carrying values for these instruments are reasonable estimates of fair value. Concentration of Credit Risk -- Credit risk with respect to accounts receivable is dispensed due to the nature of the business, the large number of customers and the diversity of industries serviced. The Company performs credit evaluations of all its customers. F-98 158 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income Taxes -- Prior to April 1, 1994, the Company was a C Corporation and, accordingly, was subject to federal and state income taxes. The Company accounted for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which recognizes deferred tax assets and liabilities for future tax consequences attributed to differences between the financial statement and income tax basis of assets and liabilities and operating loss carryforwards. In connection with the reorganization in April 1994, the Company elected S Corporation status for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded for periods subsequent to this change in tax status as such tax liabilities arising from the date of election as an S Corporation are liabilities of the shareholders of the Company. Also in connection with the April 1994 reorganization, the Company changed its tax year-end from March 31 to December 31. The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change in the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
FISCAL YEAR ----------------------- MARCH 31, 1994 1995 1996 --------- --------- --------- (UNAUDITED) Office equipment................................ $ 117,938 $ 171,842 $ 186,439 Computer equipment.............................. 123,966 153,405 170,216 Vehicles........................................ 16,301 26,501 26,501 Computer software............................... 33,531 45,775 49,979 Leasehold improvements.......................... 56,009 83,248 88,102 --------- --------- --------- 347,745 480,771 521,237 Less accumulated depreciation................. 151,635 153,531 161,763 --------- --------- --------- $ 196,110 $ 327,240 $ 359,474 ========= ========= =========
3. LINE OF CREDIT: The Company has a revolving line of credit with a bank. Maximum borrowings under the line are equal to the lesser of $400,000 or 80% of the Company's eligible accounts receivable, as defined within the line of credit agreement. The line is secured by the Company's accounts receivable, and interest is payable monthly at prime (8.5% at December 31, 1995), with principal due May 31, 1996. Amounts outstanding under the line were $0, $200,000 and $150,000 (unaudited) as of December 31, 1994, December 31, 1995 and March 31, 1996, respectively. In addition, the line of credit is secured by a personal guaranty of the majority shareholder and, among other things, has certain financial ratios and restrictions on incurring additional debt. The Company was in compliance with these covenants as of December 31, 1995. The Company intends to renew this line of credit upon its annual maturity date. The Company had approximately $400,000, $200,000 and $250,000 available under its line of credit at December 31, 1994, December 31, 1995 and March 31, 1996, respectively. F-99 159 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. NOTE PAYABLE TO SHAREHOLDER: The Company has an unsecured note payable to the majority shareholder with interest payable semiannually at 8% and principal due on demand. 5. INCOME TAXES: Components of the tax provision (benefit) for the periods prior to the S Corporation election, effective April 1, 1994, are shown below:
FISCAL YEARS ---------------------- 1993 1994 -------- --------- Provision for (benefit from) income taxes -- Federal: Current.................................................. $188,194 $(127,554) Deferred................................................. (3,607) (8,197) -------- --------- Total federal....................................... 184,587 (135,751) -------- --------- State: Current.................................................. 48,500 (32,800) Deferred................................................. (300) 300 -------- --------- Total state......................................... 48,200 (32,500) -------- --------- $232,787 $(168,251) ======== =========
The income tax provision (benefit) for the periods prior to the S Corporation election, effective April 1, 1994, differs from the amount computed by applying the federal statutory rate of 34% to income before taxes due to the following:
FISCAL YEARS ---------------------- 1993 1994 -------- --------- Income tax provision computed at the federal statutory rate... $199,321 $ (37,781) State taxes, net of federal tax benefit....................... 30,953 (586) Effect of permanent differences............................... 3,621 4,143 Elimination of net deferred tax liabilities upon S Corporation election.................................................... -- 3,827 Taxable income earned after S Corporation election, not subject to taxation......................................... -- (137,854) Other......................................................... (1,108) -- -------- --------- Provision (benefit) for income taxes........................ $232,787 $(168,251) ======== =========
Deferred income taxes reflect the impact of the "temporary differences" between the financial and tax basis of assets and liabilities as measured by enacted tax laws. The temporary differences which gave rise to deferred tax assets and liabilities as of December 31, 1993 (the period prior to the S Corporation election), were as follows: Deferred tax assets -- Allowance for doubtful accounts.......................................... $ 7,800 Vacation accrual......................................................... 12,805 ------- Total deferred tax assets........................................ $20,605 ======= Deferred tax liabilities -- Accelerated depreciation....................... $ 9,349 =======
F-100 160 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. COMMITMENTS AND CONTINGENCIES: Noncancelable Operating Leases -- The Company leases office space under noncancelable operating leases. Approximate future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at September 30, 1995, are as follows: 1996.............................................. $ 92,000 1997.............................................. 86,000 1998.............................................. 85,000 1999.............................................. 67,000 2000.............................................. 43,000 Thereafter........................................ 78,000 -------- $451,000 ========
Rental expense totaled $61,000, $82,000 and $103,000 for fiscal years 1993, 1994 and 1995, respectively, and $22,000 and $30,000 for the unaudited three-month periods ended March 26, 1995 and March 31, 1996, respectively. 401(k) Plan -- In 1995, the Company adopted a 401(k) Savings Plan for its employees in which the Company matches 50% of the employee's contribution up to 3% of the employee's salary. The Company's contribution expense was $18,000 for 1995 and $6,000 for the unaudited three-month period ended March 31, 1996. 7. SIGNIFICANT CUSTOMERS: The Company had one customer which represented 12%, 13%, 12%, 13% and 12% of service revenues for the years ended December 31, 1993, 1994 and 1995, and the unaudited three-month periods ended March 26, 1995 and March 31, 1996, respectively. Another customer represented 11% of service revenues for the year ended December 31, 1993. No other customer accounted for more than 10% of service revenues for those periods. F-101 161 FIRST CHOICE STAFFING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): StaffMark -- In June 1996, the shareholders of the Company entered into a definitive agreement to merge the Company with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's anticipated initial public offering. Prior to or coincident with this proposed merger, the Company plans to make a cash distribution to the majority shareholder representing the Company's S Corporation Accumulated Adjustment Account. The balance of the Company's S Corporation Accumulated Adjustment Account at December 31, 1995, was approximately $504,000. In conjunction with the proposed merger discussed above, the majority shareholder will enter into an employment agreement which provides for a set base salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete if and when the shareholder's employment is terminated. Strategic Sourcing, Inc. -- In June 1996, the Company entered into a definitive agreement to acquire certain of the operating assets of Strategic Sourcing, Inc., a temporary staffing business located in Charlotte, North Carolina. The proposed purchase price is $750,000 with closing to occur in July 1996. F-102 162 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Blethen Group: We have audited the accompanying combined balance sheets of the companies identified in Note 1 to the financial statements ("The Blethen Group"), as of December 31, 1995 and January 1, 1995, and the related combined statements of income (loss), shareholders' equity and cash flows for each of the three fiscal years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's managements. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 audits provide 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 The Blethen Group as of December 31, 1995 and January 1, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, May 24, 1996. F-103 163 THE BLETHEN GROUP COMBINED BALANCE SHEETS
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents............................... $ 31,921 $ 44,644 $ 42,114 Accounts receivable..................................... 1,136,081 1,377,799 1,467,827 Deferred tax asset...................................... 5,500 11,000 11,000 Prepaid expenses and other.............................. 16,809 14,510 9,191 ---------- ----------- ---------- Total current assets............................ 1,190,311 1,447,953 1,530,132 PROPERTY AND EQUIPMENT, net............................... 393,330 307,286 296,423 OTHER ASSETS: Due from shareholders................................... 185,236 194,163 231,328 Deferred tax asset...................................... 24,100 20,760 20,760 Other................................................... 11,750 12,232 7,383 ---------- ----------- ---------- Total other assets.............................. 221,086 227,155 259,471 ---------- ----------- ---------- $1,804,727 $ 1,982,394 $2,086,026 ========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Lines of credit......................................... $ 764,645 $ 971,436 $ 856,617 Accounts payable........................................ 220,801 105,648 111,504 Outstanding checks...................................... -- 25,329 -- Payroll and related liabilities......................... 295,472 301,258 456,588 Current maturities of long-term debt.................... 25,341 10,151 5,047 Current maturities of capital lease obligations......... 82,708 47,148 38,689 Current maturities of notes payable to related parties.............................................. 83,308 62,813 102,051 Income taxes payable.................................... 15,783 82,583 111,732 Accrued interest and other.............................. 16,001 55,043 49,193 ---------- ----------- ---------- Total current liabilities....................... 1,504,059 1,661,409 1,731,421 LONG-TERM DEBT, less current maturities................... 35,604 24,922 25,820 CAPITAL LEASE OBLIGATIONS, less current maturities........ 67,452 22,475 17,196 NOTES PAYABLE TO RELATED PARTIES, less current maturities.............................................. 49,037 45,271 45,271 COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 8 and 9) SHAREHOLDERS' EQUITY: Common stock............................................ 8,399 8,399 8,399 Additional paid-in capital.............................. 8,940 8,940 8,940 Retained earnings....................................... 131,236 210,978 248,979 ---------- ----------- ---------- Total shareholders' equity...................... 148,575 228,317 266,318 ---------- ----------- ---------- $1,804,727 $ 1,982,394 $2,086,026 ========== =========== ==========
The accompanying notes to combined financial statements are an integral part of these balance sheets. F-104 164 THE BLETHEN GROUP COMBINED STATEMENTS OF INCOME (LOSS)
THREE MONTHS ENDED FISCAL YEARS ----------------------- --------------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ---------- (UNAUDITED) (UNAUDITED) SERVICE REVENUES.................. $11,197,726 $11,966,633 $13,380,157 $3,181,729 $3,496,711 COST OF SERVICES.................. 8,131,773 8,806,124 9,917,548 2,354,647 2,629,346 ----------- ----------- ----------- ---------- ---------- Gross profit............ 3,065,953 3,160,509 3,462,609 827,082 867,365 OPERATING EXPENSES: Selling, general and administrative............... 3,042,816 2,713,376 2,931,881 692,426 701,543 Depreciation and amortization... 134,968 122,963 111,437 23,554 26,060 ----------- ----------- ----------- ---------- ---------- Operating income (loss)................ (111,831) 324,170 419,291 111,102 139,762 OTHER INCOME (EXPENSE): Interest expense................ (134,815) (137,448) (140,800) (28,344) (34,069) Other, net...................... 19,467 2,917 10,884 (2,861) (2,619) ----------- ----------- ----------- ---------- ---------- INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES...... (227,179) 189,639 289,375 79,897 103,074 PROVISION (BENEFIT) FOR INCOME TAXES........................... (136,263) 49,000 81,000 21,000 53,000 ----------- ----------- ----------- ---------- ---------- Net income (loss)....... $ (90,916) $ 140,639 $ 208,375 $ 58,897 $ 50,074 =========== =========== =========== ========== ==========
The accompanying notes to combined financial statements are an integral part of these statements. F-105 165 THE BLETHEN GROUP COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ---------- -------- -------- BALANCE, January 4, 1993............................ $8,543 $ 32,265 $239,861 $280,669 Net loss.......................................... -- -- (90,916) (90,916) Dividends......................................... -- -- (57,343) (57,343) ------ -------- -------- -------- BALANCE, January 2, 1994............................ 8,543 32,265 91,602 132,410 Net income........................................ -- -- 140,639 140,639 Dividends......................................... -- -- (99,474) (99,474) Repurchase and retirement of common stock......... (144) (23,325) (1,531) (25,000) ------ -------- -------- -------- BALANCE, January 1, 1995............................ 8,399 8,940 131,236 148,575 Net income........................................ -- -- 208,375 208,375 Dividends......................................... -- -- (128,633) (128,633) ------ -------- -------- -------- BALANCE, December 31, 1995.......................... 8,399 8,940 210,978 228,317 Net income (Unaudited)............................ -- -- 50,074 50,074 Dividends (Unaudited)............................. -- -- (12,073) (12,073) ------ -------- -------- -------- BALANCE, March 31, 1996 (Unaudited)................. $8,399 $ 8,940 $248,979 $266,318 ====== ======== ======== ========
The accompanying notes to combined financial statements are an integral part of these statements. F-106 166 THE BLETHEN GROUP COMBINED STATEMENTS OF CASH FLOWS
FISCAL YEARS THREE MONTHS ENDED ----------------------------------- -------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 --------- -------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).............................. $ (90,916) $140,639 $ 208,375 $ 58,897 $ 50,074 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............... 134,968 122,963 111,437 23,554 26,060 Provision for (benefit from) deferred income taxes..................................... (136,263) 29,898 (2,160) -- -- Change in operating assets and liabilities: Accounts receivable....................... (17,767) (54,870) (241,718) (21,569) (90,028) Prepaid expenses and other................ (14,096) 30,971 2,299 (8,919) 5,319 Other assets.............................. 21,491 5,769 (482) -- 4,849 Accounts payable.......................... 180,570 (97,532) (115,153) 52,578 5,856 Outstanding checks........................ -- -- 25,329 -- (25,329) Payroll and related liabilities........... (75,190) 65,663 5,786 65,017 155,330 Income taxes payable (receivable)......... (13,711) 29,494 66,800 20,709 29,149 Accrued interest and other................ 77,477 (55,306) 39,042 44,694 (5,850) --------- -------- ---------- --------- --------- Net cash provided by operating activities........................... 66,563 217,689 99,555 234,961 155,430 --------- -------- ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................... (130,178) (72,119) (25,393) -- (15,197) --------- -------- ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (payments on) lines of credit...................................... 53,773 10,681 206,791 (109,737) (114,819) Proceeds from issuance of long-term debt....... 12,851 54,172 -- -- -- Payments on long-term debt..................... (28,243) (10,282) (25,872) (15,900) (4,206) Payments on capital lease obligations.......... (16,213) (113,042) (80,537) (22,645) (13,738) Change in notes payable to related parties..... 34,314 73,031 (24,261) (22,586) 39,238 Cash distributions to shareholders............. (57,343) (99,474) (128,633) (21,000) (12,073) Change in due from shareholders................ 837 (44,099) (8,927) 5,531 (37,165) --------- -------- ---------- --------- --------- Net cash provided by (used in) financing activities................. (24) (129,013) (61,439) (186,337) (142,763) --------- -------- ---------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (63,639) 16,557 12,723 48,624 (2,530) CASH AND CASH EQUIVALENTS, beginning of period... 79,003 15,364 31,921 31,921 44,644 --------- -------- ---------- --------- --------- CASH AND CASH EQUIVALENTS, end of period......... $ 15,364 $ 31,921 $ 44,644 $ 80,545 $ 42,114 ========= ======== ========== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid.................................. $ 97,062 $169,227 $ 141,324 $ 28,868 $ 34,069 ========= ======== ========== ========= ========= Taxes paid..................................... $ -- $ 66 $ 41,476 $ 22,925 $ 33,009 ========= ======== ========== ========= ========= Noncash transactions: Repurchase of common stock through a note payable................................... $ -- $ 25,000 $ -- $ -- $ -- ========= ======== ========== ========= ========= Purchase of property and equipment through capital leases............................ $ 45,975 $ -- $ -- $ -- $ -- ========= ======== ========== ========= =========
The accompanying notes to combined financial statements are an integral part of these statements. F-107 167 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- The Blethen Group's (the "Company") primary business purpose is to provide temporary personnel services. The Company's administrative headquarters are in Burlington, North Carolina, and as of December 31, 1995, the Company 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 The Blethen Group:
FORM OF DATE OF CORPORATION 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
Basis of Presentation -- The accompanying financial statements are presented on a combined basis as the entities comprising the Company are under common ownership and/or common management. Furthermore, Blethen Temporaries, Inc. has an option to purchase all outstanding shares of common stock of Dixon Enterprises of Burlington, Inc. and TRASEC Corp. for an amount not to exceed $5,000. Blethen Temporaries, Inc. intends to exercise this option in 1996. As a result, upon exercise of this option, all companies in the accompanying combined financial statements, with the exception of Jaeger Personnel Services, Ltd., will be owned by one individual (the majority shareholder). All significant intercompany transactions have been eliminated. Fiscal Periods -- The Company's fiscal year ends on the Sunday closest to December 31. Fiscal year 1993 refers to the year ended January 2, 1994, fiscal year 1994 refers to the year ended January 1, 1995, and fiscal year 1995 refers to the year ended December 31, 1995. The fiscal years 1993, 1994 and 1995 each included 52 weeks. The unaudited interim periods included in the accompanying combined financial statements each included 13 weeks. Interim Financial Statements -- The accompanying interim combined financial statements and related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the audited combined financial statements for the three years in the period ended December 31, 1995, and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the combined results of operations and F-108 168 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Revenue Recognition -- Service revenues and permanent placement fee revenues are recognized as income at the time staffing services are provided or the permanent employee is placed with the customer. In addition to the services described above, the Company, through a Licensing Agreement (see Note 7), employs and pays individuals to perform services for the licensees' customers, invoices customers, maintains professional liability insurance and supports the training, office administration, systems and marketing needs of the licensee. All revenues generated by the licensee, therefore, belong to the Company and are included in the Company's revenues and expenses. The Company is primarily liable for operating expenses. Use of Estimates -- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying combined financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the combined financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying combined financial statements. Cash and Cash Equivalents -- For statement of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- The Company provides, if necessary, allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying combined financial statements. Management believes all accounts are collectible and accordingly, has not recorded an allowance as of January 1, 1995, December 31, 1995 and March 31, 1996. Included in accounts receivable in the accompanying combined balance sheets are unbilled amounts of $143,515, $149,665 and $16,280 (unaudited) at January 1, 1995, December 31, 1995 and March 31, 1996, respectively. All unbilled amounts are normally billable in the following month. Credit risk with respect to accounts receivable is dispersed due to the nature of the business, the large number of customers and the diversity of industries serviced. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment............................................. 5 to 7 years Computer equipment and software.............................. 5 years Vehicles..................................................... 5 years Leasehold improvements....................................... 5 to 15 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and F-109 169 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Fair Value of Financial Instruments -- The Company's financial instruments include cash, related party notes payable, due from shareholders and their debt obligations. Management believes that these instruments bear interest at rates which approximate prevailing market rates for instruments with similar characteristics, and accordingly, that the carrying values for these instruments are reasonable estimates of fair value. Income Taxes -- Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under this new statement, deferred income taxes are provided based on the estimated future tax effects of differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The adoption of SFAS 109 did not have a material effect on the Company's financial position or results of operations. Blethen Temporaries, Inc. and Jaeger Personnel Services, Ltd. have elected to be taxed as S Corporations for federal and state income tax reporting purposes. Accordingly, no income tax expense (benefit) has been recorded in the accompanying combined financial statements related to these entities as such taxes are liabilities of the respective shareholders. These entities' tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to their reported income or loss, the taxable income or loss reported by the respective shareholders could also change. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Office equipment................................. $421,890 $ 428,610 $ 431,772 Computer equipment and software.................. 336,166 352,528 364,563 Vehicles......................................... 65,118 65,118 65,118 Leasehold improvements........................... 109,926 109,926 109,926 -------- ---------- --------- 933,100 956,182 971,379 Less accumulated depreciation and amortization................................ 539,770 648,896 674,956 -------- ---------- --------- $393,330 $ 307,286 $ 296,423 ======== ========== =========
F-110 170 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. DEBT: Long-term debt consisted of the following:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Note payable to Chase Auto Financial. Principal and interest payable monthly. Interest payable at a fixed rate of 7.75%. Secured by a vehicle. ...................................... $ 35,172 $ 28,514 $ 25,143 Unsecured note payable to NationsBank of North Carolina, N.A. Interest payable monthly at a variable rate which ranged from 9.25% to 10.00% and averaged 9.83% during 1995. Principal was repaid in 1995. ............................... 15,900 -- -- Unsecured note payable to NationsBank of North Carolina, N.A. Principal and interest are payable in monthly installments of $320. Interest rate is variable and ranged from 9.25% to 10.00% and averaged 9.83% during 1995. ..... 9,873 6,559 5,724 ---------- ---------- --------- 60,945 35,073 30,867 Less current maturities........................ 25,341 10,151 5,047 ---------- ---------- --------- $ 35,604 $ 24,922 $ 25,820 ========== ========== =========
The Company has two revolving lines of credit with Lighthouse Financial Corp. that allow for maximum borrowings equal to the lesser of $800,000 and $750,000 or 85% of the applicable Company's eligible accounts receivable, as defined. Interest is payable monthly at a variable rate which ranged from 11.00% to 11.50% and averaged 11.33% during 1995. The lines of credit are renewed annually and are currently due April 6, 1997. They are secured by the assets of the Company and guaranteed by the majority shareholder. Principal and interest on the lines of credit are repaid by collection of accounts receivable under a lockbox arrangement. Accordingly, such lines are classified as current maturities of long-term debt. At December 31, 1995 approximately $31,424 of cash held by the Company was subject to this arrangement. Under the terms of both lines of credit, the Company is required to maintain certain financial ratios, including working capital in excess of $125,000 and positive cash flow each month, among other things. As of March 31, 1996, the Company did not comply with certain of these ratios, as well as certain other negative covenants. However, Lighthouse Financial Corp. has waived all events of noncompliance and default. Balances outstanding under these lines were $764,645, $971,436 and $856,617 (unaudited) as of January 1, 1995, December 31, 1995 and March 31, 1996, respectively. Annual maturities of debt subsequent to December 31, 1995 were as follows: 1996........................................... $ 981,587 1997........................................... 10,262 1998........................................... 7,773 1999........................................... 6,887 ---------- $1,006,509 ==========
F-111 171 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. CAPITAL LEASE OBLIGATIONS: As of December 31, 1995, future minimum lease payments were as follows: 1996.................................................................... $ 53,957 1997.................................................................... 23,204 -------- Total minimum lease payments............................................ 77,161 Amount representing interest............................................ (7,538) -------- Present value of net minimum lease payments............................. 69,623 Less current maturities............................................... 47,148 -------- $ 22,475 ========
The net book value of assets (primarily office equipment) held under capital leases at December 31, 1995 was $102,483, net of accumulated amortization of $180,375. 5. INCOME TAXES: Provision (benefit) for income taxes consisted of the following components:
THREE MONTHS ENDED FISCAL YEARS ------------------------- ----------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 --------- ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Current: Federal.......................... $ -- $19,102 $69,160 $17,000 $42,000 State............................ -- -- 14,000 4,000 11,000 --------- ------- ------- ------- ------- -- 19,102 83,160 21,000 53,000 --------- ------- ------- ------- ------- Deferred: Federal.......................... (109,263) 23,898 (1,660) -- -- State............................ (27,000) 6,000 (500) -- -- --------- ------- ------- ------- ------- (136,263) 29,898 (2,160) -- -- --------- ------- ------- ------- ------- Total.................... $(136,263) $49,000 $81,000 $21,000 $53,000 ========= ======= ======= ======= =======
Provision (benefit) for income taxes differs from the amount computed by applying the federal statutory tax rate to pretax income due to the following:
THREE MONTHS ENDED FISCAL YEARS ------------------------- ----------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 --------- ------- ------- ----------- ----------- (UNAUDITED) (UNAUDITED) Provision (benefit) for income taxes computed at the federal statutory rate................... $ (77,000) $64,000 $98,000 $27,000 $35,000 State taxes, net of federal tax benefit.......................... (12,000) 10,000 15,000 4,000 5,000 Effect of permanent differences.... 1,000 2,000 3,000 1,000 1,000 (Income) loss of S Corporations not subject to taxation.............. (43,000) (19,000) (32,000) (10,000) 13,000 Other.............................. (5,263) (8,000) (3,000) (1,000) (1,000) --------- ------- ------- ------- ------- Provision (benefit) for income taxes......................... $(136,263) $49,000 $81,000 $21,000 $53,000 ========= ======= ======= ======= =======
F-112 172 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the impact of "temporary differences" between the financial and tax basis of assets and liabilities. The temporary differences which gave rise to deferred tax assets and (liabilities) are as follows:
JANUARY 1, DECEMBER 31, MARCH 31, 1995 1995 1996 ---------- ------------ ----------- (UNAUDITED) Current -- Employee advances treated as compensation......... $ (1,000) $ -- $ -- Workers' compensation accrual..................... 4,000 4,000 4,000 Vacation accrual.................................. 2,000 3,000 3,000 Other............................................. 500 4,000 4,000 --------- -------- --------- 5,500 11,000 11,000 --------- -------- --------- Long term -- NOLs.............................................. 78,000 42,000 42,000 Accelerated depreciation for tax purposes......... (30,000) (26,000) (26,000) Alternative minimum tax and other credits......... 13,000 4,000 4,000 Change in income tax accounting method............ (37,000) -- -- Other............................................. 100 760 760 --------- -------- --------- 24,100 20,760 20,760 --------- -------- --------- Net deferred tax assets............................. $ 29,600 $ 31,760 $ 31,760 ========= ======== =========
The NOL carryforward at December 31, 1995 was approximately $103,000. Utilization of this carryforward may be limited as a result of the potential change in ownership that would result in the event of the intended merger subsequent to year-end (Note 9). However, management believes that the deferred tax asset related to the NOL carryforward is fully realizable, and therefore no valuation allowance has been recorded. 6. RELATED PARTY TRANSACTIONS: Notes Payable to Related Parties -- The Company has an informal note payable to a member of the Boards of Directors and relative of the majority shareholder. The note is payable in monthly installments of $711. The note bears interest at an annually adjustable rate equal to the six month average rate of two year treasury notes (6.49% at December 31, 1995). The outstanding balances as of January 1, 1995, December 31, 1995 and March 31, 1996 were $68,694, $49,038 and $49,038 (unaudited), respectively. Interest expense related to these notes amounted to approximately $6,000, $5,000 and $3,000 during fiscal years 1993, 1994 and 1995, respectively, and $1,000 during each of the unaudited three-month periods ended April 2, 1995 and March 31, 1996. The Company had a note payable to a former shareholder which originated through the Company's purchase of the former shareholder's equity interest in DP Pros of Burlington, Inc. The note did not bear interest and was due in equal quarterly installments of $4,000. The note was fully repaid in 1995. The outstanding balance as of January 1, 1995, was $8,000. The Company has two unsecured notes payable to shareholders, which bear interest at variable rates ranging between 8.25% and 10.00%. Both notes are due on demand and aggregate outstanding balances as of January 1, 1995, December 31, 1995 and March 31, 1996, were $52,337, $59,046 and $85,294 (unaudited), respectively. Interest expense related to these notes amounted to $5,417 and $5,764 during fiscal years 1994 and 1995, respectively, and $1,441 and $1,858 during the unaudited three-month periods ended April 2, 1995 and March 31, 1996, respectively. F-113 173 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Shareholder Transactions -- The Company leases offices and a vehicle from the majority shareholder through informal agreements at a monthly cost of $600 each. In March 1996, the office lease payments were increased to $1,200 per month. Market rental rates may differ from these rental payments. The Company also frequently borrows from the majority shareholder. Rental expense under the above agreements totaled $14,400 for each of the fiscal years 1993, 1994 and 1995 and $3,600 and $4,200 for the unaudited three month periods ended April 2, 1995 and March 31, 1996, respectively. Due from shareholders primarily represents advances to the majority shareholder. The Company rents its Henderson office facilities from a shareholder under a month-to-month agreement. Rent expense related to these facilities was $17,500, $19,000 and $24,000 during the fiscal years 1993, 1994 and 1995, respectively, and $6,000 during each of the unaudited three month periods ended April 2, 1995 and March 31, 1996. During 1991 the Company entered into a three year noncompete agreement with a related party. Pursuant thereto, the individual agreed not to compete, as defined, with the Company for the term of the agreement, expiring in January 1994, in exchange for $150,000 payable in weekly installments of $962. 7. COMMITMENTS AND CONTINGENCIES: Distributions to Shareholders -- Blethen Temporaries, Inc. and Jaeger Personnel Services, Ltd. pay dividends to their shareholders in amounts sufficient to cover, among other things, their estimated tax payments attributable to each entity's net income which will be included in their individual tax returns. Licensing Agreement -- During 1995, the Company entered into an agreement whereby it granted a license to a third party to open and maintain a branch in West End, North Carolina, for the purpose of providing temporary personnel services in that market for an indefinite term. The Company also thereby granted the non-exclusive right to utilize the Company's trade secrets, methods and know-how. The Company receives 40% of gross margin, as defined, as payment for management services. The balance of such gross margin is paid to the licensee. Amounts expensed under the agreement amounted to $36,515 during fiscal year 1995 and $19,943 during the unaudited three month period ended March 31, 1996. Such expense is included in selling, general and administrative expenses in the accompanying combined statements of income (loss). 8. NONCANCELABLE OPERATING LEASES: The Company leases office space and a vehicle (Note 6) under noncancelable operating leases. As discussed in Note 6, certain of these facilities are leased from related parties. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at December 31, 1995, are as follows: 1996.............................................. $ 93,395 1997.............................................. 86,317 1998.............................................. 88,140 1999.............................................. 33,932 -------- $301,784 ========
F-114 174 THE BLETHEN GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Rental expense totaled $95,208, $155,230 and $157,121 for fiscal years 1993, 1994 and 1995, respectively, and $30,631 and $36,696 for the unaudited three month periods ended April 2, 1995 and March 31, 1996, respectively. 9. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, certain of the shareholders, representing a majority thereof, of each of the companies comprising The Blethen Group entered into a definitive agreement to merge with StaffMark, Inc. ("StaffMark") in conjunction with StaffMark's anticipated initial public offering. Prior to, or coincident with this proposed merger, the Company plans to make a cash distribution of approximately $138,000, which represents the Company's estimated S Corporation Accumulated Adjustment Account. Had this transaction occurred as of March 31, 1996, the effect on the accompanying unaudited interim combined balance sheet would be a decrease in total assets and shareholders' equity of approximately $138,000. In conjunction with the proposed merger discussed above, certain of the shareholders will enter into employment agreements which provide for a set base aggregate salary, participation in future incentive bonus plans, certain other benefits and a covenant not to compete following termination of each person's employment. F-115 175 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To E.P. Enterprises Corporation: We have audited the accompanying balance sheets of E.P. Enterprises Corporation (the "Company"), as of December 31, 1994 and July 10, 1995 and the related statements of income, shareholders' equity (deficit) and cash flows for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through July 10, 1995. 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 audits. We conducted our audits 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 audits provide 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 E.P. Enterprises Corporation as of December 31, 1994 and July 10, 1995 and the results of its operations and its cash flows for the years ended December 31, 1993 and 1994 and for the period from January 1, 1995 through July 10, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia, May 17, 1996. F-116 176 E.P. ENTERPRISES CORPORATION BALANCE SHEETS
DECEMBER 31, JULY 10, 1994 1995 ------------ ---------- ASSETS CURRENT ASSETS: Cash............................................................. $ -- $ 2,331 Accounts receivable, net of allowance for doubtful accounts of $10,000....................................................... 1,420,510 1,929,922 Prepaid expenses and other....................................... 58,591 57,723 ---------- ---------- Total current assets..................................... 1,479,101 1,989,976 PROPERTY AND EQUIPMENT, net........................................ 124,523 111,561 OTHER ASSETS....................................................... 6,458 5,830 ---------- ---------- $1,610,082 $2,107,367 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable................................................. $ 6,476 $ 72,050 Outstanding checks, net.......................................... 145,340 397,142 Payroll and related liabilities.................................. 405,296 660,807 Reserve for workers' compensation claims......................... 81,797 285,000 Current maturities of long-term debt and leases.................. 41,414 1,005,144 Accrued interest and other....................................... 27,759 7,690 ---------- ---------- Total current liabilities................................ 708,082 2,427,833 LONG-TERM DEBT AND LEASES, less current maturities................. 10,282 8,769 COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 9) SHAREHOLDERS' EQUITY (DEFICIT): Common stock, $100 par value in 1995 and 1994; authorized and issued shares of 150 in 1995 and 1994, outstanding shares of 10 in 1995 and 1994........................................... 15,000 15,000 Paid-in capital.................................................. 22,500 22,500 Retained earnings................................................ 1,323,718 102,765 Treasury stock, 140 shares....................................... (469,500) (469,500) ---------- ---------- Total shareholders' equity (deficit)..................... 891,718 (329,235) ---------- ---------- $1,610,082 $2,107,367 ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. F-117 177 E.P. ENTERPRISES CORPORATION STATEMENTS OF INCOME
FOR THE PERIOD YEARS ENDED DECEMBER 31, FROM --------------------------- JANUARY 1, 1995 1993 1994 TO JULY 10, 1995 ----------- ----------- ---------------- SERVICE REVENUES................................... $14,211,743 $17,553,687 $ 11,034,812 COST OF SERVICES................................... 10,833,922 13,583,176 8,751,870 ----------- ----------- ------------ Gross profit............................. 3,377,821 3,970,511 2,282,942 OPERATING EXPENSES: Selling, general and administrative.............. 2,308,467 2,338,574 1,330,700 Depreciation and amortization.................... 16,418 23,849 17,331 ----------- ----------- ------------ Operating income......................... 1,052,936 1,608,088 934,911 ----------- ----------- ------------ OTHER INCOME (EXPENSE): Interest expense................................. (2,025) (2,564) (14,685) Interest and other income (expense).............. 36,271 (4,230) 33,821 ----------- ----------- ------------ Net income............................... $ 1,087,182 $ 1,601,294 $ 954,047 =========== =========== ============
The accompanying notes to financial statements are an integral part of these statements. F-118 178 E.P. ENTERPRISES CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ----------------- PAID-IN RETAINED TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL ------ ------- ------- ----------- --------- ----------- BALANCE, December 31, 1992... 150 $15,000 $22,500 $ 1,165,242 $(469,500) $ 733,242 Net income................. -- -- -- 1,087,182 -- 1,087,182 Dividends.................. -- -- -- (230,000) -- (230,000) --- ------- ------- ----------- --------- ----------- BALANCE, December 31, 1993... 150 15,000 22,500 2,022,424 (469,500) 1,590,424 Net income................. -- -- -- 1,601,294 -- 1,601,294 Dividends.................. -- -- -- (2,300,000) -- (2,300,000) --- ------- ------- ----------- --------- ----------- BALANCE, December 31, 1994... 150 15,000 22,500 1,323,718 (469,500) 891,718 Net income................. -- -- -- 954,047 -- 954,047 Dividends.................. -- -- -- (2,175,000) -- (2,175,000) --- ------- ------- ----------- --------- ----------- BALANCE, July 10, 1995....... 150 $15,000 $22,500 $ 102,765 $(469,500) $ (329,235) === ======= ======= =========== ========= ===========
The accompanying notes to financial statements are an integral part of these statements. F-119 179 E.P. ENTERPRISES CORPORATION STATEMENTS OF CASH FLOWS
FOR THE PERIOD YEARS ENDED DECEMBER 31, FROM -------------------------- JANUARY 1, 1995 1993 1994 TO JULY 10, 1995 ---------- ----------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................ $1,087,182 $ 1,601,294 $ 954,047 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................. 16,418 23,849 17,331 Provision for bad debts........................ 2,420 12,557 -- Net (gain) loss on sale of equipment........... 5,351 230 (31,032) Change in operating assets and liabilities: Accounts receivable.......................... (766,117) 196,457 (509,412) Prepaid expenses and other................... 54,414 23,460 868 Other assets................................. (838) (3,037) 628 Accounts payable............................. (8,750) (5,973) 65,574 Bank overdraft............................... -- 145,340 251,802 Payroll and related liabilities.............. 121,995 14,695 255,511 Reserve for workers' compensation claims..... 41,406 31,891 203,203 Accrued interest and other................... (170,597) (29,517) (20,069) ---------- ----------- ------------ Net cash provided by operating activities.............................. 382,884 2,011,246 1,188,451 ---------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.............................. (61,867) (67,893) (13,612) Proceeds from the sales of property and equipment...................................... 12,529 -- 40,275 ---------- ----------- ------------ Net cash provided by (used in) investing activities.............................. (49,338) (67,893) 26,663 ---------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of short-term debt......... -- -- 800,000 Net borrowings on revolving line of credit........ -- 38,207 164,055 Payments on capital leases........................ -- 13,489 (1,838) Cash distributions to shareholders................ (230,000) (2,300,000) (2,175,000) ---------- ----------- ------------ Net cash used in financing activities..... (230,000) (2,248,304) (1,212,783) ---------- ----------- ------------ NET INCREASE (DECREASE) IN CASH..................... 103,546 (304,951) 2,331 CASH, beginning of period........................... 201,405 304,951 -- ---------- ----------- ------------ CASH, end of period................................. $ 304,951 $ -- $ 2,331 ========== =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid..................................... $ 2,025 $ 2,564 $ 14,685 ========== =========== ============
The accompanying notes to financial statements are an integral part of these statements. F-120 180 E.P. ENTERPRISES CORPORATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- E.P. Enterprises Corporation (the "Company"), doing business as Caldwell Services, Inc., was incorporated in the state of Georgia on December 27, 1973. The Company's primary business purpose is to provide temporary personnel services. The Company is headquartered in Atlanta, Georgia, and as of July 10, 1995 operated five staffing offices in the Atlanta area. On July 10, 1995, Brewer Personnel Services, Inc. ("Brewer") acquired the stock of the Company. Total consideration paid by Brewer for the Company was approximately $17.3 million. The purchase price included cash of $11.5 million, a note for $3.1 million and the assumption of certain liabilities of the Company. The accompanying balance sheet as of July 10, 1995 has been prepared as of the date of acquisition and does not reflect the purchase accounting adjustments which were recorded by Brewer in conjunction with this acquisition. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. However, actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Accounts Receivable -- The Company maintains allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $254,016 and $324,783 at December 31, 1994 and July 10, 1995, respectively. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment.................................................. 5-7 years Computer equipment................................................ 5 years Computer software................................................. 3 years Leasehold improvements............................................ 39 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. F-121 181 E.P. ENTERPRISES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Workers' Compensation -- The Company self-insures certain risks related to workers' compensation claims. The estimated costs of existing and future claims are accrued as incidents occur based upon historical loss development trends and may be subsequently revised based on developments relating to such claims. The Company engages the services of a third-party actuary to assist with the development of these cost estimates. 2. PROPERTY AND EQUIPMENT: Components of property and equipment at December 31, 1994 and July 10, 1995 are as follows:
1994 1995 -------- -------- Office equipment............................................... $225,051 $118,787 Computer equipment............................................. 130,685 123,103 Computer software.............................................. 6,891 9,450 Leasehold improvements......................................... 81,194 7,231 -------- -------- 443,821 258,571 Less accumulated depreciation and amortization............ 319,298 147,010 -------- -------- $124,523 $111,561 ======== ========
Depreciation and amortization expense related to property and equipment totaled $16,418, $23,849 and $17,331 for the years ended 1993 and 1994 and the period ended July 10, 1995, respectively. 3. LONG-TERM DEBT AND LEASES: At December 31, 1994 and July 10, 1995, long-term debt consisted of the following:
1994 1995 -------- ----------- Term loan with Bank South; interest payable monthly at 6.85%; principal due September 23, 1995; secured by the assets and common stock of the Company. .................. $ -- $ 600,000 Term loan with Bank South; interest payable monthly at prime; principal due September 23, 1995; secured by the assets and common stock of the Company. .................. -- 200,000 Line of Credit with Bank South; maximum borrowings equal the lesser of $800,000 or 85% of the Company's eligible accounts receivable balance; interest payable monthly at prime; principal due on demand or by April 30, 1996; secured by the assets and common stock of the Company. ... 38,207 202,262 Capital lease obligations................................... 13,489 11,651 -------- ----------- 51,696 1,013,913 Less current maturities................................ 41,414 1,005,144 -------- ----------- Total long-term debt and leases............................. $ 10,282 $ 8,769 ======== ===========
F-122 182 E.P. ENTERPRISES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Annual maturities of long-term debt subsequent to July 10, 1995 are as follows: 1996............................................. $1,005,144 1997............................................. 3,799 1998............................................. 4,970 ---------- $1,013,913 ==========
Long-term debt of the Company was repaid concurrent with the sale of the Company (Note 9). 4. INCOME TAXES: The Company operates as an S Corporation for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements as such taxes are liabilities of the individual shareholders. The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 5. WORKERS' COMPENSATION: The Company is self-insured for certain workers' compensation claims and is regulated by the Workers' Compensation Insurance Commission in the state of Georgia. Workers' compensation expense totaled $101,411, $240,908 and $349,934 for the years ended December 31, 1993 and 1994 and for the period ended July 10, 1995, respectively. 6. RELATED PARTY TRANSACTIONS: Through July 1995, the Company occupied a building owned by an affiliated partnership comprised of the Company's shareholders. Expenses related to this building were $33,000 for both years ended December 31, 1993 and 1994, and $17,325 for the period ended July 10, 1995. The Company has hardware and software maintenance support agreements with related companies. Amounts paid on these contracts were $10,327 and $16,141 for the years ended December 31, 1993 and 1994, respectively, and $8,160 for the period ended July 10, 1995. The Company supplies some of its services to affiliated companies. Service revenues from these companies were $32,944 and $52,941 for the years ended December 31, 1993 and 1994, respectively, and $34,396 for the period ended July 10, 1995. 7. COMMITMENTS AND CONTINGENCIES: The Company has historically paid bonuses to its shareholders in amounts sufficient to cover their estimated tax payments attributable to the respective share of the Company's net income included in their individual tax returns. F-123 183 E.P. ENTERPRISES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. NONCANCELABLE OPERATING LEASES: The Company leases branch office space under noncancelable operating leases. Future minimum payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year at July 10, 1995, are as follows: 1996.............................................. $110,290 1997.............................................. 93,067 1998.............................................. 48,165 1999.............................................. 36,840 2000.............................................. 36,840 -------- $325,202 ========
Rental expense totaled $105,125, $115,945 and $83,399 for the years ended December 31, 1993 and 1994, and for the period ended July 10, 1995, respectively. 9. LITIGATION: The Company is a party to certain lawsuits primarily involving workers' compensation claims. Management believes, based in part on consultation from legal counsel, that the ultimate outcome of these matters will not have a materially adverse effect on the Company's financial position, liquidity or results of operations. F-124 184 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To On Call Employment Services, Inc.: We have audited the accompanying balance sheets of On Call Employment Services, Inc. (the "Company"), a Colorado corporation, as of December 31, 1994 and 1995 and February 2, 1996 and the related statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995 and for the period from January 1, 1996 to February 2, 1996. 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 audits. We conducted our audits 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 audits provide 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 On Call Employment Services, Inc. as of December 31, 1994 and 1995 and February 2, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the period from January 1, 1996 to February 2, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, May 24, 1996. F-125 185 ON CALL EMPLOYMENT SERVICES, INC. BALANCE SHEETS
DECEMBER 31, ------------------------ FEBRUARY 2, 1994 1995 1996 ---------- ---------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents.............................. $ 95,313 $ 340,594 $ 4,849 Accounts receivable.................................... 1,678,682 2,068,461 273,067 Prepaid expenses and other............................. 1,071 1,671 8,878 ---------- ---------- ---------- Total current assets........................... 1,775,066 2,410,726 286,794 PROPERTY AND EQUIPMENT, net.............................. 65,103 114,537 115,369 ---------- ---------- ---------- $1,840,169 $2,525,263 $ 402,163 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable....................................... $ 68,302 $ 123,653 $ 129,970 Payroll and related liabilities........................ 140,195 183,410 253,601 Reserve for workers' compensation claims............... 30,360 40,815 43,305 Other.................................................. 10,000 11,275 12,000 ---------- ---------- ---------- Total current liabilities...................... 248,857 359,153 438,876 COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8) SHAREHOLDERS' EQUITY (DEFICIT): Common stock, 1,000,000 shares authorized, issued and outstanding......................................... 60,000 60,000 60,000 Paid-in capital........................................ 185,000 185,000 185,000 Retained earnings (deficit)............................ 1,346,312 1,921,110 (281,713) ---------- ---------- ---------- Total shareholders' equity (deficit)........... 1,591,312 2,166,110 (36,713) ---------- ---------- ---------- $1,840,169 $2,525,263 $ 402,163 ========== ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. F-126 186 ON CALL EMPLOYMENT SERVICES, INC. STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, YEARS ENDED DECEMBER 31, 1996 TO ----------------------------------------- FEBRUARY 2, 1993 1994 1995 1996 ----------- ----------- ----------- ----------- SERVICE REVENUES.......................... $22,130,961 $10,098,261 $12,497,627 $ 1,127,091 COST OF SERVICES.......................... 18,364,966 8,176,489 10,203,428 945,388 ----------- ----------- ----------- ----------- Gross profit.................... 3,765,995 1,921,772 2,294,199 181,703 OPERATING EXPENSES: Selling, general and administrative..... 1,459,203 1,293,619 1,304,762 116,092 Depreciation and amortization........... 6,372 13,242 24,473 2,525 ----------- ----------- ----------- ----------- Operating income................ 2,300,420 614,911 964,964 63,086 OTHER INCOME: Interest income......................... 19,610 25,605 43,334 4,847 ----------- ----------- ----------- ----------- Net income...................... $ 2,320,030 $ 640,516 $ 1,008,298 $ 67,933 =========== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-127 187 ON CALL EMPLOYMENT SERVICES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK -------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL --------- ------- -------- ----------- ----------- BALANCE, December 31, 1992.......... 1,000,000 $60,000 $ -- $ 1,458,724 $ 1,518,724 Net income........................ -- -- -- 2,320,030 2,320,030 Dividends......................... -- -- -- (230,000) (230,000) --------- ------- -------- ----------- ----------- BALANCE, December 31, 1993.......... 1,000,000 60,000 -- 3,548,754 3,608,754 Net income........................ -- -- -- 640,516 640,516 Contribution from shareholder..... -- -- 185,000 -- 185,000 Dividends......................... -- -- -- (2,842,958) (2,842,958) --------- ------- -------- ----------- ----------- BALANCE, December 31, 1994.......... 1,000,000 60,000 185,000 1,346,312 1,591,312 Net income........................ -- -- -- 1,008,298 1,008,298 Dividends......................... -- -- -- (433,500) (433,500) --------- ------- -------- ----------- ----------- BALANCE, December 31, 1995.......... 1,000,000 60,000 185,000 1,921,110 2,166,110 Net income for the period from January 1, 1996 to February 2, 1996............... -- -- -- 67,933 67,933 Dividends......................... -- -- -- (2,270,756) (2,270,756) --------- ------- -------- ----------- ----------- BALANCE, February 2, 1996........... 1,000,000 $60,000 $185,000 $ (281,713) $ (36,713) ========= ======= ======== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-128 188 ON CALL EMPLOYMENT SERVICES, INC. STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, YEARS ENDED DECEMBER 31, 1996 TO ---------------------------------------- FEBRUARY 2, 1993 1994 1995 1996 ----------- ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................. $ 2,320,030 $ 640,516 $1,008,298 $ 67,933 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 6,372 13,242 24,473 2,525 Change in operating assets and liabilities: Accounts receivable............................... (2,532,313) 2,634,981 (389,779) 581,883 Prepaid expenses and other........................ 465 -- (600) (10,564) Accounts payable.................................. 52,716 (78,044) 55,351 6,317 Outstanding checks................................ 110,098 (110,098) -- -- Payroll and related liabilities................... 236,744 (302,925) 43,215 70,191 Reserve for workers compensation claims........... 7,520 (888) 10,455 2,490 Other............................................. -- -- 1,275 725 ----------- ----------- ---------- ----------- Net cash provided by operating activities...... 201,632 2,796,784 752,688 721,500 ----------- ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................... (26,130) (43,513) (73,907) -- ----------- ----------- ---------- ----------- Net cash used in investing activities.......... (26,130) (43,513) (73,907) -- ----------- ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends.............................................. (230,000) (2,842,958) (433,500) (1,057,245) Contribution by shareholders........................... -- 185,000 -- -- ----------- ----------- ---------- ----------- Net cash used in financing activities.......... (230,000) (2,657,958) (433,500) (1,057,245) ----------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (54,498) 95,313 245,281 (335,745) CASH AND CASH EQUIVALENTS, beginning of period........... 54,498 -- 95,313 340,594 ----------- ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, end of period................. $ -- $ 95,313 $ 340,594 $ 4,849 =========== =========== ========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Non-cash transactions: Distribution of accounts receivable to shareholders (Note 1).......................................... $ -- $ -- $ -- $ 1,213,511 =========== =========== ========== ===========
The accompanying notes to financial statements are an integral part of these statements. F-129 189 ON CALL EMPLOYMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- On Call Employment Services, Inc. ("On Call" or the "Company") was incorporated in the state of Colorado. The Company's primary business purpose was to provide temporary personnel services to companies in northern Colorado, mainly those which specialize in high tech manufacturing. The Company is headquartered in Loveland, Colorado and as of February 2, 1996, operated staffing offices in Loveland, Longmont, Boulder and Greeley, Colorado. On January 19, 1996, the two shareholders of On Call who aggregately owned 100 percent of the Company entered into an Agreement and Plan of Reorganization (the "Agreement") with Brewer Personnel Services, Inc. ("Brewer"), an Arkansas corporation. The Agreement was effective February 2, 1996. Under the terms of the Agreement, the outstanding shares of the Company prior to the merger (1,000,000 shares) were converted into i) ten shares of Brewer's common stock at an exchange rate of one share of Brewer for every 100,000 shares of the Company and ii) $2.64 million in cash. Brewer was the surviving company of the merger. The Agreement also specified that cash and certain accounts receivable would be distributed to the two shareholders prior to the merger. The accompanying balance sheet as of February 2, 1996 reflects such distributions of cash and accounts receivable but does not reflect the purchase accounting adjustments which were recorded by Brewer in conjunction with this acquisition. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements were based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Revenue Recognition -- Service revenues are recognized as income at the time staffing services are provided. Cash and Cash Equivalents -- For statements of cash flow purposes, the Company considers cash on deposit with financial institutions and all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts Receivable -- Included in accounts receivable in the accompanying balance sheets are unbilled amounts of $159,733, $173,238 and $273,067 at December 31, 1994 and 1995 and February 2, 1996, respectively. Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets which are as follows: Office equipment................................................ 5 to 7 years Computer equipment.............................................. 3 to 5 years Computer software............................................... 3 to 5 years
F-130 190 ON CALL EMPLOYMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet and any resultant gain or loss is recorded. Concentration of Credit Risk -- The Company had no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintained its cash balances with financial institutions, in the form of demand deposits. The Company performed ongoing credit evaluations of its customers' financial condition and generally did not require collateral. Its accounts receivable balances were domestic and were due from companies located in northern Colorado which were primarily engaged in businesses related to the high technology manufacturing industry. 2. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
DECEMBER 31, --------------------- FEBRUARY 2, 1994 1995 1996 -------- -------- --------- Office equipment................................ $ 6,412 $ 24,037 $ 24,037 Computer equipment.............................. 75,585 119,867 119,867 Computer software............................... 10,000 22,000 22,000 -------- -------- --------- 91,997 165,904 165,904 Less accumulated depreciation and amortization............................. 26,894 51,367 50,535 -------- -------- --------- $ 65,103 $114,537 $ 115,369 ======== ======== =========
Depreciation and amortization expense related to property and equipment totaled $6,372, $13,242, $24,473 and $2,525 for the years ended December 31, 1993, 1994 and 1995 and the period from January 1, 1996 to February 2, 1996, respectively. 3. INCOME TAXES: Prior to February 2, 1996, the Company operated as an S Corporation for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded in the accompanying financial statements as such taxes were liabilities of the individual shareholders. The Company had historically made distributions to its shareholders which were used, in part, to satisfy the income tax liability reported by the shareholders related to the Company's operations. The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 4. WORKERS' COMPENSATION: The Company was insured by certain insurance companies for workers' compensation claims and was regulated by the Workers' Compensation Insurance Commission in the state of Colorado. Workers' compensation expense totaled approximately $218,500, $171,100, $131,800 and $9,300 for the years ended December 31, 1993, 1994 and 1995, and the period from January 1, 1996 to February 2, 1996, respectively. F-131 191 ON CALL EMPLOYMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. COMMON STOCK: As of December 31, 1993, 1994 and 1995 and February 2, 1996, the Company had an authorized capitalization consisting of 1,000,000 shares of common stock, of which 1,000,000 shares were issued and outstanding and no shares were held as treasury stock. 6. NONCANCELABLE OPERATING LEASES: The Company leased office space for its four branch locations in northern Colorado through noncancelable operating leases. Future minimum annual payments required during each of the next five years under operating leases that had initial or remaining noncancelable lease terms of one year or more at February 2, 1996, are as follows: 1996.............................................. $ 70,640 1997.............................................. 29,052 1998.............................................. 23,464 1999.............................................. 17,344 2000.............................................. 8,680 Thereafter........................................ 2,920 -------- $152,100 ========
Rent expense totaled approximately $66,900, $78,500, $82,200 and $7,200 for the years ended December 31, 1993, 1994 and 1995 and the period from January 1, 1996 to February 2, 1996, respectively. The shareholders committed to the construction of a commercial office building in Loveland, Colorado which should be completed by October 1996. The Company plans on moving its Loveland office to this new building once completed. Brewer has agreed to sublease this office space from the shareholders for a five-year period. 7. EMPLOYEE BENEFIT PLAN: The Company had a 401(k) plan under which eligible employees may defer up to 12% of their compensation. The Company's plan does not allow for matching employer contributions. 8. CONTINGENCIES: The Company is subject to various claims and business disputes in the ordinary course of business. Management does not anticipate that the ultimate outcome of these issues will have a material impact on the Company's financial position or results of operations. 9. SIGNIFICANT CUSTOMERS: The Company's sales to customers which individually account for 10% or more of service revenues for the years ended December 31, 1993, 1994 and 1995 and the period from January 1, 1996 to February 2, 1996, were as follows:
JANUARY 1 TO 1993 1994 1995 FEBRUARY 2, 1996 -------------------------- -------------------------- --------------------------- ---------------------------- AMOUNTS PERCENTAGES AMOUNTS PERCENTAGES AMOUNTS PERCENTAGES AMOUNTS PERCENTAGES ------------- ----------- ------------- ----------- ------------- ----------- ------------- ------------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) Customer 1.... $13.3 60% $ 1.6 16% $ 1.5 12% $0.2 18% Customer 2.... 3.1 14 2.2 22 3.2 26 0.3 23 Customer 3.... -- -- -- -- 1.6 13 0.2 17
F-132 192 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Strategic Sourcing, Inc.: We have audited the accompanying balance sheets of Strategic Sourcing, Inc. (the "Company") as of December 31, 1994 and 1995, and the related statements of income (loss), shareholders' equity (deficit) and cash flows for the period from the date of incorporation (May 25, 1993) to December 31, 1993, and each of the two years in the period ended December 31, 1995. 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 audits. We conducted our audits 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 to 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 audits provide 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 Sourcing, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for the period from the date of incorporation (May 25, 1993) to December 31, 1993, and each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Raleigh, North Carolina, May 24, 1996. F-133 193 STRATEGIC SOURCING, INC. BALANCE SHEETS
DECEMBER 31, --------------------- MARCH 31, 1994 1995 1996 -------- -------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash.................................................... $ 26,159 $ 13,281 $ 14,744 Accounts receivable..................................... 92,041 121,217 131,319 Prepaid expenses and other.............................. -- 1,675 -- -------- -------- --------- Total current assets............................ 118,200 136,173 146,063 PROPERTY AND EQUIPMENT, net............................... 13,406 21,667 20,991 OTHER ASSETS.............................................. 2,435 2,347 5,056 -------- -------- --------- $134,041 $160,187 $ 172,110 ======== ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable........................................ $ 4,038 $ 9,118 $ 31,507 Payroll and related liabilities......................... 26,869 6,325 4,866 Current portion of note payable to shareholder.......... 55,000 6,145 6,145 -------- -------- --------- Total current liabilities....................... 85,907 21,588 42,518 NOTE PAYABLE TO SHAREHOLDER............................... 69,166 63,021 63,021 COMMITMENTS AND CONTINGENCIES (Note 6) SHAREHOLDERS' EQUITY (DEFICIT): Common stock, no par value, 1,000 shares authorized, 600 shares issued and outstanding in 1994, 1995 and 1996................................................. 3,000 3,000 3,000 Retained earnings (deficit)............................. (24,032) 72,578 63,571 -------- -------- --------- Total shareholders' equity (deficit)............ (21,032) 75,578 66,571 -------- -------- --------- $134,041 $160,187 $ 172,110 ======== ======== =========
The accompanying notes to financial statements are an integral part of these balance sheets. F-134 194 STRATEGIC SOURCING, INC. STATEMENTS OF INCOME (LOSS)
PERIOD FROM MAY 25, YEARS ENDED THREE MONTHS ENDED 1993, TO DECEMBER 31, MARCH 31, DECEMBER 31, ---------------------- -------------------------- 1993 1994 1995 1995 1996 ------------ -------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES: Service revenues................. $ 23,932 $608,030 $1,013,332 $ 304,161 $ 95,879 Permanent placement fee revenues...................... 26,407 85,068 230,166 85,806 56,206 -------- -------- ---------- --------- --------- 50,339 693,098 1,243,498 389,967 152,085 COST OF SERVICES................... 10,236 358,228 612,197 125,196 75,047 -------- -------- ---------- --------- --------- Gross profit............. 40,103 334,870 631,301 264,771 77,038 OPERATING EXPENSES: Selling, general and administrative................ 101,920 278,603 414,254 188,475 82,090 Depreciation and amortization.... 1,769 3,258 5,015 1,250 676 -------- -------- ---------- --------- --------- Operating income (loss)................. (63,586) 53,009 212,032 75,046 (5,728) OTHER INCOME (EXPENSE), net........ (1,356) (12,099) 735 -- 37 -------- -------- ---------- --------- --------- Net income (loss)........ $(64,942) $ 40,910 $ 212,767 $ 75,046 $ (5,691) ======== ======== ========== ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-135 195 STRATEGIC SOURCING, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
TOTAL RETAINED SHAREHOLDERS' COMMON EARNINGS EQUITY STOCK (DEFICIT) (DEFICIT) ------ --------- ------------- Initial capital contribution on May 25, 1993 (date of incorporation)............................................ $3,000 $ -- $ 3,000 Net loss.................................................. -- (64,942) (64,942) ------ --------- --------- BALANCE, December 31, 1993.................................. 3,000 (64,942) (61,942) Net income................................................ -- 40,910 40,910 ------ --------- --------- BALANCE, December 31, 1994.................................. 3,000 (24,032) (21,032) Net income................................................ -- 212,767 212,767 Dividends................................................. -- (116,157) (116,157) ------ --------- --------- BALANCE, December 31, 1995.................................. 3,000 72,578 75,578 Net loss (Unaudited)...................................... -- (5,691) (5,691) Dividends (Unaudited)..................................... -- (3,316) (3,316) ------ --------- --------- BALANCE, March 31, 1996 (Unaudited)......................... $3,000 $ 63,571 $ 66,571 ====== ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-136 196 STRATEGIC SOURCING, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 25, YEARS ENDED THREE MONTHS ENDED 1993, TO DECEMBER 31, MARCH 31, DECEMBER 31, --------------------- --------------------- 1993 1994 1995 1995 1996 ------------ ------- --------- -------- -------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................... $(64,942) $40,910 $ 212,767 $ 75,046 $ (5,691) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization................ 1,769 3,258 5,015 1,250 676 Change in operating assets and liabilities: Accounts receivable........................ (32,230) (59,811) (29,176) (28,505) (10,102) Prepaid expenses and other................. -- -- (1,675) -- 1,675 Other assets............................... (1,072) (1,363) 88 (442) (2,709) Accounts payable........................... 5,911 (1,873) 5,080 7,187 22,389 Payroll and related liabilities............ 2,099 24,770 (20,544) (3,628) (1,459) -------- ------- --------- -------- -------- Net cash provided by (used in) operating activities............................ (88,465) 5,891 171,555 50,908 4,779 -------- ------- --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................ (17,691) (742) (13,276) -- -- -------- ------- --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.......... 3,000 -- -- -- -- Proceeds from line of credit.................... 50,000 -- -- -- -- Payments on line of credit...................... -- (50,000) -- -- -- Proceeds from note payable to shareholder....... 68,379 55,787 -- -- -- Payments on note payable to shareholder......... -- -- (55,000) (9,728) -- Dividends....................................... -- -- (116,157) -- (3,316) -------- ------- --------- -------- -------- Net cash provided by (used in) financing activities............................ 121,379 5,787 (171,157) (9,728) (3,316) ------- ------- --------- -------- -------- NET INCREASE (DECREASE) IN CASH................... 15,223 10,936 (12,878) 41,180 1,463 CASH, beginning of period......................... -- 15,223 26,159 26,159 13,281 -------- ------- --------- -------- -------- CASH, end of period............................... $ 15,223 $26,159 $ 13,281 $ 67,339 $ 14,744 ======== ======= ========= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid................................... $ 1,356 $ 2,901 $ -- $ -- $ -- ======== ======= ========= ======== ========
The accompanying notes to financial statements are an integral part of these statements. F-137 197 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization -- Strategic Sourcing, Inc. (the "Company"), a North Carolina corporation, provides services related to the placement of information technology professionals in both permanent and contract positions for companies located primarily in North Carolina and South Carolina. The business was initially founded in May 1993 as Strategic Staffing, Inc. and changed its name to Strategic Sourcing, Inc. in February 1995. Accordingly, the 1993 results of operations and cash flows included in the accompanying financial statements and notes thereto reflect activity for the period from May 25, 1993 to December 31, 1993. Interim Periods -- The accompanying interim financial statements and related disclosures have not been audited by independent accountants. However, they have been prepared in conformity with the accounting principles stated in the accompanying audited financial statements and include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of operations and cash flows for each of the periods presented. The operating results for the interim periods presented are not necessarily indicative of results for the full year. Revenue Recognition -- Service revenues and permanent placement fee revenues are recognized as income at the time staffing services are provided or the permanent employee is placed with the customer. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. However, actual results may differ from the estimates and assumptions used in preparing the accompanying financial statements. Accounts Receivable -- The Company performs credit evaluations of potential customers prior to entering into contracts. The Company provides, if necessary, allowances for potential losses which management believes are adequate to absorb losses to be incurred in realizing the amounts recorded in the accompanying financial statements. Management believes all accounts are collectible and accordingly, has not recorded an allowance as of December 31, 1994 and 1995, and as of March 31, 1996. Significant Customers -- Revenues from two customers accounted for 52% and 34% of total revenues in 1993. Revenues from four customers accounted for 20%, 18%, 15% and 10% of total revenues in 1994. Revenues from one customer accounted for 60% of total revenues in 1995. Revenues from two customers accounted for 58% and 14% of total revenues for the unaudited three-month period ended March 31, 1995. Revenues from three customers accounted for 36%, 27% and 21% of total revenues for the unaudited three-month period ended March 31, 1996. F-138 198 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment -- Property and equipment are recorded at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of the assets, which are as follows: Office equipment.................................................... 5 years Computer software and equipment..................................... 5 years
Additions that extend the lives of the assets are capitalized while repairs and maintenance costs are expensed as incurred. When property and equipment are retired, the cost of the property and equipment and the related accumulated depreciation or amortization are removed from the balance sheet, and any resultant gain or loss is recorded. 2. PROPERTY AND EQUIPMENT: Components of property and equipment are as follows:
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------- ------- ----------- (UNAUDITED) Office equipment...................................... $12,691 $16,797 $16,797 Computer software and equipment....................... 5,742 14,912 14,912 ------- ------- -------- 18,433 31,709 31,709 Less accumulated depreciation and amortization... 5,027 10,042 10,718 ------- ------- -------- $13,406 $21,667 $20,991 ======= ======= ========
Depreciation and amortization expense related to property and equipment totaled $1,769, $3,258 and $5,015 for 1993, 1994 and 1995, respectively, and $1,250 and $676 for the unaudited three-month periods ended March 31, 1995 and 1996, respectively. 3. LINE OF CREDIT: The Company maintained a line of credit with a bank which was repaid during 1994 and was not renewed. Interest on the line of credit accrued at the bank's prime rate plus 1.5%. F-139 199 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. NOTE PAYABLE TO SHAREHOLDER: The Company had borrowings from a shareholder under an informal arrangement of $124,166 and $69,166 as of December 31, 1994 and 1995, respectively. The borrowings did not accrue interest during 1993 or 1995. During 1994, the Company agreed to accrue interest of $9,198 on the borrowings from the shareholder, which was added to the principal balance. In April 1996, in connection with the change in ownership described in Note 7, the Company signed a promissory note for $65,229, representing the net amount due to the former shareholder. The terms of the note specify an interest rate of 7% and minimum monthly payments of $700, representing principal and interest, commencing April 15, 1996, until paid in full, with a final maturity of March 15, 2001. Based on the terms of this note, the aggregate principal maturities subsequent to December 31, 1995, were as follows: 1996............................................... $ 6,145 1997............................................... 3,214 1998............................................... 3,629 1999............................................... 4,079 2000............................................... 4,567 Thereafter......................................... 47,532 ------- $69,166 =======
5. INCOME TAXES: The Company has elected S Corporation status for federal and state income tax reporting purposes. Accordingly, no provision for income taxes has been recorded since such tax liabilities are liabilities of the shareholders of the Company. The Company's tax returns are subject to examination by federal and state taxing authorities. If such examinations result in a change to the Company's reported income or loss, the taxable income or loss reported by the individual shareholders could also change. 6. NONCANCELABLE OPERATING LEASE: The Company leases office space under a noncancelable operating lease. Future minimum payments required under this operating lease which has an initial or remaining noncancelable lease term in excess of one year at December 31, 1995, are as follows: 1996............................................... $21,069 1997............................................... 17,982 ------- $39,051 =======
Rental expense totaled $7,623, $13,062 and $18,075 for 1993, 1994 and 1995, respectively, and $4,350 and $5,025 for the unaudited three-month periods ended March 31, 1995 and 1996, respectively. 7. SUBSEQUENT EVENTS: In April 1996, one of the Company's 50% shareholders (the "former shareholder") transferred 300 shares of common stock of the Company, representing the former shareholder's entire interest, to the other 50% shareholder, with both parties entering into a security agreement whereby the transferred shares are held in escrow until the repayment of the borrowings from the former shareholder, as discussed in Note 4. F-140 200 STRATEGIC SOURCING, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In April 1996, the Company entered into a line of credit arrangement with a bank. Funds available for advance under the line of credit are limited to 80% of accounts receivable less than 90 days old, up to a maximum borrowing of $50,000. Advances under the line bear interest at the bank's base rate plus 1% (9.25% as of April 10, 1996). Advances under the line of credit are collateralized by a security agreement, providing the bank a first lien security interest on all assets of the Company, as well as a personal guaranty from the remaining shareholder. In April 1996, the Company borrowed $45,000 from the remaining shareholder under an informal arrangement. The borrowing accrues interest at prime plus 1.75%. 8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS (UNAUDITED): In June 1996, the remaining shareholder entered into a definitive agreement to sell certain of the operating assets of the Company for $750,000, with closing to occur in July 1996. F-141 201 ================================================================================ NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE SPECIFICALLY OFFERED HEREBY OR OF ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. --------------------- TABLE OF CONTENTS
PAGE ----- Prospectus Summary.................... 3 Risk Factors.......................... 7 The Company........................... 12 Use of Proceeds....................... 14 Dividend Policy....................... 14 Dilution.............................. 15 Capitalization........................ 16 Selected Combined Founding Companies' Financial and Operating Data........ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 36 Management............................ 45 Principal Stockholders................ 49 Description of Capital Stock.......... 50 Certain Transactions.................. 52 Shares Eligible for Future Sale....... 55 Underwriting.......................... 56 Legal Matters......................... 57 Experts............................... 57 Additional Information................ 57 Index to Financial Statements......... F-1
================================================================================ ================================================================================ 5,500,000 SHARES [STAFFMARK LOGO] COMMON STOCK --------------------------- PROSPECTUS --------------------------- J.C. BRADFORD & CO. STEPHENS INC. , 1996 ================================================================================ 202 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table itemizes the expenses of this Offering to be incurred by the Company in connection with this registration statement, other than underwriting discounts and commissions. All the amounts shown are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market Application Listing Fee. SEC Registration Fee........................................... $ 26,172.41 Nasdaq National Market Application and Listing Fee............. 5,250.00 NASD Filing Fee................................................ 8,090.00 Blue Sky Fees and Expenses..................................... 30,000.00 Accounting Fees and Expenses................................... * Legal Fees and Expenses........................................ * Printing and Engraving Costs................................... * Transfer Agent Fees and Expenses............................... * Miscellaneous.................................................. * ------------- Total........................................................ $ 2,500,000 =============
- --------------- * To be supplied by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's By-laws provide that the Company shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, indemnify all persons whom it may indemnify pursuant thereto. Section 145 of the General Corporation Law of the State of Delaware permits a corporation, under specified circumstances, to indemnify its directors, officers, employees or agents against expenses (including attorney's fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by them in connection with any action, suit or proceeding brought by third parties by reason of the fact that they were or are directors, officers, employee or agents acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made only for expenses actually and reasonably incurred by directors, officers, employees or agents in connection with the defense or settlement of an action or suit, and only with respect to a matter as to which they shall have acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made if such person shall have been adjudged liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine upon application that the defendant directors, officers, employees or agents are fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability. Article Seven of the Company's Certificates of Incorporation provides that the Company's directors will not be personally liable to the Company or its stockholders for monetary damages resulting from breaches of their fiduciary duty as directors except (a) for any breach of the duty of loyalty to the Company or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the General Corporation Law of the State of Delaware, which makes directors liable for unlawful dividends or unlawful stock repurchases or redemptions or (d) for transactions from which directors derive improper personal benefit. II-1 203 Section 7 of the Underwriting Agreement filed as Exhibit 1.1 provides that the Underwriters named therein will indemnify and hold harmless the Company and each director, officer or controlling person of the Company from and against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Section 8 of such Underwriting Agreement also provides that such Underwriters will contribute to certain liabilities of such persons under the Securities Act. In accordance with Delaware law, the Company intends to enter into indemnification agreements with its directors, pursuant to which it will agree to pay certain expenses, including attorneys' fees, judgments, fines and amounts paid in settlement incurred by such directors in connection with certain actions, suits or proceedings. These agreements require directors to repay the amount of any expenses advanced if it shall be determined that they are not entitled to indemnification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to securities of the Company issued or sold within the past three years which were not registered under the Securities Act: (i) In March 1996, the Company issued 1,000 shares of Common Stock to the founding stockholders of the Company for $.01 per share and subsequently declared a 1,355-for-1 stock dividend in June 1996; and (ii) Simultaneously with the completion of this Offering, the Company will issue 5,618,249 shares of its Common Stock in connection with the acquisition of six businesses. See "The Company" and "Business." Each of these transactions was completed without registration of the relevant security under the Securities Act in reliance upon the exemptions provided by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder on the basis that such transactions did not involve a public offering, the purchasers were sophisticated with access to the kind of information registration would provide and that such purchasers acquired such securities without a view toward the distribution thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - -------------------- ---------------------------------------------------------------------- * 1.1 -- Form of Underwriting Agreement. 2.1 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Brewer Personnel Services Acquisition Corp., Brewer Personnel Services, Inc. and the Stockholders named therein. 2.2 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Prostaff Personnel Acquisition Corp., Excel Temporary Staffing Acquisition Corp., Professional Resources Acquisition Corp., Prostaff Personnel, Inc., Excel Temporary Staffing, Inc., Professional Resources, Inc., and the Stockholders named therein. 2.3 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Maxwell/Healthcare Acquisition Corp., Square One Rehab Acquisition Corp., Maxwell Staffing of Bristow Acquisition Corp., Maxwell Staffing Acquisition Corp., Technical Staffing Acquisition Corp., Maxwell/Healthcare, Inc., Square One Rehab, Inc., Maxwell Staffing of Bristow, Inc., Maxwell Staffing, Inc., Technical Staffing, Inc. and the Stockholders named therein. 2.4 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., HRA Acquisition Corp., HRA, Inc., and the Stockholders named therein.
II-2 204
EXHIBIT NUMBER DESCRIPTION - -------------------- ---------------------------------------------------------------------- 2.5 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., First Choice Staffing Acquisition Corp., First Choice Staffing, Inc., and the Stockholders named therein. 2.6 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., DP Pros of Burlington Acquisition Corp., Blethen Temporaries Acquisition Corp., Personnel Placement Acquisition Corp., Jaeger Personnel Services Acquisition Corp., Dixon Enterprises of Burlington Acquisition Corp., Trasec Acquisition Corp., DP Pros of Burlington, Inc., Blethen Temporaries, Inc., Personnel Placement, Inc., Jaeger Personnel Services, Ltd., Dixon Enterprises of Burlington, Inc., Trasec Corp., and the Stockholders named therein. 3.1 -- Certificate of Incorporation of the Company. 3.2 -- Certificate of amendment of Certificate of Incorporation. 3.3 -- Amended and Restated By-Laws of the Company, as amended to date. *4.1 -- Form of certificate evidencing ownership of Common Stock of the Company. *5.1 -- Opinion of Wright, Lindsey & Jennings regarding legality. 10.1 -- StaffMark, Inc. 1996 Stock Option Plan. 10.2 -- Form of Employment Agreement between StaffMark, Inc. and key employees. 10.3 -- Form of Director Indemnification Agreement 21.1 -- List of subsidiaries of StaffMark, Inc. *23.1 -- Consent of Wright, Lindsey & Jennings (contained in Exhibit 5.1 hereto). 23.2 -- Consents of Arthur Andersen LLP, Independent Public Accountants. 23.3 -- Consent of W. David Bartholomew to serve as a Director. 23.4 -- Consent of Steven E. Schulte to serve as a Director. 23.5 -- Consent of John H. Maxwell, Jr. to serve as a Director. 23.6 -- Consent of Janice Blethen to serve as a Director. 23.7 -- Consent of William T. Gregory to serve as a Director. 23.8 -- Consent of William J. Lynch to serve as a Director. 27.1 -- Financial Data Schedule.
- --------------- * To be supplied by amendment. (b) Financial Statement Schedules All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes hereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates on such denominations and registered in such names as required by the Representatives to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been II-3 205 settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: 1. For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. 2. For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 206 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fayetteville, State of Arkansas, on July 2, 1996. StaffMark, Inc. By: /s/ CLETE T. BREWER -------------------------------------- Clete T. Brewer President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature to this Registration Statement appears below hereby constitutes and appoints Clete T. Brewer and Robert H. Janes III, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his or her behalf individually and in the capacity stated below and to perform any acts necessary to be done in order to file all amendments and post-effective amendments to this Registration Statement, and any and all instruments or documents filed as part of or in connection with this Registration Statement or the amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue hereof.
NAME TITLE DATE - --------------------------------------------- --------------------------------- ------------- /s/ CLETE T. BREWER President, Chief Executive July 2, 1996 - --------------------------------------------- Officer and Clete T. Brewer Director (Principal Executive Officer) /s/ ROBERT H. JANES III Executive Vice President -- July 2, 1996 - --------------------------------------------- Finance, Mergers Robert H. Janes III and Acquisitions (Principal Financial and Accounting Officer) /s/ JERRY T. BREWER Chairman of the Board July 2, 1996 - --------------------------------------------- Jerry T. Brewer
II-5 207 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ---------- --------------------------------------------------------------------- * 1.1 -- Form of Underwriting Agreement. 2.1 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Brewer Personnel Services Acquisition Corp., Brewer Personnel Services, Inc. and the Stockholders named therein. 2.2 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Prostaff Personnel Acquisition Corp., Excel Temporary Staffing Acquisition Corp., Professional Resources Acquisition Corp., Prostaff Personnel, Inc., Excel Temporary Staffing, Inc., Professional Resources, Inc., and the Stockholders named therein. 2.3 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., Maxwell/Healthcare Acquisition Corp., Square One Rehab Acquisition Corp., Maxwell Staffing of Bristow Acquisition Corp., Maxwell Staffing Acquisition Corp., Technical Staffing Acquisition Corp., Maxwell/ Healthcare, Inc., Square One Rehab, Inc., Maxwell Staffing of Bristow, Inc., Maxwell Staffing, Inc., Technical Staffing, Inc. and the Stockholders named therein. 2.4 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., HRA Acquisition Corp., HRA, Inc., and the Stockholders named therein. 2.5 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., First Choice Staffing Acquisition Corp., First Choice Staffing, Inc., and the Stockholders named therein. 2.6 -- Agreement and Plan of Reorganization, dated as of June 17, 1996, by and among StaffMark, Inc., DP Pros of Burlington Acquisition Corp., Blethen Temporaries Acquisition Corp., Personnel Placement Acquisition Corp., Jaeger Personnel Services Acquisition Corp., Dixon Enterprises of Burlington Acquisition Corp., Trasec Acquisition Corp., DP Pros of Burlington, Inc., Blethen Temporaries, Inc., Personnel Placement, Inc., Jaeger Personnel Services, Ltd., Dixon Enterprises of Burlington, Inc., Trasec Corp., and the Stockholders named therein. 3.1 -- Certificate of Incorporation of the Company. 3.2 -- Certificate of amendment of Certificate of Incorporation. 3.3 -- Amended and Restated By-Laws of the Company, as amended to date. *4.1 -- Form of certificate evidencing ownership of Common Stock of the Company. * 5.1 -- Opinion of Wright, Lindsey & Jennings regarding legality. 10.1 -- StaffMark, Inc. 1996 Stock Option Plan. 10.2 -- Form of Employment Agreement between StaffMark, Inc. and key employees. 10.3 -- Form of Director Indemnification Agreement 21.1 -- List of subsidiaries of StaffMark, Inc. *23.1 -- Consent of Wright, Lindsey & Jennings (contained in Exhibit 5.1 hereto). 23.2 -- Consents of Arthur Andersen LLP, Independent Public Accountants. 23.3 -- Consent of W. David Bartholomew to serve as a Director. 23.4 -- Consent of Steven E. Schulte to serve as a Director. 23.5 -- Consent of John H. Maxwell, Jr. to serve as a Director. 23.6 -- Consent of Janice Blethen to serve as a Director. 23.7 -- Consent of William T. Gregory to serve as a Director. 23.8 -- Consent of William J. Lynch to serve as a Director. 27.1 -- Financial Data Schedule
- --------------- * To be supplied by amendment. EX-2.1 2 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.1 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. BREWER PERSONNEL SERVICES ACQUISITION CORPORATION BREWER PERSONNEL SERVICES, INC. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3 PAGE 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
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PAGE 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 34 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
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PAGE XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
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PAGE XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK
8 Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), BREWER PERSONNEL SERVICES ACQUISITION CORPORATION, a Delaware corporation ("NEWCO"), BREWER PERSONNEL SERVICES, INC., an Arkansas corporation (the "COMPANY"), CLETE T. BREWER, JERRY T. BREWER, CHAD J. BREWER, KAY A. BREWER, BETTY BECKER, JOHN BECKER and DONALD A. MARR, JR. (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly- owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of NEWCO and the COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that NEWCO merge with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and Arkansas; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of ProStaff Personnel, Inc., HRA, Inc., Blethen Group, The Maxwell Companies, Creative Temporaties Corporation, and First Choice Staffing, Inc. (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: 10 "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. "Funding and Consummation Date" has the meaning set forth in Section 4. "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. 2 11 "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). "Returns" has the meaning set forth at the end of Section 5.22. "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. 3 12 "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Arkansas and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the 4 13 Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of Arkansas. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. 5 14 II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the 6 15 STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. Each of the COMPANY and the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state 7 16 securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 8 17 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than 9 18 liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not 10 19 have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or 11 20 entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 12 21 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock 13 22 option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or 14 23 indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. 15 24 (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. 16 25 (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: 17 26 "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; 18 27 (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: 19 28 (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become 20 29 effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange 21 30 Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 22 31 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 23 32 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the 24 33 STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. 25 34 (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. 26 35 (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. 27 36 VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; 28 37 (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel. (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; 29 38 (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 30 39 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the 31 40 Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of the filing. VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 32 41 The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 33 42 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share for STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with 34 43 the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 35 44 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK 36 45 shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide 37 46 replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, 38 47 NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 39 48 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing 40 49 herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been 41 50 consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; 42 51 (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 43 52 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or 44 53 threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to Section 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof or in the event of death of any STOCKHOLDER, none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 45 54 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. 46 55 XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). 47 56 Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; 48 57 (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 49 58 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 50 59 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; 51 60 (c) If to the COMPANY, addressed to it at: Brewer Personnel Services, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Jerry T. Brewer and marked "Personal and Confidential" with copies to: Lashlee, Butler & Darling, P.A. 2894 West Walnut Rogers, Arkansas 72756 Attn: Steve Butler or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 52 61 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. 53 62 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER ----------------------------------- Name: Clete T. Brewer ------------------------------ Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- BREWER PERSONNEL SERVICES, INC. By /s/ CLETE T. BREWER ----------------------------------- Name: Clete T. Brewer ------------------------------ Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- BREWER PERSONNEL SERVICES ACQUISITION CORPORATION By /s/ CLETE T. BREWER ----------------------------------- Name: Clete T. Brewer ------------------------------ Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- 54 63 CLETE T. BREWER /s/ CLETE T. BREWER -------------------------------------- JERRY T. BREWER /s/ JERRY T. BREWER -------------------------------------- CHAD J. BREWER /s/ CHAD J. BREWER -------------------------------------- KAY A. BREWER /s/ KAY A. BREWER -------------------------------------- BETTY BECKER /s/ BETTY BECKER -------------------------------------- JOHN BECKER /s/ JOHN BECKER -------------------------------------- DONALD A. MARR, JR. /s/ DONALD A. MARR, JR. -------------------------------------- 55 EX-2.2 3 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.2 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. PROSTAFF PERSONNEL ACQUISITION CORPORATION, EXCEL TEMPORARY STAFFING ACQUISITION CORPORATION, PROFESSIONAL RESOURCES ACQUISITION CORPORATION PROSTAFF PERSONNEL, INC., EXCEL TEMPORARY STAFFING, INC., PROFESSIONAL RESOURCES, INC. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PAGE 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PAGE 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PAGE 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PAGE 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
v 7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK
vi 8 Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
vii 9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), PROSTAFF PERSONNEL ACQUISITION CORPORATION, a Delaware corporation, EXCEL TEMPORARY STAFFING ACQUISITION CORPORATION, a Delaware corporation, and PROFESSIONAL RESOURCES ACQUISITION CORPORATION, a Delaware corporation (collectively, "NEWCO"), PROSTAFF PERSONNEL, INC., an Arkansas corporation, EXCEL TEMPORARY STAFFING, INC., an Arkansas corporation, and PROFESSIONAL RESOURCES, INC., an Arkansas corporation (collectively, the "COMPANY"), EDWARD E. SCHULTE TRUST, STEVEN E. SCHULTE REVOCABLE TRUST, KARLA LEIGH SCHULTE TRUST, AND STEVEN E. SCHULTE (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, each of NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly-owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of each of NEWCO and each corresponding COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of each of the Constituent Corporations and their respective stockholders that each NEWCO merge with and into each corresponding COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and Arkansas; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of Brewer Personnel Services, Inc., HRA, Inc., Blethen Group, The Maxwell Companies, Creative Temporaries Corporation, and First Choice Staffing, Inc. (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of each of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; 10 WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. "Funding and Consummation Date" has the meaning set forth in Section 4. "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. 2 11 "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). "Returns" has the meaning set forth at the end of Section 5.22. "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. 3 12 "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III Edward E. Schulte Steven E. Schulte 4 13 The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Arkansas and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of Arkansas. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for 5 14 all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. 6 15 III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. 7 16 Each of the COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 8 17 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated 9 18 Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on 10 19 its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to 11 20 which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and 12 21 (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income 13 22 Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has 14 23 been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 15 24 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party 16 25 to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. 17 26 (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name 18 27 of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; 19 28 (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any 20 29 material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 21 30 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 22 31 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 23 32 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other 24 33 agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. 25 34 (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. 26 35 (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and 27 36 accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 28 37 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel. 29 38 (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, 30 39 any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this 31 40 Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial 32 41 statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of the filing. 7.13 OTHER. If STAFFMARK and NEWCO determine that they will not merge into any one of the three companies which comprise the COMPANY, the other two companies which comprise the COMPANY shall not be required to merge into STAFFMARK and NEWCO. VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of 33 42 which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share for STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 34 43 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. 8.13 LITIGATION. The COMPANY and STOCKHOLDERS shall be satisfied in their sole discretion prior to July 20, 1996 that the litigation listed on Schedule 5.10, Item 33 shall not have a Material Adverse Effect on the COMPANY. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 35 44 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 36 45 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. 9.14 LITIGATION. STAFFMARK and NEWCO shall be satisfied in their sole discretion prior to July 20, 1996 that the litigation listed on Schedule 5.10, Item 33 shall not have a Material Adverse Effect on the COMPANY. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 37 46 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any 38 47 demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or 39 48 relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, 40 49 and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of- pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of 41 50 all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or 42 51 (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 43 52 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in 44 53 the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. 45 54 XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to Section 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof, in the event of death of any STOCKHOLDER or transfers, with the approval of STAFFMARK, to settle a claim set forth on Schedule 5.10, Item 33 (the transferee, with the approval of the STOCKHOLDERS, may participate in registration rights pursuant to Section 17, but shall not vote her shares pursuant to Section 17.2), none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK 46 55 Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax 47 56 counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and 48 57 the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions 49 58 of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate 50 59 adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, 51 60 postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; (c) If to the COMPANY, addressed to it at: Prostaff Personnel, Inc. 2024 Arkansas Valley Dr. #704 Little Rock, Arkansas 72212 Attn: Steven Schulte and marked "Personal and Confidential" 52 61 with copies to: Rose Law Firm 120 E. Fourth Street Little Rock, Arkansas 72201 Attn: C. Brantley Buck or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding 53 62 upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 54 63 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER --------------------------------- Name: Clete T. Brewer ---------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- PROSTAFF PERSONNEL ACQUISITION CORPORATION By /s/ CLETE T. BREWER --------------------------------- Name: Clete T. Brewer ---------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- EXCEL TEMPORARY STAFFING ACQUISITION CORPORATION By /s/ CLETE T. BREWER --------------------------------- Name: Clete T. Brewer ---------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- 55 64 PROFESSIONAL RESOURCES ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- PROSTAFF PERSONNEL, INC. By /s/ STEVE SCHULTE ------------------------------------ Name: Steve Schulte ------------------------------ Title: President ATTEST: /s/ EDWARD E. SCHULTE - ----------------------------------- EXCEL TEMPORARY STAFFING, INC. By /s/ STEVE SCHULTE ------------------------------------ Name: Steve Schulte ------------------------------ Title: President ATTEST: /s/ EDWARD E. SCHULTE - ----------------------------------- PROFESSIONAL RESOURCES CORPORATION By /s/ STEVE SCHULTE ------------------------------------ Name: Steve Schulte ------------------------------- Title: President ATTEST: /s/ EDWARD E. SCHULTE - ----------------------------------- 56 65 STEVEN E. SCHULTE REVOCABLE TRUST By /s/ STEVE SCHULTE, Trustee --------------------------------- Trustee ATTEST: /s/ EDWARD E. SCHULTE - ----------------------------------- KARLA LEIGH SCHULTE TRUST By /s/ STEVE SCHULTE, Trustee --------------------------------- Trustee ATTEST: /s/ EDWARD E. SCHULTE - ----------------------------------- /s/ STEVE SCHULTE ----------------------------------- STEVEN E. SCHULTE EDWARD E. SCHULTE TRUST By /s/ EDWARD E. SCHULTE, Trustee --------------------------------- Trustee ATTEST: /s/ STEVE SCHULTE - ---------------------------------- 57 EX-2.3 4 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.3 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. MAXWELL/HEALTHCARE ACQUISITION CORPORATION, SQUARE ONE REHAB ACQUISITION CORPORATION, MAXWELL STAFFFING OF BRISTOW ACQUISITI0N CORPORATION, MAXWELL STAFFING ACQUISITION CORPORATION, TECHNICAL STAFFING ACQUISITION CORPORATION MAXWELL/HEALTHCARE, INC., SQUARE ONE REHAB, INC., MAXWELL STAFFING OF BRISTOW, INC., MAXWELL STAFFING, INC. AND TECHNICAL STAFFING, INC. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PAGE 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PAGE 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PAGE 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PAGE 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
v 7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK
vi 8 Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
vii 9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), MAXWELL/HEALTHCARE ACQUISITION CORPORATION, a Delaware corporation, SQUARE ONE REHAB ACQUISITION CORPORATION, a Delaware corporation, MAXWELL STAFFING OF BRISTOW ACQUISITION CORPORATION, a Delaware corporation, MAXWELL STAFFING ACQUISITION CORPORATION, a Delaware corporation, TECHNICAL STAFFING ACQUISITION CORPORATION, a Delaware corporation (collectively, "NEWCO"), MAXWELL/HEALTHCARE, INC., an Oklahoma corporation, SQUARE ONE REHAB, INC., an Oklahoma corporation, MAXWELL STAFFING OF BRISTOW, INC., an Oklahoma corporation, MAXWELL STAFFING, INC. an Oklahoma corporation AND TECHNICAL STAFFING, INC., an Oklahoma corporation (collectively, the "COMPANY"), JOHN H.MAXWELL, JR., TRUSTEE OF THE JOHN H. MAXWELL, JR. REVOCABLE LIVING TRUST, MARY SUE MAXWELL, TRUSTEE OF THE MARY SUE MAXWELL REVOCABLE LIVING TRUST, STEPHEN MAXWELL, TRUSTEE OF THE STEPHEN HALSTEAD MAXWELL IRREVOCABLE TRUST, STACEY MAXWELL BERRY, TRUSTEE OF THE STACEY SUE MAXWELL BERRY IRREVOCABLE TRUST, JEFFREY MAXWELL, TRUSTEE OF THE JEFFREY LYLE MAXWELL IRREVOCABLE TRUST and WILLIAM R. REDUS (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, each of NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly-owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of each of NEWCO and each corrresponding COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of each of the Constituent Corporations and their respective stockholders that each of NEWCO merge with and into each corresponding COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and Oklahoma; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of Brewer Personnel Services, Inc., ProStaff Personnel, Inc., HRA, Inc., Blethen Group, Creative Temporaries Corporation, and First Choice Staffing, Inc. (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or 10 assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of each of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. 2 11 "Funding and Consummation Date" has the meaning set forth in Section 4. "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). 3 12 "Returns" has the meaning set forth at the end of Section 5.22. "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; 4 13 (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III John H. Maxwell, Jr. Mary Sue Maxwell The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Oklahoma and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of Oklahoma. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the 5 14 COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the 6 15 STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. 7 16 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. Each of the COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and 8 17 further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period 9 18 ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of 10 19 all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, 11 20 property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); 12 21 (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 13 22 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or 14 23 capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 15 24 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party 16 25 to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. 17 26 (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name 18 27 of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; 19 28 (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any 20 29 material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 21 30 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 22 31 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 23 32 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other 24 33 agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. 25 34 (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. 26 35 (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and 27 36 accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 28 37 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel. 29 38 (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, 30 39 any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this 31 40 Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial 32 41 statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of filing. 7.13 OTHER. If STAFFMARK and NEWCO determine that they will not merge into any one or more of the five companies which comprise the COMPANY, the other companies which comprise the COMPANY shall not be required to merge into STAFFMARK or NEWCO. VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of 33 42 which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share of STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 34 43 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by 35 44 insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 36 45 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in 37 46 filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received 38 47 by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In 39 48 satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense 40 49 or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. 41 50 No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 42 51 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the 43 52 STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such 44 53 STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to Section 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof or in the event of death of any STOCKHOLDER, none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, 45 54 pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating 46 55 to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of 47 56 the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing 48 57 expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact 49 58 required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing 50 59 obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 51 60 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; (c) If to the COMPANY, addressed to it at: The Maxwell Companies 8221 East 63rd Place Tulsa, Oklahoma 74133 Attn: John H. Maxwell, Jr. and marked "Personal and Confidential" with copies to: Hall, Estill, Hardwick, Gable, Golden & Nelson 320 S. Boston Avenue, Suite 400 Tulsa, Oklahoma 74103-3708 Attn: Stephen W. Ray or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 52 61 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. 53 62 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER ------------------------------- Name: Clete T. Brewer --------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- MAXWELL/HEALTHCARE ACQUISITION CORPORATION By /s/ CLETE T. BREWER --------------------------------- Name: Clete T. Brewer ----------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- SQUARE ONE REHAB ACQUISITION CORPORATION By /s/ CLETE T. BREWER --------------------------------- Name: Clete T. Brewer ----------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- 54 63 MAXWELL STAFFING OF BRISTOW ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------- Name: Clete T. Brewer -------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- MAXWELL STAFFING ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------- Name: Clete T. Brewer -------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- TECHNICAL STAFFING ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------- Name: Clete T. Brewer -------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- MAXWELL/HEALTHCARE, INC. By /s/ JOHN H. MAXWELL, JR. ------------------------------------- Name: John H. Maxwell, Jr. -------------------------------- Title: President ATTEST: /s/ SUE MAXWELL - ----------------------------------- 55 64 SQUARE ONE REHAB, INC. By /s/ WILLIAM R. REDUS ------------------------------------ Name: William R. Redus ------------------------------- Title: President ATTEST: /s/ SUE MAXWELL - ----------------------------------- MAXWELL STAFFING OF BRISTOW, INC. By /s/ SUE MAXWELL ------------------------------------ Name: Sue Maxwell ------------------------------- Title: President ATTEST: /s/ JOHN H. MAXWELL, JR. - ----------------------------------- MAXWELL STAFFING, INC. By /s/ SUE MAXWELL ------------------------------------ Name: Sue Maxwell ------------------------------- Title: President ATTEST: /s/ JOHN H. MAXWELL, JR. - ----------------------------------- TECHNICAL STAFFING, INC. By /s/ SUE MAXWELL ------------------------------------ Name: Sue Maxwell ------------------------------- Title: President ATTEST: /s/ JOHN H. MAXWELL, JR. - ----------------------------------- 56 65 /s/ JOHN H. MAXWELL, JR. -------------------------------------- JOHN H. MAXWELL, JR., TRUSTEE OF THE JOHN H. MAXWELL, JR. REVOCABLE LIVING TRUST /s/ MARY SUE MAXWELL -------------------------------------- MARY SUE MAXWELL, TRUSTEE OF THE MARY SUE MAXWELL REVOCABLE LIVING TRUST /s/ STEPHEN MAXWELL -------------------------------------- STEPHEN MAXWELL, TRUSTEE OF THE STEPHEN HALSTEAD MAXWELL IRREVOCABLE TRUST /s/ STACEY SUE MAXWELL BERRY -------------------------------------- STACEY SUE MAXWELL BERRY, TRUSTEE OF THE STACEY SUE MAXWELL BERRY IRREVOCABLE TRUST /s/ JEFFREY L. MAXWELL -------------------------------------- JEFFREY L. MAXWELL, TRUSTEE OF THE JEFFREY LYLE MAXWELL IRREVOCABLE TRUST /s/ WILLIAM R. REDUS -------------------------------------- WILLIAM R. REDUS 57 EX-2.4 5 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.4 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. HRA ACQUISITION CORPORATION HRA, INC. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PAGE 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PAGE 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PAGE 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PAGE 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
v 7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK
vi 8 Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
vii 9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), HRA ACQUISITION CORPORATION, a Delaware corporation ("NEWCO"), HRA, INC., a Tennessee corporation (the "COMPANY"), TED FELDMAN, JIM CARPENTER and BARTFUND I LIMITED PARTNERSHIP (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly- owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of NEWCO and the COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that NEWCO merge with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and Tennessee; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of Brewer Personnel Services, Inc., ProStaff Personnel, Inc., Blethen Group, The Maxwell Companies, Creative Temporaries Corporation, and First Choice Staffing, Inc. (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: 10 "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. "Funding and Consummation Date" has the meaning set forth in Section 4. "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. 2 11 "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). "Returns" has the meaning set forth at the end of Section 5.22. "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. 3 12 "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III Ted Feldman David Bartholomew The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of Tennessee and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and 4 13 effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of Tennessee. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving 5 14 Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount 6 15 of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. Each of the COMPANY and the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof 7 16 shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of 8 17 shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are 9 18 reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the 10 19 COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid 11 20 and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. 12 21 The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, 13 22 the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding 14 23 and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the 15 24 COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. 16 25 (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 17 26 (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: 18 27 (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or 19 28 (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether 20 29 express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the 21 30 warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 22 31 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms 23 32 or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member 24 33 (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is 25 34 subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. 26 35 (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance 27 36 or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; 28 37 (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel; (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary 29 38 course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment 30 39 agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding 31 40 Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of the filing. 32 41 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any 33 42 request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share for STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 34 43 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed 35 44 hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 36 45 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of 37 46 its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without 38 47 limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 39 48 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing 40 49 herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been 41 50 consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; 42 51 (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 43 52 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or 44 53 threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to Section 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof or in the event of death of any STOCKHOLDER, none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 45 54 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. 46 55 XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). 47 56 Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; 48 57 (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 49 58 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 50 59 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; 51 60 (c) If to the COMPANY, addressed to it at: HRA, Inc. 3319 West End Avenue Nashville, Tennessee Attn: David Bartholomew and marked "Personal and Confidential" with copies to: Stokes & Bartholomew SunTrust Center 424 Church Street, 28th Floor Nashville, Tennessee 37219-2386 Attn: Carter R. Todd or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 52 61 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. 53 62 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER ----------------------------------- Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- HRA ACQUISITION CORPORATION By /s/ CLETE T. BREWER ----------------------------------- Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- HRA, INC. By /s/ TED FELDMAN ----------------------------------- Name: Ted Feldman ------------------------------- Title: President ATTEST: /s/ LETHA SEIFERT - ----------------------------------- /s/ TED FELDMAN -------------------------------------- TED FELDMAN 54 63 /s/ JIM CARPENTER -------------------------------------- JIM CARPENTER BARTFUND I LIMITED PARTNERSHIP By /s/ WILLIAM DAVID BARTHOLOMEW ----------------------------------- Title: General Partner ------------------------------- ATTEST: /s/ LETHA SEIFERT - ----------------------------------- 55 EX-2.5 6 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.5 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. FIRST CHOICE STAFFING ACQUISITION CORPORATION FIRST CHOICE STAFFING, INC. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
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PAGE 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PAGE 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PAGE 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PAGE 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
v 7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK
vi 8 Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
vii 9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), FIRST CHOICE STAFFING ACQUISITION CORPORATION, a Delaware corporation ("NEWCO"), FIRST CHOICE STAFFING, INC., a South Carolina corporation (the "COMPANY"), WILLIAM T. GREGORY, JEFFERY T. GREGORY, SHERRY GREGORY BARNES and PAIGE GREGORY GILLILAND (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly- owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of NEWCO and the COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of the Constituent Corporations and their respective stockholders that NEWCO merge with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and South Carolina; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of Brewer Personnel Services, Inc., ProStaff Personnel, Inc., HRA, Inc., Blethen Group, The Maxwell Companies, and Creative Temporaries Corporation (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: 10 "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. "Funding and Consummation Date" has the meaning set forth in Section 4. "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. 2 11 "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). "Returns" has the meaning set forth at the end of Section 5.22. "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. 3 12 "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III William T. Gregory Kirk Wall The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of South Carolina and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and 4 13 effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of South Carolina. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving 5 14 Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount 6 15 of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. Each of the COMPANY and the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof 7 16 shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of 8 17 shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are 9 18 reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the 10 19 COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid 11 20 and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. 12 21 The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, 13 22 the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding 14 23 and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the 15 24 COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. 16 25 (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. 17 26 (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: 18 27 (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or 19 28 (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether 20 29 express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the 21 30 warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 22 31 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms 23 32 or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member 24 33 (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is 25 34 subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. 26 35 (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance 27 36 or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; 28 37 (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel. (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary 29 38 course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment 30 39 agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding 31 40 Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino 32 41 filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of the filing. VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 33 42 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share for STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and 34 43 Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 35 44 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such 36 45 guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 37 46 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless 38 47 STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged 39 48 omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 40 49 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; 41 50 (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the 42 51 Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by 43 52 any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and 44 53 the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof or in the event of death of any STOCKHOLDER, none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. 45 54 XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. 46 55 XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). 47 56 Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; 48 57 (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 49 58 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 50 59 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; 51 60 (c) If to the COMPANY, addressed to it at: First Choice Staffing, Inc. 1624 Ebeneaer Road Rock Hill, South Carolina 29732 Attn: Willian T. Gregory and marked "Personal and Confidential" with copies to: Harper, Peterson & Rogers 200 Oakland Avenue, Suite D P.O. Box 229 Rock Hill, South Carolina 29731-6229 Attn: Don Harper or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 52 61 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. 53 62 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER ------------------------------------- Name: Clete T. Brewer ---------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - --------------------------------------- FIRST CHOICE STAFFING ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------- Name: Clete T. Brewer ---------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - --------------------------------------- FIRST CHOICE STAFFING, INC. By /s/ WILLIAM T. GREGORY ------------------------------------- Name: William T. Gregory ---------------------------------- Title: President ATTEST: /s/ WILLIAM T. GREGORY - --------------------------------------- /s/ WILLIAM T. GREGORY ---------------------------------------- WILLIAM T. GREGORY 54 63 /s/ JEFFREY T. GREGORY ---------------------------------------- JEFFERY T. GREGORY /s/ SHERRY GREGORY BARNES ---------------------------------------- SHERRY GREGORY BARNES /s/ PAIGE GREGORY GILLILAND ---------------------------------------- PAIGE GREGORY GILLILAND 55 EX-2.6 7 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.6 _________________________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION dated as of the 17th day of June, 1996 by and among STAFFMARK, INC. DP PROS OF BURLINGTON ACQUISITION CORPORATION, BLETHEN TEMPORARIES ACQUISITION CORPORATION, PERSONNEL PLACEMENT ACQUISITION CORPORATION, JAEGER PERSONNEL SERVICES ACQUISITION CORPORATION, DIXON ENTERPRISES OF BURLINGTON ACQUISITION CORPORATION, TRASEC ACQUISITION CORPORATION DP PROS OF BURLINGTON, INC., BLETHEN TEMPORARIES, INC., PERSONNEL PLACEMENT, INC., JAEGER PERSONNEL SERVICES, Ltd., DIXON ENTERPRISES OF BURLINGTON, INC., TRASEC CORP. and the STOCKHOLDERS named herein _________________________________________________________________ 2 TABLE OF CONTENTS
PAGE I. THE MERGER 1.1 Delivery and Filing of Articles of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.2 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Certificate of Incorporation, By-laws and Board of Directors of Surviving Corporation . . . . . . . . . . . 4 1.4 Certain Information With Respect to the Capital Stock of the COMPANY, STAFFMARK and NEWCO . . . . . . . . . 5 1.5 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 II. CONVERSION OF STOCK 2.1 Manner of Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 III. DELIVERY OF MERGER CONSIDERATION 3.1 Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.2 Delivery of Stockholder Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 IV. CLOSING 4.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS 5.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.5 No Bonus Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.7 Predecessor Status; etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.8 Spin-off by the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.9 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.10 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.11 Accounts and Notes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.12 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.14 Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.15 Significant Customers; Material Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.16 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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PAGE 5.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5.18 Compensation; Employment Agreements; Organized Labor Matters . . . . . . . . . . . . . . . . . . . . . . . 13 5.19 Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.20 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.21 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.22 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.23 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.24 Government Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.25 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.26 Deposit Accounts; Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.27 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.28 Relations with Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.29 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.30 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.31 Authority; Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.32 Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.33 No Intention to Dispose of COMPANY Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 VI. REPRESENTATIONS OF STAFFMARK AND NEWCO 6.1 Due Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Capital Stock of the COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Transactions in Capital Stock, Reorganization Accounting . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.6 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Liabilities and Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Conformity with Law; Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 No Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.10 Validity of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.11 STAFFMARK Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.12 No Side Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.13 Business; Real Property; Material Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.15 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.16 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.17 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.18 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.19 Permits and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 VII. COVENANTS PRIOR TO CLOSING 7.1 Access and Cooperation; Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
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PAGE 7.3 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.4 No Shop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Notice to Bargaining Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.6 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.7 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.8 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 7.9 Cooperation in Preparation of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.10 Final Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 7.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY 8.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 33 8.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.4 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.6 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.7 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.8 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.9 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.10 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.11 NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.12 Approval of Additional Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO 9.1 Representations and Warranties; Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 35 9.2 No Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 STOCKHOLDERS' Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Termination of Related Party Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.7 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Consents and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Good Standing Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Closing of IPO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 FIRPTA Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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PAGE X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 Release From Guarantees; Repayment of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 36 10.2 Preservation of Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.3 Preparation and Filing of Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.5 Preservation of Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.6 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.7 Right of First Refusal to Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 XI. INDEMNIFICATION 11.1 General Indemnification by the STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.2 Indemnification by STAFFMARK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11.3 Third Person Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 11.4 Exclusive Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 11.5 Limitations on Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 XII. TERMINATION OF AGREEMENT 12.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 12.2 Liabilities in Event of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 XIII. NONCOMPETITION 13.1 Prohibited Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 13.2 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.3 Reasonable Restraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Severability; Reformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.5 Independent Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 13.6 Materiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.2 STAFFMARK and NEWCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.3 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 XV. TRANSFER RESTRICTIONS 15.1 Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
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PAGE XVI. FEDERAL SECURITIES ACT REPRESENTATIONS 16.1 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.2 Economic Risk; Sophistication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 16.3 Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 XVII. REGISTRATION RIGHTS 17.1 Piggyback Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.2 Demand Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 17.3 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 17.4 Availability of Rule 144 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 17.5 Merger, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 XVIII. GENERAL 18.1 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.3 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 18.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.5 Brokers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 18.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.9 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 18.10 Exercise of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.11 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.12 Reformation and Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.13 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.14 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.15 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
v 7 SCHEDULES and ANNEXES Annex I - Form of Articles of Merger Annex II - Form of Certificate of Incorporation and By-laws of PC Annex III - Consideration to Founding Companies Annex IV - Stockholders and Stock Ownership of the COMPANY Annex V - Stockholders and Stock Ownership of PC Annex VI - Form of Opinion of Wright, Lindsey & Jennings Annex VII - Form of Opinion of COMPANY Counsel Annex VIII - Form of Employment Agreement Schedule 1.4 - Authorized and Outstanding Capital Stock Schedule 5.1 - Qualifications to do Business Schedule 5.2 - Required Shareholder Approvals Schedule 5.3 - Exceptions Regarding Capital Stock of COMPANY Schedule 5.4 - Transactions in Capital Stock; Options & Warrants to Acquire Capital Stock Schedule 5.5 - Stock Issued Pursuant to Awards, Grants and Bonuses Schedule 5.6 - Subsidiaries; Capitalization of Subsidiaries Schedule 5.7 - Names of Predecessor Companies Schedule 5.8 - Sales or Spin-Offs of Significant Assets Schedule 5.9 - Initial Financial Statements Schedule 5.10 - Significant Liabilities and Obligations Schedule 5.11 - Accounts and Notes Receivable Schedule 5.12 - Licenses, Franchises, Permits and Other Governmental Authorizations Schedule 5.13 - Environmental Matters Schedule 5.15 - Significant Customers and Material Contracts Schedule 5.16 - Real Property Schedule 5.17 - Insurance Policies and Claims Schedule 5.18 - Officers, Directors and Key Employees, Employment Agreements; Compensation Schedule 5.19 - Employee Benefit Plans Schedule 5.20 - Violations of ERISA Schedule 5.21 - Violations of Law, Regulations or Orders Schedule 5.22 - Tax Returns and Examinations Schedule 5.22(v) - Federal, State, Local and Foreign Income Tax Returns Filed Schedule 5.22(xvii) - Aggregate Tax Losses Schedule 5.23 - Violations of Charter and Documents and Material Defaults Schedule 5.24 - Governmental Contracts Subject to Price Redetermination or Renegotiation Schedule 5.25 - Changes Since Balance Sheet Date Schedule 5.26 - Deposit Accounts; Powers of Attorney Schedule 5.30 - Prohibited Activities Schedule 5.31 - Ownership of COMPANY Stock Schedule 6.4 - Transactions in Capital Stock of STAFFMARK Schedule 6.6 - Financial Statements of STAFFMARK Schedule 6.7 - Liabilities and Obligations of STAFFMARK Schedule 6.8 - Conformity with Law; Litigation of STAFFMARK
vi 8 Schedule 6.9 - Violations of Charter Documents and Material Defaults of STAFFMARK Schedule 6.13 - Real Property and Material Personal Property and Agreements of STAFFMARK Schedule 6.14 - Tax Returns of STAFFMARK Schedule 7.2 - Exceptions to Conducting Business in the Ordinary Course Between Balance Sheet Date and Consummation Date Schedule 7.3 - Prohibited Activities Schedule 7.5 - Notice to Bargaining Agents Schedule 7.8 - Amendment of Schedules Schedule 7.10 - Final Financial Statements Schedule 9.7 - Termination of Related Party Agreements Schedule 9.12 - Employment Agreements Schedule 11.1(vi) - Existing or Threatened Litigation Schedule 11.2(v) - Specifically Identified Indemnification Items Schedule 13.1 - Prohibited Activities Schedule 18.5 - Brokers and Agents
vii 9 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of the 17th day of June, 1996, by and among STAFFMARK, INC., a Delaware corporation ("STAFFMARK"), DP PROS OF BURLINGTON ACQUISITION CORPORATION, a Delaware corporation, BLETHEN TEMPORARIES ACQUISITION CORPORATION, a Delaware corporation, PERSONNEL PLACEMENT ACQUISITION CORPORATION, a Delaware corporation, JAEGER PERSONNEL SERVICES ACQUISITION CORPORATION, a Delaware corporation, DIXON ENTERPRISES OF BURLINGTON ACQUISITION CORPORATION, a Delaware corporation and TRASEC ACQUISITION CORPORATION, a Delaware corporation (collectively, "NEWCO"), DP PROS OF BURLINGTON, INC., a North Carolina corporation, BLETHEN TEMPORARIES, INC., a North Carolina corporation, PERSONNEL PLACEMENT, INC., a North Carolina corporation, JAEGER PERSONNEL SERVICES, Ltd., a North Carolina corporation, DIXON ENTERPRISES OF BURLINGTON, INC., a North Carolina corporation, and TRASEC CORP., a North Carolina corporation (collectively, the "COMPANY"), JAN BLETHEN, BLETHEN FAMILY INVESTMENTS LIMITED PARTNERSHIP, ANN F. JAEGER, CHRISTOPHER JAEGER, DEBORAH LYNN DIXON PORCH and TRACY ANNE BLETHEN (the "STOCKHOLDERS"). The STOCKHOLDERS are all the stockholders of the COMPANY. WHEREAS, each of NEWCO is a corporation duly organized and existing under the laws of the State of Delaware, having been incorporated on June 18, 1996, solely for the purpose of completing the transactions set forth herein, and is a wholly-owned subsidiary of STAFFMARK, a corporation organized and existing under the laws of the State of Delaware; WHEREAS, the respective Boards of Directors of each of NEWCO and each corresponding COMPANY (which together are hereinafter collectively referred to as "Constituent Corporations") deem it advisable and in the best interests of each of the Constituent Corporations and their respective stockholders that each NEWCO merge with and into each corresponding COMPANY pursuant to this Agreement and the applicable provisions of the laws of the States of Delaware and North Carolina; WHEREAS, STAFFMARK is entering into other separate agreements not materially different than this Agreement (the "Other Agreements"), each of which is entitled "Agreement and Plan of Reorganization," with each of Brewer Personnel Services, Inc., ProStaff Personnel, Inc., HRA, Inc., The Maxwell Companies, Creative Temporaries Corporation, and First Choice Staffing, Inc. (together with the COMPANY, the "Initial Founding Companies"), and such other entities as STAFFMARK may elect to enter into a similar agreement with, as approved by each of the Founding Companies, prior to the filing of the Registration Statement (as defined herein) in order to acquire additional staffing services (the Company, together with each of the entities with which STAFFMARK has entered into the Other Agreements, are collectively referred to herein as the "Founding Companies"); WHEREAS, this Agreement, the Other Agreements and the IPO of STAFFMARK Stock constitute the "STAFFMARK Plan of Organization;" WHEREAS, the Boards of Directors of STAFFMARK, each of the Other Founding Companies and each of the subsidiaries of STAFFMARK that are parties to the Other Agreements have approved and adopted the STAFFMARK Plan of Organization as an integrated plan to transfer the capital stock or assets of the Founding Companies to STAFFMARK as a tax-free transfer of property under Section 351 of the Internal Revenue Code of 1986, as amended; 10 WHEREAS, in consideration of the agreements of the Other Founding Companies pursuant to the Other Agreements, the Board of Directors of each of the COMPANY has approved this Agreement as part of the STAFFMARK Plan of Organization in order to transfer the capital stock of the COMPANY to STAFFMARK; WHEREAS, unless the context otherwise requires, capitalized terms used in this Agreement or in any schedule attached hereto and not otherwise defined shall have the following meanings for all purposes of this Agreement: "1933 Act" means the Securities Act of 1933, as amended. "1934 Act" means the Securities Exchange Act of 1934, as amended. "Acquired Party" has the meaning set forth at the end of Section 5.22. "Acquisition Companies" shall mean NEWCO and each of the other Delaware companies wholly-owned by STAFFMARK prior to the Funding and Consummation Date. "Articles of Merger" shall mean those Articles of Merger with respect to the Merger substantially in the form of Annex I attached hereto or with such other changes therein as may be required by applicable state laws. "Balance Sheet Date" shall mean March 31, 1996. "Charter Document" has the meaning set forth in Section 5.1. "Closing" has the meaning set forth in Section 4. "Closing Date" has the meaning set forth in Section 4. "COMPANY" has the meaning set forth in the first paragraph of this Agreement. "COMPANY Stock" has the meaning set forth in Section 2.1. "Constituent Corporations" has the meaning set forth in the second recital of this Agreement. "Effective Time of the Merger" shall mean the time as of which the Merger becomes effective, which the parties hereto contemplate to occur on the Funding and Consummation Date. "Environmental Laws" has the meaning set forth in Section 5.13. "Expiration Date" has the meaning set forth in Section 5(A). "Founding Companies" has the meaning set forth in the third recital of this Agreement. "Funding and Consummation Date" has the meaning set forth in Section 4. 2 11 "Initial Founding Companies" has the meaning set forth in the third recital of this Agreement. "IPO" means the initial public offering of STAFFMARK Stock pursuant to the Registration Statement. "Material Adverse Effect" has the meaning set forth in Section 5.1. "Material Documents" has the meaning set forth in Section 5.23. "Merger" means the merger of NEWCO with and into the COMPANY pursuant to this Agreement and the applicable provisions of the laws of the State of Delaware and other applicable state laws. "NEWCO" has the meaning set forth in the first paragraph of this Agreement. "NEWCO STOCK" means the common stock, par value $.01 per share, of NEWCO. "Non-Controlling Stockholders" means any stockholder of the COMPANY holding 10% or less of COMPANY Common Stock at the time of this Agreement. "Other Agreements" has the meaning set forth in the third recital of this Agreement. "Other Founding Companies" means all of the Founding Companies other than the Company. "STAFFMARK" has the meaning set forth in the first paragraph of this Agreement. "STAFFMARK Charter Documents" has the meaning set forth in Section 6.1. "STAFFMARK Stock" means the common stock, par value $.01 per share, of STAFFMARK. "Plans" has the meaning set forth in Section 5.19. "Plan of Organization" means the consummation of Agreements executed on the date hereof by the Founding Companies. "Pricing" means the determination by STAFFMARK and the Underwriters of the public offering price of the shares of STAFFMARK Stock in the IPO; the Pricing shall take place on or before the Closing. "Qualified Plans" has the meaning set forth in Section 5.20. "Registration Statement" means that certain registration statement on Form S-1 covering the IPO. "Relevant Group" has the meaning set forth in Section 5.22(i). "Returns" has the meaning set forth at the end of Section 5.22. 3 12 "Schedule" means each Schedule attached hereto, which shall reference the relevant sections of this Agreement, on which parties hereto disclose information as part of their respective representations, warranties and covenants. "SEC" means the United States Securities and Exchange Commission. "STOCKHOLDER(S)" has the meaning set forth in the first paragraph of this Agreement. "Surviving Corporation" shall mean the COMPANY as the surviving party in the Merger. "Tax" has the meaning set forth at the end of Section 5.22. "Taxing Authority" has the meaning set forth at the end of Section 5.22. "Underwriters" means the prospective underwriters in the IPO, as identified in the Registration Statement. NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto hereby agree as follows: I. THE MERGER 1.1 DELIVERY AND FILING OF ARTICLES OF MERGER. The Constituent Corporations will cause Articles of Merger to be signed, verified and delivered to the Secretary of State of the State of Delaware and, as required, a similar filing to be made with the relevant authorities in the jurisdiction in which the COMPANY is organized, on or before the Funding and Consummation Date. 1.2 EFFECTIVE TIME OF THE MERGER. At the Effective Time of the Merger, NEWCO shall be merged with and into the COMPANY in accordance with the Articles of Merger, the separate existence of NEWCO shall cease, the COMPANY shall be the surviving party in the Merger and the COMPANY is sometimes hereinafter referred to as the Surviving Corporation. The Merger will be effected in a single transaction. 1.3 CERTIFICATE OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING CORPORATION. At the Effective Time of the Merger: (i) the Certificate of Incorporation of the COMPANY then in effect shall be the Certificate of Incorporation of the Surviving Corporation until changed as provided by law; (ii) the By-laws of NEWCO then in effect shall become the By-laws of the Surviving Corporation; and subsequent to the Effective Time of the Merger, such By-laws shall be the By-laws of the Surviving Corporation until they shall thereafter be duly amended; 4 13 (iii) the Board of Directors of the Surviving Corporation shall consist of the following persons: Clete T. Brewer Robert H. Janes, III Jan Blethen-Groome Tracey A. Blethen The Board of Directors of the Surviving Corporation shall hold office subject to the provisions of the laws of the State of North Carolina and of the Certificate of Incorporation and By-laws of the Surviving Corporation; and (iv) the officers of the COMPANY immediately prior to the Effective Time of the Merger shall continue as the officers of the Surviving Corporation in the same capacity or capacities, and effective upon the Effective Time of the Merger Clete T. Brewer shall be appointed as a vice president of the Surviving Corporation and Robert H. Janes, III shall be appointed as an Assistant Secretary of the Surviving Corporation, each of such officers to serve, subject to the provisions of the Certificate of Incorporation and By-laws of the Surviving Corporation, until his or her successor is duly elected and qualified. 1.4 CERTAIN INFORMATION WITH RESPECT TO THE CAPITAL STOCK OF THE COMPANY, STAFFMARK AND NEWCO. The respective designations and numbers of outstanding shares and voting rights of each class of outstanding capital stock of the COMPANY, STAFFMARK and NEWCO as of the date of this Agreement are as follows: (i) as of the date of this Agreement, the authorized and outstanding capital stock of the COMPANY is as set forth on Schedule 1.4 hereto; (ii) immediately prior to the Funding and Consummation Date, the authorized capital stock of STAFFMARK will consist of 26,000,000 shares of STAFFMARK Stock, of which the number of issued and outstanding shares will be set forth in the Registration Statement, and 1,000,000 shares of preferred stock, $.01 par value, of which no shares will be issued and outstanding; and (iii) as of the date of this Agreement, the authorized capital stock of NEWCO consists of 3,000 shares of NEWCO Stock, of which ten (10) shares are issued and outstanding. 1.5 EFFECT OF MERGER. At the Effective Time of the Merger, the effect of the Merger shall be as provided in the applicable provisions of the General Corporation Law of the State of Delaware (the "Delaware GCL") and the law of the State of North Carolina. Except as herein specifically set forth, the identity, existence, purposes, powers, objects, franchises, privileges, rights and immunities of the COMPANY shall continue unaffected and unimpaired by the Merger and the corporate franchises, existence and rights of NEWCO shall be merged with and into the COMPANY, and the COMPANY, as the Surviving Corporation, shall be fully vested therewith. At the Effective Time of the Merger, the separate existence of NEWCO shall cease and, in accordance with the terms of this Agreement, the Surviving Corporation shall possess all the rights, privileges, immunities and franchises, of a public, as well as of a private, nature, and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all taxes, including those due and owing and those accrued, and all other choses in action, and all and every other interest of or belonging to or due to the 5 14 COMPANY and NEWCO shall be taken and deemed to be transferred to, and vested in, the Surviving Corporation without further act or deed; and all property, rights and privileges, powers and franchises and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the COMPANY and NEWCO; and the title to any real estate, or interest therein, whether by deed or otherwise, under the laws of the state of incorporation vested in the COMPANY and NEWCO, shall not revert or be in any way impaired by reason of the Merger. Except as otherwise provided herein, the Surviving Corporation shall thenceforth be responsible and liable for all the liabilities and obligations of the COMPANY and NEWCO and any claim existing, or action or proceeding pending, by or against the COMPANY or NEWCO may be prosecuted as if the Merger had not taken place, or the Surviving Corporation may be substituted in their place. Neither the rights of creditors nor any liens upon the property of the COMPANY or NEWCO shall be impaired by the Merger, and all debts, liabilities and duties of the COMPANY and NEWCO shall attach to the Surviving Corporation, and may be enforced against such Surviving Corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by such Surviving Corporation. II. CONVERSION OF STOCK 2.1 MANNER OF CONVERSION. The manner of converting the shares of (i) outstanding capital stock of the COMPANY ("COMPANY Stock") and (ii) NEWCO Stock, issued and outstanding immediately prior to the Effective Time of the Merger, respectively, into shares of (x) STAFFMARK Stock and (y) common stock of the Surviving Corporation, respectively, shall be as follows: As of the Effective Time of the Merger: (i) all of the shares of COMPANY Stock issued and outstanding immediately prior to the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder thereof, automatically shall be deemed to represent (1) that number of shares of STAFFMARK Stock set forth on Part I of Annex III hereto and (2) the right to receive the amount of cash set forth on Part I of Annex III hereto; (ii) all shares of COMPANY Stock that are held by the COMPANY as treasury stock shall be cancelled and retired and no shares of STAFFMARK Stock or other consideration shall be delivered or paid in exchange therefor; and (iii) each share of NEWCO Stock issued and outstanding immediately prior to the Effective Time of the Merger, shall, by virtue of the Merger and without any action on the part of STAFFMARK, automatically be converted into one fully paid and non-assessable share of common stock of the Surviving Corporation which shall constitute all of the issued and outstanding shares of common stock of the Surviving Corporation immediately after the Effective Time of the Merger. All STAFFMARK Stock received by the STOCKHOLDERS pursuant to this Agreement shall, except for restrictions on resale or transfer described in Sections 15 and 16 hereof, have the same rights as all the other shares of outstanding STAFFMARK Stock by reason of the provisions of the Certificate of Incorporation of STAFFMARK or as otherwise provided by the Delaware GCL. All voting rights of such STAFFMARK Stock received by the STOCKHOLDERS shall be fully exercisable by the 6 15 STOCKHOLDERS and the STOCKHOLDERS shall not be deprived nor restricted in exercising those rights. At the Effective Time of the Merger, STAFFMARK shall have no class of capital stock issued and outstanding other than the STAFFMARK Stock. III. DELIVERY OF MERGER CONSIDERATION 3.1 DELIVERY OF SHARES. At the Effective Time of the Merger and on the Funding and Consummation Date the STOCKHOLDERS, each of the holders of all outstanding certificates representing shares of COMPANY Stock, shall, upon surrender of such certificates, receive (i) the respective number of shares of STAFFMARK Stock set forth on Part II of Annex III and (ii) the amount of cash set forth on Part II of Annex III hereto, said cash to be payable by certified check or wire transfer at the election of the STOCKHOLDERS. 3.2 DELIVERY OF STOCKHOLDER SHARES. The STOCKHOLDERS shall deliver to STAFFMARK at the Closing the certificates representing COMPANY Stock, duly endorsed in blank by the STOCKHOLDERS, or accompanied by blank stock powers, with signatures guaranteed by a national or state chartered bank or other financial institution, and with all necessary transfer tax and other revenue stamps, acquired at the STOCKHOLDERS' expense, affixed and cancelled. The STOCKHOLDERS agree promptly to cure any deficiencies with respect to the endorsement of the stock certificates or other documents of conveyance with respect to such COMPANY Stock or with respect to the stock powers accompanying any COMPANY Stock. IV. CLOSING 4.1 CLOSING. At or prior to the Pricing, the parties shall take all actions necessary to prepare to (i) effect the Merger (including, if permitted by applicable state law, the filing with the appropriate state authorities of the Articles of Merger which shall become effective at the Effective Time of the Merger) and (ii) effect the conversion and delivery of shares referred to in Section 3 hereof; provided, that such actions shall not include the actual completion of the Merger or the conversion and delivery of the shares and certified check(s) or wire transfer(s) referred to in Section 3 hereof, each of which actions shall only be taken upon the Funding and Consummation Date as herein provided. The taking of the actions described in clauses (i) and (ii) above (the "Closing") shall take place on the closing date (the "Closing Date") at the offices of Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. On the Funding and Consummation Date (x) the Articles of Merger shall be filed with the appropriate state authorities, or if already filed shall become effective and the Merger shall thereby be effected, (y) all transactions contemplated by this Agreement, including the conversion and delivery of shares, the delivery of a certified check(s) or wire transfer(s) in an amount equal to the cash portion of the consideration which the STOCKHOLDERS shall be entitled to receive pursuant to the Merger referred to in Section 3 hereof shall be completed and (z) the closing with respect to the IPO shall occur and be deemed to be completed. The date on which the actions described in the preceding clauses (x), (y) and (z) occurs shall be referred to as the "Funding and Consummation Date." This Agreement shall in any event terminate if the Funding and Consummation Date has not occurred within 15 business days of the Closing Date. Time is of the essence. 7 16 V. REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS (A) REPRESENTATIONS AND WARRANTIES OF COMPANY AND STOCKHOLDERS. Each of the COMPANY and each of the STOCKHOLDERS jointly and severally represent and warrant that all of the following representations and warranties in this Section 5(A) are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 5.22 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 5.22 and (ii) solely for purposes of Section 11.1(iii) hereof, and solely to the extent that in connection with the IPO, STAFFMARK actually incurs liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. For purposes of this Section 5, the term COMPANY shall mean and refer to the COMPANY and all of its subsidiaries, if any. 5.1 DUE ORGANIZATION. The COMPANY is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and is duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on its business in the places and in the manner as now conducted except (i) as set forth on the Schedule 5.1 or (ii) where the failure to be so authorized or qualified would not have a material adverse effect on the business, operations, affairs, prospects, properties, assets or condition (financial or otherwise), of the COMPANY taken as a whole (as used herein with respect to the COMPANY, or with respect to any other person, a "Material Adverse Effect"). Schedule 5.1 contains a list of all jurisdictions in which the COMPANY is authorized or qualified to do business. A certified copy of the Certificate or Articles of Incorporation and a true, complete and correct copy of the By-laws, both as amended, of the COMPANY (the "Charter Documents") are attached hereto as Schedule 5.1. The minute books and stock records of the COMPANY, as heretofore made available to STAFFMARK, are correct and complete in all material respects. 5.2 AUTHORIZATION. (i) The representatives of the COMPANY executing this Agreement have the authority to enter into and bind the COMPANY to the terms of this Agreement and (ii) the COMPANY has the full legal right, power and authority to enter into this Agreement and the Merger, subject to any required shareholder approval described on Schedule 5.2. 5.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the COMPANY is as set forth in Section 1.4(i). All of the issued and outstanding shares of the capital stock of the COMPANY are owned by the STOCKHOLDERS in the amounts set forth in Annex IV and further, except as set forth on Schedule 5.3, are owned free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of the COMPANY have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by the STOCKHOLDERS and 8 17 further, such shares were offered, issued, sold and delivered by the COMPANY in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder. 5.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except as set forth on Schedule 5.4, the COMPANY has not acquired any COMPANY Stock since January 1, 1992. Except as set forth on Schedule 5.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates the COMPANY to issue any of its authorized but unissued capital stock; (ii) the COMPANY has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof; and (iii) neither the voting stock structure of the COMPANY nor the relative ownership of shares among any of its respective stockholders has been altered or changed in contemplation of the Merger. Schedule 5.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 5.5 NO BONUS SHARES. Except as set forth on Schedule 5.5, none of the shares of COMPANY Stock was issued pursuant to awards, grants or bonuses. 5.6 SUBSIDIARIES. Schedule 5.6 attached hereto lists the name of each of COMPANY's subsidiaries and sets forth the number and class of the authorized capital stock of each of COMPANY's subsidiaries and the number of shares of each of COMPANY's subsidiaries which are issued and outstanding, all of which shares (except as set forth on Schedule 5.6) are owned by the COMPANY, free and clear of all liens, security interests, pledges, voting trusts, equities, restrictions, encumbrances and claims of every kind. Except as set forth in Schedule 5.6, the COMPANY does not presently own, of record or beneficially, or control, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor is the COMPANY, directly or indirectly, a participant in any joint venture, partnership or other non-corporate entity. 5.7 PREDECESSOR STATUS; ETC. Set forth in Schedule 5.7 is a listing of all names of all predecessor companies of the COMPANY, including the names of any entities acquired by the COMPANY (by stock purchase, merger or otherwise) or from whom the COMPANY previously acquired material assets. Except as disclosed on Schedule 5.7, the COMPANY has not been a subsidiary or division of another corporation or a part of an acquisition which was later rescinded. 5.8 SPIN-OFF BY THE COMPANY. Except as set forth on Schedule 5.8, there has not been any sale, spin-off or split-up of material assets of either the COMPANY or any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the COMPANY ("Affiliates") since January 1, 1994. 5.9 FINANCIAL STATEMENTS. Attached hereto as Schedule 5.9 are copies of the following financial statements (the "COMPANY Financial Statements") of the COMPANY: the COMPANY's audited Consolidated Balance Sheet as of December 31, 1995 and 1994 and Statements of Income, Cash Flows and Retained Earnings for each of the years in the three-year period ended December 31, 1995 prepared by Arthur Andersen LLP and the COMPANY's unaudited Consolidated Balance Sheet as of March 31, 1996 and Statement of Income, Cash Flows and Retained Earnings for the three month period 9 18 ended March 31, 1996 prepared by Arthur Andersen LLP (March 31, 1996 being hereinafter referred to as the "Balance Sheet Date"). Such Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 5.9). Except as set forth on Schedule 5.9, such Consolidated Balance Sheets as of December 31, 1995, 1994, and 1993 and March 31, 1996 present fairly in all material respects the financial position of the COMPANY as of the dates indicated thereon, and such Consolidated Statements of Income, Cash Flows and Retained Earnings present fairly in all material respects the results of operations for the periods indicated thereon. 5.10 LIABILITIES AND OBLIGATIONS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.10) as of the Balance Sheet Date of (i) all liabilities of the COMPANY which are reflected on the balance sheet of the COMPANY at the Balance Sheet Date and (ii) any material liabilities of the COMPANY (including all liabilities in excess of $10,000 which are not reflected in the balance sheet as of the Balance Sheet Date. Except as set forth on Schedule 5.10, since the Balance Sheet Date the COMPANY has not incurred any material liabilities of any kind, character and description, whether accrued, absolute, secured or unsecured, contingent or otherwise, other than liabilities incurred in the ordinary course of business. The COMPANY has also delivered to STAFFMARK on Schedule 5.10, in the case of those contingent liabilities related to pending or threatened litigation, or other liabilities which are not fixed or otherwise accrued or reserved, a reasonable estimate of the maximum amount which may be payable. For each such contingent liability or liability for which the amount is not fixed or is contested, the COMPANY has provided to STAFFMARK the following information: (i) a summary description of the liability together with the following: (a) copies of all relevant documentation relating thereto; (b) amounts claimed and any other action or relief sought; and (c) name of claimant and all other parties to the claim, suit or proceeding. (ii) the name of each court or agency before which such claim, suit or proceeding is pending; and (iii) the date such claim, suit or proceeding was instituted; and (iv) a reasonable best estimate (but not a representation or warranty) of the maximum amount, if any, which is likely to become payable with respect to each such liability. If no estimate is provided, the best estimate shall for purposes of this Agreement be deemed to be zero. 5.11 ACCOUNTS AND NOTES RECEIVABLE. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.11) of the accounts and notes receivable of the COMPANY, as of the Balance Sheet Date, including any such amounts which are not reflected in the balance sheet as of the Balance Sheet Date, and including receivables from and advances to employees and the STOCKHOLDERS. Except to the extent reflected on Schedule 5.11, such accounts and notes are collectible in the amount shown on Schedule 5.11, net of reserves reflected in the balance sheet as of the Balance Sheet Date. The COMPANY shall also provide STAFFMARK with an accurate list of all receivables obtained subsequent to the Balance Sheet Date, but does not warrant the collectibility of the receivables obtained subsequent to the Balance Sheet Date. The COMPANY shall provide STAFFMARK with an aging of 10 19 all accounts and notes receivable showing amounts due in 30 day aging categories upon the execution of this Agreement and an updated aging within 5 days prior to the Closing Date. 5.12 PERMITS AND INTANGIBLES. The COMPANY holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business and the COMPANY has delivered to STAFFMARK an accurate list and summary description (Schedule 5.12) of all such licenses, franchises, permits and other governmental authorizations, including permits, titles (including motor vehicle titles and current registrations), fuel permits, licenses, franchises, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the COMPANY (including interests in software or other technology systems, programs and intellectual property). To the knowledge of the COMPANY, the licenses, franchises, permits and other governmental authorizations listed on Schedule 5.12 are valid, and the COMPANY has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. The COMPANY has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on the COMPANY. Except as specifically provided in the Schedule 5.12, the transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to the COMPANY by, any such licenses, franchises, permits or government authorizations. 5.13 ENVIRONMENTAL MATTERS. Except as set forth on the Schedule 5.13, (i) the COMPANY has complied with and is in compliance with all Federal, state, local and foreign statutes (civil and criminal), laws, ordinances, regulations, rules, notices, permits, judgments, orders and decrees applicable to any of them or any of their respective properties, assets, operations and businesses relating to environmental protection (collectively "Environmental Laws") including, without limitation, Environmental Laws relating to air, water, land and the generation, storage, use, handling, transportation, treatment or disposal of Hazardous Wastes and Hazardous Substances (as such terms are defined in any applicable Environmental Law); (ii) the COMPANY has obtained and adhered to all necessary permits and other approvals necessary to treat, transport, store, dispose of and otherwise handle Hazardous Wastes and Hazardous Substances and have reported, to the extent required by all Environmental Laws, all past and present sites owned and operated by the COMPANY where Hazardous Wastes or Hazardous Substances have been treated, stored, disposed of or otherwise handled; (iii) there have been no releases or threats of releases (as defined in Environmental Laws) at, from, in or on any property owned or operated by the COMPANY except as permitted by Environmental Laws; (iv) the COMPANY knows of no on-site or off-site location to which the COMPANY has transported or disposed of Hazardous Wastes and Hazardous Substances or arranged for the transportation of Hazardous Wastes and Hazardous Substances, which site is the subject of any Federal, state, local or foreign enforcement action or any other investigation which could lead to any claim against the COMPANY, STAFFMARK or NEWCO for any clean-up cost, remedial work, damage to natural resources or personal injury, including, but not limited to, any claim under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended; and (v) the COMPANY has no contingent liability in connection with any release of any Hazardous Waste or Hazardous Substance into the environment. 5.14 PERSONAL PROPERTY. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.14) of (x) all personal property included (or that will be included) in "depreciable plant, 11 20 property and equipment" on the balance sheet of the COMPANY, (y) all other personal property owned by the COMPANY with a value in excess of $2,500 (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date and (z) all leases and agreements in respect of personal property, including, in the case of each of (x), (y) and (z), (1) true, complete and correct copies of all such leases, (2) a listing of the capital costs of all such assets which are subject to capital leases and (3) an indication as to which assets are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.14, (i) all personal property used by the COMPANY in its business is either owned by the COMPANY or leased by the COMPANY pursuant to a lease included on Schedule 5.14, (ii) all of the personal property listed on Schedule 5.14 is in good working order and condition, ordinary wear and tear excepted and (iii) all leases and agreements included on Schedule 5.14 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.15 SIGNIFICANT CUSTOMERS; MATERIAL CONTRACTS AND COMMITMENTS. The COMPANY has delivered to STAFFMARK an accurate list (Schedule 5.15) of (i) all significant customers, or persons or entities that are sources of a significant number of customers, including those customers (or persons or entities) representing 5% or more of the COMPANY's annual revenues as of the Balance Sheet Date. Except to the extent set forth on Schedule 5.15, none of the COMPANY's significant customers (or persons or entities that are sources of a significant number of customers) have cancelled or substantially reduced or, to the knowledge of the COMPANY, are currently attempting or threatening to cancel a contract or substantially reduce utilization of the services provided by the COMPANY. The COMPANY has listed on Schedule 5.15 all material contracts, commitments and similar agreements to which the COMPANY is a party or by which it or any of its properties are bound (including, but not limited to, contracts with significant customers, joint venture or partnership agreements, contracts with any labor organizations, strategic alliances, loan agreements, indemnity or guaranty agreements, bonds, mortgages, options to purchase land, liens, pledges or other security agreements), other than agreements listed on Schedules 5.14 or 5.16, (a) in existence as of the Balance Sheet Date and (b) entered into since the Balance Sheet Date, and in each case has delivered true, complete and correct copies of such agreements to STAFFMARK. The COMPANY has complied with all material commitments and obligations pertaining to it, and is not in default under any contracts or agreements listed on Schedule 5.15 and no notice of default under any such contract or agreement has been received. The COMPANY has also indicated on Schedule 5.15 a summary description of all plans or projects involving the opening of new operations, expansion of existing operations, the acquisition of any personal property, business or assets requiring, in any event, the payment of more than $50,000 by the COMPANY. 5.16 REAL PROPERTY. Schedule 5.16 includes a list of all real property owned or leased by the COMPANY (i) as of the Balance Sheet Date and (ii) acquired since the Balance Sheet Date, and all other property, if any, used by the COMPANY in the conduct of its business. The COMPANY has good and insurable title to the real property owned by it, including those reflected on Schedule 5.14, subject to no mortgage, pledge, lien, conditional sales agreement, encumbrance or charge, except for: (i) liens reflected on Schedules 5.10 or 5.15 as securing specified liabilities (with respect to which no material default exists); 12 21 (ii) liens for current taxes not yet payable and assessments not in default; (iii) easements for utilities serving the property only; and (iv) easements, covenants and restrictions and other exceptions to title shown of record in the office of the County Clerks in which the properties, assets and leasehold estates are located which do not adversely affect the current use of the property. Schedule 5.16 shall, without limitation, contain true, complete and correct copies of all title reports and title insurance policies received or owned by the COMPANY with respect to real property owned by the COMPANY. The COMPANY has also delivered to STAFFMARK an accurate list on Schedule 5.16, true, complete and correct copies of all leases and agreements in respect of real property leased by the COMPANY, and an indication as to which such properties, if any, are currently owned, or were formerly owned, by STOCKHOLDERS or business or personal affiliates of the COMPANY or STOCKHOLDERS. Except as set forth on Schedule 5.16, all of such leases included on Schedule 5.16 are in full force and effect and constitute valid and binding agreements of the parties (and their successors) thereto in accordance with their respective terms. 5.17 INSURANCE. The COMPANY has delivered to STAFFMARK on Schedule 5.17 (i) an accurate list as of the Balance Sheet Date of all insurance policies carried by the COMPANY, (ii) an accurate list of all insurance loss runs or workers compensation claims received for the past three (3) policy years and (iii) true, complete and correct copies of all insurance policies currently in effect. Such insurance policies are currently in full force and effect and shall remain in full force and effect through the Funding and Consummation Date. No insurance carried by the COMPANY has ever been cancelled by the insurer and the COMPANY has never been denied coverage. 5.18 COMPENSATION; EMPLOYMENT AGREEMENTS; ORGANIZED LABOR MATTERS. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.18) showing all officers, directors, key employees and staff of the COMPANY, listing all employment agreements with the officers, directors and key employees and the rate of compensation (and the portions thereof attributable to salary, bonus and other compensation, respectively) of each of such persons as of (i) the Balance Sheet Date and (ii) the date hereof. The COMPANY has provided to STAFFMARK true, complete and correct copies of any employment agreements for persons listed on Schedule 5.18. Except as set forth on Schedule 5.18, since the Balance Sheet Date, there have been no increases in the compensation payable or any special bonuses to any officer, director, key employee or other employee, except ordinary salary increases implemented on a basis consistent with past practices. Except as set forth on Schedule 5.18, (i) the COMPANY is not bound by or subject to (and none of its respective assets or properties is bound by or subject to) any arrangement with any labor union, (ii) no employees of the COMPANY are represented by any labor union or covered by any collective bargaining agreement, (iii) no campaign to establish such representation is in progress and (iv) there is no pending or, to the best of the COMPANY's knowledge, threatened labor dispute involving the COMPANY and any group of its employees nor has the COMPANY experienced any labor interruptions over the past three years. The COMPANY believes its relationship with employees to be satisfactory. 13 22 5.19 EMPLOYEE PLANS. Attached hereto as Schedule 5.19 are complete and accurate copies, as of the Balance Sheet Date, of all employee benefit plans, all employee welfare benefit plans, all employee pension benefit plans, all multi-employer plans and all multi-employer welfare arrangements (as defined in Sections 3(3), (1), (2), (37) and (40), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), which are currently maintained and/or sponsored by the COMPANY, or any benefit plans or arrangements, formal or informal, that are not subject to ERISA, including, without limitation, employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements, or to which any COMPANY currently contributes, or has an obligation to contribute in the future (including, without limitation, benefit plans or arrangements that are not subject to ERISA, such as employment agreements and any other agreements containing "golden parachute" provisions and deferred compensation agreements), together with copies of any trusts related thereto and a classification of employees covered thereby (collectively, the "Plans"). Schedule 5.19 sets forth all of the Plans that have been terminated within the past three years. 5.20 COMPLIANCE WITH ERISA. Except for the Plans, the COMPANY does not maintain or sponsor, and is not a contributing employer to, a pension, profit-sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plan, employee welfare benefit plan, or any other compensation or benefit arrangement, formal or informal, with their respective employees, whether or not subject to ERISA. Except as set forth on the Schedule 5.20, (i) all Plans are in substantial compliance with all applicable provisions of ERISA and the regulations issued thereunder, as well as with all other applicable laws, and, in all material respects, have been administered, operated and managed in substantial accordance with the governing documents; (ii) all Plans that are intended to qualify (the "Qualified Plans") under Section 401(a) of the Code are so qualified and have been determined by the Internal Revenue Service to be so qualified, and copies of the current plan determination letters, most recent actuarial valuation reports, if any, most recent Form 5500, or, as applicable, Form 5500-C/R filed with respect to each such Qualified Plan or employee welfare benefit plan and most recent trustee or custodian report, are included as part of Schedule 5.20; (iii) to the extent that any Qualified Plans have not been amended to comply with applicable law, the remedial amendment period permitting retroactive amendment of such Qualified Plans has not expired and will not expire within 120 days after the Funding and Consummation Date; (iv) all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, annual reports, summary annual reports, actuarial reports, PBGC-1 Reports, audits or tax returns) have been timely filed or distributed, or failure to timely file or deliver will not result in a Material Adverse Effect to the COMPANY; (v) none of the STOCKHOLDERS, any Plan, or the COMPANY has engaged in any transaction prohibited under the provisions of Section 4975 of the Code or Section 406 of ERISA; (vi) no Plan has incurred an accumulated funding deficiency, as defined in Section 412(a) of the Code and Section 302(1) of ERISA; (vii) no circumstances exist pursuant to which the COMPANY could have any direct or indirect liability whatsoever (including being subject to any statutory lien to secure payment of any such liability), to the Pension Benefit Guaranty Corporation ("PBGC") under Title IV of ERISA or to the Internal Revenue Service for any excise tax or penalty with respect to any plan now or hereafter maintained or contributed to by the COMPANY or any member of a "controlled group" (as defined in Section 4001(a)(14) of ERISA) that includes the COMPANY; (viii) the COMPANY nor any member of a "controlled group" (as defined above) that includes the COMPANY currently has (or at the Funding and Consummation Date will have) any obligation whatsoever to contribute to any "multi-employer pension plan" (as defined in ERISA Section 4001(a)(14)), nor has any withdrawal liability whatsoever (whether or not yet assessed) arising under or 14 23 capable of assertion under Title IV of ERISA (including, but not limited to, Sections 4201, 4202, 4203, 4204, or 4205 thereof) been incurred by any Plan; (ix) there have been no terminations, partial terminations or discontinuance of contributions to any Qualified Plan without notice to and approval by the Internal Revenue Service; (x) no Plan which is subject to the provisions of Title IV of ERISA, has been terminated; (xi) there have been no "reportable events" (as that phrase is defined in Section 4043 of ERISA) with respect to any Plan which were not properly reported; (xii) the valuation of assets of any Qualified Plan, as of the Funding and Consummation Date, shall exceed the actuarial present value of all accrued pension benefits under any such Qualified Plan in accordance with the assumptions contained in the Regulations of the PBGC governing the funding of terminated defined benefit plans; (xiii) with respect to Plans which qualify as "group health plans" under Section 4980B of the Internal Revenue Code and Section 607(1) of ERISA and related regulations (relating to the benefit continuation rights imposed by "COBRA"), the COMPANY and the STOCKHOLDERS have complied (and on the Funding and Consummation Date will have complied) in all material respects with all reporting, disclosure, notice, election and other benefit continuation requirements imposed thereunder as and when applicable to such plans, and the COMPANY has not incurred (and will not incur) any material direct or indirect liability and is not (and will not be) subject to any material loss, assessment, excise tax penalty, loss of Federal income tax deduction or other sanction, arising on account of or in respect of any direct or indirect failure by the COMPANY or the STOCKHOLDERS, at any time prior to the Funding and Consummation Date, to comply with any such Federal or state benefit continuation requirement, which is capable of being assessed or asserted before or after the Funding and Consummation Date directly or indirectly against the COMPANY or the STOCKHOLDERS with respect to such group health plans; (xiv) The COMPANY is not now nor has it been within the past five years a member of a "controlled group" as defined in ERISA Section 4001(a)(14); (xv) there is no pending litigation, arbitration, or disputed claim, settlement or adjudication proceeding, and to the best of STOCKHOLDERS' knowledge, there is no threatened litigation, arbitration or disputed claim, settlement or adjudication proceeding, or any governmental or other proceeding, or investigation with respect to any Plan, or with respect to any fiduciary, administrator, or sponsor thereof (in their capacities as such), or any party in interest thereof; (xvi) the Financial Statements as of the Balance Sheet Date reflect the approximate total pension, medical and other benefit expense for all Plans, and no material funding changes or irregularities are reflected thereon which would cause such Financial Statements to be not representative of most prior periods; and (xvii) The COMPANY has not incurred liability under Section 4062 of ERISA. 5.21 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 5.21, the COMPANY is not in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 5.10, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of the COMPANY, threatened, against or affecting the COMPANY, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over any of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. The COMPANY has conducted and is conducting its business in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing which might have a Material Adverse Effect. 15 24 5.22 TAXES. Except as set forth on Schedule 5.22 (i) All Returns required to have been filed by or with respect to the COMPANY and any affiliated, combined, consolidated, unitary or similar group of which the COMPANY is or was a member (a "Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the COMPANY, any subsidiary and any member of a Relevant Group (individually, the "Acquired Party" and collectively, the "Acquired Parties") have been paid. (ii) The provisions for Taxes due by the COMPANY and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the COMPANY Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of such Acquired Party. (iii) No Acquired Party is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which an Acquired Party does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each Acquired Party has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No Acquired Party expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any Acquired Party either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any Acquired Party. No issues have been raised in any examination by any Taxing Authority with respect to any Acquired Party which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 5.22(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any Acquired Party for all taxable periods ended on or after January 1, 1991, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each Acquired Party has delivered to STAFFMARK complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, such Acquired Party since January 1, 1991. (vi) No Acquired Party has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (vii) No Acquired Party has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G of the Code. (viii) No Acquired Party is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any Acquired Party constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No Acquired Party is a party 16 25 to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No Acquired Party is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any Acquired Party is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No Acquired Party is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or, to STOCKHOLDERS' and COMPANY'S knowledge, threatened accounting method changes, of any Acquired Party that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No Acquired Party has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each Acquired Party has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No Acquired Party has any liability for Taxes of any person other than such Acquired Party (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any Acquired Party (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502-21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. (xvii) At the Balance Sheet Date the Acquired Parties had aggregate Tax Losses for federal income Tax purposes as described on Schedule 5.22(xvii) attached hereto. (xviii) At the Funding and Consummation Date, the COMPANY will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by the COMPANY to shareholders in the form of cash or other property immediately prior to the Funding and Consummation Date, amounts used by the COMPANY to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by the COMPANY will be included as assets of the COMPANY immediately prior to the Funding and Consummation Date. 17 26 (xix) At the Funding and Consummation Date, the COMPANY will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock in the COMPANY which, if exercised or converted, would affect STAFFMARK's acquisition or retention of ownership of more than 100 percent of the total combined voting power of all classes of COMPANY stock and more than 80 percent of the total number of shares of each class of COMPANY non-voting stock. (xx) The COMPANY is not an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xxi) The fair market value of the assets of the COMPANY exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxii) The COMPANY is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. For purposes of this Section 5.22, the following definitions shall apply: "Returns" means any returns, reports or statements (including any information returns) required to be filed for purposes of a particular Tax. "Tax" or "Taxes" means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, sales, use, property, deed, stamp, alternative or add-on minimum, environmental or other taxes, assessments, duties, fees, levies or other governmental charges of any nature whatever, whether disputed or not, together with any interest, penalties, additions to tax or additional amounts with respect thereto. "Taxing Authority" means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having or purporting to exercise jurisdiction with respect to any Tax. 5.23 NO VIOLATIONS. The COMPANY is not in violation of any Charter Document. Neither the COMPANY nor, to the knowledge of the COMPANY, any other party thereto, is in default under any lease, instrument, agreement, license, or permit set forth on Schedule 5.12, 5.14, 5.15 or 5.16, or any other material agreement to which it is a party or by which its properties are bound (the "Material Documents"); and, except as set forth in Schedule 5.23, (a) the rights and benefits of the COMPANY under the Material Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the Material Documents or the Charter Documents. Except as set forth on Schedule 5.23, none of the Material Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. Except as set forth on Schedule 5.23, none of the Material Documents prohibits the use or publication by the COMPANY, STAFFMARK or NEWCO of the name 18 27 of any other party to such Material Document, and none of the Material Documents prohibits or restricts the COMPANY from freely providing services to any other customer or potential customer or the COMPANY, STAFFMARK, NEWCO or any Other Founding Company. 5.24 GOVERNMENT CONTRACTS. Except as set forth on Schedule 5.24, the COMPANY is not now a party to any governmental contracts subject to price redetermination or renegotiation. 5.25 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth on Schedule 5.25, there has not been: (i) any material adverse change in the financial condition, assets, liabilities (contingent or otherwise), income or business of the COMPANY; (ii) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the properties or business of the COMPANY; (iii) any change in the authorized capital of the COMPANY or its outstanding securities or any change in its ownership interests or any grant of any options, warrants, calls, conversion rights or commitments; (iv) any declaration or payment of any dividend or distribution in respect of the capital stock or any direct or indirect redemption, purchase or other acquisition of any of the capital stock of the COMPANY; (v) any increase in the compensation, bonus, sales commissions or fee arrangement payable or to become payable by the COMPANY to any of its officers, directors, STOCKHOLDERS, employees, consultants or agents, except for ordinary and customary bonuses and salary increases for employees in accordance with past practice; (vi) any work interruptions, labor grievances or claims filed, or any event or condition of any character, materially adversely affecting the business of the COMPANY; (vii) any sale or transfer, or any agreement to sell or transfer, any material assets, property or rights of COMPANY to any person, including, without limitation, the STOCKHOLDERS and their affiliates; (viii) any cancellation, or agreement to cancel, any indebtedness or other obligation owing to the COMPANY, including without limitation any indebtedness or obligation of any STOCKHOLDERS or any affiliate thereof; (ix) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of the assets, property or rights of the COMPANY or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (x) any purchase or acquisition of, or agreement, plan or arrangement to purchase or acquire, any property, rights or assets outside of the ordinary course of the COMPANY's business; 19 28 (xi) any waiver of any material rights or claims of the COMPANY; (xii) any breach, amendment or termination of any material contract, agreement, license, permit or other right to which the COMPANY is a party; (xiii) any transaction by the COMPANY outside the ordinary course of its respective businesses; (xiv) any cancellation or termination of a material contract with a customer or client prior to the scheduled termination date; or (xv) any other distribution of property or assets by the COMPANY. 5.26 DEPOSIT ACCOUNTS; POWERS OF ATTORNEY. The COMPANY has delivered to STAFFMARK an accurate schedule (Schedule 5.26) as of the date of the Agreement, of: (i) the name of each financial institution in which the COMPANY has accounts or safe deposit boxes; (ii) the names in which the accounts or boxes are held; (iii) the type of account and account number; and (iv) the name of each person authorized to draw thereon or have access thereto. Schedule 5.26 also sets forth the name of each person, corporation, firm or other entity holding a general or special power of attorney from the COMPANY and a description of the terms of such power. 5.27 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by the COMPANY and the performance of the transactions contemplated herein have been duly and validly authorized by the Board of Directors of the COMPANY and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of the COMPANY. 5.28 RELATIONS WITH GOVERNMENTS. The COMPANY has not made, offered or agreed to offer anything of value to any governmental official, political party or candidate for government office nor has it otherwise taken any action which would cause the COMPANY to be in violation of the Foreign Corrupt Practices Act of 1977, as amended or any law of similar effect. 5.29 DISCLOSURE. (a) This Agreement, including the schedules hereto, presents fairly the business and operations of the COMPANY as addressed in the representations and warranties. The COMPANY's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which the COMPANY is a party, or by which its properties are subject, or by any other fact or circumstance regarding the COMPANY that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, the COMPANY or the STOCKHOLDERS become aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of COMPANY or STOCKHOLDERS in this Agreement or would affect any document delivered pursuant hereto in any 20 29 material respect, the COMPANY and the STOCKHOLDERS shall immediately give notice of such fact or circumstance to STAFFMARK. However, subject to the provisions of Section 7.8, such notification shall not relieve either the COMPANY or the STOCKHOLDERS of their respective obligations under this Agreement, and, subject to the provisions of Section 7.8, at the sole option of STAFFMARK, the truth and accuracy of any and all warranties and representations of COMPANY, or on behalf of the COMPANY and of STOCKHOLDERS at the date of this Agreement and at the Closing, shall be a precondition to the consummation of this transaction. (b) The COMPANY and the STOCKHOLDERS acknowledge and agree (i) that there exists no firm commitment, binding agreement, or promise or other assurance of any kind, whether express or implied, oral or written, that a Registration Statement will become effective or that the IPO pursuant thereto will occur at a particular price or within a particular range of prices or occur at all; (ii) that neither STAFFMARK or any of its officers, directors, agents or representatives nor any Underwriter shall have any liability to the COMPANY, the STOCKHOLDERS or any other person affiliated or associated with the COMPANY for any failure of the Registration Statement to become effective, the IPO to occur at a particular price or within a particular range of prices or to occur at all; and (iii) that the decision of STOCKHOLDERS to enter into this Agreement, or to vote in favor of or consent to the proposed Merger, has been or will be made independent of, and without reliance upon, any statements, opinions or other communications, or due diligence investigations which have been or will be made or performed by any prospective Underwriter, relative to STAFFMARK or the prospective IPO. 5.30 PROHIBITED ACTIVITIES. Except as set forth on Schedule 5.30, the COMPANY has not taken any of the actions (Prohibited Activities) set forth in Section 7.3. (B) REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS Each STOCKHOLDER severally represents and warrants that the representations and warranties set forth below are true as of the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and on the Funding and Consummation Date, and that the representations and warranties set forth in Section 5.31 and 5.32 shall survive until the tenth anniversary of the Funding and Consummation Date, which shall be deemed to the Expiration Date for purposes of Sections 5.31 and 5.32. 5.31 AUTHORITY; OWNERSHIP. Such STOCKHOLDER has the full legal right, power and authority to enter into this Agreement. Such STOCKHOLDER owns beneficially and of record all of the shares of the COMPANY stock identified on Annex IV as being owned by such STOCKHOLDER, and, except as set forth on the Schedule 5.31, such COMPANY Stock is owned free and clear of all liens, encumbrances and claims of every kind. 5.32 PREEMPTIVE RIGHTS. Such STOCKHOLDER does not have, or hereby waives, any preemptive or other right to acquire shares of COMPANY Stock or STAFFMARK Stock, that such STOCKHOLDER has or may have had other than rights of any STOCKHOLDER to acquire STAFFMARK Stock pursuant to (i) this Agreement or (ii) any option granted by STAFFMARK. 21 30 5.33 NO INTENTION TO DISPOSE OF COMPANY STOCK. There is no current plan or intention by any STOCKHOLDER to sell, exchange or otherwise dispose of shares of STAFFMARK Stock received in the Merger. VI. REPRESENTATIONS OF STAFFMARK AND NEWCO STAFFMARK and NEWCO jointly and severally represent and warrant that all of the following representations and warranties in this Section 6 are true at the date of this Agreement and, subject to Section 7.8 hereof, shall be true at the time of Closing and the Funding and Consummation Date, and that such representations and warranties shall survive the Funding and Consummation Date for a period of twenty-four (24) months (the last day of such period being the "Expiration Date"), except that (i) the warranties and representations set forth in Section 6.14 hereof shall survive until such time as the limitations period has run for all tax periods ended on or prior to the Funding and Consummation Date, which shall be deemed to be the Expiration Date for Section 6.14 and (ii) solely for purposes of Section 11.2(iv) hereof, and solely to the extent that in connection with the IPO, STOCKHOLDERS actually incur liability under the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any other Federal or state securities laws, the representations and warranties set forth herein shall survive until the expiration of any applicable limitations period, which shall be deemed to be the Expiration Date for such purposes. 6.1 DUE ORGANIZATION. STAFFMARK and NEWCO are each corporations duly organized, validly existing and in good standing under the laws of the state of Delaware, and are duly authorized and qualified to do business under all applicable laws, regulations, ordinances and orders of public authorities to carry on their respective business in the places and in the manner as now conducted except where the failure to be so authorized or qualified would not have a Material Adverse Effect. True, complete and correct copies of the Certificate of Incorporation and By-laws, each as amended, of STAFFMARK and NEWCO (the "STAFFMARK Charter Documents") are all attached hereto as Annex II. 6.2 AUTHORIZATION. (i) The respective representatives of STAFFMARK and NEWCO executing this Agreement have the authority to enter into and bind STAFFMARK and NEWCO to the terms of this Agreement and (ii) STAFFMARK and NEWCO have the full legal right, power and authority to enter into this Agreement and the Merger. 6.3 CAPITAL STOCK OF THE COMPANY. The authorized capital stock of STAFFMARK and NEWCO is as set forth in Section 1.4(ii) and (iii), respectively. All of the issued and outstanding shares of the capital stock of NEWCO are owned by STAFFMARK and all of the issued and outstanding shares of the capital stock of STAFFMARK are owned by the persons set forth on Annex V hereof, in each case, free and clear of all liens, security interests, pledges, charges, voting trusts, restrictions, encumbrances and claims of every kind. All of the issued and outstanding shares of the capital stock of STAFFMARK and NEWCO have been duly authorized and validly issued, are fully paid and nonassessable, are owned of record and beneficially by STAFFMARK and the persons set forth on Annex V, respectively, and further, such shares were offered, issued, sold and delivered by STAFFMARK and NEWCO in compliance with all applicable state and Federal laws concerning the issuance of securities. Further, none of such shares were issued in violation of the preemptive rights of any past or present stockholder of STAFFMARK or NEWCO. 22 31 6.4 TRANSACTIONS IN CAPITAL STOCK, REORGANIZATION ACCOUNTING. Except for the Other Agreements and as set forth on Schedule 6.4, (i) no option, warrant, call, conversion right or commitment of any kind exists which obligates STAFFMARK or NEWCO to issue any of their respective authorized but unissued capital stock; and (ii) neither STAFFMARK nor NEWCO has any obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. Schedule 6.4 also includes complete and accurate copies of all stock option or stock purchase plans, including a list, accurate as of the date hereof, of all outstanding options, warrants or other rights to acquire shares of the COMPANY's stock. 6.5 SUBSIDIARIES. NEWCO has no subsidiaries. STAFFMARK has no subsidiaries except for the companies identified as "NEWCO" in each of the Other Agreements. Except as set forth in the preceding sentence, neither STAFFMARK nor NEWCO presently owns, of record or beneficially, or controls, directly or indirectly, any capital stock, securities convertible into capital stock or any other equity interest in any corporation, association or business entity nor are STAFFMARK or NEWCO, directly or indirectly, participants in any joint venture, partnership or other non-corporate entity. 6.6 FINANCIAL STATEMENTS. Attached hereto as Schedule 6.6 are copies of the following financial statements (the "STAFFMARK Financial Statements") of STAFFMARK, which reflect the results of its operations from inception in March, 1996: STAFFMARK's unaudited Balance Sheet as of March 31, 1996 and Statements of Income, Cash Flows and Retained Earnings for the period from inception through March 31, 1996. Such STAFFMARK Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted thereon or on Schedule 6.6). Except as set forth on Schedule 6.6, such Balance Sheets as of March 31, 1996 present fairly the financial position of STAFFMARK as of such date, and such Statements of Income, Cash Flows and Retained Earnings present fairly the results of operations for the period indicated. 6.7 LIABILITIES AND OBLIGATIONS. Except as set forth on Schedule 6.7, STAFFMARK and NEWCO have no material liabilities, contingent or otherwise, except as set forth in or contemplated by this Agreement and the Other Agreements and except for fees incurred in connection with the transactions contemplated hereby and thereby. 6.8 CONFORMITY WITH LAW; LITIGATION. Except to the extent set forth on Schedule 6.8, neither STAFFMARK nor NEWCO is in violation of any law or regulation or any order of any court or Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them which would have a Material Adverse Effect; and except to the extent set forth in Schedule 6.8, there are no material claims, actions, suits or proceedings, pending or, to the knowledge of STAFFMARK or NEWCO, threatened, against or affecting STAFFMARK or NEWCO, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality having jurisdiction over either of them and no notice of any claim, action, suit or proceeding, whether pending or threatened, has been received. STAFFMARK and NEWCO have conducted and are conducting their respective businesses in substantial compliance with the requirements, standards, criteria and conditions set forth in applicable Federal, state and local statutes, ordinances, permits, licenses, orders, approvals, variances, rules and regulations and are not in violation of any of the foregoing which might have a Material Adverse Effect. 23 32 6.9 NO VIOLATIONS. Neither STAFFMARK nor NEWCO is in violation of any STAFFMARK Charter Document. None of STAFFMARK, NEWCO, or, to the knowledge of STAFFMARK and NEWCO, any other party thereto, is in default under any lease, instrument, agreement, license, or permit to which STAFFMARK or NEWCO is a party, or by which STAFFMARK or NEWCO, or any of their respective properties, are bound (collectively, the "STAFFMARK Documents"); and (a) the rights and benefits of STAFFMARK and NEWCO under the STAFFMARK Documents will not be adversely affected by the transactions contemplated hereby and (b) the execution of this Agreement and the performance of the obligations hereunder and the consummation of the transactions contemplated hereby will not result in any material violation or breach or constitute a default under, any of the terms or provisions of the STAFFMARK Documents or the STAFFMARK Charter Documents. Except as set forth on Schedule 6.9, none of the STAFFMARK Documents requires notice to, or the consent or approval of, any governmental agency or other third party with respect to any of the transactions contemplated hereby in order to remain in full force and effect and consummation of the transactions contemplated hereby will not give rise to any right to termination, cancellation or acceleration or loss of any right or benefit. 6.10 VALIDITY OF OBLIGATIONS. The execution and delivery of this Agreement by STAFFMARK and NEWCO and the performance of the transactions contemplated herein have been duly and validly authorized by the respective Boards of Directors of STAFFMARK and NEWCO and this Agreement has been duly and validly authorized by all necessary corporate action and is a legal, valid and binding obligation of STAFFMARK and NEWCO. 6.11 STAFFMARK STOCK. At the time of issuance thereof, the STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement will constitute valid and legally issued shares of STAFFMARK, fully paid and nonassessable, and with the exception of restrictions upon resale set forth in Sections 15 and 16 hereof, will be identical in all respects to the STAFFMARK Stock issued and outstanding as of the date hereof by reason of the provisions of the Delaware GCL. The shares of STAFFMARK Stock to be issued to the STOCKHOLDERS pursuant to this Agreement will not be registered under the 1933 Act, except as provided in Section 17 hereof. 6.12 NO SIDE AGREEMENTS. Neither STAFFMARK nor NEWCO has entered or will enter into any agreement with any of the Founding Companies or any of the stockholders of the Founding Companies or STAFFMARK other than the Other Agreements and the agreements contemplated by each of the Other Agreements, including the employment agreements referred to therein, none of which, except for amounts of consideration (which shall, however, be derived from the same methodology) and schedules attached thereto, shall be materially different than this Agreement and the agreements contemplated by it. STAFFMARK has made available to the COMPANY copies of all agreements entered into between STAFFMARK or NEWCO and the Founding Companies or any stockholders of the Founding Companies. Further, STAFFMARK will make available to the COMPANY copies of any of the foregoing agreements entered into between the date hereof and the Funding and Consummation Date promptly after such agreements are entered into. 6.13 BUSINESS; REAL PROPERTY; MATERIAL AGREEMENTS. STAFFMARK was formed in June, 1996, and has conducted limited operations since that time. Neither STAFFMARK nor NEWCO has conducted any material business since the date of its inception, except in connection with this Agreement, the Other Agreements and the IPO. Neither STAFFMARK nor NEWCO owns or has at any time owned any real property or any material personal property or is a party to any other 24 33 agreement, except as listed on Schedule 6.13 and except that STAFFMARK is a party to the Other Agreements and the agreements contemplated thereby and to such agreements as will be filed as Exhibits to the Registration Statement. 6.14 TAXES. NEWCO is a newly formed entity which has no tax or operational history. Except as set forth on Schedule 6.14: (i) All Returns required to have been filed by or with respect to STAFFMARK and any affiliated, combined, consolidated, unitary or similar group of which STAFFMARK is or was a member (a "STAFFMARK Relevant Group") with any Taxing Authority have been duly filed, and each such Return correctly and completely reflects the income, franchise or other Tax liability and all other information required to be reported thereon. All Taxes (whether or not shown on any Return) owed by the STAFFMARK Relevant Group have been paid. (ii) The provisions for Taxes due by STAFFMARK and any subsidiaries (as opposed to any reserve for deferred Taxes established to reflect timing differences between book and Tax income) in the STAFFMARK Financial Statements are sufficient for all unpaid Taxes, being current taxes not yet due and payable, of the STAFFMARK Relevant Group. (iii) No corporation in the STAFFMARK Relevant Group is a party to any agreement extending the time within which to file any Return. No claim has ever been made by any Taxing Authority in a jurisdiction in which a corporation in the STAFFMARK Relevant Group does not file Returns that it is or may be subject to taxation by that jurisdiction. (iv) Each corporation in the STAFFMARK Relevant Group has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party. (v) No corporation in the STAFFMARK Relevant Group expects any Taxing Authority to assess any additional Taxes against or in respect of it for any past period. There is no dispute or claim concerning any Tax liability of any corporation in the STAFFMARK Relevant Group either (i) claimed or raised by any Taxing Authority or (ii) otherwise known to any corporation in the STAFFMARK Relevant Group. No issues have been raised in any examination by any Taxing Authority with respect to any corporation in the STAFFMARK Relevant Group which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Schedule 6.14(v) attached hereto lists all federal, state, local and foreign income Tax Returns filed by or with respect to any corporation in the STAFFMARK Relevant Group for all taxable periods ended on or after January 1, 1988, indicates those Returns, if any, that have been audited, and indicates those Returns that currently are the subject of audit. Each corporation in the STAFFMARK Relevant Group will make available to the STOCKHOLDERS, at their request, complete and correct copies of all federal, state, local and foreign income Tax Returns filed by, and all Tax examination reports and statements of deficiencies assessed against or agreed to by, STAFFMARK since January 1, 1991. (vi) No corporation in the STAFFMARK Relevant Group has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. 25 34 (vii) No corporation in the STAFFMARK Relevant Group has made any payments, is obligated to make any payments, or is a party to any agreement that under certain circumstances could require it to make any payments, that are not deductible under Section 280G the Code. (viii) No corporation in the STAFFMARK Relevant Group is a party to any Tax allocation or sharing agreement. (ix) None of the assets of any corporation in the STAFFMARK Relevant Group constitutes tax-exempt bond financed property or tax-exempt use property, within the meaning of Section 168 of the Code. No corporation in the STAFFMARK Relevant Group is a party to any "safe harbor lease" that is subject to the provisions of Section 168(f)(8) of the Internal Revenue Code as in effect prior to the Tax Reform Act of 1986, or to any "long-term contract" within the meaning of Section 460 of the Code. (x) No corporation in the STAFFMARK Relevant Group is a "consenting corporation" within the meaning of Section 341(f)(1) of the Code, or comparable provisions of any state statutes, and none of the assets of any corporation in the STAFFMARK Relevant Group is subject to an election under Section 341(f) of the Code or comparable provisions of any state statutes. (xi) No corporation in the STAFFMARK Relevant Group is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes. (xii) There are no accounting method changes or proposed or threatened accounting method changes, of any corporation in the STAFFMARK Relevant Group that could give rise to an adjustment under Section 481 of the Code for periods after the Funding and Consummation Date. (xiii) No corporation in the STAFFMARK Relevant Group has received any written ruling of a Taxing Authority related to Taxes or entered into any written and legally binding agreement with a Taxing Authority relating to Taxes. (xiv) Each corporation in the STAFFMARK Relevant Group has disclosed (in accordance with Section 6662(d)(2)(B)(ii) of the Code) on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662(d) of the Code. (xv) No corporation in the STAFFMARK Relevant Group has any liability for Taxes of any person other than such corporation in the STAFFMARK Relevant Group (i) under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or (iv) otherwise. (xvi) There currently are no limitations on the utilization of the net operating losses, built-in losses, capital losses, Tax credits or other similar items of any corporation in the STAFFMARK Relevant Group (collectively, the "Tax Losses") under (i) Section 382 of the Code, (ii) Section 383 of the Code, (iii) Section 384 of the Code, (iv) Section 269 of the Code, (v) Section 1.1502-15 and Section 1.1502-15A of the Treasury regulations, (vi) Section 1.1502- 21 and Section 1.1502-21A of the Treasury regulations or (vii) Sections 1.1502-91 through 1.1502-99 of the Treasury regulations, in each case as in effect both prior to and following the Tax Reform Act of 1986. 26 35 (xvii) At March 31, 1996, the STAFFMARK consolidated return group had aggregate Tax Losses for federal income Tax purposes as described on Schedule 6.15(xvii) attached hereto. (xviii) At the Funding and Consummation Date, NEWCO will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets held immediately prior to the Funding and Consummation Date. For purposes of this representation, amounts paid by NEWCO to shareholders in the form of cash or other property, amounts used by NEWCO to pay reorganization expenses (including real estate transfer or gains taxes, if any), and all redemptions and distributions (except for regular, normal dividends) made by NEWCO will be included as assets of NEWCO immediately prior to the Funding and Consummation Date. (xix) Neither STAFFMARK nor NEWCO is an investment company as defined in Section 368(a)(2)(F)(iii) and (iv) of the Code. (xx) The fair market value of the assets of the NEWCO exceeds the sum of its liabilities, plus the amount of liabilities, if any, to which the assets are subject. (xxi) STAFFMARK is not under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. 6.15 STOCK OPTION PLAN. Prior to the Funding and Consummation Date, STAFFMARK will adopt a stock option plan for awards to be made to key employees of the COMPANY. The grant and terms of all such awards will be determined by the board of directors of STAFFMARK, subject to approval by the Stockholders. 6.16 SOLVENCY. Upon consummation of the Mergers contemplated herein, STAFFMARK and its subsidiaries, individually and taken as a whole, shall be solvent. 6.17 FINANCING. STAFFMARK has or, on consummation of the Public Offering, will have sufficient funds or available financing to enable STAFFMARK (i) to pay the Merger Consideration and all fees and expenses related to the Merger and its obligations in connection with the Public Offering, and (ii) to retire, release or refinance any indebtedness of the Founding Companies assumed by STAFFMARK for which the Stockholders have provided personal guarantees. 6.18 DISCLOSURE. (a) This Agreement, including the schedules hereto, present fairly the business and operations of STAFFMARK. STAFFMARK's rights under the documents delivered pursuant hereto would not be materially adversely affected by, and no statement made herein would be rendered untrue by, any other document to which STAFFMARK is a party, or by which its properties are subject, or by any other fact or circumstance regarding STAFFMARK that is not disclosed pursuant hereto. If, prior to the 25th day after the date of the final prospectus of STAFFMARK utilized in connection with the IPO, STAFFMARK becomes aware of any fact or circumstance which would change (or, if after the Funding and Consummation Date, would have changed) a representation or warranty of STAFFMARK in this Agreement or would affect any document delivered pursuant hereto in any material respect, STAFFMARK shall immediately give notice of such fact or circumstance to the COMPANY and the STOCKHOLDERS. However, subject to the provisions of Section 7.8, such notification shall not relieve STAFFMARK of its obligations under this Agreement, and, subject to the provisions of Section 7.8, at the option of the COMPANY and the STOCKHOLDERS, the truth and 27 36 accuracy of any and all warranties and representations of STAFFMARK and at the Closing, shall be a precondition to the consummation of this transaction. 6.19 PERMITS AND INTANGIBLES. STAFFMARK holds all licenses, franchises, permits and other governmental authorizations the absence of any of which could have a Material Adverse Effect on its business. To the knowledge of STAFFMARK, its licenses, franchises, permits and other governmental authorizations are valid, and it has not received any notice that any governmental authority intends to cancel, terminate or not renew any such license, franchise, permit or other governmental authorization. STAFFMARK has conducted and is conducting its business in compliance with the requirements, standards, criteria and conditions set forth in applicable permits, licenses, orders, approvals, variances, rules and regulations and is not in violation of any of the foregoing except where such non-compliance or violation would not have a Material Adverse Effect on STAFFMARK. The transactions contemplated by this Agreement will not result in a default under or a breach or violation of, or adversely affect the rights and benefits afforded to STAFFMARK by, any such licenses, franchises, permits or government authorizations. VII. COVENANTS PRIOR TO CLOSING 7.1 ACCESS AND COOPERATION; DUE DILIGENCE. (a) Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will afford to the officers and authorized representatives of STAFFMARK and the Other Founding Companies access to all of the COMPANY's sites, properties, books and records and will furnish STAFFMARK with such additional financial and operating data and other information as to the business and properties of the COMPANY as STAFFMARK or the Other Founding Companies may from time to time reasonably request. The COMPANY will cooperate with STAFFMARK and the Other Founding Companies, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. STAFFMARK, NEWCO, the STOCKHOLDERS and the COMPANY will treat all information obtained in connection with the negotiation and performance of this Agreement or the due diligence investigations conducted with respect to the Other Founding Companies as confidential in accordance with the provisions of Section 14 hereof. In addition, STAFFMARK will cause each of the Other Founding Companies to enter into a provision similar to this Section 7.1 requiring each such Other Founding Company, its stockholders, directors, officers, representatives, employees and agents to keep confidential any information obtained by such Other Founding Company. (b) Between the date of this Agreement and the Funding and Consummation Date, STAFFMARK will afford to the officers and authorized representatives of the COMPANY access to all of STAFFMARK's and NEWCO's sites, properties, books and records and will furnish the COMPANY with such additional financial and operating data and other information as to the business and properties of STAFFMARK and NEWCO as the COMPANY may from time to time reasonably request. STAFFMARK and NEWCO will cooperate with the COMPANY, its representatives, auditors and counsel in the preparation of any documents or other material which may be required in connection with any documents or materials required by this Agreement. The COMPANY will cause all information obtained in connection with the negotiation and performance of this Agreement to be treated as confidential in accordance with the provisions of Section 14 hereof. 28 37 7.2 CONDUCT OF BUSINESS PENDING CLOSING. Between the date of this Agreement and the Funding and Consummation Date, the COMPANY will, except as set forth on the Schedule 7.2 (i) carry on its respective businesses in substantially the same manner as it has heretofore and not introduce any material new method of management, operation or accounting; (ii) maintain its respective properties and facilities, including those held under leases, in as good working order and condition as at present, ordinary wear and tear excepted; (iii) perform all of its respective obligations under agreements relating to or affecting its respective assets, properties or rights; (iv) keep in full force and effect present insurance policies or other comparable insurance coverage; (v) use its best efforts to maintain and preserve its business organization intact, retain its respective present key employees and maintain its respective relationships with suppliers, customers and others having business relations with the COMPANY; (vi) maintain compliance with all permits, laws, rules and regulations, consent orders, and all other orders of applicable courts, regulatory agencies and similar governmental authorities; (vii) maintain present debt and lease instruments and not enter into new or amended debt or lease instruments except for S-Corporation distributions or bonuses (which debt will be deducted from the valuation of the COMPANY), without the knowledge and consent of STAFFMARK (which consent shall not be unreasonably withheld); and (viii) maintain or reduce present salaries and commission levels for all officers, directors, employees and agents. 7.3 PROHIBITED ACTIVITIES. Except as disclosed on Schedule 7.3, between the date hereof and the Funding and Consummation Date, the COMPANY will not, without prior written consent of STAFFMARK: (i) make any change in its Articles of Incorporation or By-laws; (ii) issue any securities, options (except options of the COMPANY determined by Arthur Andersen to have no adverse effect on pooling), warrants, calls, conversion rights or commitments relating to its securities of any kind other than in connection with the exercise of options or warrants listed in Schedule 5.4; (iii) declare or pay any dividend, or make any distribution in respect of its stock whether now or hereafter outstanding, or purchase, redeem or otherwise acquire or retire for value any shares of its stock or declare any dividends or make any distributions (other than S-Corporation distributions), nor pay out any extraordinary bonuses in excess of pro rata bonuses customarily paid, or fees, or commissions to the Stockholders, directors, management or other personnel. 29 38 (iv) enter into any contract or commitment or incur or agree to incur any liability or make any capital expenditures, except if it is in the normal course of business (consistent with past practice) or involves an amount not in excess of $100,000; (v) create, assume or permit to exist any mortgage, pledge or other lien or encumbrance upon any assets or properties whether now owned or hereafter acquired, except (1) with respect to purchase money liens incurred in connection with the acquisition of equipment with an aggregate cost not in excess of $10,000 necessary or desirable for the conduct of the businesses of the COMPANY, (2) (A) liens for taxes either not yet due or being contested in good faith and by appropriate proceedings (and for which contested taxes adequate reserves have been established and are being maintained) or (B) materialmen's, mechanics', workers', repairmen's, employees' or other like liens arising in the ordinary course of business (the liens set forth in clause (2) being referred to herein as "Statutory Liens"), or (3) liens set forth on Schedule 5.15 hereto; (vi) sell, assign, lease or otherwise transfer or dispose of any property or equipment except in the normal course of business; (vii) negotiate for the acquisition of any business or the start-up of any new business; (viii) merge or consolidate or agree to merge or consolidate with or into any other corporation; (ix) waive any material rights or claims of the COMPANY, provided that the COMPANY may negotiate and adjust bills in the course of good faith disputes with customers in a manner consistent with past practice, provided, further, that such adjustments shall not be deemed to be included in Schedule 5.11 unless specifically listed thereon; (x) commit a material breach or amend or terminate any material agreement, permit, license or other right of the COMPANY; (xi) enter into any other transaction outside the ordinary course of its business or prohibited hereunder; or (xii) change its accounts receivable collection practice or factor its accounts receivable in any way. 7.4 NO SHOP. None of the STOCKHOLDERS, the COMPANY, nor any agent, officer, director, trustee or any representative of any of the foregoing will, during the period commencing on the date of this Agreement and ending with the earlier to occur of the Funding and Consummation Date or the termination of this Agreement in accordance with its terms, directly or indirectly: (i) solicit or initiate the submission of proposals or offers from any person for, (ii) participate in any discussions pertaining to, or (iii) furnish any information to any person other than STAFFMARK or its authorized agents relating to, 30 39 any acquisition or purchase of all or a material amount of the assets of, or any equity interest in, the COMPANY or a merger, consolidation or business combination of the COMPANY. 7.5 NOTICE TO BARGAINING AGENTS. Prior to the Closing Date, the COMPANY shall satisfy any requirement for notice of the transactions contemplated by this Agreement under applicable collective bargaining agreements, and shall provide STAFFMARK on Schedule 7.5 with proof that any required notice has been sent. 7.6 AGREEMENTS. The STOCKHOLDERS and the COMPANY shall terminate (i) any stockholders agreements, voting agreements, voting trusts, options, warrants and employment agreements between the COMPANY and any employee and (ii) any existing agreement between the COMPANY and any STOCKHOLDER, at or prior to the Funding and Consummation Date. 7.7 NOTIFICATION OF CERTAIN MATTERS. The STOCKHOLDERS and the COMPANY shall give prompt notice to STAFFMARK of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of the COMPANY or the STOCKHOLDERS contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of any STOCKHOLDER or the COMPANY to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by such person hereunder. STAFFMARK and NEWCO shall give prompt notice to the COMPANY of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty of STAFFMARK or NEWCO contained herein to be untrue or inaccurate in any material respect at or prior to the Closing and (ii) any material failure of STAFFMARK or NEWCO to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder. The delivery of any notice pursuant to this Section 7.7 shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, which modification may only be made pursuant to Section 7.8, (ii) modify the conditions set forth in Sections 8 and 9, or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.8 AMENDMENT OF SCHEDULES. Each party hereto agrees that, with respect to the representations and warranties of such party contained in this Agreement, such party shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules, provided however, that supplements and amendments to Schedules 5.10, 5.11, 5.14 and 5.15 shall only have to be delivered at the Closing Date (the supplement to Schedule 5.11 shall include receivables obtained by the Company through the Friday immediately prior to the Closing Date), unless such Schedule is to be amended to reflect an event occurring other than in the ordinary course of business. Notwithstanding the foregoing sentence, no amendment or supplement to a Schedule prepared by the COMPANY that constitutes or reflects an event or occurrence that would have a Material Adverse Effect, may be made unless STAFFMARK and a majority of the Founding Companies other than the COMPANY consent to such amendment or supplement; and provided further, that no amendment or supplement to a Schedule prepared by STAFFMARK or NEWCO that constitutes or reflects an event or occurrence that would have a Material Adverse Effect may be made unless a majority of the Founding Companies consent to such amendment or supplement. For all purposes of this Agreement, including without limitation for purposes of determining whether the conditions set forth in Sections 8.1 and 9.1 have been fulfilled, the Schedules hereto shall be deemed to be the Schedules as amended or supplemented pursuant to this 31 40 Section 7.8. In the event that one of the Other Founding Companies seeks to amend or supplement a Schedule pursuant to Section 7.8 of one of the Other Agreements, and such amendment or supplement constitutes or reflects an event or occurrence that would have a Material Adverse Effect on such Other Founding Company, STAFFMARK shall give the COMPANY notice promptly after it has knowledge thereof. If STAFFMARK and a majority of the Founding Companies consent to such amendment or supplement, which consent shall have been deemed given if no response is received within 24 hours after notice of such amendment or supplement (or sooner if required by the circumstances under which such consent is requested), but the COMPANY does not, the COMPANY may terminate this Agreement pursuant to Section 12.1(iv) hereof. In the event that the COMPANY seeks to amend or supplement a Schedule pursuant to this Section 7.8, and STAFFMARK and a majority of the Other Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. In the event that STAFFMARK or NEWCO seeks to amend or supplement a Schedule pursuant to this Section 7.8 and a majority of the Founding Companies do not consent to such amendment or supplement, this Agreement shall be deemed terminated by mutual consent as set forth in Section 12.1(i) hereof. No party to this Agreement shall be liable to any other party if this Agreement shall be terminated pursuant to the provisions of this Section 7.8. No amendment of or supplement to a Schedule shall be made later than 24 hours prior to the anticipated effectiveness of the Registration Statement. 7.9 COOPERATION IN PREPARATION OF REGISTRATION STATEMENT. The COMPANY and STOCKHOLDERS shall cooperate with STAFFMARK in its preparation of the Registration Statement and shall furnish or cause to be furnished to STAFFMARK and the Underwriters all of the information requested by STAFFMARK concerning the COMPANY and the STOCKHOLDERS required for inclusion in, and will cooperate with STAFFMARK and the Underwriters in the preparation of, the Registration Statement and the prospectus included therein (including audited and unaudited financial statements, prepared in accordance with generally accepted accounting principles, in form suitable for inclusion in the Registration Statement). The COMPANY and the STOCKHOLDERS agree promptly to advise STAFFMARK if at any time during the period in which a prospectus relating to the offering is required to be delivered under the Securities Act, any information contained in the prospectus concerning the COMPANY or the STOCKHOLDERS becomes incorrect or incomplete in any material respect, and to provide the information needed to correct such inaccuracy. Insofar as the information relates solely to the COMPANY or the STOCKHOLDERS, each of the COMPANY and the STOCKHOLDERS represents and warrants that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. 7.10 FINAL FINANCIAL STATEMENTS. The COMPANY shall provide prior to the Funding and Consummation Date, and STAFFMARK shall have had sufficient time to review the unaudited consolidated balance sheets of the COMPANY as of the end of all fiscal quarters following the Balance Sheet Date, and the unaudited consolidated statement of income, cash flows and retained earnings of the COMPANY for all fiscal quarters ended after the Balance Sheet Date, disclosing no material adverse change in the financial condition of the COMPANY or the results of its operations from the financial 32 41 statements as of the Balance Sheet Date. Such financial statements shall have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated (except as noted therein). Except as noted in such financial statements, all of such financial statements will present fairly the results of operations of the COMPANY for the periods indicated thereon. 7.11 FURTHER ASSURANCES. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other action as may be reasonably necessary or convenient to carry out the transactions contemplated hereby. 7.12 FILINGS. If STAFFMARK determines that it is necessary to make a Hart-Scott-Rodino filing, the COMPANY will cooperate fully in preparation of such filing, and STAFFMARK shall pay the cost of the filing. 7.13 OTHER. If STAFFMARK and NEWCO determine that they will not merge into any one of the six companies which comprise the COMPANY, the other five companies which comprise the COMPANY shall not be required to merge into STAFFMARK or NEWCO. VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF STOCKHOLDERS AND COMPANY The obligations of STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of the STOCKHOLDERS and the COMPANY with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 8.1, 8.7 and 8.8. As of the Closing Date or, with respect to the conditions set forth in Sections 8.1, 8.7 and 8.8, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of STAFFMARK and NEWCO contained in Section 6 hereof: 8.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All representations and warranties of STAFFMARK and NEWCO contained in Section 6 shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date as though such representations and warranties had been made as of that time; all of the terms, covenants and conditions of this Agreement to be complied with and performed by STAFFMARK and NEWCO on or before the Closing Date and the Funding and Consummation Date shall have been duly complied with and performed in all material respects; and a certificate to the foregoing effect dated the Closing Date and the Funding and Consummation Date and signed by the President or any Vice President of STAFFMARK shall have been delivered to the STOCKHOLDERS. 8.2 NO LITIGATION. Prior to the Funding and Consummation Date, no action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of the COMPANY as a result of 33 42 which the management of the COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.3 OPINION OF COUNSEL. The COMPANY shall have received an opinion from counsel for STAFFMARK, dated the Funding and Consummation Date, in substantially the form annexed hereto as Annex VI. 8.4 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC and the underwriters named therein shall have agreed to acquire on a firm commitment basis, subject to the conditions set forth in the underwriting agreement, on terms such that the aggregate value of the cash and the number of shares of STAFFMARK Stock to be received by the STOCKHOLDERS is not less than the Minimum Value set forth on Annex III and the allocation of the price between cash and the number of shares of STAFFMARK Stock is as set forth on Annex III. 8.5 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transaction contemplated herein shall have been obtained and made and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of COMPANY as a result of which COMPANY deems it inadvisable to proceed with the transactions hereunder. 8.6 GOOD STANDING CERTIFICATES. STAFFMARK and NEWCO each shall have delivered to the COMPANY a certificate, dated as of a date no later than ten days prior to the Closing Date, duly issued by the Delaware Secretary of State and in each state in which STAFFMARK or NEWCO is authorized to do business, showing that each of STAFFMARK and NEWCO is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for STAFFMARK and NEWCO, respectively, for all periods prior to the Closing have been filed and paid. 8.7 NO MATERIAL ADVERSE CHANGE. No event or circumstance shall have occurred with respect to STAFFMARK or NEWCO which would constitute a Material Adverse Effect. 8.8 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder, resulting in an IPO price per share for STAFFMARK Stock of $8 or greater. 8.9 SECRETARY'S CERTIFICATE. The COMPANY shall have received a certificate or certificates, dated the Closing Date and signed by the secretary of the COMPANY and of NEWCO, certifying the truth and correctness of attached copies of the COMPANY's and NEWCO's respective Certificates of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the boards of directors and, if required, the stockholders of STAFFMARK and NEWCO approving STAFFMARK's and NEWCO's entering into this Agreement and the consummation of the transactions contemplated hereby. 8.10 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have had an opportunity to enter into an employment agreement substantially in the form of Annex VIII hereto. 34 43 8.11 NASDAQ. The common stock of STAFFMARK shall have been listed on the NASDAQ National Market or the New York Stock Exchange. 8.12 APPROVAL OF ADDITIONAL COMPANIES. Each of the Initial Founding Companies shall have approved the addition of any Founding Company which is not an Initial Founding Company. IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF STAFFMARK AND NEWCO The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Closing Date are subject to the satisfaction or waiver on or prior to the Closing Date of all of the following conditions. The obligations of STAFFMARK and NEWCO with respect to actions to be taken on the Funding and Consummation Date are subject to the satisfaction or waiver on or prior to the Funding and Consummation Date of the conditions set forth in Sections 9.1, 9.4 and 9.12. As of the Closing Date or, with respect to the conditions set forth in Sections 9.1, 9.4 and 9.12, as of the Funding and Consummation Date, all conditions not satisfied shall be deemed to have been waived, except that no such waiver shall be deemed to affect the survival of the representations and warranties of the COMPANY contained in Section 5 hereof. 9.1 REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF OBLIGATIONS. All the representations and warranties of the STOCKHOLDERS and the COMPANY contained in this Agreement shall be true and correct in all material respects as of the Closing Date and the Funding and Consummation Date with the same effect as though such representations and warranties had been made on and as of such date; all of the terms, covenants and conditions of this Agreement to be complied with or performed by the STOCKHOLDERS and the COMPANY on or before the Closing Date or the Funding and Consummation Date, as the case may be, shall have been duly performed or complied with in all material respects; and the STOCKHOLDERS shall have delivered to STAFFMARK a certificate dated the Closing Date and the Funding and Consummation Date and signed by them to such effect. 9.2 NO LITIGATION. No action or proceeding before a court or any other governmental agency or body shall have been instituted or threatened to restrain or prohibit the merger of NEWCO with and into the COMPANY or the offering and sale by STAFFMARK of STAFFMARK Stock pursuant to the Registration Statement and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which the management of STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.3 SECRETARY'S CERTIFICATE. STAFFMARK shall have received a certificate, dated the Closing Date and signed by the secretary of the COMPANY, certifying the truth and correctness of attached copies of the COMPANY's Certificate of Incorporation (including amendments thereto), By-Laws (including amendments thereto), and resolutions of the board of directors and, if required, the STOCKHOLDERS approving the COMPANY's entering into this Agreement and the consummation of the transactions contemplated hereby. 9.4 NO MATERIAL ADVERSE EFFECT. No event or circumstance shall have occurred with respect to the COMPANY which would constitute a Material Adverse Effect, and the COMPANY shall not have suffered any material loss or damages to any of its properties or assets, whether or not covered by 35 44 insurance, which change, loss or damage materially affects or impairs the ability of the COMPANY to conduct its business. 9.5 STOCKHOLDERS' RELEASE. The STOCKHOLDERS shall have delivered to STAFFMARK an instrument dated the Closing Date releasing the COMPANY from (i) any and all claims of the STOCKHOLDERS against the COMPANY and STAFFMARK and (ii) obligations of the COMPANY and STAFFMARK to the STOCKHOLDERS, except for (w) director and officer indemnification claims as permitted by the COMPANY'S Charter Documents or applicable state corporate law, (x) items specifically identified on Schedules 5.10 and 5.15 as being claims of or obligations to the STOCKHOLDERS, (y) continuing obligations to STOCKHOLDERS relating to their employment by the COMPANY and (z) obligations arising under this Agreement or the transactions contemplated hereby. 9.6 TERMINATION OF RELATED PARTY AGREEMENTS. Except as set forth on Schedule 9.6, all existing agreements between the COMPANY and the STOCKHOLDERS shall have been cancelled effective prior to or as of the Funding and Consummation Date. 9.7 OPINION OF COUNSEL. STAFFMARK shall have received an opinion from Counsel to the COMPANY and the STOCKHOLDERS, dated the Closing Date, in substantially the form annexed hereto as Annex VII, and the Underwriters shall have received a copy of the same opinion addressed to them. 9.8 CONSENTS AND APPROVALS. All necessary consents of and filings with any governmental authority or agency relating to the consummation of the transactions contemplated herein shall have been obtained and made; all consents and approvals of third parties listed on Schedule 5.23 shall have been obtained; and no action or proceeding shall have been instituted or threatened to restrain or prohibit the Merger and no governmental agency or body shall have taken any other action or made any request of STAFFMARK as a result of which STAFFMARK deems it inadvisable to proceed with the transactions hereunder. 9.9 GOOD STANDING CERTIFICATES. The COMPANY shall have delivered to STAFFMARK a certificate, dated as of a date no earlier than ten days prior to the Closing Date, duly issued by the appropriate governmental authority in the COMPANY's state of incorporation and, unless waived by STAFFMARK, in each state in which the COMPANY is authorized to do business, showing the COMPANY is in good standing and authorized to do business and that all state franchise and/or income tax returns and taxes for the COMPANY for all periods prior to the Closing have been filed and paid. 9.10 REGISTRATION STATEMENT. The Registration Statement shall have been declared effective by the SEC. 9.11 EMPLOYMENT AGREEMENTS. Each of the persons listed on Schedule 9.11 shall have entered into an employment agreement substantially in the form of Annex VIII hereto. 9.12 CLOSING OF IPO. The closing of the sale of the STAFFMARK Stock to the Underwriters in the IPO shall have occurred simultaneously with the Funding and Consummation Date hereunder. 36 45 9.13 FIRPTA CERTIFICATE. Each STOCKHOLDER shall have delivered to STAFFMARK a certificate to the effect that he is not a foreign person pursuant to Section 1.1445-2(b) of the Treasury regulations. X. COVENANTS OF STAFFMARK AFTER CLOSING 10.1 RELEASE FROM GUARANTEES; REPAYMENT OF CERTAIN OBLIGATIONS. STAFFMARK shall use its best efforts to have the STOCKHOLDERS released from any and all guarantees on any indebtedness, and shall have the STOCKHOLDERS released on or before the Funding and Consummation Date from any and all guarantees on any indebtedness owing to any bank or related to accounts receivable factoring, that they personally guaranteed for the benefit of the COMPANY, with all such guarantees on indebtedness being assumed by STAFFMARK at the Funding and Consummation Date. In the event that STAFFMARK cannot obtain releases from other lenders of any other guaranteed indebtedness on or prior to 90 days subsequent to the Funding and Consummation Date, STAFFMARK shall pay off or otherwise refinance or retire such other indebtedness and, in the event that STAFFMARK cannot obtain releases on or prior to the Funding and Consummation Date for such other indebtedness, STAFFMARK agrees to indemnify the STOCKHOLDERS against any and all claims made by lenders under such guarantees which arise as a result of STAFFMARK's failure to cause such guarantees to be released on or prior to the Funding and Consummation Date. 10.2 PRESERVATION OF TAX AND ACCOUNTING TREATMENT. Except as contemplated by this Agreement or the Registration Statement, after the Funding and Consummation Date, STAFFMARK shall not and shall not permit any of its subsidiaries to undertake any act that would jeopardize the tax-free status of the reorganization, including: (a) the retirement or reacquisition, directly or indirectly, of all or part of the STAFFMARK Stock issued in connection with the transactions contemplated hereby; (b) the entering into of financial arrangements for the benefit of the STOCKHOLDERS; (c) the disposition of any material part of the assets of the COMPANY within the two years following the Funding and Consummation Date except in the ordinary course of business or to eliminate duplicate services or excess capacity. 10.3 PREPARATION AND FILING OF TAX RETURNS. (i) The COMPANY shall, if possible, file or cause to be filed all separate Returns of any Acquired Party for all taxable periods that end on or before the Funding and Consummation Date. If the Company is an S Corporation, each STOCKHOLDER shall pay or cause to be paid all Tax liabilities shown by such Returns to be due. (ii) STAFFMARK shall file or cause to be filed all separate Returns of, or that include, any Acquired Party for all taxable periods ending after the Funding and Consummation Date. (iii) Each party hereto shall, and shall cause its subsidiaries and affiliates to, provide to each of the other parties hereto such cooperation and information as any of them reasonably may request in 37 46 filing any Return, amended Return or claim for refund, determining a liability for Taxes or a right to refund of Taxes or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property, which such party may possess. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Subject to the preceding sentence, each party required to file Returns pursuant to this Agreement shall bear all costs of filing such Returns. (iv) Each of the COMPANY, NEWCO, STAFFMARK and each STOCKHOLDER shall comply with the tax reporting requirements of Section 1.351-3 of the Treasury Regulations promulgated under the Code, and treat the transaction as a tax-free reorganization and contribution under Section 351(a) of the Code. 10.4 DIRECTORS. The persons named in the Registration Statement shall be appointed as directors promptly following the Funding and Consummation Date of the IPO. 10.5 PRESERVATION OF EMPLOYEE BENEFIT PLANS. Following the Closing, STAFFMARK shall not terminate any health insurance, life insurance or 401(k) plan in effect at the COMPANY until such time as STAFFMARK is able to replace such plan with a plan that is applicable to STAFFMARK and all of its then existing subsidiaries, provided that STAFFMARK shall have no obligation to provide replacement plans that have the same terms and provisions as the existing plans, provided, further, that any new health insurance plan shall provide for coverage for preexisting conditions. 10.6 REGISTRATION RIGHTS. From and after the date of this Agreement, STAFFMARK shall not, without the written consent of STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued to the Founding Stockholders in the STAFFMARK Plan of Organization, enter into any agreement with any holder or prospective holder of any securities of STAFFMARK relating to registration rights unless such agreement includes: (a) to the extent the agreement will allow such holder or such prospective holder to include such securities in any registration filed under Section 17.1 or 17.2 hereof, a provision that such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of Registrable Securities of the Founding Stockholders which would otherwise be included; and (b) a provision that any demand registration rights granted to such holder or prospective holder shall in no event be exercisable prior to 25 months after the Closing Date. 10.7 RIGHT OF FIRST REFUSAL TO STOCKHOLDERS. If at any time prior to the third anniversary of this Agreement STAFFMARK agrees to sell substantially all the assets or common stock of the COMPANY (alone, and not in conjunction with the sale of any of the other Founding Companies), the STOCKHOLDERS (or any one of the STOCKHOLDERS) shall have a right- of-first refusal to purchase all of such assets or common stock at a price and under terms and conditions equal to the price, terms and conditions offered by the third-party purchaser. Within five (5) days of entering into an agreement to sell the aforementioned assets or common stock, STAFFMARK shall notify the STOCKHOLDERS in writing that it has agreed to such sale and the price to be paid by the third-party purchaser. Within ten (10) days of the receipt of such written notice, the STOCKHOLDERS shall notify STAFFMARK in writing that STOCKHOLDERS intend to purchase the assets or common stock. If notice is not received 38 47 by STAFFMARK within such ten (10) day period, STAFFMARK shall be free to consummate the sale to the third-party purchaser. If notice is received by STAFFMARK that the STOCKHOLDERS intend to purchase the assets or common stock, such sale must be consummated within thirty (30) days of receipt of such notice by STAFFMARK or STAFFMARK may consummate the sale of the assets or common stock to the third-party purchaser. Upon consummation of sale hereunder, STAFFMARK and STOCKHOLDERS shall enter into a new non-competition agreement which allows the STOCKHOLDERS to operate the COMPANY in its current market areas and not otherwise compete with STAFFMARK for a reasonable period of time. XI. INDEMNIFICATION The STOCKHOLDERS, STAFFMARK and NEWCO each make the following covenants that are applicable to them, respectively: 11.1 GENERAL INDEMNIFICATION BY THE STOCKHOLDERS. The STOCKHOLDERS, other than Non-Controlling Stockholders, covenant and agree that they, jointly and severally (except with respect to Sections 5.31 through 5.33 which shall be several), will indemnify, defend, protect and hold harmless STAFFMARK, NEWCO, the COMPANY and the Surviving Corporation at all times, from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation as a result of or arising from (i) any breach of the representations and warranties of the STOCKHOLDERS or the COMPANY set forth herein or on the schedules or certificates delivered in connection herewith, (ii) any nonfulfillment of any agreement on the part of the STOCKHOLDERS or the COMPANY under this Agreement, (iii) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement of a material fact relating to the COMPANY or the STOCKHOLDERS, and provided to STAFFMARK or its counsel by the COMPANY or the STOCKHOLDERS contained in the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission to state therein a material fact relating to the COMPANY or the STOCKHOLDERS required to be stated therein or necessary to make the statements therein not misleading, (iv) any Tax imposed upon or relating to an Acquired Party for any pre-Funding and Consummation Date period, (v) any Tax imposed upon or relating to any third party for a pre-Funding and Consummation Date period, including, in each case, any such Tax for which an Acquired Party may be liable under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise, or (vi) the matters described on Schedule 11.1(vi) [which will consist of specifically identified items such as existing or threatened litigation], provided, however, that such indemnity shall not inure to the benefit of STAFFMARK, NEWCO, the COMPANY or the Surviving Corporation to the extent that such untrue statement was made in, or omission occurred in, any preliminary prospectus and the STOCKHOLDERS provided, in writing, corrected information to STAFFMARK counsel and to STAFFMARK for inclusion in the final prospectus, and such information was not so included or properly delivered, and provided further, that no STOCKHOLDER shall be liable for any indemnification obligation pursuant to this Section 11.1 to the extent attributable to a breach of any representation, warranty or agreement made herein individually by any other STOCKHOLDER. In 39 48 satisfying any indemnification obligation, the STOCKHOLDERS may tender shares of STAFFMARK at the greater of the initial public offering price or the fair market value of the shares on the date of tender. 11.2 INDEMNIFICATION BY STAFFMARK. STAFFMARK covenants and agrees that it will indemnify, defend, protect and hold harmless the STOCKHOLDERS at all times from and after the date of this Agreement until the Expiration Date, from and against all claims, damages, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incurred by the STOCKHOLDERS as a result of or arising from (i) any breach by STAFFMARK or NEWCO of their representations and warranties set forth herein or on the schedules or certificates attached hereto, (ii) any nonfulfillment of any agreement on the part of STAFFMARK or NEWCO under this Agreement, (iii) any liabilities which the STOCKHOLDERS may incur due to STAFFMARK's or NEWCO's failure to be responsible for the liabilities and obligations of the COMPANY as provided in Section 1 hereof (except to the extent that STAFFMARK or NEWCO has claims against the STOCKHOLDERS by reason of such liabilities); (iv) any liability under the 1933 Act, the 1934 Act or other Federal or state law or regulation, at common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact relating to STAFFMARK, NEWCO or any of the Other Founding Companies contained in any preliminary prospectus, the Registration Statement or any prospectus forming a part thereof, or any amendment thereof or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact relating to STAFFMARK or NEWCO or any of the Other Founding Companies required to be stated therein or necessary to make the statements therein not misleading, or (v) the matters described on Schedule 11.2(v) [i.e., specifically identified items]. 11.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the "Indemnified Party") has received notice of or has knowledge of any claim by a person not a party to this Agreement ("Third Person"), or the commencement of any action or proceeding by a Third Person, the Indemnified Party shall, as a condition precedent to a claim with respect thereto being made against any party obligated to provide indemnification pursuant to Section 11.1 or 11.2 hereof (hereinafter the "Indemnifying Party"), give the Indemnifying Party written notice of such claim or the commencement of such action or proceeding. Such notice shall state the nature and the basis of such claim and a reasonable estimate of the amount thereof. The Indemnifying Party shall have the right to defend and settle, at its own expense and by its own counsel, any such matter so long as the Indemnifying Party pursues the same in good faith and diligently, provided that the Indemnifying Party shall not settle any criminal proceeding without the written consent of the Indemnified Party. If the Indemnifying Party undertakes to defend or settle, it shall promptly notify the Indemnified Party of its intention to do so, and the Indemnified Party shall cooperate with the Indemnifying Party and its counsel in the defense thereof and in any settlement thereof. Such cooperation shall include, but shall not be limited to, furnishing the Indemnifying Party with any books, records or information reasonably requested by the Indemnifying Party that are in the Indemnified Party's possession or control. All Indemnified Parties shall use the same counsel, which shall be the counsel selected by Indemnifying Party, provided that if counsel to the Indemnifying Party shall have a conflict of interest that prevents counsel for the Indemnifying Party from representing Indemnified Party, Indemnified Party shall have the right to participate in such matter through counsel of its own choosing and Indemnifying Party will reimburse the Indemnified Party for the expenses of its counsel. After the Indemnifying Party has notified the Indemnified Party of its intention to undertake to defend or settle any such asserted liability, and for so long as the Indemnifying Party diligently pursues such defense, the Indemnifying Party shall not be liable for any additional legal expenses incurred by the Indemnified Party in connection with any defense 40 49 or settlement of such asserted liability, except (i) as set forth in the preceding sentence and (ii) to the extent such participation is requested by the Indemnifying Party, in which event the Indemnified Party shall be reimbursed by the Indemnifying Party for reasonable additional legal expenses and out-of-pocket expenses. If the Indemnifying Party desires to accept a final and complete settlement of any such Third Person claim and the Indemnified Party refuses to consent to such settlement, then the Indemnifying Party's liability under this Section with respect to such Third Person claim shall be limited to the amount so offered in settlement by said Third Person and the Indemnified Party shall reimburse the Indemnifying Party for any additional costs of defense which it subsequently incurs with respect to such claim and all additional costs of settlement or judgment. If the Indemnifying Party does not undertake to defend such matter to which the Indemnified Party is entitled to indemnification hereunder, or fails diligently to pursue such defense, the Indemnified Party may undertake such defense through counsel of its choice, at the cost and expense of the Indemnifying Party, and the Indemnified Party may settle such matter, and the Indemnifying Party shall reimburse the Indemnified Party for the amount paid in such settlement and any other liabilities or expenses incurred by the Indemnified Party in connection therewith, provided, however, that under no circumstances shall the Indemnified Party settle any Third Person claim without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. All settlements hereunder shall effect a complete release of the Indemnified Party, unless the Indemnified Party otherwise agrees in writing. The parties hereto will make appropriate adjustments for insurance proceeds in determining the amount of any indemnification obligation under this Section. 11.4 EXCLUSIVE REMEDY. The indemnification provided for in this Section 11 shall (except as prohibited by ERISA) be the exclusive remedy in any action seeking damages or any other form of monetary relief brought by any party to this Agreement against another party, provided that, nothing herein shall be construed to limit the right of a party, in a proper case, to seek injunctive relief for a breach of this Agreement. 11.5 LIMITATIONS ON INDEMNIFICATION. STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 shall not assert any claim for indemnification hereunder against the STOCKHOLDERS until such time as, and solely to the extent that, the aggregate of all claims which such persons may have against such STOCKHOLDERS shall exceed 1.0% of the sum of the cash paid to STOCKHOLDERS plus the value of the STAFFMARK Stock delivered to STOCKHOLDERS (calculated as provided in the last sentence of this section) (the "Indemnification Threshold"), provided, however, that STAFFMARK, NEWCO, the Surviving Corporation and the other persons or entities indemnified pursuant to Section 11.1 may assert and shall be indemnified for any claim under Section 11.1(vi) at any time, regardless of whether the aggregate of all claims which such persons may have against any STOCKHOLDER or all STOCKHOLDERS exceeds the Indemnification Threshold, it being understood that the amount of any such claim under Section 11.1(vi) shall not be counted towards the Indemnification Threshold. STOCKHOLDERS shall not assert any claim (other than a Third Person claim) for indemnification hereunder against STAFFMARK or NEWCO until such time as, and solely to the extent that, the aggregate of all claims which STOCKHOLDERS may have against STAFFMARK or NEWCO shall exceed $20,000; provided, however, that STOCKHOLDER and the other persons or entities indemnified pursuant to Section 11.2 may assert and shall be indemnified for any claim under Section 11.2(v) at any time, regardless of whether the aggregate of all claims which such persons may have against any of STAFFMARK, or NEWCO exceeds $20,000, it being understood that the amount of any such claim under Section 11.2(v) shall not be counted towards such $20,000 amount. 41 50 No person shall be entitled to indemnification under this Section 11 if and to the extent that such person's claim for indemnification is directly related to a breach by such person of any representation, warranty, covenant or other agreement set forth in this Agreement. Notwithstanding any other term of this Agreement (except the proviso to this sentence), no STOCKHOLDER shall be liable under this Section 11 for an amount which exceeds the amount of proceeds received by such STOCKHOLDER in connection with the Merger, provided that a STOCKHOLDER's indemnification obligations pursuant to Section 11.1(vi) shall not be limited. For purposes of calculating the value of the STAFFMARK Stock received by a STOCKHOLDER, STAFFMARK Stock shall be valued at its initial public offering price as set forth in the Registration Statement. XII. TERMINATION OF AGREEMENT 12.1 TERMINATION. This Agreement may be terminated at any time prior to the Funding and Consummation Date solely: (i) by mutual consent of the boards of directors of STAFFMARK and the COMPANY; (ii) by the STOCKHOLDERS or the COMPANY (acting through its board of directors), on the one hand, or by STAFFMARK (acting through its board of directors), on the other hand, if the transactions contemplated by this Agreement to take place at the Closing shall not have been consummated by December 31, 1996, unless the failure of such transactions to be consummated is due to the willful failure of the party seeking to terminate this Agreement to perform any of its obligations under this Agreement to the extent required to be performed by it prior to or on the Funding and Consummation Date; (iii) by the STOCKHOLDERS or COMPANY, on the one hand, or by STAFFMARK, on the other hand, if a material breach or default shall be made by the other party in the observance or in the due and timely performance of any of the covenants, agreements or conditions contained herein, and the curing of such default shall not have been made on or before the Funding and Consummation Date; (iv) pursuant to Section 7.8 hereof; or (v) pursuant to Section 4 hereof. 12.2 LIABILITIES IN EVENT OF TERMINATION. There shall be no liability hereunder for termination except in the case of willful breach or default, or fraud, by a party with respect to any of its representations, warranties, covenants or agreements contained in this Agreement, in which case there will be no limit on any obligation or liability of such party in such circumstances including, but not limited to, legal and audit costs and out of pocket expenses. XIII. NONCOMPETITION 42 51 13.1 PROHIBITED ACTIVITIES. The STOCKHOLDERS will not, for a period of five (5) years following the Funding and Consummation Date, for any reason whatsoever, directly or indirectly, for themselves or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business or other entity that engages in the employee staffing industry including, but not limited to, temporary services, permanent placement and employee payrolling, that is in direct competition with STAFFMARK or any of the subsidiaries thereof, within 100 miles of where the COMPANY or any of its subsidiaries conducted business prior to the effectiveness of the Merger (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of STAFFMARK (including the subsidiaries thereof) in a sales representative or managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of STAFFMARK (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to the Funding and Consummation Date, a customer of STAFFMARK (including the subsidiaries thereof), of the COMPANY or of any of the Other Founding Companies within the Territory for the purpose of soliciting or selling products or services in direct competition with STAFFMARK within the Territory; (iv) call upon any prospective acquisition candidate, on any STOCKHOLDER's own behalf or on behalf of any competitor in the temporary services business, which candidate was either called upon by STAFFMARK (including the subsidiaries thereof) or for which STAFFMARK (or any subsidiary thereof) made an acquisition analysis, for the purpose of acquiring such entity; or (v) disclose customers, whether in existence or proposed, of the COMPANY to any person, firm, partnership, corporation or business for any reason or purpose whatsoever except to the extent that the COMPANY has in the past disclosed such information to the public for valid business reasons. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit any STOCKHOLDER from acquiring as an investment not more than one percent (1%) of the capital stock of a competing business whose stock is traded on a national securities exchange or over-the-counter. 13.2 DAMAGES. Because of the difficulty of measuring economic losses to STAFFMARK as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to STAFFMARK for which it would have no other adequate remedy, each STOCKHOLDER agrees that the foregoing covenant may be enforced by STAFFMARK in the event of breach by such STOCKHOLDER, by injunctions and restraining orders. 13.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the foregoing covenants in this Section 13 impose a reasonable restraint on the STOCKHOLDERS in light of the activities and business of STAFFMARK (including the subsidiaries thereof) on the date of the execution of this Agreement and the current plans of STAFFMARK; but it is also the intent of STAFFMARK and the 43 52 STOCKHOLDERS that such covenants be construed and enforced in accordance with the changing activities and business of STAFFMARK (including the subsidiaries thereof) throughout the term of this covenant. 13.4 SEVERABILITY; REFORMATION. The covenants in this Section 13 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 13.5 INDEPENDENT COVENANT. All of the covenants in this Section 13 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of any STOCKHOLDER against STAFFMARK (including the subsidiaries thereof), whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by STAFFMARK of such covenants. It is specifically agreed that the period of five (5) years stated at the beginning of this Section 13, during which the agreements and covenants of each STOCKHOLDER made in this Section 13 shall be effective, shall be computed by excluding from such computation any time during which such STOCKHOLDER is in violation of any provision of this Section 13. The covenants contained in Section 13 shall not be affected by any breach of any other provision hereof by any party hereto and shall have no effect if the transactions contemplated by this Agreement are not consummated. 13.6 MATERIALITY. The COMPANY and the STOCKHOLDERS hereby agree that this covenant is a material and substantial part of this transaction. XIV. NONDISCLOSURE OF CONFIDENTIAL INFORMATION 14.1 STOCKHOLDERS. The STOCKHOLDERS recognize and acknowledge that they had in the past, currently have, and in the future may possibly have, access to certain confidential information of the COMPANY, the Other Founding Companies, and/or STAFFMARK, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's, the Other Founding Companies' and/or STAFFMARK's respective businesses. The STOCKHOLDERS agree that they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of STAFFMARK, (b) following the Closing, such information may be disclosed by the STOCKHOLDERS as is required in the course of performing their duties for STAFFMARK or the Surviving Corporation and (c) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1, unless (i) such information becomes known to the public generally through no fault of the STOCKHOLDERS, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), the STOCKHOLDERS shall give prior written notice thereof to STAFFMARK and provide STAFFMARK with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by any of the STOCKHOLDERS of the provisions of this Section, STAFFMARK shall be entitled to an injunction restraining such 44 53 STOCKHOLDERS from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting STAFFMARK from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. In the event the transactions contemplated by this Agreement are not consummated, STOCKHOLDERS shall have none of the above-mentioned restrictions on their ability to disseminate confidential information with respect to the COMPANY. 14.2 STAFFMARK AND NEWCO. STAFFMARK and NEWCO recognize and acknowledge that they had in the past and currently have access to certain confidential information of the COMPANY, such as operational policies, and pricing and cost policies that are valuable, special and unique assets of the COMPANY's business. STAFFMARK and NEWCO agree that, prior to the Closing, or if the Transactions contemplated by this Agreement are not consummated, they will not disclose such confidential information to any person, firm, corporation, association or other entity for any purpose or reason whatsoever, except (a) to authorized representatives of the COMPANY, (b) to counsel and other advisers, provided that such advisers (other than counsel) agree to the confidentiality provisions of this Section 14.1 and (c) to the Other Founding Companies and their representatives pursuant to Section 7.1(a), unless (i) such information becomes known to the public generally through no fault of STAFFMARK or NEWCO, (ii) disclosure is required by law or the order of any governmental authority under color of law, provided, that prior to disclosing any information pursuant to this clause (ii), STAFFMARK and NEWCO shall, if possible, give prior written notice thereof to the COMPANY and the STOCKHOLDERS and provide the COMPANY and the STOCKHOLDERS with the opportunity to contest such disclosure, or (iii) the disclosing party reasonably believes that such disclosure is required in connection with the defense of a lawsuit against the disclosing party. In the event of a breach or threatened breach by STAFFMARK or NEWCO of the provisions of this Section, the COMPANY and the STOCKHOLDERS shall be entitled to an injunction restraining STAFFMARK and NEWCO from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting the COMPANY and the STOCKHOLDERS from pursuing any other available remedy for such breach or threatened breach, including the recovery of damages. 14.3 DAMAGES. Because of the difficulty of measuring economic losses as a result of the breach of the foregoing covenants in Section 14.1 and 14.2, and because of the immediate and irreparable damage that would be caused for which they would have no other adequate remedy, the parties hereto agree that, in the event of a breach by any of them of the foregoing covenants, the covenant may be enforced against the other parties by injunctions and restraining orders. 14.4 SURVIVAL. The obligations of the parties under this Article 14 shall survive the termination of this Agreement for a period of five years from the Funding and Consummation Date. XV. TRANSFER RESTRICTIONS 15.1 TRANSFER RESTRICTIONS. Except for transfers to immediate family members who agree to be bound by the restrictions set forth in this Section 15.1 (or trusts for the benefit of the STOCKHOLDERS or family members, the trustees of which so agree or family limited partnership)(who may participate in registration rights pursuant to Section 17, but shall not vote their shares pursuant to Section 17.2), for a period of two years from the Closing, except pursuant to Section 17 hereof or in the event of death of any STOCKHOLDER, none of the STOCKHOLDERS shall sell, assign, exchange, transfer, encumber, 45 54 pledge, distribute, appoint, or otherwise dispose of (a) any shares of STAFFMARK Stock received by the STOCKHOLDERS in the Merger, or (b) grant any interest (including, without limitation, an option to buy or sell) in any such shares of STAFFMARK Stock, in whole or in part, and no such attempted transfer shall be treated as effective for any purpose. The certificates evidencing the STAFFMARK Stock delivered to the STOCKHOLDERS pursuant to Section 3 of this Agreement will bear a legend substantially in the form set forth below and containing such other information as STAFFMARK may deem necessary or appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO [SECOND ANNIVERSARY OF CLOSING DATE]. UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE SPECIFIED ABOVE. XVI. FEDERAL SECURITIES ACT REPRESENTATIONS The STOCKHOLDERS acknowledge that the shares of STAFFMARK Stock to be delivered to the STOCKHOLDERS pursuant to this Agreement have not been and will not be registered under the 1933 Act and therefore may not be resold without compliance with the 1933 Act. The STAFFMARK Stock to be acquired by such STOCKHOLDERS pursuant to this Agreement is being acquired solely for their own respective accounts, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. 16.1 COMPLIANCE WITH LAW. The STOCKHOLDERS covenant, warrant and represent that none of the shares of STAFFMARK Stock issued to such STOCKHOLDERS will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the 1933 Act and the rules and regulations of the SEC. All the STAFFMARK Stock shall bear the following legend in addition to the legend required under Section 15 of this Agreement: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW. 16.2 ECONOMIC RISK; SOPHISTICATION. The STOCKHOLDERS are able to bear the economic risk of an investment in the STAFFMARK Stock acquired pursuant to this Agreement and can afford to sustain a total loss of such investment and have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the proposed investment in the STAFFMARK Stock. The STOCKHOLDERS party hereto have had an adequate opportunity to ask questions and receive answers from the officers of STAFFMARK concerning any and all matters relating 46 55 to the transactions described herein including, without limitation, the background and experience of the current and proposed officers and directors of STAFFMARK, the plans for the operations of the business of STAFFMARK, the business, operations and financial condition of the Founding Companies other than the COMPANY, and any plans for additional acquisitions and the like. The STOCKHOLDERS have asked any and all questions in the nature described in the preceding sentence and all questions have been answered to their satisfaction. 16.3 INVESTIGATION. STAFFMARK has made or caused to be made an investigation of the COMPANY, its assets, business, liabilities and all other matters affecting its judgment to enter into this Agreement and to engage in the transactions contemplated hereby. STAFFMARK acknowledges that notwithstanding the fact that the COMPANY or STOCKHOLDERS may have made available to STAFFMARK certain information prepared by or in the possession of the COMPANY or STOCKHOLDERS for their general use with respect to this Agreement, neither the COMPANY nor STOCKHOLDERS have made any representations or warranties, oral or written, except as expressly set forth in this Agreement or in the Schedules attached hereto, upon which STAFFMARK has relied or is entitled to rely. Neither the COMPANY nor the STOCKHOLDERS have made any representations or warranties to STAFFMARK regarding the future success or profitability of the business heretofore conducted by the COMPANY. STAFFMARK has no actual knowledge of any existing breach of a representation or warranty made herein by the COMPANY or the STOCKHOLDERS. XVII. REGISTRATION RIGHTS 17.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the Closing, whenever STAFFMARK proposes to register any STAFFMARK Stock for its own or others account under the 1933 Act for a public offering, other than (i) any shelf registration of shares to be used as consideration for acquisitions of additional businesses by STAFFMARK and (ii) registrations relating solely to employee benefit plans, STAFFMARK shall give each of the STOCKHOLDERS prompt written notice of its intent to do so. Upon the written request of any of the STOCKHOLDERS given within 30 days after receipt of such notice, STAFFMARK shall cause to be included in such registration all of the STAFFMARK Stock received pursuant to this Agreement ("Registrable Securities") which any such STOCKHOLDER requests, provided that STAFFMARK shall have the right to reduce the number of shares included in such registration to the extent that inclusion of such shares could, in the opinion of tax counsel to STAFFMARK or its independent auditors, jeopardize the status of the transactions contemplated hereby and by the Registration Statement as a tax-free reorganization. If a STOCKHOLDER requests inclusion of any shares of Registrable Securities in a registration and if the public offering is to be underwritten, STAFFMARK will request the underwriters of the offering to purchase and sell such shares of Registrable Securities. If STAFFMARK is advised in writing in good faith by any managing underwriter of an underwritten offering of the securities being offered pursuant to any registration statement under this Section 17.1 that the number of shares to be sold by persons other than STAFFMARK is greater than the number of such shares which can be offered without adversely affecting the offering, STAFFMARK may reduce pro rata the number of shares offered for the accounts of such persons (based upon the number of shares held by such person) to a number deemed satisfactory by such managing underwriter; provided, that, for each such offering made by STAFFMARK after the IPO, such reduction shall be made first by reducing the number of shares to be sold by persons other than STAFFMARK, the STOCKHOLDERS and the stockholders of 47 56 the Other Founding Companies (collectively, the STOCKHOLDERS and the stockholders of the other Founding Companies being referred to herein as the "Founding Stockholders"), and thereafter, if a further reduction is required, by reducing the number of shares to be sold by the Founding Stockholders. A STOCKHOLDER may at any time prior to the effectiveness of a registration statement withdraw shares of Registrable Securities held by it from the public offering. The fact that any shares of STAFFMARK Stock have been the subject of a request for registration pursuant to this Section 17.1 shall not prevent such shares from being the subject of a future request for registration pursuant to this Section 17.1 if for any reason such shares were not included in the registration statement. 17.2 DEMAND REGISTRATION RIGHTS. At any time after the date 22 months after the Closing, STOCKHOLDERS owning at least 876,450 shares of STAFFMARK Stock issued in the STAFFMARK Plan of Organization may request in writing that STAFFMARK file a registration statement under the 1933 Act covering the registration of the shares of Registrable Securities issued to the Founding Stockholders in the STAFFMARK Plan of Organization (a "Demand Registration"). Within ten (10) days of the receipt of such request, STAFFMARK shall give written notice of such request to all other Founding Stockholders and shall, as soon as practicable (but in no event later than 75 days after the receipt of such request), file and use its best efforts to cause to become effective a registration statement covering all such shares. STAFFMARK shall be obligated to effect only one Demand Registration for the Founding Stockholders collectively and will keep such Demand Registration current and effective for not less than 60 days (or such shorter period as is required to sell all of the shares registered thereon). Any Demand Registration which shall not have become effective in accordance with this Section 17.2, and any Demand Registration pursuant to which the Founding Stockholders are unable to include at least 70% of the shares of STAFFMARK Stock which they desire to include, shall not be included in the calculation of the number of Demand Registrations contemplated by this Section 17.2. Notwithstanding the foregoing paragraph, following such a demand a majority of the STAFFMARK's disinterested directors (i.e., directors who have not demanded or elected to sell shares in any such public offering) may defer the filing of the registration statement for a 60-day period. If with respect to any public offering which is the subject of a Demand Registration pursuant to this Section 17.2, STAFFMARK proposes to include securities to be issued by it or any other person proposes to include securities of STAFFMARK held by someone other than a Founding Stockholder, and the underwriters advising STAFFMARK believe that the offering of such shares cannot successfully be made if the offering includes such other securities as well as the shares held by the Founding Stockholders, STAFFMARK may exclude the securities to be issued by such other person from such offering and such securities shall not be included in the registration statement. If a Demand Registration is in connection with an underwritten public offering, the principal underwriter will be selected by STAFFMARK and approved by the Founding Stockholders holding a majority of the shares of STAFFMARK Stock to be included in such registration. 17.3 REGISTRATION PROCEDURES. STAFFMARK will bear all expenses incurred in connection with each registration statement filed in accordance with this Article and any action taken by STAFFMARK in conjunction with the offering made pursuant to such registration statement (including the expense of preparing and filing of such registration statement, furnishing of such number of copies of the prospectus included therein as may be reasonably required in connection with the offering, printing 48 57 expenses, fees and expenses of independent certified public accountants (including the expense of any audit), qualification of such offering under such state securities laws as the holders of shares of STAFFMARK Stock shall reasonably request, and payment of the fees and expenses of counsel for STAFFMARK, but excluding underwriting commissions and discounts). If and whenever STAFFMARK is required to effect or cause the registration of any shares of STAFFMARK Stock under this Article, STAFFMARK will, as expeditiously as possible: (a) Prepare and file with the SEC an appropriate registration statement with respect to such shares of STAFFMARK Stock and use its best efforts to cause such registration statement to become effective, provided that before filing a registration statement or prospectus or any amendments or supplements thereto, STAFFMARK will furnish the STOCKHOLDERS with copies of all such documents proposed to be filed; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith and use its best efforts to cause such registration statement to remain effective for a period of at least sixty (60) days (or such shorter period during which holders shall have sold all Registrable Securities which they requested to be registered) and to comply with the provisions of the 1933 Act (to the extent applicable to STAFFMARK) with respect to the disposition of all securities in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) Furnish to each STOCKHOLDER selling shares of STAFFMARK Stock such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus), in conformity with the requirements of the 1933 Act and the regulations thereunder and such other documents, as each seller may reasonably request in order to facilitate a public sale or other disposition of the shares of STAFFMARK Stock; (d) Use its best efforts to register or qualify the shares of STAFFMARK Stock covered by such registration statement under the securities or blue sky laws of such states as any selling STOCKHOLDER reasonably requests, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of shares of STAFFMARK Stock owned by such STOCKHOLDER, except that STAFFMARK will not be required to qualify generally to do business as a foreign corporation in any state wherein it would not but for the requirements of this subparagraph be obligated to be qualified, to subject itself to taxation in any such state, or to consent to general service of process in any such state; (e) Notify each STOCKHOLDER selling shares of STAFFMARK Stock covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, of this happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact 49 58 required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. At the request of any such STOCKHOLDER, STAFFMARK will prepare and furnish to each STOCKHOLDER a reasonable number of copies of a supplement or an amendment of such prospectus as may be necessary so that, as thereafter delivered, such prospectus will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (f) Cause all shares of STAFFMARK Stock covered by such registration statement to be listed on securities exchanges on which similar securities issued by STAFFMARK are then listed, if any; (g) Provide a transfer agent and registrar for all shares of STAFFMARK Stock covered by such registration statement not later than the effective date of such registration statement; (h) Enter into such customary agreements (including an underwriting agreement in customary form with underwriters) and take such other reasonable and customary action necessary to facilitate the disposition of the shares of STAFFMARK Stock being sold; and (i) Make available for inspection by any seller (upon the reasonable request of any such seller) of shares of STAFFMARK Stock covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by any such seller or any such underwriter, all financial and other records, pertinent corporate documents and properties of STAFFMARK, and cause all of STAFFMARK's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement. 17.4 AVAILABILITY OF RULE 144. STAFFMARK shall not be obligated to register shares of STAFFMARK Stock held by any STOCKHOLDER pursuant to this Section 17 if such Registrable Securities held by such STOCKHOLDER may be sold in the public market without registration under the 1933 Act pursuant to Rule 144(k) and any applicable state securities laws. 17.5 MERGER, ETC. In the event that any capital stock or other securities are issued in respect of, in exchange for, or in substitution of, any of the shares of STAFFMARK held by the STOCKHOLDERS by reason of any reorganization, recapitalization, reclassification, merger, consolidation, spin-off, partial or complete liquidation, stock dividend, split-up, partial or complete liquidation, stock dividend, split-up, sale of assets, distribution to stockholders or combination of the shares of STAFFMARK, or any other change in STAFFMARK's capital structure, appropriate adjustment shall be made to the registration rights granted to the STOCKHOLDERS so as to fairly and equitably preserve, as far as practical, the original rights and obligations of the parties hereto under this Agreement. XVIII. GENERAL 18.1 COOPERATION. The COMPANY, STOCKHOLDERS, STAFFMARK and NEWCO shall each deliver or cause to be delivered to the other on the Funding and Consummation Date, and at such other times and places as shall be reasonably agreed to, such additional instruments as the other may reasonably request for the purpose of carrying out this Agreement. The COMPANY will cooperate and use its reasonable efforts to have the present officers, directors and employees of the COMPANY cooperate with STAFFMARK on and after the Funding and Consummation Date in furnishing information, evidence, testimony and other assistance in connection with any tax return filing 50 59 obligations, actions, proceedings, arrangements or disputes of any nature with respect to matters pertaining to all periods prior to the Funding and Consummation Date. 18.2 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties hereunder may not be assigned (except by operation of law) and shall be binding upon and shall inure to the benefit of the parties hereto, the successors of STAFFMARK, and the heirs and legal representatives of the STOCKHOLDERS. 18.3 ENTIRE AGREEMENT. This Agreement (including the schedules, exhibits and annexes attached hereto) and the documents delivered pursuant hereto constitute the entire agreement and understanding among the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK and supersede any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement, upon execution, constitutes a valid and binding agreement of the parties hereto enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by the STOCKHOLDERS, the COMPANY, NEWCO and STAFFMARK, acting through their respective officers or trustees, duly authorized by their respective Boards of Directors. Any disclosure made on any Schedule delivered pursuant hereto shall be deemed to have been disclosed for purposes of any other Schedule required hereby. 18.4 COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 18.5 BROKERS AND AGENTS. Except as disclosed on Schedule 18.5, each party represents and warrants that it employed no broker or agent in connection with this transaction and agrees to indemnify the other parties hereto against all loss, cost, damages or expense arising out of claims for fees or commission of brokers employed or alleged to have been employed by such indemnifying party. 18.6 EXPENSES. Whether or not the transactions herein contemplated shall be consummated, STAFFMARK will pay the fees, expenses and disbursements of STAFFMARK and its agents, representatives, accountants and counsel incurred in connection with the subject matter of this Agreement and any amendments thereto in excess of the initial aggregate deposits of the Founding Companies (the "Deposits"), including all costs and expenses incurred in the performance and compliance with all conditions to be performed by STAFFMARK under this Agreement, including the fees and expenses of Arthur Andersen, LLP, Wright, Lindsey & Jennings and the costs of preparing the Registration Statement. Each STOCKHOLDER shall pay all sales, use, transfer, real property transfer, recording, gains, stock transfer and other similar taxes and fees ("Transfer Taxes") imposed in connection with the Merger, other than Transfer Taxes, if any, imposed by the State of Delaware and his own personal professional fees necessary to consummate this transaction, including legal and accounting fees incurred by the COMPANY in connection with this transaction. Each STOCKHOLDER shall file all necessary documentation and Returns with respect to such Transfer Taxes. In addition, each STOCKHOLDER acknowledges that he, and not the COMPANY or STAFFMARK, will pay all taxes due upon receipt of the consideration payable pursuant to Section 2 hereof, and will assume all tax risks and liabilities of such STOCKHOLDER in connection with the transactions contemplated hereby. If the transactions herein contemplated are not consummated, the remaining balance of the Deposits after payment of all transaction expenses will be reimbursed to the COMPANY and the other Founding Companies on a pro-rata basis based on the original Deposits made by each Founding Company. 51 60 18.7 NOTICES. All notices of communication required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested, or by delivering the same in person to an officer or agent of such party. (a) If to STAFFMARK, or NEWCO, addressed to them at: StaffMark, Inc. 302 East Millsap Fayetteville, Arkansas 72702 Attn: Clete T. Brewer with copies to: Wright, Lindsey & Jennings 200 W. Capitol Avenue, Suite 220 Little Rock, Arkansas 72201 Attn: C. Douglas Buford, Jr. (b) If to the STOCKHOLDERS, addressed to them at their addresses set forth on Annex IV, with copies to such counsel as is set forth with respect to each STOCKHOLDER on such Annex IV; (c) If to the COMPANY, addressed to it at: The Blethen Group I-85 Plaza Burlington, North Carolina 27215 Attn: Jan Blethen and marked "Personal and Confidential" with copies to: Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. 2000 Renaissance Plaza 230 North Elm Street P.O. Box 26000 Greensboro, North Carolina 28202 Attn: Howard Williams or to such other address or counsel as any party hereto shall specify pursuant to this Section 18.7 from time to time. 18.8 GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Delaware. 52 61 18.9 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations, warranties, covenants and agreements of the parties made herein and at the time of the Closing or in writing delivered pursuant to the provisions of this Agreement shall survive the consummation of the transactions contemplated hereby and any examination on behalf of the parties until the Expiration Date. 18.10 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein, no delay of or omission in the exercise of any right, power or remedy accruing to any party as a result of any breach or default by any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver. 18.11 TIME. Time is of the essence with respect to this Agreement. 18.12 REFORMATION AND SEVERABILITY. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as to most nearly retain the intent of the parties, and if such modification is not possible, such provision shall be severed from this Agreement, and in either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. 18.13 REMEDIES CUMULATIVE. No right, remedy or election given by any term of this Agreement shall be deemed exclusive but each shall be cumulative with all other rights, remedies and elections available at law or in equity. 18.14 CAPTIONS. The headings of this Agreement are inserted for convenience only, shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof. 18.15 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived only with the written consent of STAFFMARK, NEWCO, the COMPANY and STOCKHOLDERS who will hold or who hold at least 50% of the STAFFMARK Stock issued or to be issued to the STOCKHOLDERS upon consummation of the Merger. Any amendment or waiver effected in accordance with this Section 18.15 shall be binding upon each of the parties hereto, any other person receiving STAFFMARK Stock in connection with the Merger and each future holder of such STAFFMARK Stock. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. STAFFMARK, INC. By /s/ CLETE T. BREWER ------------------------------------------------- Name: Clete T. Brewer -------------------------------------------- Title: President 53 62 ATTEST: /s/ JERRY T. BREWER - ----------------------------------- DP PROS OF BURLINGTON ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- BLETHEN TEMPORARIES ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- PERSONNEL PLACEMENT ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- 54 63 JAEGER PERSONNEL SERVICES ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- DIXON ENTERPRISES OF BURLINGTON ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- TRASEC ACQUISITION CORPORATION By /s/ CLETE T. BREWER ------------------------------------ Name: Clete T. Brewer ------------------------------- Title: President ATTEST: /s/ JERRY T. BREWER - ----------------------------------- 55 64 DP PROS OF BURLINGTON, INC. By /s/ JAN BLETHEN ------------------------------------ Name: Jan Blethen ------------------------------- Title: President ATTEST: /s/ TRACY A. BLETHEN - ----------------------------------- BLETHEN TEMPORARIES, INC. By /s/ JAN BLETHEN ------------------------------------ Name: Jan Blethen ------------------------------- Title: President ATTEST: /s/ TRACY A. BLETHEN - ----------------------------------- PERSONNEL PLACEMENT, INC. By /s/ JAN BLETHEN ------------------------------------ Name: Jan Blethen ------------------------------- Title: President ATTEST: /s/ TRACY A. BLETHEN - ----------------------------------- BLETHEN FAMILY INVESTMENTS LIMITED PARTNERSHIP By /s/ JAN BLETHEN, President ------------------------------------ DP PROS, INC. ATTEST: /s/ TRACY A. BLETHEN - ----------------------------------- By /s/ JAN BLETHEN -------------------------------------- JAN BLETHEN 56 65 JAEGER PERSONNEL SERVICES, LTD. By /s/ ANN F. JAEGER ------------------------------------ Name: Ann F. Jaeger ------------------------------- Title: President ATTEST: /s/ J. CHRISTOPHER JAEGER - ----------------------------------- /s/ ANN F. JAEGER, President -------------------------------------- ANN F. JAEGER /s/ J. CHRISTOPHER JAEGER -------------------------------------- CHRISTOPHER JAEGER 57 66 DIXON ENTERPRISES OF BURLINGTON, INC. By /s/ DEBORAH D. PORCH ----------------------------------- Name: Deborah D. Porch ------------------------------- Title: President ATTEST: /s/ TRACY A. BLETHEN - ----------------------------------- TRASEC CORP. By /s/ TRACY A. BLETHEN ----------------------------------- Name: Tracy A. Blethen ------------------------------- Title: President ATTEST: /s/ DEBORAH D. PORCH - ----------------------------------- /s/ DEBORAH LYNN DIXON PORCH -------------------------------------- DEBORAH LYNN DIXON PORCH /s/ TRACY ANNE BLETHEN -------------------------------------- TRACY ANNE BLETHEN 58 EX-3.1 8 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF ONE SOURCE STAFFING, INC. I, THE UNDERSIGNED, for the purposes of incorporating and organizing a corporation under the General Corporation Law of the State of Delaware, do execute this Certificate of Incorporation and DO HEREBY CERTIFY as follows: ARTICLE ONE The name of the Corporation is ONE SOURCE STAFFING, INC. ARTICLE TWO The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THREE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. ARTICLE FOUR The total number of shares of all classes of stock which the Corporation shall have authority to issue is twenty seven million (27,000,000), divided into two classes of which one million (1,000,000) shares, par value $.01 per share, shall be designated Preferred Stock (the "Preferred Stock"), and twenty-six million (26,000,000) shares, par value $.01 per share, shall be designated Common Stock (the "Common Stock"). 2 A. Preferred Stock The Board of Directors is authorized, subject to limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish the number of shares to be included in each such series and to fix the designations, powers, preferences and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof. B. Common Stock 1. Dividends. Subject to the preferential rights, if any, of the Preferred Stock, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in property or in shares of Common Stock or other securities of the Corporation. 2. Liquidation. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, after payment or provision for payment of the debts and other liabilities of the Corporation and of the preferential amounts, if any, to which the holders of Preferred Stock may be entitled, the holders of all outstanding shares of Common Stock shall be entitled to share ratably in the remaining net assets of the Corporation. 3. Voting Rights. At every annual or special meeting of stockholders of the Corporation, every holder of Common Stock shall be entitled to one vote, in person or by proxy, for each share of Common Stock standing in his or her name on the books of the Corporation. 2 3 ARTICLE FIVE The incorporator of the Corporation is Fred M. Perkins, III, whose mailing address is Wright, Lindsey & Jennings, 200 W. Capitol Avenue, Suite 2200, Little Rock, Arkansas 72201. ARTICLE SIX In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to adopt, alter and repeal the By-Laws of the Corporation. ARTICLE SEVEN The Corporation reserves the right to amend, alter, change or repeal any provisions in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute. ARTICLE EIGHT No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. If the General Corporation Law of Delaware is hereafter amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of Delaware as so amended. Any repeal or modification of this ARTICLE EIGHT shall not 3 4 adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE NINE To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, the Corporation shall indemnify any and all of its directors and officers, or former directors and officers, or any person who may have served at the Corporation's request as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-law, agreement, vote of stockholders, vote of disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such persons and the Corporation may purchase and maintain insurance on behalf of any director or officer to the extent permitted by Section 145 of the Delaware General Corporation Law. ARTICLE TEN Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions 4 5 of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such a manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization, shall if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. ARTICLE ELEVEN The powers of the incorporator are to terminate upon the filing of this Certificate of Incorporation. The name and mailing address of the person who is to serve as the initial director of the Corporation until the first annual meeting of stockholders of the Corporation, or until his successor is elected and qualifies, is: Clete T. Brewer P. O. Box 1687 Fayetteville, Arkansas 72702 IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges that the foregoing Certificate of Incorporation is his act and deed on this 12th day of March, 1996. /s/ FRED M. PERKINS, III --------------------------------------- Fred M. Perkins III, Incorporator 5 EX-3.2 9 CERTIFICATE OF AMENDMENT OF CERT. OF INCORP. 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION One Source Staffing, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That a meeting of the Board of Directors of One Source Staffing, Inc., resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered "One" so that, as amended said Article shall be read as follows: ARTICLE ONE The name of the Corporation is StaffMark, Inc. SECOND: That thereafter, pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. 2 THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Corporation has caused this certificate to be signed by Robert H. Janes III, its authorized officer, this 14th day of June, 1996. BY: /s/ ROBERT H. JANES III ----------------------------------------- Robert H. Janes III, Secretary/Treasurer 2 EX-3.3 10 RESTATED BY-LAWS 1 EXHIBIT 3.3 THE AMENDED AND RESTATED BY-LAWS OF STAFFMARK, INC. 2 THE AMENDED AND RESTATED BY-LAWS OF STAFFMARK, INC. ARTICLE I - STOCKHOLDERS SECTION 1. Annual Meeting. The annual meeting of the stockholders of the Corporation shall be held on such date, at such time and at such place within or without the State of Delaware as may be designated by the Board of Directors, for the purpose of electing Directors and for the transaction of such other business as may be properly brought before the meeting. SECTION 2. Special Meetings. Except as otherwise provided in the Certificate of Incorporation, a special meeting of the stockholders of the Corporation may be called at any time by the Board of Directors, the Chairman of the Board or the President and shall be called by the President or the Secretary at the request in writing of stockholders holding together at least twenty-five percent of the number of shares of stock outstanding and entitled to vote at such meeting. Any special meeting of the stockholders shall be held on such date, at such time and at such place within or without the State of Delaware as the Board of Directors or the officer calling the meeting may designate. At a special meeting of the stockholders, no business shall be transaction and no corporation action shall be taken other than that stated in the notice of the meeting unless all of the stockholders are present in person or by proxy, in which case any and all business may be transacted at the meeting even though the meeting is held without notice. SECTION 3. Notice of Meetings. Except as otherwise provided in these By-Laws or by law, a written notice of each meeting of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of the Corporation entitled to vote at such meeting at his address as it appears on the records of the Corporation. The notice shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. SECTION 4. Quorum. At any meeting of the stockholders, the holders of a majority in number of the total outstanding shares of stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, shall constitute a quorum of the stockholders for all purposes, unless the representation of a larger number of shares shall be required by law, by the Certificate of Incorporation or by these By-Laws, in which case the representation of the number of shares so required shall constitute a quorum; provided that at any meeting of the stockholders at which the holders of any class of stock of the 3 Corporation shall be entitled to vote separately as a class, the holders of a majority in number of the total outstanding shares of such class, present in person or represented by proxy, shall constitute a quorum for purposes of such class vote unless the representation of a larger number of shares of such class shall be required by law, by the Certificate of Incorporation, or by these By-Laws. SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present in person or represented at any meeting of the stockholders, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting may adjourn from time to time; provided, however, that if the holders of any class of stock of the Corporation are entitled to vote separately as a class upon any matter at such meeting, any adjournment of the meeting in respect of action of such class upon such matter shall be determined by the holders of a majority of the shares of such class present in person or represented by proxy and entitled to vote at such meeting. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournments is taken. At the adjourned meeting the stockholders, or the holder of any class of stock entitled to vote separately as a class, as the case may be, may transact any business which might have been transacted by them at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. SECTION 6. Organization. The President or, in his absence, any Vice President shall call all meetings of the stockholders to order, and shall act as Chairman of such meetings. In the absence of the President and all of the Vice Presidents, the holders of a majority in number of the shares of stock of the Corporation present in person or represented by proxy and entitled to vote at such meeting shall elect a Chairman. The Secretary of the Corporation shall act as Secretary of all meetings of the stockholders; but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. It shall be the duty of the Secretary to prepare and make, at least ten days before every meeting of stockholders, a complete list of stockholders entitled to vote at such meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held, for 2 4 the ten days next preceding the meeting, to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, and shall be produced and kept at the time and place of the meeting during the whole time thereof and subject to the inspection of any stockholder who may be present. SECTION 7. Voting. Except as otherwise provided in the Certificate of Incorporation or by law, each stockholder shall be entitled to one vote for each share of the capital stock of the Corporation registered in the name of such stockholder upon the books of the Corporation. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. When directed by the presiding officer or upon the demand of any stockholder, the vote upon any matter before a meeting of stockholders shall be by ballot. Except as otherwise provided by law or by the Certificate of Incorporation, Directors shall be elected by a plurality of the votes cast at a meeting of stockholders by the stockholders entitled to vote in the election and, whenever any corporate action, other than the election of Directors is to be taken, it shall be authorized by a majority of the votes cast at a meeting of stockholders by the stockholders entitled to vote thereon. Shares of the capital stock of the Corporation belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. SECTION 8. Inspectors. When required by law or directed by the presiding officer or upon the demand of any stockholder entitled to vote, but not otherwise, the polls shall be opened and closed, the proxies and ballots shall be received and taken in charge, and all questions touching the qualification of voters, the validity of proxies and the acceptance or rejection of votes shall be decided at any meeting of the stockholders by two or more inspectors who may be appointed by the Board of Directors before the meeting, or if not so appointed, shall be appointed by the presiding officer at the meeting. If any person so appointed fails to appear or act, the vacancy may be filled by appointment in like manner. SECTION 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken or which may be taken at any annual or special meeting of the stockholders of the Corporation, may be taken without a meeting, without prior notice and without 3 5 a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of any such corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II BOARD OF DIRECTORS SECTION 1. Number and Term of Office. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, none of whom need be stockholders of the Corporation. The numbers of Directors constituting the Board of Directors shall be fixed from time to time by resolution passed by a majority of the Board of Directors. The Director shall, except as hereinafter otherwise provided for filling vacancies, be elected at the annual meeting of stockholders, and shall hold office until their respective successors are elected and qualified or until their earlier resignation or removal. SECTION 2. Removal, Vacancies and Additional Directors. The stockholders may, at any special meeting the notice of which shall state that it is called for that purpose, remove, with or without cause, any Director and fill the vacancy; provided that whenever any Director shall have been elected by the holders of any class of stock of the Corporation voting separately as a class under the provisions of the Certificate of Incorporation, such Director may be removed and the vacancy filled only by the holders of that class of stock voting separately as a class. Vacancies caused by any such removal and not filled by the stockholder; at the meeting at which such removal shall have been made, or any vacancy caused by the death or resignation of any Director or for any other reason, and any newly created directorship resulting from any increase in the authorized number of Directors, may be filled by the affirmative vote of a majority of the Directors then in office, although less than a quorum, and any Director so elected to fill any such vacancy or newly created directorship shall hold office until his successor is elected and qualified or until his earlier resignation or removal. When one or more Directors shall resign effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office as herein provided in connection with the filling of other vacancies. 4 6 SECTION 3. Place of Meeting. The Board of Directors may hold its meetings in such place or places in the State of Delaware or outside the State of Delaware as the Board from time to time shall determine. SECTION 4. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times and places as the Board from time to time by resolution shall determine. No notice shall be required for any regular meeting of the Board of Directors; but a copy of every resolution fixing or changing the time or place of regular meetings shall be mailed to every Director at least five days before the first meeting held in pursuance thereof. SECTION 5. Special Meeting. Special meetings of the Board of Directors shall be held whenever called by direction of the President, the Chairman of the Board or by any two of the Directors then in office. Notice of the day, hour and place of holding of each special meeting shall be given by mailing the same at least two days before the meeting or by causing the same to be transmitted by telegraph, cable or wireless at least one day before the meeting to each Director. Unless otherwise indicated in the notice thereof, any and all business other than an amendment of these By-Laws may be transacted at any special meeting, and an amendment of these By-Laws may be acted upon if the notice of the meeting shall have stated that the amendment of these By-Laws is one of the purposes of the meeting. At any meeting at which every Director shall be present, even though without any notice, any business may be transacted, including the amendment of these By-Laws. SECTION 6. Quorum. Subject to the provisions of Section 2 of this Article II, a majority of the members of the Board of Directors in office (but in no case less than one-third of the total number of Directors nor less than two Directors) shall constitute a quorum for the transaction of business and the vote of the majority of the Directors present at any meeting of the Board of Directors at which a quorum is present shall be the act of the Board of Directors. If at any meeting of the Board there is less than a quorum present, a majority of those present may adjourn the meeting from time to time. SECTION 7. Organization. The Chairman of the Board shall preside at all meetings of the Board of Directors. In the absence of the Chairman, an acting Chairman shall be elected from the Directors present to preside at such meeting. The Secretary of the Corporation shall act as Secretary of all meetings of the Directors; but in the absence of the Secretary, the Chairman may appoint any person to act as Secretary of the meeting. 5 7 SECTION 8. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the Corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not be or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided by resolution passed by a majority of the whole Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending these By-Laws; and unless such resolution, these By-Laws, or the Certificate of Incorporation expressly to provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 9. Conference Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, the members of the Board of Directors or any committee designated by the Board, may participate in a meeting of the Board of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. SECTION 10. Consent of Directors or Committee in Lieu of Meeting. Unless otherwise restricted by the Certificate of Incorporation or by these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board or committee, as the case may be. 6 8 ARTICLE III OFFICERS SECTION 1. Officers. The officers of the Corporation may be a President, one or more Vice Presidents, a Secretary and a Treasurer, and such additional officers, if any, as shall be elected by the Board of Directors pursuant to the provisions of Section 6 of this Article III. The President, one or more Vice Presidents, the Secretary and the Treasurer shall be elected by the Board of Directors at its first meeting after each annual meeting of the stockholders. The failure to hold such election shall not of itself terminate the term of office of any officer. All officers shall hold office at the pleasure of the Board of Directors. Any officer may resign at any time upon written notice to the Corporation. Officers may, but need not, be Directors. Any number of offices may be held by the same person. All officers, agents and employees shall be subject to removal, with or without cause, at any time by the Board of Directors. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. All agents and employees other than officers elected by the Board of Directors shall also be subject to removal, with or without cause, at any time by the officers appointing them. Any vacancy caused by the death of any officer, his resignation, his removal, or otherwise, may be filled by the Board of Directors, and any officer so elected shall hold office at the pleasure of the Board of Directors. In addition to the powers and duties of the officers of the Corporation as set forth in these By-Laws, the officers shall have such authority and shall perform such duties as from time to time may be determined by the Board of Directors. SECTION 2. Powers and Duties of the President. The President shall be the chief executive officer of the Corporation, and subject to the control of the Board of Directors, shall have general charge and control of all its business and affairs and shall have all powers and shall perform all duties incident to the office of President. He shall preside at all meetings of the stockholders and at all meetings of the Board of Directors and shall have such other powers and perform such other duties as may from time to time be assigned to him by these By-Laws or by the Board of Directors. SECTION 3. Powers and Duties of the Vice Presidents. Each Vice President shall have all powers and shall perform all duties incident to the office of Vice President and shall have such other powers and perform such other duties as may from time to 7 9 time be assigned to him by these By-Laws or by the Board of Directors or the President. SECTION 4. Powers and Duties of the Secretary. The Secretary shall keep the minutes of all meetings of the Board of Directors and the minutes of all meetings of the stockholders in books provided for that purpose, he shall attend to the giving or serving of all notices of the Corporation; he shall have custody of the corporate seal of the Corporation and shall affix the same to such documents and other papers as the Board of Directors or the President shall authorize and direct; he shall have charge of the stock certificate books, transfer books and stock ledgers and such other books and papers as the Board of Directors or the President shall direct, all of which shall at all reasonable times be open to the examination of any Director, upon application, at the office of the Corporation during business hours; and he shall have all powers and shall perform all duties incident to the office of Secretary and shall also have such other powers and shall perform such other duties as may from time to time be assigned to him by these By-Laws or by the Board of Directors or the President. SECTION 5. Powers and Duties of the Treasurer. The Treasurer shall have custody of, and when proper shall pay out, disburse or otherwise dispose of, all funds and securities of the Corporation which may have come into his hands; he may endorse on behalf of the Corporation for collection checks, notes and other obligations and shall deposit the same to the credit of the Corporation in such bank or banks or depository or depositories as the Board of Directors may designate; he shall sign all receipts and vouchers for payments made to the Corporation; he shall enter or cause to be entered regularly in the books of the Corporation kept for the purpose full and accurate accounts of all moneys received or paid or otherwise disposed of by him and whenever required by the Board of Directors or the President shall render statements of such accounts; he shall, at all reasonable times, exhibit his books and accounts to any Director of the Corporation upon application at the office of the Corporation during business hours; and he shall have all powers and shall perform all duties incident of the office of Treasurer and shall also have such other powers and shall perform such other duties as may from time to time be assigned to him by these By-Laws or by the Board of Directors or the President. SECTION 6. Additional Officers. The Board of Directors may from time to time elect such other officers (who may but need not be Directors), including a Controller, Assistant Treasurer, Assistant Secretaries and Assistant Controllers, as the Board may deem advisable and such officers shall have such authority and shall perform such duties as may from time to time be assigned to them by the Board of Directors or the President. 8 10 The Board of Directors may from time to time by resolution delegate to any Assistant Treasurer or Assistant Treasurers any of the powers or duties herein assigned to the Treasurer; and may similarly delegate to any Assistant Secretary or Assistant Secretaries any of the powers or duties herein assigned to the Secretary. SECTION 7. Giving of Bond by Officers. All officers of the Corporation, if required to do so by the Board of Directors, shall furnish bonds to the Corporation for the faithful performance of their duties, in such penalties and with such conditions and security as the Board shall require. SECTION 8. Voting Upon Stocks. Unless otherwise ordered by the Board of Directors, the President or any Vice President shall have full power and authority on behalf of the Corporation to attend and to act and to vote, or in the name of the Corporation to execute proxies to vote, at any meeting of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise, in person or by proxy, any and all rights, powers and privileges incident to the ownership of such stock. The Board of Directors may from time to time, by resolution, confer like powers upon any other person or persons. SECTION 9. Compensation of Officers. The officers of the Corporation shall be entitled to receive such compensation for their services as shall from time to time be determined by the Board of Directors. ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1. Nature of Indemnity. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request to the Corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation, as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid 9 11 settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful, except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) such indemnification shall e limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION 2. Successful Defense. To the extent that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 of this Article IV or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 3. Determination that Indemnification is Proper. Any indemnification of a Director or officer of the Corporation under Section 1 of this Article IV (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the Director or officer is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Section 1. Any indemnification of an employee or agent of the Corporation under Section 1 (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1. Any such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not 10 12 parties to such actions, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. SECTION 4. Advance Payment of Expenses. Unless the Board of Directors otherwise determines in a specific case, expenses incurred by a Director or officer in defending a civil or criminal action, suite or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article IV. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's legal counsel to represent such Director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. SECTION 5. Survival: Preservation of Other Rights. The foregoing indemnification provisions shall be deemed to be a contract between the Corporation and each Director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware General Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such Director, officer, employee or agent. The indemnification provided by this Article IV shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent shall inure to the benefit of the heirs, executors and administrators of such a person. The corporation may enter into an agreement with any of its Directors, officers, employees or agents providing for indemnification and advancement of expenses, including attorneys fees, that may change, enhance, qualify or limit any right to indemnification or advancement of expenses created by this Article IV. 11 13 SECTION 6. Severability. If this Article IV or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorney's fees), judgment, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the corporation, to the fullest extent permitted by any applicable portion of this Article IV that shall not have been invalidated and to the fullest extent permitted by applicable law. SECTION 7. Subrogation. In the event of payment of indemnification to a person described in Section 1 of this Article IV, the Corporation shall be subrogated to the extent of such payment to any right of recovery such person may have and such person, as a condition of receiving indemnification from the Corporation, shall execute all documents and do all things that the Corporation may deem necessary or desirable to perfect such right of recovery, including the execution of such documents necessary to enable the Corporation effectively to enforce any such recovery. SECTION 8. No Duplication of Payments. The Corporation shall not be liable under this Article IV to make any payments in connection with any claim made against a person described in Section 1 of this Article IV to the extent such person has otherwise received payment (under any insurance policy, by-law or otherwise) of the amounts otherwise indemnifiable hereunder. ARTICLE V STOCK SEAL FISCAL YEAR SECTION 1. Certificates for Shares of Stock. The certificates for shares of stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be approved by the Board of Directors. All certificates shall be signed by the President or a Vice president and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and shall not be valid unless so signed. In case any officer or officers who shall have signed any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer or officers of the Corporation. 12 14 All certificates for shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby with the number of such shares and the date of issue thereof shall be entered on the books of the Corporation. Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be cancelled, and no new certificates shall be issued until former certificates for the same number of shares have been surrendered and cancelled. SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person owning a certificate for shares of stock of the Corporation alleges that it has been lost, stolen or destroyed, he shall file in the office of the Corporation an affidavit setting forth, to the best of his knowledge and belief, the time, place and circumstances of the loss, theft or destruction, and if required by the Board of Directors, a bond of indemnity or other indemnification sufficient in the opinion of the Board of Directors to indemnify the Corporation and its agents against any claim that may be made against it or them on account of the alleged loss, theft or destruction of any such certificate or the issuance of a new certificate in replacement therefor. Thereupon the Corporation may cause to be issued to such person a new certificate in replacement for the certificate alleged to have been lost, stolen or destroyed. Upon the stub of every new certificate so issued shall be noted the fact of such issue and the number, date and the name of the registered owner of the lost, stolen or destroyed certificate in lieu of which the new certificate is issued. SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall be transferred on the books of the Corporation by the holder hereof, in person or by his attorney duly authorized in writing, upon surrender and cancellation of certificates for the number of shares of stock to be transferred, except as provided in Section 2 of this Article IV. SECTION 4. Regulations. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. SECTION 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, as the case may be, the Board of Directors may fix, in advance, a record date, which shall not be 13 15 (i) more than sixty (60) nor less than ten (10) days before the date of such meeting, or (ii) in the case of corporate action to be taken by consent in writing without a meeting, prior to, or more than ten (10) days after, the date upon which the resolution fixing the record date is adopted by the Board of Directors, or (iii) more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or so vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is delivered to the Corporation; and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 6. Dividends. Subject to the provisions of the Certificate of Incorporation, the Board of Directors shall have power to declare and pay dividends upon shares of stock of the Corporation, but only out of funds available for the payment of dividends as provided by law. Subject to the provisions of the Certificate of Incorporation, any dividends declared upon the stock of the Corporation shall be payable on such date or dates as the Board of Directors shall determine. If the date fixed for the payment of any dividend shall in any year fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday. SECTION 7. Corporate Seal. The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be kept in the custody of the Secretary. A duplicate of the seal may be kept and be used by any officer of the Corporation designated by the Board of Directors or the President. SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be such fiscal year as the Board of Directors from time to time by resolution shall determine. 14 16 ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange, acceptances, notes or other obligations or orders for the payment of money shall be signed and, if so required by the Board of Directors, countersigned by such officers of the Corporation and/or other persons as the Board of Directors from time to time shall designate. Checks, drafts, bills of exchange, acceptance notes, obligations and orders for the payment of money made payable to the Corporation may be endorsed for deposit to the credit of the Corporation with a duly authorized depository by the Treasurer and/or such other officers or persons as the Board of Directors from time to time may designate. SECTION 2. Loans. No loans and no renewals of any loans shall be contracted on behalf of the Corporation except as authorized by the Board of Directors. When authorized to do so, any officer or agent of the Corporation may effect loans and advances for the Corporation from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other evidences of indebtedness of the Corporation. When authorized so to do, any officer or agent of the Corporation may pledge, hypothecate or transfer, as security for the payment of any and all loans, advances, indebtedness and liabilities of the Corporation, any and all stocks, securities and other personal property at any time held by the Corporation, and to that end may endorse, assign and deliver the same. Such authority may be general or confined to specific instances. SECTION 3. Contracts. Except as otherwise provided in these By-Laws or by law or as otherwise directed by the Board of Directors, the President or any Vice President shall be authorized to execute and deliver, in the name and on behalf of the Corporation, all agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and the seal of the Corporation, if appropriate, shall be affixed thereto by any of such officers or the Secretary or an Assistant Secretary. The Board of Directors, the President or any Vice President designated by the Board of Directors may authorize any other officer, employee or agent to execute and deliver, in the name and on behalf of the Corporation, agreements, bonds, contracts, deeds, mortgages, and other instruments, either for the Corporation's own account or in a fiduciary or other capacity, and, if appropriate, to affix the seal of the Corporation thereto. The grant of such authority by the Board or any such officer may be general or confined to specific instances. 15 17 SECTION 4. Waivers of Notice. Whenever any notice whatever is required to be given by law, by the Certificate of Incorporation or by these By-Laws to any person or persons, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent thereto. SECTION 5. Officers Outside of Delaware. Except as otherwise required by the laws of the State of Delaware, the Corporation may have an office or offices and keep its books, documents and papers outside of the State of Delaware at such place or places as from time to time may be determined by the Board of Directors or the President. ARTICLE VII AMENDMENTS These By-Laws and any amendment thereof may be altered, amended or repealed, or new By-Laws may be adopted, by the Board of Directors at any regular or special meeting by the affirmative vote of a majority of all of the members of the Board, provided in the case of any special meeting at which all of the members of the Board are not present, that the notice of such meeting shall have stated that the amendment of these By-Laws was one of the purposes of the meeting; but these By-Laws and any amendment thereof may be altered, amended or repealed or new By-Laws may be adopted by the holders of a majority of the total outstanding stock of the Corporation entitled to vote at any annual meeting or at any special meeting provided, in the case of any special meeting, that notice of such proposed alteration, amendment, repeal or adoption is included in the notice of the meeting. 16 18 CERTIFICATION OF ADOPTION The foregoing By-Laws of the Corporation have been duly adopted this 12th day of March, 1996, by action of the Board of Directors of the Corporation pursuant to the laws of this State. IN TESTIMONY THEREOF, witness the hand of the undersigned as Secretary of the Corporation on such date. /s/ ROBERT H. JANES, III ----------------------------------------- Secretary APPROVED: /s/ CLETE T. BREWER - --------------------------------------- President (SEAL) 17 EX-10.1 11 STOCK OPTION PLAN 1 EXHIBIT 10.1 STAFFMARK, INC. 1996 STOCK OPTION PLAN SECTION 1. PURPOSE. The Plan (i) authorizes the Committee to provide to Employees and Consultants of the Corporation and its Subsidiaries, who are in a position to contribute materially to the long-term success of the Corporation, with options to acquire Common Stock, par value $.01 per share, of the Corporation, and (ii) provides for the automatic grant of options to Non-Employee Directors of the Corporation in accordance with the terms specified herein. The Corporation believes that this incentive program will cause those persons to increase their interest in the Corporation's welfare, and aid in attracting and retaining Employees, Consultants and Directors of outstanding ability. SECTION 2. DEFINITIONS. Unless the context clearly indicates otherwise, the following terms, when used in this Plan, shall have the meanings set forth in this Section: (a) "Board" shall mean the Board of Directors of the Corporation. (b) A "Change in Control" shall be deemed to have occurred if: (i) any person, other than the Corporation or an employee benefit plan of the Corporation, acquires directly or indirectly the Beneficial Ownership of any voting security of the Corporation and immediately after such acquisition such Person is, directly or indirectly, the Beneficial Owner of voting securities representing 50% or more of the total voting power of the then-outstanding voting securities of the Corporation; (ii) the individuals (A) who, as of the closing date of the Initial Public Offering, constitute the Board (the "Original Directors") or (B) who thereafter are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors then still in office (such directors becoming "Additional Original Directors" immediately following their election) or (C) who are elected to the Board and whose election, or nomination for election, to the Board was approved by a vote of at least two-thirds (2/3) of the Original Directors and Additional Original Directors then still in office (such directors also becoming "Additional Original Directors" immediately following their election)(such individuals being the "Continuing Directors"), cease for any reason to constitute a majority of the members of the Board; (iii) the stockholders of the Corporation shall approve a merger, consolidation, recapitalization, or reorganization of the Corporation, a reverse stock split of outstanding voting securities, or consummation of any such transaction if stockholder approval is not sought or obtained, other than any such transaction which would result in at least 75% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being Beneficially Owned by at least 75% of the holders of outstanding voting securities of the Corporation immediately prior to the transaction, with the voting power of each such continuing holder relative to other such continuing holders not substantially altered in the transaction; or (iv) the stockholders of the Corporation shall approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or a 2 substantial portion of the Corporation's assets (i.e. 50% or more of the total assets of the Corporation). (c) "Code" shall mean the Internal Revenue Code of 1986 as it may be amended from time to time. (d) "Committee" shall mean the Board, or any Committee of two or more Directors that may be designated by the Board to administer the Plan. (e) "Consultant" shall mean (i) any person who is engaged to perform services for the Corporation or its Subsidiaries, other than as an Employee or Director, or (ii) any person who has agreed to become a consultant within the meaning of clause (i). (f) "Control Person" shall mean any person who, as of the date of grant of an Option, owns (within the meaning of Section 422(b)(6) of the Code) stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Corporation or of any parent or Subsidiary. (g) "Corporation" shall mean Staffmark, Inc., a Delaware corporation. (h) "Director" shall mean any member of the Board. (i) "Employee" shall mean (i) any full-time employee of the Corporation or its Subsidiaries (including Directors who are otherwise employed on a full-time basis by the Corporation or its Subsidiaries), or (ii) any person who has agreed to become an employee within the meaning of clause (i). (j) "Exchange Act" shall mean the Securities Exchange Act of 1934 as it may be amended from time to time. (k) "Fair Market Value" of the Stock on a given date shall be based upon: (i) if the Stock is listed on a national securities exchange or quoted in an interdealer quotation system, the last sales price or, if unavailable, the average of the closing bid and asked prices per share of the Stock on such date (or, if there was no trading or quotation in the Stock on such date, on the next preceding date on which there was trading or quotation) as provided by one of such organizations; or (ii) if the Stock is not listed on a national securities exchange or quoted in an interdealer quotation system, as determined by the Board in good faith in its sole discretion, provided, however, that the "fair market value" of Stock on the date on which shares of Stock are first issued and sold pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission shall be the Initial Public Offering price of the shares so issued and sold, as set forth in the first prospectus used in such offering. (l) "Grantee" shall mean a person granted an Option under the Plan. (m) "Initial Public Offering" shall mean an initial public offering of shares of Stock in a firm commitment underwriting registered with the Securities and Exchange Commission in compliance with the provisions of the 1933 Act. 2 3 (n) "ISO" shall mean an Option granted pursuant to the Plan to purchase shares of Stock and intended to qualify as an incentive stock option under Section 422 of the Code, as now or hereafter constituted. (o) "1933 Act" shall mean the Securities Act of 1933, as amended. (p) "Non-Employee Director" shall mean a Director of the Corporation who is not an Employee, and who was not an Employee at any time during the prior one year period. (q) "NQSO" shall mean an Option granted pursuant to the Plan to purchase shares of the Stock that are not ISOs. (r) "Options" shall refer collectively to NQSOs and ISOs issued under and subject to the Plan. (s) "Parent" shall mean any parent corporation as defined in Section 424(e)(6) of the Code. (t) "Plan" shall mean this 1996 Stock Option Plan as set forth herein and as amended from time to time. (u) "Stock" shall mean shares of the common stock of the Corporation. (v) "Stock Option Agreement" shall mean a written agreement between the Corporation and the Grantee, or a certificate accepted by the Grantee, evidencing the grant of an Option hereunder and containing such terms and conditions, not inconsistent with the Plan, as the Committee shall approve. (w) "Subsidiary" shall mean (i) any corporation with respect to which the Corporation owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock of such corporation, or (ii) any entity which the Committee reasonably expects to become a subsidiary within the meaning of clause (i). SECTION 3. SHARES OF STOCK SUBJECT TO THE PLAN. The total amount of Stock that may be subject to outstanding Options, determined immediately after the grant of any Option, shall not exceed the greater of 650,000 shares or 12% percent of the total number of shares of Stock outstanding. Notwithstanding the foregoing, the number of shares that may be delivered upon exercise of ISOs shall not exceed 650,000, provided, however, that shares subject to ISOs shall not be deemed delivered if such Options are forfeited, expire or otherwise terminate without delivery of shares to the Grantee. Any shares of Stock delivered pursuant to an Option may consist, in whole or in part, of authorized and unissued shares or treasury shares. SECTION 4. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee. Subject to the express provisions of the Plan, the Committee shall have the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of Stock Option Agreements thereunder and to make all other determinations necessary or advisable for the administration of the Plan. Any controversy or claim arising out of or related to this Plan or the Options granted thereunder shall be determined unilaterally by, and at the sole discretion of, the Committee. Any 3 4 action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Corporation, Subsidiaries of the Corporation, Grantees, and any person claiming any rights under the Plan from or through any Grantee and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. To the extent necessary to comply with Rule 16b-3 under the Exchange Act, determinations concerning Options granted to any person who is subject to Section 16(B) of the Exchange Act shall be made by the Committee, all of whose members shall be "disinterested persons" within the meaning of Rule 16b-3 under the Exchange Act. The Committee may delegate to officers or managers of the Corporation or any Subsidiary the authority, subject to such terms as the Committee shall determine, to perform administrative functions and with respect to persons not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee may determine, to the extent permitted under Rule 16b-3, if applicable, and other applicable law. SECTION 5. TYPES OF OPTIONS. Options granted under the Plan may be of two types: ISOs or NQSOs. The Committee shall have the authority and discretion to grant to an eligible Employee either ISOs, NQSOs or both, but shall clearly designate the nature of each Option at the time of grant in the Stock Option Agreement. Grantees who are not Employees (determined with reference to Section 2(i)(i) only) of the Corporation or a Subsidiary (determined with reference to Section 2(w)(i) only) on the date an Option is granted shall only receive NQSOs. SECTION 6. GRANT OF OPTIONS TO EMPLOYEES AND CONSULTANTS. (a) Employees and Consultants of the Corporation and its Subsidiaries shall be eligible to receive Options under the Plan. Consultants shall be eligible to only receive NQSOs. (b) The exercise price per share of Stock subject to an Option granted to an Employee or Consultant shall be determined by the Committee and specified in the Stock Option Agreement, provided, however, that the exercise price of each share subject to an Option shall be not less than 100%, or, in the case of an ISO granted to a Control Person, 110% of the Fair Market Value of a share of the Stock on the date such Option is granted. (c) The term of each Option granted to an Employee or Consultant shall be determined by the Committee and specified in a Stock Option Agreement, provided that no Option shall be exercisable more than ten years from the date such Option is granted, and provided further that no ISO granted to a Control Person shall be exercisable more than five years from the date of the Option grant. (d) The Committee shall determine and designate from time to time Employees or Consultants who are to be granted Options, and shall specify in the Stock Option Agreement the nature of each Option granted and the number of shares of Stock subject to each such Option, provided, however, that in any calendar year, no Employee or Consultant may be granted an Option to purchase more than 500,000 shares of Stock (determined without regard to when such Option is exercisable), subject to adjustment pursuant to Section 10. (e) Notwithstanding any other provisions hereof, the aggregate Fair Market Value (determined at the time the ISO is granted) of the Stock with respect to which ISOs are exercisable for the first time by any Employee during any calendar year under all plans of the Corporation and 4 5 any Parent or Subsidiary corporation shall not exceed $100,000. To the extent the limitation set forth in the preceding sentence is exceeded, the Options with respect to such excess shall be treated as NQSOs. (f) The Committee shall determine whether any Option granted to an Employee or Consultant shall become exercisable in one or more installments and specify the installment dates in the Stock Option Agreement. The Committee may also specify in the Stock Option Agreement such other provisions, not inconsistent with the terms of this Plan, as it may deem desirable, including such provisions as it may deem necessary to qualify any ISO under the provisions of Section 422 of the Code. Unless otherwise determined by the Committee and specified in the Stock Option Agreement, all Options shall immediately become exercisable upon a Change in Control. (g) All Options granted hereunder prior to the Initial Public Offering shall be conditional upon, and for all purposes hereunder, deemed granted upon, the Initial Public Offering. (h) The Committee may, at any time, grant new or additional options to any eligible Employee or Consultant who has previously received Options under this Plan, or options under other plans, whether such prior Options or other options are still outstanding, have been exercised previously in whole or in part, or have been cancelled. The exercise price of such new or additional Options may be established by the Committee, subject to Section 6(b) hereof, without regard to such previously granted Options or other options. SECTION 7. GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS. (a) Non-Employee Directors of the Corporation shall be eligible to receive Options under the Plan only pursuant to the provisions of this Section 7. Each individual who agrees to become a Non-Employee Director prior to the consummation of the Corporation's Initial Public Offering shall receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 10,000 shares of Stock at an exercise price per share equal to the Initial Public Offering Price per share. Such Option grant shall be conditional upon, and for all purposes hereunder, deemed granted upon, the Initial Public Offering. Thereafter, on the day after the first annual meeting of stockholders next following the date of an Initial Public Offering, and the day after each subsequent annual meeting, each person who is a continuing Non-Employee Director on any such date shall receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 5,000 shares of Stock, and each person who is a new, first-time Non-Employee Director on any such date shall receive, without the exercise of the discretion of any person, an NQSO under the Plan relating to the purchase of 10,000 shares of Stock. In the event that there are not sufficient shares available under this Plan to allow for the grant to each Non-Employee Director of an NQSO for the number of shares provided herein, each Non-Employee Director shall receive an NQSO for his pro rata share of the total number of shares of Stock available under the Plan. (b) Except as set forth in Section 7(a), the exercise price of each share of Stock subject to an Option granted to a Non-Employee Director shall equal the Fair Market Value of a share of Stock on the date such Option is granted. 5 6 (c) Each Option granted to a Non-Employee Director shall become exercisable in equal annual installments on the date of grant and on each of the first two anniversaries of the date of grant, and shall have a term of five years from the date of grant. Notwithstanding the exercise period of any Option granted to a Non-Employee Director, all such Options shall immediately become exercisable upon a Change in Control. SECTION 8. EXERCISE OF OPTIONS. (a) A Grantee shall exercise an Option by delivery of written notice to the Corporation setting forth the number of shares with respect to which the Option is to be exercised, together with cash, certified check, bank draft, wire transfer, or postal or express money order payable to the order of the Corporation for an amount equal to the Option price of such shares and any income tax which may be required to be withheld as determined by the Committee pursuant to Section 12. The Committee may, in its sole discretion, permit a Grantee to pay all or a portion of the exercise price by delivery of Stock or other property (including notes or other contractual obligations of Grantees to make payment on a deferred basis, such as through "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Stock will be delivered or deemed to be delivered to Grantees. (b) Except as provided pursuant to section 9(a), no Option granted to an Employee or Consultant shall be exercised unless at the time of such exercise the Grantee is then an Employee (determined with reference to Section 2(i)(i) only) or Consultant (determined with reference to Section 2(e)(i) only) of the Corporation or a Subsidiary (determined with reference to Section 2(w)(i) only). (c) Except as provided in Section 9(a), no Option granted to a Non-Employee Director shall be exercised unless at the time of such exercise the Grantee is then a Non-Employee Director. SECTION 9. EXERCISE OF OPTIONS UPON TERMINATION. (a) Unless otherwise determined by the Committee, upon termination of a Grantee's employment with the Corporation and its Subsidiaries, such Grantee may exercise any Options during the three month period following such termination of employment, but only to the extent such Option was exercisable immediately prior to such termination of employment. Notwithstanding the foregoing, if the Committee determines that such termination is for cause, all Options held by the Grantee shall immediately terminate. In addition, all Options granted on the basis of clause (ii) of Section 2(e), Section 2(i) or Section 2(w) shall immediately terminate if the Committee determines, in its sole discretion, that the Consultant, Employee, or Subsidiary, as the case may be, will not become a Consultant, Employee or Subsidiary within the meaning of clause (i) of such Sections. (b) Unless otherwise determined by the Committee and specified in the Stock Option Agreement, in no event shall any Option be exercisable for more than the maximum number of shares that the Grantee was entitled to purchase at the date of termination of the relationship with the Corporation and its Subsidiaries. (c) The sale of any Subsidiary shall be treated as a termination of employment with respect to any Grantee employed by such Subsidiary. 6 7 (d) Subject to the foregoing, in the event of death, Options may be exercised by a Grantee's legal representative. SECTION 10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Grantees under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of shares of Stock deemed to be available thereafter for grants of Options under Section 3, (ii) the number and kind of shares of Stock that may be delivered or deliverable in respect of outstanding Options, (iii) the number of shares with respect to which Options may be granted to a given Grantee in the specified period as set forth in Section 6(d), and (iv) the exercise price or, if deemed appropriate, the Committee may make provision for a cash payment with respect to any conditions of, and the criteria included in, Options (including, without limitation, cash payments in exchange for an Option or substitution of Options using stock of a successor or other entity) in recognition of unusual or nonrecurring events (including, without limitation, events described in the preceding sentence) affecting the Corporation or any Subsidiary or the financial statements of the Corporation or any Subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. SECTION 11. RESTRICTIONS ON ISSUING SHARES. The Corporation shall not be obligated to deliver Stock upon the exercise or settlement of any Options or take other actions under the Plan until the Corporation shall have determined that applicable federal and state laws, rules, and regulations have been complied with and such approvals of any regulatory or governmental agency have been obtained and contractual obligations to which the Option may be subject have been satisfied. The Corporation, in its discretion, may postpone the issuance or delivery of Stock under any Option until completion of such stock exchange listing or registration or qualification of such Stock or other required action under any federal or state law, rule, or regulation as the Corporation may consider appropriate, and may require any Grantee to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Stock under the Plan. SECTION 12. TAX WITHHOLDING. To the extent required by applicable federal, state, local or foreign law, a Grantee shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise by reason of an Option exercise or any sale of shares. The Company shall not be required to issue shares until such obligations are satisfied. The Committee may permit these obligations to be satisfied by having the Company withhold a portion of the shares of the stock that otherwise would be issued to him or her upon the exercise of the Option, or to the extent permitted, by tendering shares previously acquired. The Committee may also, upon the request of a Grantee desiring to exercise an Option, direct the Company to lend the Grantee an amount necessary to pay any federal and state income tax withholding requirements in connection with such exercise, which loan may be forgiven over a three-year period subject to continued service with the Company. SECTION 13. LOANS TO GRANTEES. The Committee may, upon the request of a Grantee, direct the Company to lend the Grantee an amount necessary to satisfy the exercise price of any Option. Such loan may be forgiven over a three-year period subject to continued service with the Company. SECTION 14. TRANSFERABILITY. No Option shall be subject to anticipation, sale, assignment, pledge, encumbrance, charge or transfer except by will or the laws of descent and distribution, and an Option shall be exercisable during the Grantee's lifetime only by the Grantee. 7 8 SECTION 15. GENERAL PROVISIONS. (a) Each Option shall be evidenced by a Stock Option Agreement. The terms and provisions of such Stock Option Agreements may vary among Grantees and among different Options granted to the same Grantee. (b) The grant of an Option in any year shall not give the Grantee any right to similar grants in future years, any right to continue such Grantee's employment relationship with the Corporation or its Subsidiaries, or, until such Option is exercised and share certificates are issued, any rights as a stockholder of the Corporation. All Grantees shall remain subject to discharge to the same extent as if the Plan were not in effect. (c) No Grantee, and no beneficiary or other persons claiming under or through the Grantee shall have any right, title or interest by reason of any Option to any particular assets of the Corporation or its Subsidiaries, or any shares of Stock allocated or reserved for the purposes of the Plan or subject to any Option except as set forth herein. The Corporation shall not be required to establish any fund or make any other segregation of assets to assure the payment of any Option. (d) The issuance of shares of Stock to Grantees or to their legal representatives shall be subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof. SECTION 16. AMENDMENT OR TERMINATION. The Board may, at any time, alter, amend, suspend, discontinue or terminate this Plan; provided, however, that no such action shall adversely affect the rights of Grantees to Options previously granted hereunder and, provided further, however, that any shareholder approval necessary or desirable in order to comply with Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or other applicable law or regulation) shall be obtained in the manner required therein. In addition, no plan provision, within the meaning of Rule 16b-3(c)(2)(i)(D), shall be amended more than once every six months, other than to comport with changes in the Code or rules thereunder. The Committee may waive any conditions or rights under, or amend, alter, suspend, discontinue, or terminate, any Option theretofore granted and any Stock Option Agreement relating thereto; provided, however, that, without the consent of an affected Grantee, no such action may materially impair the rights of such Grantee under such Option. SECTION 17. EFFECTIVE DATE OF PLAN. This Plan is effective upon its adoption by the Board and shall continue in effect until terminated by the Board. No ISO may be granted more than ten years after the adoption of the Plan by the Board or approval of the Plan by the stockholders, whichever is earlier. 8 EX-10.2 12 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of _____________, 1996, by and between _____________________, a ___________________ corporation (hereinafter referred to as the "Company"), and ___________________ (hereinafter referred to as "______________"). W I T N E S S E T H WHEREAS, ________________ has been a shareholder of, and has been employed as an executive officer by, the Company; and WHEREAS, the Company and its shareholders have entered into an Agreement and Plan of Reorganization dated as of ____________________, 1996 (the "Reorganization Agreement") with STAFFMARK, INC., a Delaware corporation, whereby the Company has agreed to merge with a subsidiary of STAFFMARK, INC.; and WHEREAS, the Company is desirous of the continuation of _______________'s employment with the Company; and WHEREAS, in the course of building the business of the Company, and in his capacity as an executive officer thereof, ___________________ has gained knowledge of the business, affairs, customers and methods of the Company, and _______________ will gain similar knowledge with respect to STAFFMARK, INC. and each of STAFFMARK, INC.'s direct and indirect subsidiaries during his employment with the Company, has had and will have access to lists of the Company, STAFFMARK, INC. and their affiliates' customers and their needs, and had and will become personally known to and acquainted with the Company, STAFFMARK, INC. and their affiliates' customers thereby establishing a personal relationship with such customers for the benefit of the Company. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. TERM OF AGREEMENT. The term of this Agreement shall commence on the date hereof and terminate on ____________________, 2001. During the term of this Agreement, each twelve month period commencing on ________________ and ending on the following ________________ shall be referred to herein as a "Compensation Year." 2. DUTIES AND PERFORMANCE. (a) During the term of this Agreement, ________________ shall be employed by the Company on a full-time basis as its ________________ and shall have such authority and shall perform such duties consistent with his position as may be reasonably assigned to him by, and shall report to, the Chief Executive Officer, the Board of Directors of the Company or any other member of senior management designated by the Board of Directors or the Chief Executive Officer; provided, however, that without the approval of the Board of 2 Directors of the Company and STAFFMARK, INC., ________________ may not, on behalf of the Company (A) enter into term employment arrangements for the Company's employees of terms longer than those in place on the date hereof, (B) borrow funds or make material capital expenditures or commitments, (C) alter or adopt any employee benefit plans, or (D) adopt or maintain any employee policy or program materially different from those utilized by STAFFMARK, INC. and its operating subsidiaries. ________________ shall use all reasonable efforts to further the interests of the Company and shall devote substantially all of his business time and attentions to his duties hereunder. (b) ________________ shall be entitled to be reimbursed in accordance with the policies of the Company, as adopted and amended from time to time, for all reasonable and necessary expenses incurred by him in connection with the performance of his duties of employment hereunder; provided ________________ shall, as a condition of such reimbursement, submit verification of the nature and amount of such expenses in accordance with the reimbursement policies from time to time adopted by the Company. 3. BASE SALARY. The Company shall pay to ________________ a base salary at the rate of $____________ per annum through the expiration of the term of the Agreement, payable bi-weekly as per normal pay practices of the Company. 4. BENEFITS. (a) When eligible under non-discriminatory standards, ________________ shall be entitled to participate in any employee benefit plan maintained by the Company for its full time employees and shall be entitled to four (4) weeks vacation per annum and such holidays as the Company may establish as company policy. (b) The Company shall pay to ________________ on or about the first (1st) day of each month an automobile allowance in the amount of $500 per month which shall be used to pay all automobile related expenses. The Company may, at its discretion, provide equivalent automobile arrangements as it deems appropriate with sixty (60) days' written notice to ________________. ________________ shall maintain with respect to any automobile used for business purposes such insurance coverage as may be reasonably required by the Company, the cost of which shall be paid by ____________ from such monthly allowance. ________________ shall provide the Company with a copy of such insurance policy, which policy shall name the Company as an additional insured party. (c) The Company shall reimburse ______________ up to $250 per month for club dues actually incurred by _______________, provided that such club is used at least 50 percent of the time for business purposes and such usage is subject to audit by the Company or STAFFMARK, INC. 2 3 (d) _______________ shall be eligible to participate in the incentive compensation plans of STAFFMARK, INC. and its affiliates. 5. TERMINATION OF AGREEMENT. (a) The Company shall be entitled to terminate ________________'s services, in any of the following circumstances: (i) For "cause," which shall mean by reason of any of the following: (A) ________________'s conviction of, or plea of nolo contendere to, any felony or to any crime or offense causing substantial harm to STAFFMARK, INC., the Company or any of their affiliates (whether or not for personal gain) or involving acts of theft, fraud, embezzlement, moral turpitude or similar conduct, (B) ________________'s violation of the Company's substance abuse policy, (C) malfeasance in the conduct of ________________'s duties, including but not limited to (i) willful and intentional misuse or diversion of STAFFMARK, INC., the Company, or any of their affiliates' funds, (ii) embezzlement, and/or (iii) fraudulent, willful or material misrepresentations or concealments on any written reports submitted to STAFFMARK, INC., the Company or their affiliates, (D) material failure to perform the duties of such person's employment, (E) material failure to follow or comply with the reasonable and lawful directives of the Chief Executive Officer, any member of senior management designated by the Board of Directors of STAFFMARK, INC., or the Board of Directors of STAFFMARK, INC., or the Company, (F) the failure of the business under ________________'s supervision and control, without good reason, to substantially achieve (or exceed) the previously-approved business plan and budget for such business for two (2) consecutive calendar quarters, (G) a material breach by ________________ of the provisions of the Reorganization Agreement or this Agreement (including without limitation any breach of Section 6 of this Agreement), or (H) the occurrence of an event or series of events which lead the Chief Executive Officer of the Company to the reasonable conclusion that ________________ has materially breached or damaged their trust in his character and integrity sufficiently to impair his standing with STAFFMARK, INC. and the Company; provided, however, that in the case of the foregoing clauses (D) and (E), ________________ shall have been informed, in writing, of such material failure referred to in the foregoing clauses (D) and (E), respectively; (ii) If, for any reason, ________________ is unable to perform the essential functions of such person's duties, with or without reasonable accommodation, for a consecutive period of sixty (60) days or a non-consecutive period of one hundred twenty (120) days during any twelve month period, or such other period as may be required by applicable employment laws; or (iii) The death of ________________. 3 4 (b) In the event of the termination of ________________'s employment: (i) For cause, except as provided in Section 5(b)(ii), or in the event of the resignation of ________________, then as of the date of such termination all of the Company's obligations hereunder, including, without limitation, the Company's obligations to pay ________________'s base salary accruing after the date of such termination, and any benefits (except as otherwise required by applicable law), other than those obligations which have accrued but remain unpaid as of the date of such termination (such as accrued but unpaid salary, expense reimbursements, health insurance premiums, retirement plan contributions, if any, vacation pay, sick pay, etc.), shall cease and ________________ shall not be entitled to receive any incentive compensation for the Compensation Year of such termination; (ii) By reason of ________________'s death or inability to perform the essential functions of such person's position as provided in Section 5(a)(ii) and (iii) hereof or for cause only as provided in Section 5(a)(i)(D) and (E), then the Company shall continue to pay ________________'s base salary and to provide for the continuation of any Company health insurance benefits for which he would be eligible but for such termination, until the first to occur of (A) _________, 1998 or (B) ___________ shall have sold shares of Staffmark, Inc. in a public offering in which ___________ received cash in excess of $500,000 for such shares sold; (iii) By the Company for any other reason other than for the reasons set forth in clauses (i) and (ii) above, then in such event the Company shall continue to pay ________________'s base salary (without offset for any compensation received by ________________ from any subsequent employment by any person other than by an affiliate of the Company or in violation of Section 6 hereof) and to provide for the continuation of any Company health insurance benefits for which he would be eligible but for such termination, for a period which is the greater of (A) sixty (60) days from the date of such termination, or (B) the remaining term of this Agreement. 6. COVENANT NOT TO COMPETE; CONFIDENTIALITY. (a) ________________ acknowledges that in the course of his employment by the Company he has and will become privy to various economic and trade secrets and relationships of the Company, Staffmark, Inc. and its affiliates. Therefore, in consideration of this Agreement and of the merger by the Company and a subsidiary of One Source, ________________ hereby agrees that neither he nor his spouse nor any member of his immediate family that resides with him will, directly or indirectly, except for the benefit of the Company or its affiliates or subsidiaries, or with the prior written consent of the Board of Directors of the Company, which consent may be granted or withheld at the sole discretion of the Company's Board of Directors: 4 5 (i) During the Noncompetition Period (as hereinafter defined), become an officer, director, stockholder, partner, member, manager, associate, employee, owner, agent, creditor, independent contractor, co-venturer, consultant or otherwise, or be interested in or associated with any other person, corporation, firm or business engaged in providing temporary or permanent staffing services, outsourcing or medical or clinical staffing or recruiting (a "STAFFMARK, INC. Services Business") in the State of ______________ and, outside the State of ________________, within a radius of fifty (50) miles from any office operated during the Noncompetition Period by the Company, STAFFMARK, INC. or any of their affiliates (collectively, the "Territory") or in any STAFFMARK, INC. Services Business directly competitive with that of the Company, STAFFMARK, INC. or any of their affiliates, or itself engage in such business; provided, however, that (A) Nothing herein shall be construed to prohibit ________________ from owning not more than five percent (5%) of any class of securities issued by an entity which is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or which is traded over the counter; (B) The foregoing shall not restrict ________________ with respect to businesses, other than STAFFMARK, INC. Services Businesses, engaged in by the Company or its affiliates during the Noncompetition Period unless ________________ either is or was substantially involved in such other businesses of the Company or such affiliates or had access to Confidential Information (as hereinafter defined) with respect to such other businesses; or (ii) During the Noncompetition Period, in the Territory, solicit, cause or authorize, directly or indirectly, to be solicited for or on behalf of himself or third parties, from parties who are or were customers of the Company or its affiliates, any STAFFMARK, INC. Services Business transacted by or with such customer by the Company or its affiliates; or (iii) During the Noncompetition Period, in the Territory, accept or cause or authorize, directly or indirectly, to be accepted for or on behalf of himself or for third parties, any such STAFFMARK, INC. Services Business from any such customers of the Company or its affiliates; or (iv) During the Noncompetition Period, use, publish, disseminate or otherwise disclose, directly or indirectly, any information heretofore or hereafter acquired, developed or used by the Company or its or STAFFMARK, INC.'s affiliates relating to their business or the operations, employees or customers of the Company or its or STAFFMARK, INC.'s affiliates which constitutes proprietary or confidential information of the Company or its or STAFFMARK, INC.'s affiliates ("Confidential Information"), including without limitation any Confidential Information contained in any customer lists, 5 6 mailing lists and sources thereof, statistical data and compilations, patents, copyrights, trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals or any other documents; and (B) from and after the date hereof, use, publish, disseminate or otherwise disclose, directly or indirectly, any information heretofore or hereafter acquired, developed or used by the Company or its affiliates which constitutes Confidential Information, but excluding any Confidential Information which has become part of common knowledge or understanding in the STAFFMARK, INC. Services Business industry or otherwise in the public domain (other than from disclosure by ________________ in violation of this Agreement); provided, however, this subparagraph (iv) shall not be applicable to the extent ________________ is required to testify in a judicial or regularity proceeding pursuant to the order of a judge or administrative law judge after ________________ requests that such Confidential Information be preserved; or (v) During the Noncompetition Period, in the Territory, (A) Solicit, entice, persuade or induce, directly or indirectly, any employee (or person who within the preceding ninety (90) days was an employee) of the Company or its or STAFFMARK, INC.'s affiliates or any other person who is under contract with or rendering services to the Company or its or STAFFMARK, INC.'s affiliates, to terminate his or her employment by, or contractual relationship with, such person or to refrain from extending or renewing the same (upon the same or new terms) or to refrain from rendering services to or for such person or to become employed by or to enter into contractual relations with any persons other than such person or to enter into a relationship with a competitor of the Company or its affiliates; (B) Approach any such employee for any of the foregoing purposes; or (C) Authorize or knowingly approve or assist in the taking of any such actions by any person other than the Company or its affiliates. (b) For purposes of this Agreement, the term "Noncompetition Period" shall mean the period commencing on the date hereof and ending twenty-four (24) months after the date ________________ ceases to be an officer or employee of, or consultant to, STAFFMARK, INC., the Company, or any of their affiliates; provided, however, that the Noncompetition Period shall end immediately upon a termination of the employment of ________________ by the Company under this Agreement which is not for cause. (c) The invalidity or non-enforceability of this Section 6 in any respect shall not affect the validity or enforceability of this Section 6 in any other respect or of any other provisions of this Agreement. In the event that any provision of this Section 6 shall be held 6 7 invalid or unenforceable by a court of competent jurisdiction by reason of the geographic or business scope or the duration thereof, such invalidity or unenforceability shall attach only to the scope or duration of such provision and shall not affect or render invalid or unenforceable any other provision of this Agreement, and, to the fullest extent permitted by law, this Agreement shall be construed as if the geographic or business scope or the duration of such provision had been more narrowly drafted so as not to be invalid or unenforceable and further, to the extent permitted by law, such geographic or business scope or the duration thereof may be re-written by a court of competent jurisdiction to make such sufficiently limited to be enforceable. (d) ________________ acknowledges that the Company's remedy at law for any breach of the provisions of this Section 6 is and will be insufficient and inadequate and that the Company shall be entitled to equitable relief, including by way of temporary and permanent injunction, in addition to any remedies the Company may have at law. (e) The provisions of this Section 6 shall survive termination of this Agreement. (f) In the event of any conflict between the terms and provisions of this Section 6 and the provisions of Section ____ of the Reorganization Agreement, then the terms and provisions of such Section ____ of the Reorganization Agreement shall govern; provided, however, that the invalidity or unenforceability of all or any part of such section shall not have any effect upon the validity or enforceability of this Section 6. 7. DIVISIBILITY OF AGREEMENT. In the event that any term, condition or provision of this Agreement is for any reason rendered void, all remaining terms, conditions and provisions shall remain and continue as valid and enforceable obligations of the parties hereto. 8. NOTICES. Any notices or other communications required or permitted to be sent hereunder shall be in writing and shall be duly given if personally delivered or sent postage prepaid by certified or registered mail, return receipt requested, or sent by prepaid overnight courier service, delivery confirmed, as follows: (a) If to [Stockholder]: ---------------------------------- ---------------------------------- ---------------------------------- 7 8 (b) If to the Company: -------------------------------- c/o STAFFMARK, INC. 302 E. Millsap Road Fayetteville, Arkansas 72703 Attn: Chief Executive Officer Either party may change his or its address for the sending of notice to such party by written notice to the other party sent in accordance with the provisions hereof. 9. COMPLETE AGREEMENT. This Agreement contains the entire understanding of the parties with respect to the employment of ________________ and supersedes all prior arrangements or understandings with respect thereto. This Agreement may not be altered or amended except by a writing, duly executed by the party against whom such alteration or amendment is sought to be enforced. 10. ASSIGNMENT. This Agreement is personal and non-assignable by ________________. It shall inure to the benefit of any corporation or other entity with which the Company shall merge or consolidate or to which the Company shall lease or sell all or substantially all of its assets and may be assigned by the Company to any affiliate of the Company or to any corporation or entity with which such affiliate shall merge or consolidate or which shall lease or acquire all or substantially all of the assets of such affiliate. 11. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 12. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of Delaware. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement in multiple counterparts as of the day and year first above written. [STOCKHOLDER] By: ----------------------------------- ----------------------------------- Title 8 EX-10.3 13 FORM OF DIRECTOR INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.3 INDEMNITY AGREEMENT This Indemnity Agreement dated as of ____________, 1996, is made by and between StaffMark, Inc., a Delaware corporation (the "Company"), and ___________________________ (the "Indemnitee"). RECITALS A. The Company is aware that competent and experienced persons are increasingly reluctant to serve as directors, officers or agents of corporations unless they are protected by comprehensive liability insurance or indemnification, due to increased exposure to litigation costs and risks resulting from their service to such corporations, and due to the fact that the exposure frequently bears no reasonable relationship to the compensation of such directors, officers and other agents. B. The statutes and judicial decisions regarding the duties of directors and officers are often difficult to apply, ambiguous, or conflicting, and therefore fail to provide such directors, officers and agents with adequate, reliable knowledge of legal risks to which they are exposed or information regarding the proper course of action to take. C. Plaintiffs often seek damages in such large amounts and the costs of litigation may be so enormous (whether or not the case is meritorious), that the defense and/or settlement of such litigation is often beyond the personal resources of directors, officers and other agents. D. The Company believes that it is unfair for its directors, officers and agents and the directors, officers and agents of its subsidiaries to assume the risk of huge judgments and other expenses which may occur in cases in which the director, officer or agent received no personal profit and in cases where the director, officer or agent was not culpable. E. The Company recognizes that the issues in controversy in litigation against a director, officer or agent of a corporation such as the Company or its subsidiaries are often related to the knowledge, motives and intent of such director, officer or agent, that he is usually the only witness with knowledge of the essential facts and exculpating circumstances regarding such matters, and that the long period of time which usually elapses before the trial or other disposition of such litigation often extends beyond the time that the director, officer or agent can reasonably recall such matters; and may extend beyond the normal time for retirement for such director, officer or agent with the result that he, after retirement or in the event of his death, his spouse, heirs, executors or administrators, may be faced with limited liability and undue hardship in maintaining an adequate defense, which may discourage such a director, officer or agent from serving in that position. F. Based upon their experience as business managers, the Board of Directors of the Company (the "Board") has concluded that, to retain and attract talented and experienced individuals to serve as directors, officers and agents of the Company and its subsidiaries and 2 to encourage such individuals to take the business risks necessary for the success of the Company and its subsidiaries, it is necessary for the Company to contractually indemnify its directors, officers and agents and the directors, officers and agents of its subsidiaries, and to assume for itself maximum liability for expenses and damages in connection with claims against such directors, officers and agents in connection with their service to the Company and its subsidiaries, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Company and its subsidiaries and the Company's stockholders. G. Section 145 of the General Corporation Law of Delaware, under which the Company is organized ("Section 145"), empowers the Company to indemnify its directors, officers, employees and agents by agreement and to indemnify persons who serve, at the request of the Company, as the directors, officers, employees or agents of other corporations or enterprises, and expressly provides that the indemnification provided by Section 145 is not exclusive. H. The Company desires and has requested the Indemnitee to serve or continue to serve as a director, officer or agent of the Company and/or one or more subsidiaries of the Company free from undue concern for claims for damages arising out of or related to such services to the Company and/or one or more subsidiaries of the Company. I. Indemnitee is willing to serve, or to continue to serve, the Company and/or one or more subsidiaries of the Company, provided that he is furnished the indemnity provided for herein. AGREEMENT NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. (a) Agent. For the purposes of this Agreement, "agent" of the Company means any person who is or was a director, officer, employee or other agent of the Company or a subsidiary of the Company; or is or was serving at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation. (b) Expenses. For purposes of this Agreement, "expenses" include all out-of-pocket costs of any type or nature whatsoever (including, without limitation, all 2 3 attorneys' fees and related disbursements), actually and reasonably incurred by the Indemnitee in connection with either the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement or Section 145 or otherwise; provided, however, that "expenses" shall not include any judgments, fines, ERISA excise taxes or penalties, or amounts paid in settlement of a proceeding. (c) Proceeding. For the purposes of this Agreement, "proceeding" means any threatened, pending or contemplated action, suit or other proceeding, whether civil, criminal, administrative or investigative. (d) Subsidiary. For purposes of this Agreement, "subsidiary" means any corporation of which more than 50% of the outstanding voting securities is owned directly or indirectly by the Company, by the Company and one or more other subsidiaries, or by one or more other subsidiaries. 2. Agreement to Serve. The Indemnitee agrees to serve and/or continue to serve as agent of the Company, at its will (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of the Company, so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing provided, however, that nothing contained in this Agreement is intended to create any right to continued employment by Indemnitee. 3. Liability Insurance. (a) Maintenance of D&O Insurance. The Company hereby covenants and agrees that, so long as the Indemnitee shall continue to serve as an agent of the Company and thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that the Indemnitee was an agent of the Company, the Company, subject to Section 3(c), shall promptly obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") in reasonable amounts from established and reputable insurers. (b) Rights and Benefits. In all policies of D&O Insurance, the Indemnitees shall be named as an insured in such a manner as to provide the Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if the Indemnitee is a director; or of the Company's officers, if the Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if the Indemnitee is not a director or officer but is a key employee. (c) Limitation on Required Maintenance of D&O Insurance. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain D&O Insurance if the Company determines in good faith that such insurance 3 4 is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary of the Company. 4. Mandatory Indemnification. Subject to Section 9 below, the Company shall indemnify the Indemnitee as follows: (a) Successful Defense. To the extent the Indemnitee has been successful on the merits or otherwise in defense of any proceeding (including, without limitation, an action by or in the right of the Company) to which the Indemnitee was a party by reason of the fact that he is or was an Agent of the Company at any time, against all expenses of any type whatsoever actually and reasonably incurred by him in connection with the investigation, defense or appeal of such proceeding. (b) Third Party Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Company) by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred by him in connection with the investigation, defense, settlement or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. (c) Derivative Actions. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by or in the right of the Company by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, the Company shall indemnify the Indemnitee against all expenses actually and reasonably incurred by him in connection with the investigation, defense, settlement, or appeal of such proceeding, provided the Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company and its stockholders; except that no indemnification under the subsection 4(c) shall be made in respect to any claim, issue or matter as to which such person shall have been finally adjudged to be liable to the Company by a court of competent jurisdiction unless and only to the extent that the court in which such proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such amounts which the court shall deem proper. 4 5 (d) Actions where Indemnitee is Deceased. If the Indemnitee is a person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that he is or was an agent of the Company, or by reason of anything done or not done by him in any such capacity, and if prior to, during the pendency of after completion of such proceeding Indemnitee becomes deceased, the Company shall indemnify the Indemnitee's heirs, executors and administrators against any and all expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA, excise taxes and penalties, and amounts paid in settlement) actually and reasonably incurred to the extent Indemnitee would have been entitled to indemnification pursuant to Sections 4(a), 4(b), or 4(c) above were Indemnitee still alive. (e) Notwithstanding the foregoing, the Company shall not be obligated to indemnify the Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) for which payment is actually made to or on behalf of Indemnitee under a valid and collectible insurance policy of D&O Insurance, or under a valid and enforceable indemnity clause, by-law or agreement. 5. Partial Indemnification. If the Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes and penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a proceeding, but not entitled, however, to indemnification for all of the total amount hereof, the Company shall nevertheless indemnify the Indemnitee for such total amount except as to the portion hereof to which the Indemnitee is not entitled. 6. Mandatory Advancement of Expenses. Subject to Section 8(a) below, the Company shall advance all expenses incurred by the Indemnitee in connection with the investigation, defense, settlement or appeal of any proceeding to which the Indemnitee is a party or is threatened to be made a party by reason of the fact that the Indemnitee is or was an agent of the Company. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall be determined ultimately that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee within twenty (20) days following delivery of a written request therefor by the Indemnitee to the Company. 7. Notice and Other Indemnification Procedures. (a) Promptly after receipt by the Indemnitee of notice of the commencement of or the threat of commencement of any proceeding, the Indemnitee shall, if the Indemnitee believes that indemnification with respect thereto may be 5 6 sought from the Company under this Agreement, notify the Company of the commencement or threat of commencement thereof. (b) If, at the time of the receipt of a notice of the commencement of a proceeding pursuant to Section 7(a) hereof, the Company has D&O Insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (c) In the event the Company shall be obligated to pay the expenses of any proceeding against the Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by the Indemnitee, upon the delivery to the Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by the Indemnitee and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same proceeding, provided that (i) the Indemnitee shall have the right to employ his counsel in any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment of counsel by the Indemnitee has been previously authorized by the Company, (B) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 8. Exceptions. Any other provision herein to the contrary notwithstanding the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to the Indemnitee with respect to proceedings or claims initiated or brought voluntarily by the Indemnitee and not by way of defense, unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board, (iii) such indemnification is provided by the Company, in its sole discretion, pursuant to the powers vested in the Company under the General Corporate Law of Delaware or (iv) the proceeding is brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145. (b) Lack of Good Faith. To indemnify the Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by the Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines 6 7 that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (c) Unauthorized Settlements. To indemnify the Indemnitee under this Agreement for any amounts paid in settlement of a proceeding unless the Company consents to such settlement, which consent shall not be unreasonably withheld. 9. Non-exclusivity. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnitee may have under any provisions of law, the Company's Certificate of Incorporation or Bylaws, the vote of the Company's stockholders or disinterested directors, other agreements, or otherwise, both as to action in his official capacity and to action in another capacity while occupying his position as an agent of the Company, and the Indemnitee's rights hereunder shall continue after the Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors and administrators of the Indemnitee. 10. Enforcement. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee, in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under this Agreement (other than an action brought to enforce a claim for expenses pursuant to Section 6 hereof, provided that the required undertaking has been tendered to the Company) that Indemnitee is not entitled to indemnification because of the limitations set forth in Sections 4 and 8 hereof. Neither the failure of the Corporation (including its Board of Directors or its stockholders) to have made a determination prior to the commencement of such enforcement action that indemnification of Indemnitee is proper in the circumstances, nor an actual determination by the Company (including its Board of Directors or its stockholders) that such indemnification is improper, shall be a defense to the action or create a presumption that Indemnitee is not entitled to indemnification under this Agreement or otherwise. 11. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 12. Survival of Rights. (a) All agreements and obligations of the company contained herein shall continue during the period Indemnitee is an agent of the Company and shall continue 7 8 thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. (b) The Company shall require any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. 13. Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to the Indemnitee to the fullest extent permitted by law including those circumstances in which indemnification would otherwise be discretionary. 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (i) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (ii) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect in Section 13 hereof. 15. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. 16. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addresses or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware. 8 9 The parties hereto have entered into this Indemnity Agreement effective as of the date first above written. STAFFMARK, INC. By --------------------------------- Clete T. Brewer, President INDEMNITEE [Indemnitee's Printed Name] Address --------------------------- ----------------------------------- 9 EX-21.1 14 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 Subsidiaries of StaffMark, Inc. Each of the following subsidiaries are incorporated under the General Corporation Law of Delaware. 1. Blethen Temporaries Acquisition Corporation 2. Brewer Personnel Services Acquisition Corporation 3. Dixon Enterprises of Burlington Acquisition Corporation 4. DP Pros of Burlington Acquisition Corporation 5. Jaeger Personnel Services Acquisition Corporation 6. Personnel Placement Acquisition Corporation 7. Trasec Acquisition Corporation 8. Maxwell Staffing Acquisition Corporation 9. Technical Staffing Acquisition Corporation 10. Excel Temporary Staffing Acquisition Corporation 11. Professional Resources Acquisition Corporation 12. Prostaff Personnel Acquisition Corporation 13. HRA Acquisition Corporation 14. First Choice Staffing Acquisition Corporation 15. Maxwell/Healthcare Acquisition Corporation 16. Maxwell Staffing of Bristow Acquisition Corporation 17. Square One Rehab Acquisition Corporation EX-23.2 15 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Little Rock, Arkansas, July 1, 1996. 2 EXHIBIT 23.2.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Memphis, Tennessee, July 1, 1996. 3 EXHIBIT 23.2.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Raleigh, North Carolina, July 1, 1996. 4 EXHIBIT 23.2.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Atlanta, Georgia, July 1, 1996. 5 EXHIBIT 23.2.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Denver, Colorado, July 1, 1996. EX-23.3 16 CONSENT OF DAVID BARTHOLOMEW 1 EXHIBIT 23.3 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, W. David Bartholomew, a resident of Nashville, Tennessee, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this date. SIGNATURE: /s/ W. DAVID BARTHOLOMEW ---------------------------------------- W. David Bartholomew DATE: June 28, 1996 ----------------------------------- EX-23.4 17 CONSENT OF STEVEN E. SCHULTZ 1 EXHIBIT 23.4 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, Steven E. Schulte, a resident of Little Rock, Arkansas, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this date. SIGNATURE: /s/ STEVEN SCHULTE ---------------------------------------- Steven E. Schulte DATE: July 2, 1996 ----------------------------------- EX-23.5 18 CONSENT OF JOHN H. MAXWELL 1 EXHIBIT 23.5 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, John H. Maxwell, a resident of Tulsa, Oklahoma, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this date. SIGNATURE: /s/ JOHN H. MAXWELL, JR. ---------------------------------------- John H. Maxwell, Jr. DATE: June 28, 1996 ----------------------------------- EX-23.6 19 CONSENT OF JANICE BLETHEN 1 EXHIBIT 23.6 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, Janice Blethen, a resident of Burlington, North Carolina, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set her hand this date. SIGNATURE: /s/ JANICE BLETHEN ---------------------------------------- Janice Blethen DATE: June 28, 1996 ----------------------------------- EX-23.7 20 CONSENT OF WILLIAM T. GREGORY 1 EXHIBIT 23.7 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, William T. Gregory, a resident of Rock Hill, South Carolina, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this date. SIGNATURE: /s/ WILLIAM T. GREGORY ---------------------------------------- William T. Gregory DATE: June 28, 1996 ----------------------------------- EX-23.8 21 CONSENT OF WILLIAM J. LYNCH 1 EXHIBIT 23.8 CONSENT TO SERVE AS DIRECTOR OF STAFFMARK, INC. I, William J. Lynch, a resident of New York, New York, having been designated by the Board of Directors of StaffMark, Inc. (the "Company") as a nominee to serve on the Board of Directors of the Company, hereby consent to serve as a director, and shall assume such position upon notice of proper election; such consent being conditional upon and subject to the closing of the Company's initial public offering of its common stock, $.01 par value. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this date. SIGNATURE: /s/ WILLIAM J. LYNCH ---------------------------------------- William J. Lynch DATE: July 1, 1996 ----------------------------------- EX-27.1 22 FINANCAIL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 2,280 429 15,255 378 0 18,978 5,631 2,799 37,827 13,653 0 46 0 0 8,570 37,827 0 146,687 0 117,104 25,226 438 1,089 3,351 93 3,257 0 0 0 3,257 0 0
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